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 811-21842
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First Trust Strategic High Income Fund II
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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: October 31
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Date of reporting period: October 31, 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
STRATEGIC
HIGH INCOME
FUND II (FHY)
ANNUAL REPORT
FOR THE YEAR ENDED
OCTOBER 31, 2016
FIRST TRUST BROOKFIELD
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TABLE OF CONTENTS
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FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
ANNUAL REPORT
OCTOBER 31, 2016
Shareholder Letter.......................................................... 1
At a Glance................................................................. 2
Portfolio Commentary........................................................ 3
Portfolio of Investments.................................................... 6
Statement of Assets and Liabilities......................................... 14
Statement of Operations..................................................... 15
Statements of Changes in Net Assets......................................... 16
Statement of Cash Flows..................................................... 17
Financial Highlights........................................................ 18
Notes to Financial Statements............................................... 19
Report of Independent Registered Public Accounting Firm..................... 26
Additional Information...................................................... 27
Board of Trustees and Officers.............................................. 33
Privacy Policy.............................................................. 35
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 Brookfield Investment Management Inc.
("Brookfield" 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 Strategic High Income Fund II (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 objectives. 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 current 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 web page 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. 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
Brookfield 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 STRATEGIC HIGH INCOME FUND II (FHY) ANNUAL
LETTER FROM THE CHAIRMAN AND CEO
OCTOBER 31, 2016
Dear Shareholders:
Thank you for your investment in First Trust Strategic High Income Fund II.
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
annual report which contains detailed information about your investment for the
12 months ended October 31, 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.
Early in 2016, many investors were concerned that the volatility witnessed in
the stock market in 2015 would continue, and it did. During the first six months
of the year, one of the events that affected the global markets was the "Brexit"
vote (where citizens in the UK voted to leave the European Union). Just a few
days after the historic vote, the global equity markets rebounded to close June
30, 2016 at a combined market capitalization of $62 trillion. As of October 31,
2016, the S&P 500(R) Index was up 5.87% calendar year-to-date, according to
Bloomberg. From October 30, 2015 through October 31, 2016, the S&P 500(R) Index
was also in positive territory at 4.51%. The last few months have had investors
keenly watching the presidential election in anticipation of the outcome of the
vote and its effect on the stock market and economy. I will discuss that more in
my next letter.
The current bull market (measuring from March 9, 2009 through October 31, 2016)
is the second longest in history. First Trust believes that having a long-term
investment horizon and investing in quality products can help you reach your
goals, regardless of ups and downs in the market. We strive to provide quality
investment products, which has been one of the hallmarks of our firm since its
inception more than 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 STRATEGIC HIGH INCOME FUND II (FHY)
"AT A GLANCE"
AS OF OCTOBER 31, 2016 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FHY
Common Share Price $12.14
Common Share Net Asset Value ("NAV") $13.99
Premium (Discount) to NAV (13.22)%
Net Assets Applicable to Common Shares $115,264,460
Current Monthly Distribution per Common Share (1) $0.09
Current Annualized Distribution per Common Share$1.08
Current Distribution Rate on Closing Common Share Price (2) 8.90%
Current Distribution Rate on NAV (2) 7.72%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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COMMON SHARE PRICE NAV
10/15 12.21 14.15
11.95 13.91
11.61 13.82
11.54 13.65
11/15 11.47 13.62
11.39 13.48
10.82 13.13
11.11 12.91
11.19 12.99
12/15 11.13 13.00
10.95 12.84
10.39 12.43
10.24 12.43
1/16 10.60 12.57
10.37 12.27
10.04 11.95
10.18 12.12
2/16 10.42 12.28
10.88 12.64
11.24 12.82
11.53 13.00
3/16 11.37 12.92
11.24 12.94
11.27 12.97
11.46 13.21
11.71 13.41
4/16 11.80 13.49
11.68 13.36
11.68 13.41
11.63 13.42
5/16 11.74 13.52
11.78 13.46
11.92 13.60
11.81 13.49
6/16 11.85 13.49
11.91 13.57
12.10 13.75
12.24 13.96
12.27 14.01
7/16 12.21 13.89
12.08 13.86
12.18 13.95
12.19 13.97
8/16 12.22 14.02
12.25 13.97
12.15 13.94
11.93 13.83
12.22 14.01
9/16 12.34 14.09
12.14 14.06
12.13 14.08
12.18 14.15
12.14 14.08
10/16 12.14 13.99
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PERFORMANCE
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Average Annual Total Return
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1 Year Ended 5 Years Ended 10 Years Ended Inception (3/28/06)
10/31/16 10/31/16 10/31/16 to 10/31/16
FUND PERFORMANCE (3)
NAV 9.76% 6.92% -2.34% -1.32%
Market Value 10.38% 6.21% -4.05% -3.05%
INDEX PERFORMANCE
Barclays Capital Ba U.S. High Yield Index 8.74% 7.33% 8.06% 8.10%
BofA Merrill Lynch U.S. High Yield
Master II Index 10.17% 7.06% 7.46% 7.58%
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% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS
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Corporate Bonds and Notes 77.7%
Foreign Corporate Bonds and Notes 9.5
Residential Mortgage-Backed Securities 3.8
Manufactured Housing Loans 3.8
Senior Floating-Rate Loan Interests 3.0
Equity 1.4
Commercial Mortgage-Backed Securities 0.8
Collateralized Debt Obligations 0.0*
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Total 100.0%
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* Amount is less than 0.1%
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% OF TOTAL
FIXED-INCOME
CREDIT QUALITY (4) INVESTMENTS
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AAA 0.6%
AA- 1.0
BBB 1.1
BBB- 5.1
BB+ 12.7
BB 20.0
BB- 14.0
B+ 6.8
B 12.3
B- 9.8
CCC+ 5.1
CCC 2.4
CCC- 0.6
CC 2.1
C 2.0
D 0.1
NR 4.3
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Total 100.0%
======
(1) Most recent distribution paid or declared through 10/31/2016. 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 10/31/2016. 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 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 less
than one year. Past performance is not indicative of future results.
