UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-23072
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First Trust Dynamic Europe Equity Income Fund
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(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)
Registrant's telephone number, including area code: (630) 765-8000
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Date of fiscal year end: December 31
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Date of reporting period: June 30, 2016
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FIRST TRUST
DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
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SEMI-ANNUAL REPORT
FOR THE SIX MONTHS ENDED
JUNE 30, 2016
HENDERSON
GLOBAL INVESTORS FIRST TRUST
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TABLE OF CONTENTS
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FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
SEMI-ANNUAL REPORT
JUNE 30, 2016
Shareholder Letter.......................................................... 1
At a Glance................................................................. 2
Portfolio Commentary........................................................ 3
Portfolio of Investments.................................................... 5
Statement of Assets and Liabilities......................................... 10
Statement of Operations..................................................... 11
Statements of Changes in Net Assets......................................... 12
Statement of Cash Flows..................................................... 13
Financial Highlights........................................................ 14
Notes to Financial Statements............................................... 15
Additional Information...................................................... 22
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Henderson Global Investors (North America) Inc.
("Henderson" or the "Sub-Advisor") and their respective representatives, taking
into account the information currently available to them. Forward-looking
statements include all statements that do not relate solely to current or
historical fact. For example, forward-looking statements include the use of
words such as "anticipate," "estimate," "intend," "expect," "believe," "plan,"
"may," "should," "would" or other words that convey uncertainty of future events
or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust Dynamic Europe Equity Income Fund (the "Fund") to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. When evaluating the information
included in this report, you are cautioned not to place undue reliance on these
forward-looking statements, which reflect the judgment of the Advisor and/or
Sub-Advisor and their respective representatives only as of the date hereof. We
undertake no obligation to publicly revise or update these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and future performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund
performance on the Fund's webpage at http://www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. It includes details about the Fund and presents data and analysis that
provide insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance during the period covered by this report. The statistical
information that follows may help you understand the Fund's performance compared
to that of relevant market benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
Henderson are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The material risks of investing in the
Fund are spelled out in the prospectus, the statement of additional information,
this report and other Fund regulatory filings.
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SHAREHOLDER LETTER
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FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
JUNE 30, 2016
Dear Shareholders:
Thank you for your investment in First Trust Dynamic Europe Equity Income Fund
(the "Fund").
First Trust Advisors L.P. ("First Trust") is pleased to provide you with this
semi-annual report which contains detailed information about your investment for
the six months ended June 30, 2016, including a market overview and a
performance analysis for the period. We encourage you to read this report and
discuss it with your financial advisor.
While markets were up and down during 2015, we believe there are three important
things to remember. First, the U.S. economy grew, despite the massive decline in
oil prices. Second, the tapering that began in 2014 by the Federal Reserve (the
"Fed") did not stop growth in the U.S. economy. Finally, the long-anticipated
rate hike by the Fed in December had little effect on the money supply, and the
stock market was not shocked by the hike. Early in 2016, many investors were
concerned that the volatility we saw in the market in 2015 would continue, and
it did. From December 31, 2015 through February 11, 2016, the S&P 500(R) Index
declined by 10.27%. Since then, the market has made a steady comeback, and as of
June 30, 2016, the S&P 500(R) Index was up 15.73%.
First Trust believes that having a long-term investment horizon and investing in
quality products can help you reach your goals, regardless of how the market
behaves. We have always maintained perspective about the markets and believe
investors should as well. We will continue to strive to provide quality
investments each and every day, which has been one of the hallmarks of our firm
since its inception 25 years ago.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value our relationship with you and will continue to focus on helping
investors like you reach your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
"AT A GLANCE"
AS OF JUNE 30, 2016 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FDEU
Common Share Price $15.98
Common Share Net Asset Value ("NAV") $17.79
Premium (Discount) to NAV (10.17)%
Net Assets Applicable to Common Shares $306,538,991
Current Monthly Distribution per Common Share (1) $0.121
Current Annualized Distribution per Common Share $1.452
Current Distribution Rate on Closing Common Share Price (2) 9.09%
Current Distribution Rate on NAV (2) 8.16%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
9/24/15 $20.00 $19.10
20.00 19.06
20.03 19.23
20.04 19.91
20.00 20.04
20.00 20.10
10/15 20.00 19.90
20.00 19.55
18.42 19.04
18.65 19.64
11/15 18.03 19.51
18.33 19.37
17.26 18.58
17.02 18.73
17.25 19.24
12/15 17.16 19.07
16.25 17.76
15.50 17.42
15.07 17.64
1/16 15.59 18.07
15.23 17.21
14.26 16.56
15.24 17.36
2/16 15.22 17.40
15.38 17.79
16.08 18.14
16.20 18.17
3/16 16.01 17.77
16.17 17.90
15.75 18.05
16.31 18.51
16.26 18.43
4/16 16.06 18.42
15.67 17.93
15.73 18.17
15.69 18.20
5/16 16.20 18.73
16.00 18.47
15.74 17.87
15.34 17.42
15.21 16.79
6/16 15.98 17.79
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PERFORMANCE
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Cumulative Total Return
-------------------------
6 Months Ended Inception (9/24/2015)
6/30/2016 to 6/30/2016
FUND PERFORMANCE (3)
NAV -2.29% -1.77%
Market Value -2.46% -15.74%
INDEX PERFORMANCE
MSCI Europe Index -5.03% -0.97%
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% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
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Roche Holding AG (CHF) 4.4%
Orange S.A. (EUR) 4.1
Novartis AG (CHF) 4.1
Nestle S.A. (CHF) 3.5
Vodafone Group PLC (GBP) 3.4
Sanofi (EUR) 3.4
Deutsche Post AG (EUR) 3.2
British American Tobacco PLC (GBP) 3.1
Unilever N.V. (EUR) 2.9
Deutsche Telekom AG (EUR) 2.9
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Total 35.0%
======
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% OF TOTAL
COUNTRY ALLOCATION INVESTMENTS
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United Kingdom 27.7%
France 24.6
Switzerland 16.0
Germany 13.2
Netherlands 8.3
Italy 5.0
Norway 2.1
Spain 1.5
Luxembourg 0.8
Portugal 0.8
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Total 100.0%
======
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% OF TOTAL
SECTOR CLASSIFICATION INVESTMENTS
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Financials 23.3%
Health Care 16.1
Consumer Staples 14.4
Telecommunication Services 12.5
Industrials 9.8
Consumer Discretionary 9.1
Utilities 7.7
Energy 6.2
Materials 0.9
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Total 100.0%
======
(1) Most recent distribution paid or declared through 6/30/2016. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share Price or NAV, as applicable, as of 6/30/2016. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per Common Share for NAV
returns and changes in Common Share Price for market value returns. Total
returns do not reflect sales load and are not annualized for periods of
less than one year. Past performance is not indicative of future results.
Page 2
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PORTFOLIO COMMENTARY
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FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
SEMI-ANNUAL REPORT
JUNE 30, 2016 (UNAUDITED)
SUB-ADVISOR
Henderson Global Investors (North America) Inc. ("Henderson" or the
"Sub-Advisor") is an indirect, wholly owned subsidiary of Henderson Group Plc
("Henderson Group"), a London-based global investment management firm
established in 1934. Henderson Group provides a full spectrum of investment
products and services to clients around the world. First Trust Advisors L.P. and
Henderson have engaged Henderson Investment Management Limited, a registered
investment adviser and an indirect, wholly owned subsidiary of Henderson Group,
as the sub-sub-advisor responsible for certain investment decisions of the Fund.
With offices in 19 cities and more than 1,000 employees worldwide, Henderson
Group managed approximately $127 billion in assets as of June 30, 2016.
PORTFOLIO MANAGEMENT TEAM
ALEX CROOKE, HEAD OF GLOBAL EQUITY INCOME
BEN LOFTHOUSE, CFA, PORTFOLIO MANAGER
MARKET RECAP
After a turbulent first half of the year, the MSCI Europe Index (the "Index")
returned -5.03%. The market fell on concerns that global economic growth was
slowing. During the period, the European Central Bank ("ECB") reacted to lower
than expected inflation in Europe with additional monetary policy actions. While
there was some market recovery in the second quarter, European equities sold off
in June following the UK referendum result regarding membership in the European
Union ("Brexit"). In this environment, larger cap stocks with foreign currency
exposure as well as defensive companies outperformed while domestic cyclicals,
particularly in the UK, lagged.
PERFORMANCE ANALYSIS
The First Trust Dynamic Europe Equity Income Fund (the "Fund") has been invested
in European equities since its launch in September 2015. The Fund outperformed
the Index over the period under review. The Fund's share price total return was
-2.46% for the six months ended June 30, 2016 while the underlying NAV total
return was -2.29%. Income generation from the companies owned has been strong
and the Fund paid six distributions during this period, totaling $0.726 per
share.