(4) The credit quality and ratings information presented above reflects the
ratings assigned by one or more nationally recognized statistical rating
organizations (NRSROs), including Standard & Poor's Ratings Group, a
division of the McGraw Hill Companies, Inc., Moody's Investors Service,
Inc., Fitch Ratings or a comparably rated NRSRO. For situations in which a
security is rated by more than one NRSRO and the ratings are not
equivalent, the highest ratings are used. Sub-investment grade ratings are
those rated BB+/Ba1 or lower. Investment grade ratings are those rated
BBB-/Baa3 or higher. The credit ratings shown relate to the
creditworthiness of the issuers of the underlying securities in the Fund,
and not to the Fund or its shares. Credit ratings are subject to change.
NR Not rated.
Page 2
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PORTFOLIO COMMENTARY
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FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
ANNUAL REPORT
OCTOBER 31, 2016 (UNAUDITED)
SUB-ADVISOR
BROOKFIELD INVESTMENT MANAGEMENT INC.
Brookfield Investment Management Inc. (the "Sub-Advisor") is a registered
investment advisor and represents the public securities platform of Brookfield
Asset Management. The Sub-Advisor provides global listed real assets strategies
including real estate equities, infrastructure equities, real asset debt and
diversified real assets. With over $15 billion of assets under management as of
September 30, 2016, the Sub-Advisor manages separate accounts, registered funds
and opportunistic strategies for institutional and individual clients, including
financial institutions, public and private pension plans, insurance companies,
endowments and foundations, sovereign wealth funds and high net worth investors.
The Sub-Advisor is a wholly owned subsidiary of Brookfield Asset Management, a
leading global alternative asset manager with approximately $250 billion of
assets under management as of September 30, 2016.
PORTFOLIO MANAGEMENT TEAM
DANA E. ERIKSON, CFA - MANAGING DIRECTOR
COMMENTARY
FIRST TRUST STRATEGIC HIGH INCOME FUND II
The primary investment objective of the First Trust Strategic High Income Fund
II ("FHY" or the "Fund") is to seek a high level of current income. The Fund
seeks capital growth as a secondary objective. The Fund seeks to achieve its
investment objectives by investing in a diversified portfolio of
below-investment-grade and investment-grade debt securities and equity
securities that the Sub-Advisor believes offer attractive yield and/or capital
appreciation potential. There can be no assurance that the Fund will achieve its
investment objectives. The Fund may not be appropriate for all investors.
MARKET RECAP AND OUTLOOK
High Yield
The 2016 calendar year so far, has proven to be a favorable one for the
high-yield bond market, which did not look to be the case when the Fund's fiscal
year began. Following a difficult fourth quarter of last year, high-yield bonds
moved sharply lower in January and the first half of February. Oil prices at
that point were continuing their decline which had so rattled the market in
2015. In the face of high levels of investor selling, spreads moved to extremely
attractive levels thereby providing the fuel for the rally seen to date in 2016
through October 31, 2016.
As measured by the BofA Merrill Lynch U.S. High Yield Master II Index, the high
yield market returned 10.17% for the 12-month period ended October 31, 2016(1).
Equities, as measured by the S&P 500(R) Index, were up 4.51% for the same time
period(2). High-yield securities have benefited from the twin tailwinds of
positive equity markets and lower interest rates with the 10-year US treasury
yield falling from 2.1% to 1.8%(3). Investors have been willing to take credit
risk throughout the year, with lower quality bonds outperforming higher quality.
Many of last year's industry laggards have been the winners in 2016, to date.
Stronger product prices in metals and energy pushed bonds in those sectors much
higher.
We believe market mechanisms have appeared healthy in 2016, relieving concerns
some had at the end of calendar 2015. New issue volume which was only $5 billion
in December 2015 has been healthy, with new issuance totaling $250 billion
through October 31, 2016, down only slightly from the same period of last
year(4). Shareholder flows into high-yield mutual funds, which have been
negative each of the past three years, have suddenly turned positive totaling
$11 billion calendar year-to-date through October 31, 2016(5). Further
supporting market prices, company tenders for their own debt have run $59
billion calendar year-to-date through October 31, 2016, exceeding the $50
billion for all of 2015(6). Bond tenders reduce the outstanding supply of
securities and can serve to push prices higher. Also, despite seven years of
-----------------------------
(1) 12 month return of H0A0 as of October 31, 2016. Bloomberg.
(2) 12 month return of SPX as of October 31, 2016, Bloomberg.
(3) Yield on GT10 as of October 30, 2015 and October 31, 2016, Bloomberg.
(4) J.P. Morgan High Yield Market Monitor 1 November 2016 p 8
(5) Source J.P. Morgan High Yield Market Monitor 1 November 2016 p 8-9
(6) Source J.P. Morgan High Yield Market Monitor 1 November 2016 p16
Page 3
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
ANNUAL REPORT
OCTOBER 31, 2016 (UNAUDITED)
historically low interest rates, companies have continued to actively call their
high-yield bonds prior to maturity. Calendar year-to-date through October 31,
2016, $97 billion of bonds have been called, down only slightly from 2015's full
year amount of $126 billion(7). We believe that the new issue market is healthy
and functioning well as is the secondary trading market.
The biggest positive surprise for credit investors has been this year's default
rate. The largest industry in the U.S. high-yield bond market is Energy, which
had suffered from a 75% decline in oil prices over the two year period ended
October 31, 2016. Oil prices bottomed in mid-February and rebounded since then.
Still, they remain substantially below 2015 prices. Many strategists expected
substantial defaults in the Energy sector and indeed, many companies chose to
restructure their debts. However, while many were expecting the 12-month
high-yield bond default rate to rise to the 6% level or higher, the J.P. Morgan
calculation of high-yield bond defaults peaked several months ago at the 4%
level and has since declined to 3.6% as of October 20168. Put simply, not as
many energy companies defaulted as had been expected.
OUTLOOK
We believe corporate credit conditions in the U.S. have been positive for some
time. In addition to a surprisingly low default rate currently, a turn in the
upgrade/downgrade ratio is also occurring. This metric measures the volume of
debt being upgraded by credit rating agencies versus downgraded. The measure
turned negative last year and was running 0.5%, (which means the agencies were
upgrading half as many bonds as they were downgrading). Beginning in the second
quarter of 2016, and continuing through the third quarter, this trend reversed
and companies have been upgraded at roughly 1.5 times the rate as downgrades
during that time(9).
The downside to this year's market performance is it has compressed yields and
spreads. At the end of October, the JP Morgan U.S. High Yield Index had a spread
of 550 basis points over the 10-year Treasury bond which is less than its
20-year median of 573 basis points(10). While this represents a reasonably
attractive spread given current default rates and credit conditions, we believe
the market may be in the latter stages of the credit cycle and therefore views
current spreads as being neutral value.
Securitized Products
We expect economic growth, inflation and interest rates to all remain "low for
long" with inflation rising modestly as energy prices stabilize, removing a
source of dis-inflation, and interest rates rising modestly as quantitative
easing wanes and policy focus shifts to fiscal stimulus. Over the past 12 months
ended October 31, 2016, the 10-Year US Treasury Yield declined 40 basis points
while the Federal Open Market Committee increased the Federal Funds Rate 25
basis points in December 2015 and is expected to increase again following the
November 2016 U.S. election. We believe the yield curve is likely to flatten
somewhat with short-term interest rates rising more than longer-term interest
rates. Many of the Fund's securities are indexed to floating-rate benchmarks and
any increases to short-term interest rates, including the London Interbank
Offered Rate ("LIBOR"), will benefit these floating-rate securities.
RESIDENTIAL MORTGAGE
For the consumer, employment continues to improve, wages continue to grow and
consumer confidence remains high. These are positive fundamentals for
residential mortgage securities. Residential mortgage delinquency rates continue
to decline. The total delinquency rate as of the second quarter of 2016 was
4.66%, the lowest level since the second quarter of 2006, down more than 50%
from the peak of 2010.
Home prices, continue to increase with sales prices, including distressed sales,
increasing 5.4% year-to-date through August 31, 2016. Notably, this was ahead of
most expectations. The Sub-Advisor expects home prices to continue to increase
at a 4% to 5% per annum rate. With the persistent increase in home prices, many
borrowers have seen their equity position improve allowing them to refinance at
lower rates which has resulted in an increase in prepayment speeds for
Non-Agency Mortgage-Backed Securities ("MBS"). These faster prepayments benefit
the Fund's discount-priced Non-Agency MBS.
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(7) Source J.P. Morgan High Yield Market Monitor 1 November 2016 p16
(8) Source J.P. Morgan High Yield Market Monitor 1 November 2016 p 6
(9) Source J.P. Morgan High Yield Market Monitor 1 November 2016 p18
(10) Source J.P. Morgan High Yield Market Monitor 1 November 2016 p12
Page 4
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
ANNUAL REPORT
OCTOBER 31, 2016 (UNAUDITED)
Residential mortgage lending standards remain high and credit provision remains
quite limited due to regulatory obstacles. Agency MBS issuance continues
although there has been little Non-Agency MBS issuance. This lack of supply has
provided a supportive technical backdrop for MBS generally and for Non-Agency
MBS specifically.
The Fund's investments in MBS continue to benefit from these positive
fundamental and technical factors.
COMMERCIAL MORTGAGE
While we believe residential real estate and the U.S. consumer are now
stabilizing after de-leveraging, we believe commercial real estate is in a
re-leveraging cycle. Credit is readily available for commercial properties and
access to credit has expanded along with allowed leverage. Commercial property
values have continued to rise and delinquency rates have remained low.
Commerical Mortgage-Backed Securities ("CMBS") delinquency rates as of October
of 2016 were 4.8% which is well below the 10.6% peak seen in 2012, and a
substantial improvement over year-end 2015 (5.2%).
The influx of foreign money for commercial real estate in top-tier markets has
been significant, pushing prices in these markets well above the pre-crisis
peak. The RCA Commercial Property Price Index tracking major markets across the
U.S. shows a 4.7% increase year-to-date through August 31, 2016. We believe
future commercial real estate price performance is likely to be more tempered in
light of increasing supply in some markets and the potential for regulation to
curb financing availability. Accordingly, we believe there are concerns for the
pricing of risk, as it may not be adequate for more recently issued subordinated
securities from multi-borrower CMBS deals.
The Fund's investments in CMBS are generally seasoned rather than recently
issued, with most issued prior to 2008. These CMBS holdings continue to benefit
from appreciation in commercial real estate markets.
PERFORMANCE ANALYSIS
For the 12-month period ended October 31, 2016, the Fund had a total return(11)
of 9.76% based on net asset value ("NAV"). The Fund traded at a discount to NAV
of -13.71% at the beginning of the period, to a discount to NAV of -13.22% at
the end of the period, resulting in a total return of 10.38%, based on market
price.
The total return for the Fund's benchmark, the Barclays Capital Ba U.S. High
Yield Index, was 8.74% for the 12-month period ended October 31, 2016. While the
benchmark contains mostly corporate debt, it is important to note that the Fund
maintained exposure to structured finance and mortgage-related securities during
the period.
An important factor impacting the return of the Fund relative to its benchmark
was the Fund's use of financial leverage through the use of bank borrowings. As
of October 31, 2016, the Fund's leverage was approximately 27.3% of Managed
Assets. The use of leveraged contributed to performance during the period. The
Fund may utilize leverage in an amount up to 33.33% of Managed Assets. The Fund
uses leverage because the Sub-Advisor believes that, over time, leverage
provides opportunities for additional income and capital growth for common
shareholders. However, the use of leverage also can expose common shareholders
to additional volatility. For example, as the prices of securities held by the
Fund decline, the negative impact of the valuation changes on common share net
asset value and common shareholder total return is magnified by the use of
leverage. Conversely, leverage may enhance common share returns during periods
when the prices of securities held by the Fund are rising generally. The benefit
of the Fund's allocation to equities was offset by the performance drag of the
securitized position.