Macro indicators across Europe remained subdued with companies voicing caution
as growth expectations and earnings expectations for 2016 were lowered
consistently due to slower than expected global growth. There have, however,
been signs of increased economic activity; car sales have been increasing across
the continent since the start of the year and housing starts in some regions are
picking up significantly.
The Fund maintains its tilt towards high quality businesses, with a focus on
strong balance sheets and cash flow. The Fund's overweight position versus the
Index in defensive sectors including Consumer Staples, Telecoms and Utilities
has delivered outperformance. Continued market volatility and political
uncertainty led to investors seeking reliable and attractive dividend yields in
these sectors. Investments like Unilever and regulated utility National Grid
also continued to increase their dividends this year, enabling the Fund to
progress towards its yield objectives.
Among the best performing stocks in the Fund were Nexity, a French homebuilder
benefiting from government policy that is driving the housing market forward;
SGS, a stable industrial inspection company that re-rated on increasing margins;
and British American Tobacco, which the market rewarded for its resilient
business model. After poor performance in recent years, Energy has been the best
performing sector this year. A rally in the price of oil provided a boost to
shares across the group. The Fund had some exposure to the sector and benefited
from strong individual stock performances such as that of Royal Dutch Shell,
which was the top performer during the period. While the share price
appreciation has been welcome, we remain wary and hold a modest position in the
sector due to the low cash coverage supporting the sector's dividends.
Page 3
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PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
SEMI-ANNUAL REPORT
JUNE 30, 2016 (UNAUDITED)
Negative interest rates introduced by the ECB and, more recently, concerns
regarding Italian banks (not held in the portfolio) have meant that Financials
have been the worst performing sector of the market this year. Several of the
Fund's financial holdings have actually appreciated during the period, including
Swiss lender Cembra and European Real Estate Trust Icade, and investors have
benefited from significant dividend growth from many of the holdings. At the
same time, many of the most significant negative contributors for the period are
financial holdings such as insurer AXA and ING Group. The Fund has maintained
its financial exposure as it is focused on undervalued companies with strong
balance sheets, good competitive positions, and well-covered dividends. Outside
of financials, the most significant underperformers included Lagardere, the
French media business, and ITV, the British broadcast business.
INVESTMENT ACTIVITY
The Fund increased the level of leverage through the first quarter in order to
take advantage of dislocated markets and opportunistically bought oversold
names. New positions initiated included pharmaceutical company Bayer, oil
company BP, and engineering firm Siemens. Some profits were taken in crop
science company Syngenta, which has been bid for, and Swiss testing company SGS.
Positions in HSBC and Barclays were sold on concerns around their dividend
growth rates.
A dynamic currency hedging process has been utilized to mitigate the risk of
adverse currency movements on the portfolio. At the end of 2015, a short forward
currency contract was put in place to mitigate the risk of sterling weakness and
was a positive contributor to performance over the first half of the reporting
period as sterling weakened against the US dollar by -10%. The euro-denominated
borrowing has been a negative contributor to performance in the short term, as
the euro has appreciated slightly against the US dollar.
OPTIONS
To generate additional income, the Fund may write (or sell) call options on
portfolio equity securities and certain broad-based securities indices in an
amount up to 40% of the value of its Managed Assets. During this performance
period, the options portfolio management team overwrote approximately 30% of the
Fund's Managed Assets. The option strategy was executed on the broad-based Euro
Stoxx 50 Index, selling one to three month call options approximately
at-the-money to slightly out-of-the-money. The option strategy added to the
total return of the Fund during the period as the overwritten index, the
EuroStoxx 50, traded lower in price during the period.
MARKET AND FUND OUTLOOK
The Fund's focus on high quality income-generating investments has provided good
support during the volatile markets seen during the first six months of 2016.
European interest rates have continued to fall this year and in our view the
outlook for dividend stocks remains positive in this environment due to
investors increased requirement for yielding assets. Macro weakness could hamper
the amount of ultimate dividend growth for the market overall; we believe the
resilient cash-generative investments in this fund should continue to provide
investors with attractive income returns. We will seek to benefit from periods
of volatility by opportunistically adding to any oversold European franchises
that offer healthy long-term income and capital appreciation prospects.
Additionally, while equity markets have recovered from the drawdown post-Brexit
vote, we remain cautiously positioned. We believe the knock-on impact of the
vote will undoubtedly weigh on economic growth, especially in the UK and Europe,
and that we will begin to see this during the second half of 2016. Investors,
however, continue to be comforted by central banks' willingness to support
economies with continued loose monetary policy and expanding fiscal policies to
drive growth and inflation. As always, we continue to focus on bottom-up,
company specific investment opportunities.
Page 4
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
PORTFOLIO OF INVESTMENTS
JUNE 30, 2016 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------ --------------------------------------------------- --------------
COMMON STOCKS - 112.7% (a)
AIR FREIGHT & LOGISTICS - 3.8%
410,955 Deutsche Post AG (b)............................... $ 11,577,634
--------------
BANKS - 7.8%
209,070 BNP Paribas S.A. (b)............................... 9,168,875
712,584 ING Groep N.V. (b) (c)............................. 7,372,332
3,038,349 Lloyds Banking Group PLC (b)....................... 2,200,647
1,385,273 Natixis S.A. (b)................................... 5,212,598
--------------
23,954,452
--------------
BEVERAGES - 3.2%
354,833 Diageo PLC (b)..................................... 9,912,495
--------------
BUILDING PRODUCTS - 2.8%
225,643 Cie de Saint-Gobain (b)............................ 8,553,133
--------------
CONSUMER FINANCE - 2.7%
116,232 Cembra Money Bank AG (b)........................... 8,129,417
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 10.9%
626,725 Deutsche Telekom AG (b)............................ 10,687,086
922,591 Orange S.A. (b).................................... 15,001,797
464,808 Telenor ASA (b).................................... 7,693,977
--------------
33,382,860
--------------
ELECTRIC UTILITIES - 4.8%
2,038,892 Enel S.p.A. (b).................................... 9,051,556
61,514 Red Electrica Corp. S.A. (b) (d)................... 5,496,506
--------------
14,548,062
--------------
FOOD PRODUCTS - 4.2%
166,377 Nestle S.A. (b).................................... 12,890,613
--------------
GAS UTILITIES - 2.2%
1,108,992 Snam S.p.A. (b).................................... 6,630,031
--------------
INDUSTRIAL CONGLOMERATES - 2.9%
87,854 Siemens AG (b)..................................... 9,015,683
--------------
INSURANCE - 9.2%
23,556 Allianz SE (b)..................................... 3,360,439
230,172 Assicurazioni Generali S.p.A. (b).................. 2,714,277
342,588 AXA S.A. (b)....................................... 6,773,861
32,729 Muenchener Rueckversicherungs-Gesellschaft AG in
Muenchen (b).................................... 5,488,491
274,194 Prudential PLC (b)................................. 4,652,773
171,398 SCOR SE (b)........................................ 5,067,389
--------------
28,057,230
--------------
MEDIA - 10.8%
3,000,231 ITV PLC (b)........................................ 7,193,581
301,724 Lagardere SCA (b).................................. 6,563,117
462,906 NOS SGPS S.A. (b).................................. 2,801,359
301,947 Reed Elsevier N.V. (b)............................. 5,223,875
34,577 RTL Group S.A. (b)................................. 2,836,894
409,879 WPP PLC (b)........................................ 8,542,456
--------------
33,161,282
--------------
See Notes to Financial Statements Page 5
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2016 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------ --------------------------------------------------- --------------
COMMON STOCKS (CONTINUED) (a)
METALS & MINING - 1.1%
110,457 Rio Tinto PLC (b).................................. $ 3,431,517
--------------
MULTI-UTILITIES - 2.3%
481,539 National Grid PLC (b).............................. 7,081,189
--------------
OIL, GAS & CONSUMABLE FUELS - 7.4%
849,788 BP PLC (b)......................................... 4,974,249
357,313 Royal Dutch Shell PLC (b) (c)...................... 9,801,247
167,545 TOTAL S.A. (b)..................................... 8,034,792
--------------
22,810,288
--------------
PERSONAL PRODUCTS - 3.5%
230,391 Unilever N.V....................................... 10,715,398
--------------
PHARMACEUTICALS - 19.2%
123,577 AstraZeneca PLC (b)................................ 7,387,868
81,137 Bayer AG (b)....................................... 8,148,987
180,144 Novartis AG (b).................................... 14,868,825
61,403 Roche Holding AG (b)............................... 16,203,013
148,604 Sanofi (b)......................................... 12,346,426
--------------
58,955,119
--------------
PROFESSIONAL SERVICES - 2.2%
131,950 Adecco S.A. (b).................................... 6,655,305
--------------
REAL ESTATE MANAGEMENT & DEVELOPMENT - 1.4%
87,404 Nexity S.A. (b).................................... 4,421,379
--------------
TOBACCO - 6.2%
176,409 British American Tobacco PLC (b)................... 11,436,427
139,963 Imperial Brands PLC (b)............................ 7,590,582
--------------
19,027,009
--------------
WIRELESS TELECOMMUNICATION SERVICES - 4.1%
4,086,923 Vodafone Group PLC (b)............................. 12,460,453
--------------
TOTAL COMMON STOCKS................................ 345,370,549
(Cost $363,023,652) --------------
REAL ESTATE INVESTMENT TRUSTS - 6.7% (a)
REAL ESTATE INVESTMENT TRUSTS - 6.7%
599,283 British Land (The) Co., PLC (b).................... 4,865,754
162,666 Eurocommercial Properties N.V. (b)................. 6,927,423
127,105 Icade (b).......................................... 8,931,715
--------------
TOTAL REAL ESTATE INVESTMENT TRUSTS................ 20,724,892
(Cost $23,591,599) --------------
TOTAL INVESTMENTS - 119.4%......................... 366,095,441
(Cost $386,615,251) (e) --------------
Page 6 See Notes to Financial Statements
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2016 (UNAUDITED)
NUMBER OF
CONTRACTS DESCRIPTION VALUE
------------ --------------------------------------------------- --------------
CALL OPTIONS WRITTEN - (0.5%)
EURO STOXX 50 PRICE
779 @ $3,000 due July 2016............................. $ (72,605)
643 @ 3,150 due July 2016............................. (3,568)
816 @ 2,975 due August 2016........................... (408,361)
704 @ 2,900 due September 2016........................ (726,240)
679 @ 3,000 due September 2016........................ (396,622)
--------------
TOTAL CALL OPTIONS WRITTEN......................... (1,607,396)
(Premiums received $3,801,633) --------------
OUTSTANDING LOAN - (29.5%)......................... (90,444,623)
NET OTHER ASSETS AND LIABILITIES - 10.6%........... 32,495,569
--------------
NET ASSETS - 100.0%................................ $ 306,538,991
==============
-----------------------------
(a) All of a portion of these securities serve as collateral on the
outstanding loan.
(b) This security is fair valued by the Advisor's Pricing Committee in
accordance with procedures adopted by the Fund's Board of Trustees and in
accordance with provisions of the Investment Company Act of 1940, as
amended. At June 30, 2016, securities noted as such are valued at
$355,380,043 or 115.9% of net assets. Certain of these securities are fair
valued using a factor provided by an independent pricing service due to
the change in value between the foreign markets' close and the New York
Stock Exchange close exceeding a certain threshold. On days when this
threshold is not exceeded, these securities are typically valued at the
last sale price on the exchange on which they are principally traded.
(c) All or a portion of this security is pledged to cover index call options
written.
(d) Non-income producing security.
(e) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of June 30, 2016, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $10,366,417 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $30,886,227.
Currency Abbreviations:
EUR Euro
GBP British Pound Sterling
USD United States Dollar
See Notes to Financial Statements Page 7
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2016 (UNAUDITED)
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of June 30, 2016
is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
6/30/2016 PRICES INPUTS INPUTS
------------- ------------- ------------- -------------
Common Stocks:
Personal Products............................... $ 10,715,398 $ 10,715,398 $ -- $ --
Other Industry Categories*...................... 334,655,151 -- 334,655,151 --
------------- ------------- ------------- -------------
Total Common Stocks................................ 345,370,549 10,715,398 334,655,151 --
Real Estate Investment Trusts...................... 20,724,892 -- 20,724,892 --
------------- ------------- ------------- -------------
Total Investments ................................. 366,095,441 10,715,398 355,380,043 --
Forward Foreign Currency Contracts**............... 4,522,343 -- 4,522,343 --
------------- ------------- ------------- -------------
Total.............................................. $ 370,617,784 $ 10,715,398 $ 359,902,386 $ --
============= ============= ============= =============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
6/30/2016 PRICES INPUTS INPUTS
------------- ------------- ------------- -------------
Call Options Written............................... $ (1,607,396) $ -- $ (1,607,396) $ --
============= ============= ============= =============
* See Portfolio of Investments for industry breakout.
** See the Forward Foreign Currency Contracts table for contract and currency
detail.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. As of June 30,
2016, the Fund transferred investments valued at $5,194,124 from Level 1 to
Level 2 of the fair value hierarchy. The investments that transferred from Level
1 to Level 2 did so as a result of being fair valued using a factor provided by
a pricing service due to the change in value between the foreign markets' close
and the New York Stock Exchange close on June 30, 2016, exceeding a certain
threshold. Previously, these investments were valued based on quoted prices. The
inputs or methodologies used for valuing securities and classifying them in one
of the three levels of the fair value hierarchy are not necessarily an
indication of the risk associated with investing in those securities.
Page 8 See Notes to Financial Statements
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2016 (UNAUDITED)
FORWARD FOREIGN CURRENCY CONTRACTS (see Note 2C - Forward Foreign Currency
Contracts in the Notes to Financial Statements):
FORWARD FOREIGN CURRENCY CONTRACTS
-------------------------------------------------------------
PURCHASE SALE UNREALIZED
SETTLEMENT AMOUNT AMOUNT VALUE AS OF VALUE AS OF APPRECIATION
DATE COUNTERPARTY PURCHASED (1) SOLD (1) JUNE 30, 2016 JUNE 30, 2016 (DEPRECIATION)
------------- ------------ ------------------ -------------------- ----------------- ----------------- --------------
08/04/16 BNS USD 30,853,232 GBP 21,097,742 $ 30,853,232 $ 28,093,950 $ 2,759,282
08/04/16 BNS USD 42,579,217 EUR 36,738,051 42,579,217 40,816,156 1,763,061
--------------
Net Unrealized Appreciation (Depreciation)...................................................................... $ 4,522,343
==============
(1) Please see Portfolio of Investments for currency descriptions.
Counterparty Abbreviations:
BNS Bank of Nova Scotia
CURRENCY EXPOSURE % OF TOTAL
DIVERSIFICATION INVESTMENTS (2)
-------------------------------------------------
Euro 45.1%
United States Dollar 19.8
British Pound Sterling 17.2
Swiss Franc 15.8
Norwegian Krone 2.1
-------------------------------------------------
Total 100.0%
======
(2) The weightings include the impact of currency forwards.