Contributors to relative performance for the 12-month period ended October 31,
2016 included the Fund's allocation to the retail sector, particularly
supermarkets, utilities, and the underweight in banking bonds. The Fund's
underweight in large issues, and overweight in medium-sized bonds also
contributed to performance. The overweight in B-rated bonds, and underweight in
BB-rated bonds contributed to performance as well.
Detractors from performance included the Fund's overweight in the energy sector,
despite the underweight to commodity-sensitive exploration and production
subsector. Additionally, the Fund's holdings in the basic industry sector,
especially the metals subsector, and overweight in the communications sector,
particularly wireless, detracted from performance.
-----------------------------
(11) 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 share for NAV
returns and changes in Common Share price for market value returns and
does not reflect sales load. Past performance is not indicative of future
results.
Page 5
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------- --------- ------------ ------------
CORPORATE BONDS AND NOTES - 103.4%
AUTOMOTIVE - 3.5%
$ 1,275,000 American Axle & Manufacturing, Inc. (a)....... 6.25% 03/15/21 $ 1,329,188
1,050,000 American Axle & Manufacturing, Inc. (a)....... 6.63% 10/15/22 1,113,000
1,500,000 Ford Motor Co. (a)............................ 6.50% 08/01/18 1,622,782
------------
4,064,970
------------
BASIC INDUSTRY - 6.3%
775,000 AK Steel Corp................................. 7.63% 05/15/20 782,750
775,000 Hexion, Inc................................... 8.88% 02/01/18 740,512
1,075,000 Hexion, Inc. / Hexion Nova Scotia Finance ULC
(a)........................................ 9.00% 11/15/20 779,375
500,000 Ply Gem Industries, Inc....................... 6.50% 02/01/22 523,675
2,100,000 Pulte Group, Inc. (a)......................... 6.38% 05/15/33 2,178,750
2,100,000 USG Corp. (a) (b)............................. 9.50% 01/15/18 2,273,250
------------
7,278,312
------------
CAPITAL GOODS - 5.9%
1,700,000 Crown Cork & Seal Co., Inc. (a)............... 7.38% 12/15/26 1,916,750
2,375,000 H&E Equipment Services, Inc. (a).............. 7.00% 09/01/22 2,510,375
650,000 Terex Corp.................................... 6.50% 04/01/20 666,250
1,625,000 Terex Corp. (a)............................... 6.00% 05/15/21 1,659,531
------------
6,752,906
------------
CONSUMER GOODS - 5.0%
2,000,000 ACCO Brands Corp. (a)......................... 6.75% 04/30/20 2,110,000
1,775,000 L Brands, Inc. (a)............................ 7.60% 07/15/37 1,868,188
1,800,000 New Albertsons, Inc. (a)...................... 7.75% 06/15/26 1,795,500
------------
5,773,688
------------
ENERGY - 25.0%
250,000 Antero Midstream Partners LP/Antero Midstream
Finance Corp. (c).......................... 5.38% 09/15/24 252,500
2,525,000 Blue Racer Midstream LLC/Blue Racer Finance
Corp. (c).................................. 6.13% 11/15/22 2,480,812
1,500,000 Concho Resources, Inc......................... 5.50% 04/01/23 1,542,000
1,625,000 Crestwood Midstream Partners L.P./Crestwood
Midstream Finance Corp. (a) (b)............ 6.25% 04/01/23 1,653,438
2,075,000 EP Energy LLC / Everest Acquisition Finance,
Inc........................................ 6.38% 06/15/23 1,421,375
1,850,000 Ferrellgas Partners LP/Ferrellgas Partners
Finance Corp. (a).......................... 8.63% 06/15/20 1,826,875
1,800,000 Global Partners LP/GLP Finance Corp. (a) (d).. 6.25% 07/15/22 1,728,000
1,650,000 Holly Energy Partners LP/ Holly Energy Finance
Corp....................................... 6.50% 03/01/20 1,703,625
1,000,000 ION Geophysical Corp. (e)..................... 9.13% 12/15/21 595,000
3,250,000 MPLX LP....................................... 4.88% 12/01/24 3,404,544
2,300,000 NRG Energy, Inc. (a).......................... 6.25% 07/15/22 2,317,250
2,325,000 NRG Yield Operating, LLC (a).................. 5.38% 08/15/24 2,383,125
1,275,000 Pioneer Natural Resources Co. (a)............. 6.65% 03/15/17 1,299,790
1,550,000 Suburban Propane Partners LP/Suburban Energy
Finance Corp............................... 7.38% 08/01/21 1,612,969
2,100,000 Targa Pipeline Partners LP/Targa Pipeline
Finance Corp. (a) (d)...................... 5.88% 08/01/23 2,055,375
2,375,000 Tesoro Logistics LP/Tesoro Logistics Finance
Corp. (a).................................. 6.13% 10/15/21 2,486,328
------------
28,763,006
------------
Page 6 See Notes to Financial Statements
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------- --------- ------------ ------------
CORPORATE BONDS AND NOTES (CONTINUED)
HEALTHCARE - 8.6%
$ 1,925,000 CHS/Community Health Systems, Inc. (a)........ 7.13% 07/15/20 $ 1,564,063
675,000 CHS/Community Health Systems, Inc............. 6.88% 02/01/22 518,063
2,925,000 HCA, Inc. (a)................................. 5.25% 06/15/26 3,063,937
2,000,000 Kindred Healthcare, Inc. (a).................. 6.38% 04/15/22 1,858,760
500,000 Quorum Health Corp. (c)....................... 11.63% 04/15/23 365,000
2,625,000 Tenet Healthcare Corp......................... 8.13% 04/01/22 2,579,062
------------
9,948,885
------------
LEISURE - 7.1%
1,450,000 Boyd Gaming Corp. (c)......................... 6.38% 04/01/26 1,558,750
2,375,000 Cedar Fair LP/Canada's Wonderland Co./Magnum
Management Corp. (a)....................... 5.25% 03/15/21 2,465,297
2,450,000 GLP Capital LP/GLP Financing II, Inc. (a)..... 5.38% 11/01/23 2,639,875
1,425,000 MGM Growth Properties Operating Partnership
LP / MGP Escrow, Inc. (c).................. 5.63% 05/01/24 1,520,333
------------
8,184,255
------------
MEDIA - 10.8%
3,125,000 CCO Holdings LLC/CCO Holdings Capital Corp.
(a)........................................ 5.75% 01/15/24 3,312,500
2,275,000 CSC Holdings LLC (c).......................... 10.88% 10/15/25 2,621,937
1,345,000 Cumulus Media Holdings, Inc. (a).............. 7.75% 05/01/19 564,900
1,700,000 iHeartCommunications, Inc. (a)................ 9.00% 03/01/21 1,221,875
2,325,000 Lamar Media Corp. (a)......................... 5.38% 01/15/24 2,458,688
2,200,000 Mediacom Broadband LLC/Mediacom Broadband
Corp. (a).................................. 6.38% 04/01/23 2,299,000
------------
12,478,900
------------
SERVICES - 5.0%
1,000,000 Avis Budget Car Rental LLC/Avis Budget
Finance, Inc. (a).......................... 5.50% 04/01/23 993,750
1,790,000 Casella Waste Systems, Inc. (a)............... 7.75% 02/15/19 1,828,485
900,000 United Rentals North America, Inc. (a)........ 7.63% 04/15/22 961,542
1,925,000 United Rentals North America, Inc............. 5.75% 11/15/24 2,006,813
------------
5,790,590
------------
TECHNOLOGY & ELECTRONICS - 2.3%
2,450,000 CyrusOne LP/CyrusOne Finance Corp............. 6.38% 11/15/22 2,609,250
------------
TELECOMMUNICATIONS - 18.3%
2,750,000 Centurylink, Inc. (a)......................... 7.65% 03/15/42 2,461,250
2,375,000 FairPoint Communications, Inc. (a) (c)........ 8.75% 08/15/19 2,425,469
2,125,000 Frontier Communications Corp. (a)............. 11.00% 09/15/25 2,183,756
3,250,000 Level 3 Financing, Inc........................ 5.38% 05/01/25 3,306,875
500,000 Qwest Capital Funding, Inc.................... 6.88% 07/15/28 475,000
2,750,000 SBA Communications Corp. (a).................. 4.88% 07/15/22 2,811,875
1,875,000 T-Mobile USA, Inc. (a)........................ 6.63% 04/01/23 1,997,213
3,275,000 Windstream Services LLC (a)................... 7.50% 06/01/22 3,111,250
2,225,000 Zayo Group LLC/Zayo Capital, Inc. (a)......... 6.00% 04/01/23 2,352,937
------------
21,125,625
------------
TRANSPORTATION - 1.6%
1,800,000 Watco Cos. LLC/Watco Finance Corp. (a) (e).... 6.38% 04/01/23 1,836,000
------------
See Notes to Financial Statements Page 7
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------- --------- ------------ ------------
CORPORATE BONDS AND NOTES (CONTINUED)
UTILITY - 4.0%
$ 2,350,000 AES Corp. (a)................................. 4.88% 05/15/23 $ 2,343,396
2,275,000 Dynegy, Inc................................... 6.75% 11/01/19 2,313,880
------------
4,657,276
------------
TOTAL CORPORATE BONDS AND NOTES............................................ 119,263,663
(Cost $118,909,507) ------------
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
---------------- ---------------------------------------------- --------- ------------ ------------
FOREIGN CORPORATE BONDS AND NOTES - 12.7%
BASIC INDUSTRY - 3.4%
1,000,000 Cascades, Inc. (USD) (a) (c).................. 5.50% 07/15/22 1,025,630
2,400,000 Ineos Group Holdings S.A. (USD) (c)........... 5.63% 08/01/24 2,385,000
875,000 Millar Western Forest Products Ltd. (USD)
(d)........................................ 8.50% 04/01/21 494,375
------------
3,905,005
------------
CAPITAL GOODS - 1.8%
2,000,000 Ardagh Packaging Finance PLC/Ardagh Holdings
USA Inc. (USD) (a) (c)..................... 6.75% 01/31/21 2,070,000
------------
ENERGY - 3.7%
1,800,000 LBC Tank Terminals Holding Netherlands BV
(USD) (e).................................. 6.88% 05/15/23 1,813,500
645,000 Precision Drilling Corp. (USD)................ 6.63% 11/15/20 631,294
1,750,000 Puma International Financing S.A. (USD) (e)... 6.75% 02/01/21 1,807,260
------------
4,252,054
------------
TELECOMMUNICATIONS - 1.0%
3,600,000 Intelsat Luxembourg S.A. (USD) (a)............ 7.75% 06/01/21 1,188,000
------------
TRANSPORTATION - 2.8%
1,550,000 Dynagas LNG Partners LP/Dynagas Finance, Inc.
(USD) (a) (d).............................. 6.25% 10/30/19 1,449,250
2,000,000 Teekay Offshore Partners LP/Teekay Offshore
Finance Corp. (USD) (a) (d)................ 6.00% 07/30/19 1,707,500
------------
3,156,750
------------
TOTAL FOREIGN CORPORATE BONDS AND NOTES.................................... 14,571,809
(Cost $17,233,518) ------------
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------- --------- ------------ ------------
MORTGAGE-BACKED SECURITIES - 6.1%
COLLATERALIZED MORTGAGE OBLIGATIONS - 5.1%
Countrywide Alternative Loan Trust
$ 840,535 Series 2007-OA3, Class 1A1 (f)............. 0.67% 04/25/47 723,277
Countrywide Home Loan Mortgage Pass-Through
Trust
136,047 Series 2006-21, Class A8................... 5.75% 02/01/37 122,623
Page 8 See Notes to Financial Statements
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------- --------- ------------ ------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Home Equity Asset Trust
$ 1,190,000 Series 2006-4, Class 2A4 (f)............... 0.81% 08/25/36 $ 1,054,865
1,172,852 Series 2006-7, Class 2A3 (f)............... 0.68% 01/25/37 863,935
Nomura Resecuritization Trust
2,642,803 Series 2014-1R, Class 2A11 (c) (f)......... 0.82% 02/26/37 1,500,479
Residential Accredit Loans, Inc.