See Notes to Financial Statements Page 9
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2016 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $386,615,251)......................................................................... $366,095,441
Cash........................................................................................... 22,396,195
Unrealized appreciation on forward foreign currency contracts.................................. 4,522,343
Receivables:
Investment securities sold.................................................................. 4,115,645
Dividends................................................................................... 1,259,586
Dividend reclaims........................................................................... 1,118,919
Prepaid expenses............................................................................... 17,317
------------
Total Assets................................................................................ 399,525,446
------------
LIABILITIES:
Outstanding loan............................................................................... 90,444,623
Options written, at value (Premiums received $3,801,633)....................................... 1,607,396
Due to custodian foreign currency (Cost $32,631)............................................... 33,933
Payables:
Investment advisory fees.................................................................... 361,610
Interest and fees due on loan............................................................... 153,030
Administrative fees......................................................................... 132,238
Custodian fees.............................................................................. 82,215
Offering costs.............................................................................. 72,016
Printing fees............................................................................... 53,906
Audit and tax fees.......................................................................... 27,217
Transfer agent fees......................................................................... 8,571
Financial reporting fees.................................................................... 745
Trustees' fees and expenses................................................................. 701
Other liabilities.............................................................................. 8,254
------------
Total Liabilities........................................................................... 92,986,455
------------
NET ASSETS..................................................................................... $306,538,991
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $328,297,124
Par value...................................................................................... 172,319
Accumulated net investment income (loss)....................................................... (1,213,927)
Accumulated net realized gain (loss) on investments, options, forward foreign currency
contracts and foreign currency transactions................................................. (5,886,391)
Net unrealized appreciation (depreciation) on investments, options, forward
foreign currency contracts, and foreign currency translation................................... (14,830,134)
------------
NET ASSETS..................................................................................... $306,538,991
============
NET ASSET VALUE, per share..................................................................... $ 17.79
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 17,231,908
============
Page 10 See Notes to Financial Statements
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2016 (UNAUDITED)
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $1,847,116)....................................... $ 14,788,723
Interest....................................................................................... 9,324
Other.......................................................................................... 22
------------
Total investment income..................................................................... 14,798,069
------------
EXPENSES:
Investment advisory fees....................................................................... 2,207,353
Interest and fees on loan...................................................................... 390,050
Administrative fees............................................................................ 86,935
Custodian fees................................................................................. 53,239
Printing fees.................................................................................. 37,295
Audit and tax fees............................................................................. 22,228
Transfer agent fees............................................................................ 11,851
Listing expense................................................................................ 11,810
Legal fees..................................................................................... 10,248
Trustees' fees and expenses.................................................................... 9,562
Financial reporting fees....................................................................... 4,599
Other.......................................................................................... 10,900
------------
Total expenses.............................................................................. 2,856,070
------------
NET INVESTMENT INCOME (LOSS)................................................................... 11,941,999
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments................................................................................. (9,938,816)
Written option transactions................................................................. 5,612,521
Forward foreign currency contracts.......................................................... (1,198,386)
Foreign currency transactions............................................................... (321,101)
------------
Net realized gain (loss)....................................................................... (5,845,782)
------------
Net change in unrealized appreciation (depreciation) on:
Investments................................................................................. (17,713,893)
Written options held........................................................................ 641,207
Forward foreign currency contracts.......................................................... 3,582,626
Foreign currency translation................................................................ (2,204,615)
------------
Net change in unrealized appreciation (depreciation)........................................... (15,694,675)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ (21,540,457)
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ (9,598,458)
============
See Notes to Financial Statements Page 11
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE
SIX MONTHS
ENDED PERIOD
6/30/2016 ENDED
(UNAUDITED) 12/31/2015 (a)
-------------- --------------
OPERATIONS:
Net investment income (loss)...................................................... $ 11,941,999 $ 704,128
Net realized gain (loss).......................................................... (5,845,782) 694,763
Net change in unrealized appreciation (depreciation).............................. (15,694,675) 864,541
------------ ------------
Net increase (decrease) in net assets resulting from operations................... (9,598,458) 2,263,432
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................................. (12,510,365) (1,206,937)
Net realized gain................................................................. -- (878,124)
------------ ------------
Total distributions to shareholders............................................... (12,510,365) (2,085,061)
------------ ------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold......................................................... -- 329,129,443
Cost of shares redeemed........................................................... -- --
Offering costs.................................................................... -- (660,000)
------------ ------------
Net increase (decrease) in net assets resulting from shareholder transactions..... -- 328,469,443
------------ ------------
Total increase (decrease) in net assets........................................... (22,108,823) 328,647,814
NET ASSETS:
Beginning of period............................................................... 328,647,814 --
------------ ------------
End of period..................................................................... $306,538,991 $328,647,814
============ ============
Accumulated net investment income (loss) at end of period......................... $ (1,213,927) $ (645,561)
============ ============
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period........................................... 17,231,908 --
Shares sold....................................................................... -- 17,231,908
------------ ------------
Shares outstanding, end of period................................................. 17,231,908 17,231,908
============ ============
(a) The Fund was seeded on August 20, 2015 and commenced operations on
September 24, 2015.
Page 12 See Notes to Financial Statements
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
STATEMENT OF CASH FLOWS FOR
THE SIX MONTHS ENDED JUNE 30, 2016 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations................. $ (9,598,458)
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash used by operating activities:
Purchases of investments.................................................. (100,030,355)
Sales of investments...................................................... 108,878,791
Proceeds from written options............................................. 7,379,955
Amount paid to close written options...................................... (1,673,592)
Net realized gain/loss on investments and written options transactions.... 4,326,295
Net change in unrealized appreciation/depreciation on investments and
written options held................................................... 17,072,686
Net change in unrealized appreciation (depreciation) on forward foreign
currency contracts..................................................... (3,582,626)
CHANGES IN ASSETS AND LIABILITIES:
Increase in dividends receivable.......................................... (749,990)
Increase in dividend reclaims receivable.................................. (1,118,919)
Increase in prepaid expenses.............................................. (11,448)
Decrease in offering costs payable........................................ (185,984)
Increase in interest and fees on loan payable............................. 19,979
Decrease in investment advisory fees payable.............................. (28,948)
Decrease in audit and tax fees payable.................................... (17,483)
Increase in printing fees payable......................................... 16,591
Increase in administrative fees payable................................... 86,934
Increase in custodian fees payable........................................ 53,239
Decrease in transfer agent fees payable................................... (8)
Increase in Trustees' fees and expenses payable........................... 505
Decrease in financial reporting fees payable.............................. (26)
Increase in other liabilities payable..................................... 5,466
------------
CASH PROVIDED BY OPERATING ACTIVITIES........................................... $ 20,842,604
---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders from net investment income........... (12,510,365)
Repayment of Euro Borrowings.............................................. (7,892,850)
Proceeds from Euro Borrowings............................................. 7,088,575
Effect of exchange rate changes on Euro loan (a).......................... 2,135,400
------------
CASH USED BY FINANCING ACTIVITIES............................................... (11,179,240)
---------------
Increase in cash and foreign currency (b)....................................... 9,663,364
Cash and foreign currency at beginning of period................................ 12,698,898
---------------
CASH AND FOREIGN CURRENCY AT END OF PERIOD..................................... $ 22,362,262
===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees............................... $ 370,071
===============
(a) This amount is a component of net change in unrealized appreciation
(depreciation) on foreign currency translation as shown on the Statement
of Operations.
(b) Includes net change in unrealized appreciation (depreciation) on foreign
currency of $(69,215), which does not include the effect of exchange rate
changes on Euro borrowings.
See Notes to Financial Statements Page 13
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD
SIX MONTHS FOR THE PERIOD
ENDED 9/24/2015 (a)
6/30/2016 THROUGH
(UNAUDITED) 12/31/2015
----------- --------------
Net asset value, beginning of period........ $ 19.07 $ 19.10
--------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)................ 0.69 0.04
Net realized and unrealized gain (loss)..... (1.24) 0.05
--------- ----------
Total from investment operations............ (0.55) 0.09
--------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income....................... (0.73) (0.07)
Net realized gain........................... -- (0.05)
--------- ----------
Total distributions......................... (0.73) (0.12)
--------- ----------
Net asset value, end of period.............. $ 17.79 $ 19.07
========= ==========
Market value, end of period................. $ 15.98 $ 17.16
========= ==========
TOTAL RETURN BASED ON NET ASSET VALUE (b)... (2.29)% 0.52%
========= ==========
TOTAL RETURN BASED ON MARKET VALUE (b)...... (2.46)% (13.61)%
========= ==========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........ $ 306,539 $ 328,648
Ratio of total expenses to average net
assets................................... 1.86% (c) 1.72% (c)
Ratio of net expenses to average net assets
excluding interest expense............... 1.61% (c) 1.56% (c)
Ratio of net investment income (loss) to
average net assets....................... 7.78% (c) 0.82% (c)
Portfolio turnover rate..................... 25% 5%
INDEBTEDNESS:
Total loan outstanding (in 000's)........... $ 90,445 $ 89,113
Asset coverage per $1,000 of
indebtedness (d)......................... $ 4,389 $ 4,688
-----------------------------
(a) The Fund was seeded on August 20, 2015 and commenced operations on
September 24, 2015.
(b) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, and changes in net asset value per Common
Share for net asset value returns and changes in Common Share Price for
market value returns. Total returns do not reflect sales load and are not
annualized for periods of less than one year. Past performance is not
indicative of future results.
(c) Annualized.
(d) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the loan outstanding) and dividing by the loan
balance in 000s.
Page 14 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
JUNE 30, 2016 (UNAUDITED)
1. ORGANIZATION
First Trust Dynamic Europe Equity Income Fund (the "Fund") is a non-diversified,
closed-end management investment company organized as a Massachusetts business
trust on May 11, 2015, and is registered with the Securities and Exchange
Commission under the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund trades under the ticker symbol "FDEU" on the New York Stock
Exchange ("NYSE").
The Fund's investment objective is to provide a high level of current income,
with a secondary focus on capital appreciation. The Fund pursues its objective
by investing at least 80% of its Managed Assets under normal market conditions,
in a portfolio of equity securities of European companies of any market
capitalization. "Managed Assets" means the total asset value of the Fund minus
the sum of the Fund's liabilities other than the principal amount of borrowings,
if any. There can be no assurance that the Fund will achieve its investment
objective.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund, which is an investment company within the scope of Financial
Accounting Standards Board ("FASB") Accounting Standards Update 2013-08, follows
accounting and reporting guidance under FASB Accounting Standards Codification
Topic 946, "Financial Services-Investment Companies." The following is a summary
of significant accounting policies consistently followed by the Fund in the
preparation of its financial statements. The preparation of financial statements
in accordance with accounting principles generally accepted in the United States
of America ("U.S. GAAP") requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
A. PORTFOLIO VALUATION
The net asset value ("NAV") of the Common Shares of the Fund is determined daily
as of the close of regular trading on the NYSE, normally 4:00 p.m. Eastern time,
on each day the NYSE is open for trading. If the NYSE closes early on a
valuation day, the NAV is determined as of that time. Domestic debt securities
and foreign securities are priced using data reflecting the earlier closing of
the principal markets for those securities. The Fund's NAV per Common Share is
calculated by dividing the value of all assets of the Fund (including accrued
interest and dividends), less all liabilities (including accrued expenses,
dividends declared but unpaid and any borrowings of the Fund), by the total
number of Common Shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Pricing Committee of the Fund's
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"),
in accordance with valuation procedures adopted by the Fund's Board of Trustees,
and in accordance with provisions of the 1940 Act. Investments valued by the
Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to
the Portfolio of Investments. The Fund's investments are valued as follows:
Common stocks, real estate investment trusts ("REITs") and other equity
securities listed on any national or foreign exchange (excluding The
Nasdaq Stock Market LLC ("Nasdaq") and the London Stock Exchange
Alternative Investment Market ("AIM")) are valued at the last sale price
on the exchange on which they are principally traded or, for Nasdaq and
AIM securities, the official closing price. Securities traded on more than
one securities exchange are valued at the last sale price or official
closing price, as applicable, at the close of the securities exchange
representing the principal market for such securities.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Over-the-counter options contracts are fair valued at the closing price in
the market of the underlying contracts where such contracts are
principally traded.
Forward foreign currency contracts are valued at the current day's
interpolated foreign exchange rate, as calculated using the current day's
spot rate, and the thirty, sixty, ninety, and one-hundred eighty day
forward rates provided by a third-party pricing service or by certain
independent dealers in such contracts.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Fund's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a pricing service is unable to provide a market
price; securities whose trading has been formally suspended; a security whose
market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the pricing service, does not reflect the security's fair value. As a general
principle, the current fair value of a security would appear to be the amount
Page 15
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
JUNE 30, 2016 (UNAUDITED)
which the owner might reasonably expect to receive for the security upon its
current sale. When fair value prices are used, generally they will differ from
market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to, the following:
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or the
appropriate stock exchange;
8) an analysis of the issuer's financial statement;
9) the existence of merger proposals or tender offers that might affect
the value of the security;
10) the value of similar foreign securities traded on other foreign
markets;
11) ADR trading of similar securities;
12) closed-end fund trading of similar securities;
13) foreign currency exchange activity;
14) the trading prices of financial products that are tied to baskets of
foreign securities;
15) factors relating to the event that precipitated the pricing problem;
16) whether the event is likely to recur; and
17) whether the effects of the event are isolated or whether they affect
entire markets, countries or regions.
Because foreign markets may be open on different days than the days during which
investors may transact in the shares of the Fund, the value of the Fund's
securities may change on the days when investors are not able to transact in the
shares of the Fund. The value of securities denominated in foreign currencies is
converted into U.S. dollars using exchange rates determined daily as of the
close of regular trading on the NYSE.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of June 30, 2016, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
daily on the accrual basis. Amortization of premiums and accretion of discounts
are recorded by using the effective interest method.
The Fund holds shares of REITs. Distributions from such investments may be
comprised of return of capital, capital gains and income. The actual character
of amounts received during the year is not known until after the REIT's fiscal
year end. The Fund records the character of distributions received from REITs
during the year based on estimates available. The characterization of
distributions received by the Fund may be subsequently revised based on
information received from the REITs after their tax reporting periods conclude.
C. FORWARD FOREIGN CURRENCY CONTRACTS
The Fund is subject to foreign currency risk in the normal course of pursuing
its investment objective. Forward foreign currency contracts are agreements
between two parties ("Counterparties") to exchange one currency for another at a
future date and at a specified price. The Fund uses forward foreign currency
contracts to facilitate transactions in foreign securities and to manage the
Page 16
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
JUNE 30, 2016 (UNAUDITED)
Fund's foreign currency exposure. These contracts are valued daily, and the
Fund's net equity therein, representing unrealized gain or loss on the contracts
as measured by the difference between the forward foreign exchange rates at the
dates of entry into the contracts and the forward rates at the reporting date,
is included in "Unrealized appreciation (depreciation) on forward foreign
currency contracts" on the Statement of Assets and Liabilities. The change in
unrealized appreciation (depreciation) is included in "Net change in unrealized
appreciation (depreciation) on forward foreign currency contracts" on the
Statement of Operations. When the forward contract is closed, the Fund records a
realized gain or loss equal to the difference between the proceeds from (or the
cost of) the closing transaction and the Fund's basis in the contract. This
realized gain or loss would be included in "Net realized gain (loss) on forward
foreign currency contracts" on the Statement of Operations. Risks arise from the
possible inability of counterparties to meet the terms of their contracts and
from movement in currency and securities values and interest rates. Due to the
risks, the Fund could incur losses in excess of the net unrealized value shown
on the Forward Foreign Currency Contracts table in the Portfolio of Investments.
In the event of default by the Counterparty, the Fund will provide notice to the
Counterparty of the Fund's intent to convert the currency held by the Fund into
the currency that the counterparty agreed to exchange with the Fund. If a
Counterparty becomes bankrupt or otherwise fails to perform its obligations due
to financial difficulties, the Fund may experience significant delays in
obtaining any recovery in a bankruptcy or other reorganizing process. The Fund
may obtain only limited recovery or may obtain no recovery in such
circumstances.
D. OFFSETTING ON THE STATEMENT OF ASSETS AND LIABILITIES
Offsetting Assets and Liabilities requires entities to disclose both gross and
net information about instruments and transactions eligible for offset on the
Statement of Assets and Liabilities, and disclose instruments and transactions
subject to master netting or similar agreements. These disclosure requirements
are intended to help investors and other financial statement users better assess
the effect or potential effect of offsetting arrangements on a fund's financial
position. The transactions subject to offsetting disclosures are derivative
instruments, repurchase agreements and reverse repurchase agreements, and
securities borrowing and securities lending transactions.
For financial reporting purposes, the Fund does not offset financial assets and
financial liabilities that are subject to master netting arrangements ("MNAs")
or similar agreements on the Statement of Assets and Liabilities. MNAs provide
the right, in the event of default (including bankruptcy and insolvency) for the
non-defaulting counterparty to liquidate the collateral and calculate the net
exposure to the defaulting party or request additional collateral.
At June 30, 2016, derivative assets and liabilities (by type) on a gross basis
are as follows:
Gross Amounts
not Offset in the
Statement of
Net Amounts of Assets and Liabilities
Gross Amounts Assets Presented ------------------------
Gross Amounts of Offset in the in the Statement Collateral
Recognized Statement of Assets of Assets and Financial Amounts
Amounts Assets and Liabilities Liabilities Instruments Received Net Amount
---------------------------------------------------------------------------------------------------------------------------
Forward Foreign
Currency Contracts* $ 4,522,343 $ -- $ 4,522,343 $ -- $ -- $ 4,522,343
* The respective counterparties for each contract are disclosed in the
Forward Foreign Currency Contracts table in the Portfolio of Investments.
Gross Amounts
not Offset in the
Net Amounts of Statement of
Liabilities Assets and Liabilities
Gross Amounts of Gross Amounts Presented in the ------------------------
Recognized Offset in the Statement of Collateral
Amounts Statement of Assets Assets and Financial Amounts
Liabilities and Liabilities Liabilities Instruments Received Net Amount
---------------------------------------------------------------------------------------------------------------------------
Written Options $ 1,607,396 $ -- $ 1,607,396 $ -- $ -- $ 1,607,396
E. FOREIGN CURRENCY
The books and records of the Fund are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investments and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses on assets and liabilities, other than investments in securities, which
result from changes in foreign currency exchange rates have been included in
"Net change in unrealized appreciation (depreciation) on foreign currency
translation" on the Statement of Operations. Unrealized gains and losses on
investments in securities which result from changes in foreign exchange rates
are included with fluctuations arising from changes in market price and are
shown in "Net change in unrealized appreciation (depreciation) on investments"
on the Statement of Operations. Net realized foreign currency gains and losses
Page 17
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
JUNE 30, 2016 (UNAUDITED)
include the effect of changes in exchange rates between trade date and
settlement date on investment security transactions, foreign currency
transactions and interest and dividends received and are shown in "Net realized
gain/loss on foreign currency transactions" on the Statement of Operations. The
portion of foreign currency gains and losses related to fluctuation in exchange
rates between the initial purchase settlement date and subsequent sale trade
date is included in "Net realized gain (loss) on investments" on the Statement
of Operations.