119,009 Series 2007-Q56, Class A2 (f).............. 51.13% 04/25/37 279,979
Securitized Asset Backed Receivables LLC Trust
1,140,493 Series 2007, Class BR4 (f)................. 0.73% 05/25/37 720,847
Washington Mutual Alternative Mortgage
Pass-Through Certificates
36,764 Series 2007-5, Class A11 (d) (f)........... 36.28% 06/25/37 85,023
Wells Fargo Mortgage Backed Securities Trust
368,849 Series 2006-8, Class A15................... 6.00% 07/01/36 372,839
158,598 Series 2007-8, Class 2A2................... 6.00% 07/01/37 158,443
------------
5,882,310
------------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 1.0%
Greenwich Capital Commercial Funding Corp.
1,180,000 Series 2007-GG11, Class AJ (f)............. 6.24% 12/01/49 1,180,771
------------
TOTAL MORTGAGE-BACKED SECURITIES........................................... 7,063,081
(Cost $6,799,931) ------------
ASSET-BACKED SECURITIES - 5.0%
Ace Securities Corp.
771,238 Series 2003-MH1, Class A4 (c).............. 6.50% 08/01/30 877,812
BankAmerica Manufactured Housing Contract
Trust II
2,300,000 Series 1997-1, Class B1.................... 6.94% 06/10/21 2,840,243
Citigroup Mortgage Loan Trust, Inc.
2,301,000 Series 2003-HE3, Class M4 (f).............. 3.53% 12/25/33 1,234,635
Green Tree Financial Corp.
45,997 Series 1997-4, Class B1 (d)................ 7.23% 02/15/29 2,946
640,925 Series 1998-4, Class M1 (d)................ 6.83% 04/01/30 459,629
649,942 Series 1999-3, Class M1 (d)................ 6.96% 02/01/31 46,190
Oakwood Mortgage Investors, Inc.
661,886 Series 1999-B, Class M1 (d)................ 7.18% 12/01/26 268,921
------------
TOTAL ASSET-BACKED SECURITIES.............................................. 5,730,376
(Cost $4,268,956) ------------
SENIOR FLOATING-RATE LOAN INTERESTS - 4.0%
BASIC INDUSTRY - 1.0%
1,196,390 FMG Resources (August 2006) Pty Ltd., Term
Loan B (f)................................. 3.75% 06/30/19 1,195,265
------------
ENERGY - 1.4%
1,714,513 MEG Energy Corp., Incremental Term Loan (f)... 3.75% 03/31/20 1,615,122
------------
LEISURE - 1.6%
1,825,000 Four Seasons Holdings Inc. Term Loan, Second
Lien (d) (f)............................... 6.25% 12/28/20 1,837,556
------------
TOTAL SENIOR FLOATING-RATE LOAN INTERESTS.................................. 4,647,943
(Cost $4,360,688) ------------
See Notes to Financial Statements Page 9
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
SHARES/
UNITS DESCRIPTION VALUE
---------------- --------------------------------------------------------------------------- ------------
COMMON STOCKS - 1.8%
AUTOMOTIVE - 0.3%
33,500 Ford Motor Co.............................................................. $ 393,290
------------
CAPITAL GOODS - 0.5%
20,275 General Electric Co........................................................ 590,003
------------
ENERGY - 0.4%
1,526 Arch Coal, Inc. (a) (h).................................................... 111,978
10,000 ION Geophysical Corp. (h).................................................. 59,000
7 Thunderbird Resources Equity, Inc. (d) (g) (h)............................. 264,425
------------
435,403
------------
UTILITY - 0.6%
36,000 AES Corp................................................................... 423,720
13,918 TCEH Corp. (Texas Competitive Electric Holdings Co. LLC) (h) (i)........... 211,554
------------
635,274
------------
TOTAL COMMON STOCKS........................................................ 2,053,970
(Cost $2,695,921) ------------
MASTER LIMITED PARTNERSHIPS - 0.0%
ENERGY - 0.0%
4,411 EV Energy Partners, L.P.................................................... 8,204
(Cost $141,651) ------------
PREFERRED SECURITIES - 0.0%
4,000 Soloso CDO, Ltd., Series 2005-1 (e) (g) (j)................................ 1,250
(Cost $0) ------------
WARRANTS - 0.1%
ENERGY - 0.1%
3,287 Arch Coal (a) (d) (g)...................................................... 79,217
(Cost $33) ------------
RIGHTS - 0.0%
UTILITY - 0.0%
22,783 TCEH Corp. (Texas Competitive Electric Holdings Co. LLC)
Claim (g) (h) (i)....................................................... 0
14,640 TCEH Corp. (Texas Competitive Electric Holdings Co. LLC) (h) (i)........... 25,620
------------
TOTAL RIGHTS............................................................... 25,620
(Cost $25,620) ------------
Page 10 See Notes to Financial Statements
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------- --------- ------------ ------------
STRUCTURED NOTES - 0.0%
$ 5,750,000 Preferred Term Securities XXV, Ltd. (e) (g)... (j) 6/22/37 $ 1,797
Preferred Term Securities XXVI, Ltd.
2,500,000 Subordinated Note (e) (g).................. (j) 9/22/37 3,906
------------
TOTAL STRUCTURED NOTES..................................................... 5,703
(Cost $0) ------------
TOTAL INVESTMENTS - 133.1%................................................. 153,450,836
(Cost $154,435,825) (k)
OUTSTANDING LOAN - (37.6%)................................................. (43,350,000)
NET OTHER ASSETS AND LIABILITIES - 4.5%.................................... 5,163,624
------------
NET ASSETS - 100.0%........................................................ $115,264,460
============
-----------------------------
(a) All or a portion of this security serves as collateral on the outstanding
loan.