F. OPTION CONTRACTS
The Fund is subject to equity price risk in the normal course of pursuing its
investment objective and may write (sell) options to hedge against changes in
the value of equities. Also, the Fund seeks to generate additional income, in
the form of premiums received, from writing (selling) the options. The Fund may
write (sell) covered call options ("options") on a portion of the equity
securities held in the Fund's portfolio and on securities indices as determined
to be appropriate by the Advisor, and consistent with the Fund's investment
objective in an amount up to 40% of the value of its Managed Assets. The Fund
will write (sell) a call option on an individual security only if the Fund owns
the security underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or, if additional
cash consideration is required, cash or other assets determined to be liquid by
the Advisor, the Sub-Advisor or the Sub-Sub-Advisor (in accordance with
procedures approved by the Board of Trustees) in such amount that are segregated
by the Fund's custodian) upon conversion or exchange of other securities held by
the Fund. Options on securities indices are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security and are similar to options on
single securities, except that the exercise of securities index options requires
cash settlement payments and does not involve the actual purchase or sale of
securities. The Fund will not write (sell) "naked" or uncovered call options. If
certain equity securities held in the Fund's portfolio are not covered by a
related call option on the individual equity security, securities index options
may be written on all or a portion of such uncovered securities. Options are
marked-to-market daily and their value will be affected by changes in the value
and dividend rates of the underlying equity securities, changes in interest
rates, changes in the actual or perceived volatility of the securities markets
and the underlying equity securities and the remaining time to the options'
expiration. The value of options may also be adversely affected if the market
for the options becomes less liquid or trading volume diminishes.
Options the Fund writes (sells) will either be exercised, expire or be cancelled
pursuant to a closing transaction. If the price of the underlying equity
security exceeds the option's exercise price, it is likely that the option
holder will exercise the option. If an option written (sold) by the Fund is
exercised, the Fund would be obligated to deliver the underlying equity security
to the option holder upon payment of the strike price. In this case, the option
premium received by the Fund will be added to the amount realized on the sale of
the underlying security for purposes of determining gain or loss. If the price
of the underlying equity security is less than the option's strike price, the
option will likely expire without being exercised. The option premium received
by the Fund will, in this case, be treated as short-term capital gain on the
expiration date of the option. The Fund may also elect to close out its position
in an option prior to its expiration by purchasing an option of the same series
as the option written (sold) by the Fund.
The options that the Fund writes (sells) give the option holder the right, but
not the obligation, to purchase a security from the Fund at the strike price on
or prior to the option's expiration date. The ability to successfully implement
the writing (selling) of covered call options depends on the ability of the
Advisor to predict pertinent market movements, which cannot be assured. Thus,
the use of options may require the Fund to sell portfolio securities at
inopportune times or for prices other than current market value, which may limit
the amount of appreciation the Fund can realize on an investment, or may cause
the Fund to hold a security that it might otherwise sell. As the writer (seller)
of a covered option, the Fund foregoes, during the option's life, the
opportunity to profit from increases in the market value of the security
covering the option above the sum of the premium and the strike price of the
option, but has retained the risk of loss should the price of the underlying
security decline. The writer (seller) of an option has no control over the time
when it may be required to fulfill its obligation as a writer (seller) of the
option. Once an option writer (seller) has received an exercise notice, it
cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver the underlying security to the
option holder at the exercise price.
Over-the-counter options have the risk of the potential inability of
counterparties to meet the terms of their contracts. The Fund's maximum equity
price risk for purchased options is limited to the premium initially paid. In
addition, certain risks may arise upon entering into option contracts including
the risk that an illiquid secondary market will limit the Fund's ability to
close out an option contract prior to the expiration date and that a change in
the value of the option contract may not correlate exactly with changes in the
value of the securities hedged.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
The Fund distributes to holders of its Common Shares monthly distributions of
all or a portion of its net income after the payment of interest in connection
with leverage used by the Fund. In addition to regular monthly distributions,
for two years following the Fund's initial public offering, the Fund intends to
pay quarterly distributions in cash to Common Shareholders if certain conditions
are met. Distributions of net realized capital gains earned by the Fund, if any,
are distributed at least annually. Distributions are automatically reinvested
into additional Common Shares pursuant to the Fund's Dividend Reinvestment Plan
unless cash distributions are elected by the shareholder.
Page 18
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
JUNE 30, 2016 (UNAUDITED)
Distributions from net investment income and realized capital gains are
determined in accordance with federal income tax regulations, which may differ
from U.S. GAAP. Certain capital accounts in the financial statements are
periodically adjusted for permanent differences in order to reflect their tax
character. These permanent differences are primarily due to the varying
treatment of income and gain/loss on portfolio securities held by the Fund and
have no impact on net assets or NAV per Common Share. Temporary differences,
which arise from recognizing certain items of income, expense and gain/loss in
different periods for financial statement and tax purposes, will reverse at some
point in the future.
The tax character of distributions paid during the fiscal period ended December
31, 2015, was as follows:
Distributions paid from: 2015
Ordinary income.............................. $ 2,085,061
As of December 31, 2015, the distributable earnings and net assets on a tax
basis were as follows:
Undistributed ordinary income................ $ 294,156
Undistributed capital gains.................. --
--------------
Total undistributed earnings................. 294,156
Accumulated capital and other losses......... --
Net unrealized appreciation (depreciation)... (115,785)
--------------
Total accumulated earnings (losses).......... 178,371
Other........................................ --
Paid-in capital.............................. 328,469,443
--------------
Net assets................................... $ 328,647,814
==============
H. INCOME TAXES
The Fund intends to qualify as a regulated investment company by complying with
the requirements under Subchapter M of the Internal Revenue Code of 1986, as
amended, which includes distributing substantially all of its net investment
income and net realized gains to shareholders. Accordingly, no provision has
been made for federal and state income taxes. However, due to the timing and
amount of distributions, the Fund may be subject to an excise tax of 4% of the
amount by which approximately 98% of the Fund's taxable income exceeds the
distributions from such taxable income for the calendar year.
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At December 31, 2015, the
Fund had no non-expiring capital loss carryforwards for federal income tax
purposes.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. The taxable year ended 2015
remains open for audit. As of June 30, 2016, management has evaluated the
application of these standards to the Fund and has determined that no provision
for income tax is required in the Fund's financial statements for uncertain tax
positions.
I. EXPENSES:
The Fund will pay all expenses directly related to its operations.
J. ORGANIZATION AND OFFERING COSTS
Organization costs consisted of costs incurred to establish the Fund and enable
it to legally conduct business. These costs included filing fees, listing fees,
legal services pertaining to the organization of the business and audit fees
relating to the initial registration and auditing the initial statement of
assets and liabilities, among other fees. Offering costs consisted of legal fees
pertaining to the Fund's shares offered for sale, registration fees,
underwriting fees, and printing of the initial prospectus, among other fees.
First Trust paid all organization expenses. The Fund's Common Share offering
costs of $660,000 were recorded as a reduction of the proceeds from sales from
the sale of Common Shares during the period ended December 31, 2015.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
services, First Trust is entitled to a monthly fee calculated at an annual rate
of 1.10% of the Fund's Managed Assets. First Trust also provides fund reporting
services to the Fund for a flat annual fee in the amount of $9,250.
Page 19
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
JUNE 30, 2016 (UNAUDITED)
Henderson Global Investors (North America) Inc. ("Henderson" or the
"Sub-Advisor") serves as the Fund's sub-advisor and manages the Fund's portfolio
subject to First Trust's supervision. The Sub-Advisor receives a monthly
portfolio management fee calculated at an annual rate of 0.50% of the Fund's
Managed Assets that is paid by First Trust out of its investment advisory fee.
Brown Brothers Harriman & Co. ("BBH") serves as the Fund's administrator, fund
accountant and custodian in accordance with certain fee arrangements. As
administrator and fund accountant, BBH is responsible for providing certain
administrative and accounting services to the Fund, including maintaining the
Fund's books of account, records of the Fund's securities transactions, and
certain other books and records. As custodian, BBH is responsible for custody of
the Fund's assets.
Computershare, Inc. serves as the Fund's transfer agent in accordance with
certain fee arrangements. As transfer agent, Computershare is responsible for
maintaining shareholder records for the Fund.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated equally among each fund in the First Trust Fund
Complex. Each Independent Trustee is also paid an annual per fund fee that
varies based on whether the fund is a closed-end or other actively managed fund,
or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Trustees are reimbursed for travel and out-of-pocket expenses in connection with
all meetings. The Lead Independent Trustee and Committee Chairmen rotate every
three years. The officers and "Interested" Trustee receive no compensation from
the Trust for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investments, excluding short-term
investments, for the six months ended June 30, 2016, were $99,689,405 and
$112,994,436, respectively.
5. DERIVATIVE TRANSACTIONS
The following table presents the types of derivatives held by the Fund at June
30, 2016, the primary underlying risk exposure and location of these instruments
as presented on the Statement of Assets and Liabilities. In compliance with the
1940 Act, the Fund covers its derivative commitments by earmarking liquid
assets, entering into offsetting transactions or owning positions covering its
obligations.
ASSET DERIVATIVES LIABILITY DERIVATIVES
---------------------------------------------- ----------------------------------------------
DERIVATIVE STATEMENT OF ASSETS AND STATEMENT OF ASSETS AND
INSTRUMENT RISK EXPOSURE LIABILITIES LOCATION VALUE LIABILITIES LOCATION VALUE
-------------------- ------------- ---------------------------------- ---------- ---------------------------------- ----------
Forward foreign Currency Risk Unrealized appreciation on Unrealized depreciation on
currency contracts forward foreign currency contracts $4,522,343 forward foreign currency contracts $ --
Written Options Equity Risk Options written, at value $ -- Options written, at value $1,607,396
The following table presents the amount of net realized gain(loss) and change in
net unrealized appreciation (depreciation) recognized for the period ended June
30, 2016, on derivative instruments, as well as the primary underlying risk
exposure associated with each instrument.
STATEMENT OF OPERATIONS LOCATION
---------------------------------------------------------------------------
CURRENCY RISK EXPOSURE
Net realized gain (loss) on forward foreign currency contracts $ (1,198,386)
Net change in unrealized appreciation (depreciation) on forward
foreign currency contracts 3,582,626
EQUITY RISK EXPOSURE
Net realized gain (loss) on written option transactions 5,612,521
Net change in unrealized appreciation (depreciation) on written
options held 641,207
During the period ended June 30, 2016, notional values of forward foreign
currency contracts opened and closed were $144,043,647 and $142,611,198,
respectively.
Page 20
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
JUNE 30, 2016 (UNAUDITED)
Written options activity for the Fund was as follows:
NUMBER OF
WRITTEN OPTIONS CONTRACTS PREMIUMS
---------------------------------------------------------------------------
Options outstanding at December 31, 2015 3,434 $ 3,707,791
Options Written 8,589 7,379,955
Options Expired (6,993) (5,884,695)
Options Exercised -- --
Options Closed (1,409) (1,401,418)
---------- -----------
Options outstanding at June 30, 2016 3,621 $ 3,801,633
========== ===========
The Fund does not have the right to offset financial assets and financial
liabilities related to option contracts and forward foreign currency contracts
on the Statement of Assets and Liabilities.
6. BORROWINGS
The Fund has entered into a credit agreement with The Bank of Nova Scotia, which
provides for a revolving credit facility to be used as leverage for the Fund.
The revolving credit facility provides for a secured line of credit for the Fund
where Fund assets are pledged against advances made to the Fund. Under the
requirements of the 1940 Act, the Fund, immediately after any such borrowings,
must have an "asset coverage" of at least 300% (33-1/3% of the Fund's total
assets after borrowings). The total commitment under the facility is up to
$117,000,000. The borrowing rate under the revolving credit facility is equal to
the Euro rate of the 6-month LIBOR plus 77.5 basis points. As of June 30, 2016,
the Fund had three loans outstanding under the revolving credit facility
totaling $90,444,623 (81,500,000 EUR). For the six months ended June 30, 2016
the average amount outstanding was $94,720,401 (84,901,098 EUR). The high and
low annual interest rates during the six months ended June 30, 2016 were 0.7859%
and 0.7750%, respectively, and the weighted average interest rate was 0.7802%.
The interest rate at June 30, 2016 was 0.775%. The Fund does not pay a
commitment fee unless the loan balance drops below 75% of total commitment,
which results in a fee of 0.25% and is included in "Interest and fees on loan"
on the Statement of Operations.
7. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
8. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Fund through
the date the financial statements were issued, and has determined that there was
the following subsequent event:
On July 20, 2016, the Fund declared a distribution of $0.121 per Common Share to
Common Shareholders of record on August 1, 2016, payable August 15, 2016.
Page 21
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
JUNE 30, 2016 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by
Computershare Trust Company, N.A. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) NAV per Common Share on that date or
(ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the NYSE or
elsewhere, for the participants' accounts. It is possible that the
market price for the Common Shares may increase before the Plan
Agent has completed its purchases. Therefore, the average purchase
price per share paid by the Plan Agent may exceed the market price
at the time of valuation, resulting in the purchase of fewer shares
than if the dividend or distribution had been paid in Common Shares
issued by the Fund. The Plan Agent will use all dividends and
distributions received in cash to purchase Common Shares in the open
market within 30 days of the valuation date except where temporary
curtailment or suspension of purchases is necessary to comply with
federal securities laws. Interest will not be paid on any uninvested
cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing Computershare, Inc., P.O.
Box 30170, College Station, TX 77842-3170.
--------------------------------------------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio investments during the most recent 12-month period ended June 30 will
be available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
Page 22
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
JUNE 30, 2016 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR") in
Washington, DC. Information regarding the operation of the PRR may be obtained
by calling (800) SEC-0330.
RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some, but not all,
of the risks that should be considered for the Fund. For additional information
about the risks associated with investing in the Fund, please see the Fund's
prospectus and statement of additional information, as well as other Fund
regulatory filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund dividends
and distributions.
FOREIGN (NON-U.S.) SECURITIES RISK: Investing in securities of non-U.S. issuers
may involve certain risks not typically associated with investing in securities
of U.S. issuers. These risks include: (i) there may be less publicly available
information about non-U.S. issuers or markets due to less rigorous disclosure or
accounting standards or regulatory practices; (ii) non-U.S. markets may be
smaller, less liquid and more volatile than the U.S. market; (iii) potential
adverse effects of fluctuations in currency exchange rates or controls on the
value of the Fund's investments; (iv) the economies of non U.S. countries may
grow at slower rates than expected or may experience a downturn or recession;
(v) the impact of economic, political, social or diplomatic events; (vi) certain
non-U.S. countries may impose restrictions on the ability of non U.S. issuers to
make payments of principal and interest to investors located in the United
States due to blockage of non-U.S. currency exchanges or otherwise; and (vii)
withholding and other non-U.S. taxes may decrease the Fund's return.
EMERGING MARKETS RISK: Investments in securities of issuers located in emerging
market countries are considered speculative. In addition to the general risks of
investing in non-U.S. securities, heightened risks of investing in emerging
markets securities include: smaller market capitalization of securities markets,
which may suffer periods of relative illiquidity; significant price volatility;
restrictions on foreign investment; and possible restrictions on repatriation of
investment income and capital. Furthermore, foreign investors may be required to
register the proceeds of sales, and future economic or political crises could
lead to price controls, forced mergers, expropriation or confiscatory taxation,
seizure, nationalization or creation of government monopolies. The currencies of
emerging market countries may experience significant declines against the U.S.
dollar, and devaluation may occur subsequent to investments in these currencies
by the Fund. Inflation and rapid fluctuations in inflation rates have had, and
may continue to have, negative effects on the economies and securities markets
of certain emerging market countries.
EUROPEAN MARKETS RISK: Investing in Europe involves risks not typically
associated with investments in the United States. While many countries in Europe
are considered to have developed markets, investing in the developed countries
of Europe imposes different risks than those associated with investing in other
developed markets. Many countries in Europe are members of the European Union
("EU"), which faces major issues involving its membership, structure, procedures
and policies. Efforts of the member states to continue to unify their economic
and monetary policies may increase the potential for similarities in the
movements of European markets and may reduce any diversification benefit a Fund
may seek by investing in multiple countries within Europe. European countries
that are members of, or candidates to join, the Economic and Monetary Union
("EMU") (which is comprised of EU members that have adopted the Euro currency)
are subject to restrictions on inflation rates, interest rates, deficits and
debt levels, as well as fiscal and monetary controls. By adopting the Euro as
its currency, a member state relinquishes control over its own monetary
policies. As a result, European countries are significantly affected by fiscal
and monetary controls implemented by the EMU, and it is possible that the timing
and substance of these controls may not address the needs of all EMU member
countries. In addition, the fiscal policies of a single member state can impact
and pose economic risks to the EU as a whole. Investing in Euro-denominated
securities also creates exposure to a currency that may not fully reflect the
strengths and weaknesses of the disparate economies that comprise Europe. There
is continued concern over national-level support for the Euro, which could lead
to certain countries leaving the EMU, the implementation of currency controls,
or potentially the dissolution of the Euro. The dissolution of the Euro would
have significant negative effects on European economies and would cause funds
with holdings denominated in Euros to face substantial challenges, including
difficulties relating to settlement of trades and valuation of holdings,
diminished liquidity, and the redenomination of holdings into other currencies.
FOREIGN CURRENCY RISK: The Fund will engage in practices and strategies that
will result in exposure to fluctuations in foreign exchange rates, thus
subjecting the Fund to foreign currency risk. The Fund's exposure to foreign
currencies or in securities or instruments that trade, or receive revenues, in
foreign currencies are subject to the risk that those currencies will decline in
Page 23
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
JUNE 30, 2016 (UNAUDITED)
value relative to the U.S. dollar or, in the case of hedging positions, that the
U.S. dollar will decline in value relative to the currency being hedged.