(b) Multi-Step Coupon Bond - Coupon steps up or down based upon ratings
changes by Standard & Poor's Ratings Group or Moody's Investors Service,
Inc. The interest rate shown reflects the rate in effect at October 31,
2016.
(c) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under the Securities
Act of 1933, as amended (the "1933 Act"), and may be resold in
transactions exempt from registration, normally to qualified institutional
buyers. Pursuant to procedures adopted by the Fund's Board of Trustees,
this security has been determined to be liquid by Brookfield Investment
Management Inc., ("Brookfield"), the Fund's sub-advisor. Although market
instability can result in periods of increased overall market illiquidity,
liquidity for each security is determined based on security specific
factors and assumptions, which require subjective judgment. At October 31,
2016, securities noted as such amounted to $19,083,722 or 16.6% of net
assets.
(d) Pursuant to procedures adopted by the Fund's Board of Trustees, this
security has been determined to be illiquid by Brookfield.
(e) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under the 1933 Act,
and may be resold in transactions exempt from registration, normally to
qualified institutional buyers (see Note 2D - Restricted Securities in the
Notes to Financial Statements).
(f) Floating rate security. The interest rate shown reflects the rate in
effect at October 31, 2016.
(g) 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 the provisions of the Investment Company Act of 1940, as
amended. At October 31, 2016, securities noted as such are valued at
$350,595 or 0.3% of net assets.
(h) Non-income producing security.
(i) On October 3, 2016, Texas Competitive Electric Holdings ("TCEH") completed
its reorganization in the form of a tax free spin-off from the parent
company, Energy Future Holdings. As part of the reorganization, the first
lien claim holders received equity in a new entity, TCEH Corp., cash held
by the new entity, tax receivable rights, and a beneficial interest in an
unsecured claim against the parent company, Energy Future Holdings.
(j) Zero coupon security.
(k) Aggregate cost for federal income tax purposes is $164,986,117. As of
October 31, 2016, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $0 and
the aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value was $11,535,281.
CDO Collateralized Debt Obligation
USD United States Dollar
See Notes to Financial Statements Page 11
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of October 31,
2016 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
10/31/2016 PRICES INPUTS INPUTS
------------- ------------- ------------- -------------
Corporate Bonds and Notes*......................... $ 119,263,663 $ -- $ 119,263,663 $ --
Foreign Corporate Bonds and Notes*................. 14,571,809 -- 14,571,809 --
Mortgage-Backed Securities:
Collateralized Mortgage Obligations............. 5,882,310 -- 5,882,310 --
Commercial Mortgage-Backed Securities........... 1,180,771 -- 1,180,771 --
Asset-Backed Securities............................ 5,730,376 -- 5,730,376 --
Senior Floating-Rate Loan Interests*............... 4,647,943 -- 4,647,943 --
Common Stocks:
Energy.......................................... 435,403 170,978 -- 264,425
Other industry categories*...................... 1,618,567 1,618,567 -- --
Master Limited Partnerships*....................... 8,204 8,204 -- --
Preferred Securities............................... 1,250 -- -- 1,250
Warrants*.......................................... 79,217 -- 79,217 --
Rights*............................................ 25,620 -- 25,620 --**
Structured Notes................................... 5,703 -- -- 5,703
------------- ------------- ------------- -------------
Total Investments.................................. $ 153,450,836 $ 1,797,749 $ 151,381,709 $ 271,378
============= ============= ============= =============
* See Portfolio of Investments for industry breakout.
** Investment is valued at $0.
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. There were no
transfers between Levels at October 31, 2016.
The following provides information on the Level 3 equities held by the Fund that
were valued at October 31, 2016 based on unobservable inputs.
IMPACT TO
VALUATION FROM
FAIR VALUE AT VALUATION UNOBSERVABLE AN INCREASE
ASSET TYPE 10/31/16 TECHNIQUE INPUTS AMOUNT IN INPUT
---------- ------------- --------------- ------------- -------- ---------------
Equity $ 264,425 Income Approach Expected Life 20 years Decrease
Discount Rate 10% Decrease
Level 3 Structured Notes and Preferred Securities are valued using broker quotes
and Level 3 Rights are fair valued by the Advisor's Pricing Committee. These
values are based on unobservable and non-quantitative inputs. The Fund's Board
of Trustees has adopted valuation procedures that are utilized by the Advisor's
Pricing Committee to oversee the day-to-day valuation of the Fund's investments.
The Advisor's Pricing Committee, through the Fund's fund accounting agent,
monitors daily pricing via tolerance checks and stale and unchanged price
reviews. The Advisor's Pricing Committee also reviews monthly back testing of
third-party pricing services prices by comparing sales prices of Fund
investments to prior day third-party pricing service prices. Additionally, the
Advisor's Pricing Committee reviews periodic information from the Fund's
third-party pricing service that compares secondary market trade prices to their
daily valuations.
Page 12 See Notes to Financial Statements
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
The following table presents the activity of the Fund's investments measured at
fair value on a recurring basis using significant unobservable inputs (Level 3)
for the period presented.
BEGINNING BALANCE AT OCTOBER 31, 2015
Common Stocks $ 248,220
Preferred Securities 1,250
Structured Notes 4,922
Net Realized Gain (Loss) --
Net Change in Unrealized Appreciation/Depreciation
Common Stocks 16,205
Preferred Securities --
Structured Notes 781
Purchases --
Rights --**
Sales --
Transfers In --
Transfers Out --
ENDING BALANCE AT OCTOBER 31, 2016
Common Stocks 264,425
Preferred Securities 1,250
Rights --**
Structured Notes 5,703
----------
Total Level 3 holdings $ 271,378
==========
** Investment is valued at $0.
There was a net change of $16,986 in unrealized appreciation (depreciation) from
Level 3 investments held as of October 31, 2016.