Currency rates in foreign countries may fluctuate significantly over short
periods of time for a number of reasons, including the forces of supply and
demand in the non-U.S. exchange markets, actual or perceived changes in interest
rates, rates of inflation, balance of payments and governmental surpluses or
deficits, intervention (or the failure to intervene) by U.S. or foreign
governments, central banks or supranational entities such as the International
Monetary Fund, or by the imposition of currency controls or other political
developments in the United States or abroad. These fluctuations may have a
significant adverse impact on the value of the Fund's portfolio and/or the level
of Fund distributions made to Common Shareholders. As noted above, the Fund will
seek to hedge exposure to reduce the risk of loss due to fluctuations in
currency exchange rates relative to the U.S. dollar. There is no assurance,
however, that these strategies will be available or will be successful and the
Fund will incur costs associated with such strategies.
GEOGRAPHIC CONCENTRATION RISK: The Fund may invest from time to time a
substantial amount of its assets in issuers located in a single country or
region. Investments in a single region, although representing a number of
different countries within the region, may be affected by common economic forces
and other factors. Because the Fund will concentrate its investments in this
manner, it assumes the risk that economic, political and social conditions in
those countries will have a significant impact on its investment performance.
This vulnerability to factors affecting European investments is significantly
greater than it would be for a more geographically diversified fund, and may
result in greater losses and volatility. This risk increases to the extent the
Fund focuses on issuers in a limited number of countries in Europe. Western
Europe has, in certain instances, been susceptible to serious financial
hardship, high debt levels and high levels of unemployment. The European Union
itself has experienced difficulties in connection with the debt loads of some of
its member states. In addition, the Fund's investment performance may also be
more volatile if it concentrates its investments in certain countries,
especially emerging market countries.
REAL ESTATE INVESTMENT TRUST (REIT) RISK: Investing in REITs involves certain
unique risks in addition to investing in the real estate industry in general.
REITs are subject to interest rate risk and the risk of default by lessees or
borrowers. REITs whose underlying assets are concentrated in properties used by
a particular industry are also subject to risks associated with such industry.
REITs may have limited financial resources, their securities may trade less
frequently and in a limited volume, and their securities may be subject to more
abrupt or erratic price movements than larger company securities.
LEVERAGE RISK: The use of leverage results in additional risks and can magnify
the effect of any losses. The funds borrowed pursuant to a leverage borrowing
program constitute a substantial lien and burden by reason of their prior claim
against the income of the Fund and against the net assets of the Fund in
liquidation. The rights of lenders to receive payments of interest on and
repayments of principal on any borrowings made by the Fund under a leverage
borrowing program are senior to the rights of holders of Common Shares with
respect to payment of dividends or upon liquidation. If the Fund is not in
compliance with certain credit facility provisions, the Fund may not be
permitted to declare dividends or other distributions, including dividends and
distributions with respect to Common Shares or purchase Common Shares.
MARKET DISRUPTION AND GEOPOLITICAL RISK: Some countries in which the Fund
invests have experienced security concerns, war or threats of war and
aggression, terrorism, economic uncertainty, natural and environmental disasters
and/or systemic market dislocations that have led, and in the future may lead,
to increased short term market volatility and may have adverse long term effects
on the European and world economies and markets generally, each of which may
negatively impact the Fund's investments. For example, there have been various
events throughout Europe, including Russia's annexation of Crimea and the
resulting sanctions against Russia, ongoing tension between Russia and Ukraine
and the political uncertainty and market turmoil in Greece, that have recently
had and may continue to have an adverse impact on European and global markets.
It is possible, for instance, that the events occurring in Russia could result
in, among other things, Russia withholding its natural gas supply from other
European countries, which has the potential to harm the economies and markets of
such countries. The events occurring in one country or region (including
non-European countries and regions) may spread through, or otherwise effect,
other countries and regions across Europe and therefore adversely impact the
Fund's investments in such countries and regions.
EUROPEAN UNION RISK: Continuing uncertainty as to the status of the Euro and the
European Monetary Union and the potential for certain countries to withdraw from
the institution has created significant volatility in currency and financial
markets generally. Any partial or complete dissolution of the European Union
("EU") could have significant adverse effects on currency and financial markets,
and on the values of a Fund's portfolio investments. The United Kingdom's
referendum on June 23, 2016 to leave the European Union (known as "Brexit")
sparked depreciation in the value of the British pound, short-term declines in
the stock markets and heightened risk of continued economic volatility
worldwide. Although the long-term effects of Brexit are difficult to gauge and
cannot be fully known, they could have wide ranging implications for the United
Kingdom's economy, including: possible inflation or recession, continued
depreciation of the pound, or disruption to Britain's trading arrangements with
the rest of Europe. The United Kingdom is one of the EU's largest economies; its
departure also may negatively impact the EU and Europe as a whole, such as by
causing volatility within the union, trigging prolonged economic downturns in
certain European countries or sparking additional member states to contemplate
departing the EU (thereby perpetuating political instability in the region).
Page 24
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
JUNE 30, 2016 (UNAUDITED)
UNITED KINGDOM RISK: Investments in British issuers may subject the Fund to
regulatory, political, currency, security, and economic risk specific to the
United Kingdom. The United Kingdom has one of the largest economies in Europe,
and the United States and other European countries are substantial trading
partners of the United Kingdom. As a result, the British economy may be impacted
by changes to the economic health of the United States and other European
countries. On June 23, 2016, the United Kingdom voted via referendum to leave
the European Union ("EU"), which immediately led to significant market
volatility around the world, as well as political, economic, and legal
uncertainty. It is expected that the United Kingdom's exit from the EU will take
place within two years after the United Kingdom formally notifies the European
Council of its intention to withdraw. However, there is still considerable
uncertainty relating to the potential consequences and precise timeframe for the
exit, how the negotiations for the withdrawal and new trade agreements will be
conducted, and whether the United Kingdom's exit will increase the likelihood of
other countries also departing the EU. During this period of uncertainty, the
negative impact on not only the United Kingdom and European economies, but the
broader global economy, could be significant, potentially resulting in increased
volatility and illiquidity and lower economic growth for companies that rely
significantly on Europe for their business activities and revenues.
REDENOMINATION RISK: Continuing uncertainty as to the status of the euro and the
EMU has created significant volatility in currency and financial markets
generally. Any partial or complete dissolution of the EMU could have significant
adverse effects on currency and financial markets, and on the values of the
Fund's portfolio investments. If one or more EMU countries were to stop using
the euro as its primary currency, the Fund's investments in such countries may
be redenominated into a different or newly adopted currency. As a result, the
value of those investments could decline significantly and unpredictably. In
addition, securities or other investments that are redenominated may be subject
to foreign currency risk, liquidity risk and valuation risk to a greater extent
than similar investments currently denominated in euros. To the extent a
currency used for redenomination purposes is not specified in respect of certain
EMU-related investments, or should the euro cease to be used entirely, the
currency in which such investments are denominated may be unclear, making such
investments particularly difficult to value or sell. The Fund may incur
additional expenses to the extent it is required to seek judicial or other
clarification of the denomination or value of such securities.
Page 25
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FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Henderson Global Investors (North America) Inc.
737 North Michigan Avenue, Suite 1700
Chicago, Illinois 60611
ADMINISTRATOR,
FUND ACCOUNTANT &
CUSTODIAN
Brown Brothers Harriman & Co.
50 Post Office Square
Boston, MA 02110
TRANSFER AGENT
Computershare, Inc.
P.O. Box 30170
College Station, TX 77842-3170
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(a) Not applicable.
(b) There have been no changes, as of the date of this filing, in any of the
portfolio managers identified in response to paragraph (a)(1) of this Item
in the Registrant's most recent annual report on Form N-CSR.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial
officers, or persons performing similar functions, have concluded
that the registrant's disclosure controls and procedures (as defined
in Rule 30a-3(c) under the Investment Company Act of 1940, as
amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of
a date within 90 days of the filing date of the report that includes
the disclosure required by this paragraph, based on their evaluation
of these controls and procedures required by Rule 30a-3(b) under the
1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b)
under the Securities Exchange Act of 1934, as amended (17 CFR
240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act
(17 CFR 270.30a-3(d)) that occurred during the registrant's second
fiscal quarter of the period covered by this report that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Not applicable.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes- Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) First Trust Dynamic Europe Equity Income Fund
--------------------------------------------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: August 22, 2016
-------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: August 22, 2016
-------------------
By (Signature and Title)* /s/ Donald P. Swade
----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: August 22, 2016
-------------------
* Print the name and title of each signing officer under his or her signature.