See Notes to Financial Statements Page 13
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2016
ASSETS:
Investments, at value
(Cost $154,435,825)............................................................................. $ 153,450,836
Cash............................................................................................... 2,594,028
Receivables:
Interest........................................................................................ 2,504,897
Investment securities sold...................................................................... 527,993
Dividends....................................................................................... 8,985
-------------
Total Assets.................................................................................... 159,086,739
-------------
LIABILITIES:
Outstanding loan................................................................................... 43,350,000
Payables:
Common Shares repurchased....................................................................... 132,330
Investment advisory fees........................................................................ 121,662
Interest and fees on loan....................................................................... 85,293
Audit and tax fees.............................................................................. 70,200
Printing fees................................................................................... 20,516
Administrative fees............................................................................. 11,132
Custodian fees.................................................................................. 10,472
Transfer agent fees............................................................................. 7,292
Trustees' fees and expenses..................................................................... 1,412
Legal fees...................................................................................... 1,018
Financial reporting fees........................................................................ 773
Other liabilities.................................................................................. 10,179
-------------
Total Liabilities............................................................................... 43,822,279
-------------
NET ASSETS......................................................................................... $ 115,264,460
=============
NET ASSETS CONSIST OF:
Paid-in capital.................................................................................... $ 182,429,363
Par value.......................................................................................... 82,399
Accumulated net investment income (loss)........................................................... 2,517,854
Accumulated net realized gain (loss) on investments, forward foreign currency
contracts and foreign currency transactions...................................................... (68,780,167)
Net unrealized appreciation (depreciation) on investments.......................................... (984,989)
-------------
NET ASSETS......................................................................................... $ 115,264,460
=============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)............................... $ 13.99
=============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized)........ 8,239,882
=============
Page 14 See Notes to Financial Statements
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2016
INVESTMENT INCOME:
Interest........................................................................................... $ 11,597,118
Dividends (net of foreign withholding tax of $424)................................................. 65,373
Other.............................................................................................. 3,376
-------------
Total investment income......................................................................... 11,665,867
-------------
EXPENSES:
Investment advisory fees........................................................................... 1,395,914
Interest and fees on loan.......................................................................... 919,961
Administrative fees................................................................................ 89,233
Audit and tax fees................................................................................. 74,351
Printing fees...................................................................................... 53,711
Transfer agent fees................................................................................ 40,366
Custodian fees..................................................................................... 21,331
Trustees' fees and expenses........................................................................ 17,471
Financial reporting fees........................................................................... 9,250
Legal fees......................................................................................... 4,020
Other.............................................................................................. 75,213
-------------
Total expenses.................................................................................. 2,700,821
-------------
NET INVESTMENT INCOME (LOSS)....................................................................... 8,965,046
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments..................................................................................... (13,023,218)
Forward foreign currency contracts.............................................................. (5,420)
Foreign currency transactions................................................................... 5,877
-------------
Net realized gain (loss)........................................................................... (13,022,761)
-------------
Net change in unrealized appreciation (depreciation) on:
Investments..................................................................................... 12,087,105
Forward foreign currency contracts.............................................................. 30,140
Foreign currency translation.................................................................... 3,259
-------------
Net change in unrealized appreciation (depreciation)............................................... 12,120,504
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS)............................................................ (902,257)
-------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................... $ 8,062,789
=============
See Notes to Financial Statements Page 15
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
10/31/2016 10/31/2015
-------------- --------------
OPERATIONS:
Net investment income (loss)........................................................ $ 8,965,046 $ 10,452,634
Net realized gain (loss)............................................................ (13,022,761) (1,448,155)
Net change in unrealized appreciation (depreciation)................................ 12,120,504 (18,619,141)
-------------- --------------
Net increase (decrease) in net assets resulting from operations..................... 8,062,789 (9,614,662)
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................................... (7,537,587) (9,735,535)
Return of capital................................................................... (2,420,423) (1,768,527)
-------------- --------------
Total distributions to shareholders................................................. (9,958,010) (11,504,062)
-------------- --------------
CAPITAL TRANSACTIONS:
Repurchase of Common Shares......................................................... (2,136,348) (322,116)
-------------- --------------
Net increase (decrease) in net assets resulting from capital transactions........... (2,136,348) (322,116)
-------------- --------------
Total increase (decrease) in net assets............................................. (4,031,569) (21,440,840)
NET ASSETS:
Beginning of period................................................................. 119,296,029 140,736,869
-------------- --------------
End of period....................................................................... $ 115,264,460 $ 119,296,029
============== ==============
Accumulated net investment income (loss) at end of period........................... $ 2,517,854 $ 1,372,022
============== ==============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period................................................ 8,432,081 8,458,869
Common Shares repurchased*.......................................................... (192,199) (26,788)
-------------- --------------
Common Shares at end of period...................................................... 8,239,882 8,432,081
============== ==============
* On September 15, 2015, the Fund commenced a share repurchase program. The
program originally expired on March 15, 2016, but on March 15, 2016, the
Fund announced that the Board of Trustees of the Fund (the "Board")
authorized the continuation of the Fund's share repurchase program. The
program again expired on September 15, 2016, but on September 15, 2016,
the Fund again announced that the Board authorized the continuation of the
Fund's share repurchase program. For the year ended October 31, 2016, and
the year ended October 31, 2015, the Fund repurchased 192,199 and 26,788,
respectively, of its shares at a weighted-average discount of 15.33% and
14.92%, respectively, from net asset value per share. The Fund expects to
continue to repurchase its outstanding shares until the earlier of (i) the
repurchase of an additional 203,956 common shares (for an aggregate of
422,943), or (ii) March 15, 2017.
Page 16 See Notes to Financial Statements
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations..................... $ 8,062,789
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by operating activities:
Purchases of investments...................................................... (36,860,626)
Sales, maturities and paydowns of investments................................. 41,579,181
Net amortization/accretion of premiums/discounts on investments............... (357,245)
Net realized gain/loss on investments......................................... 13,023,218
Net change in unrealized appreciation/depreciation forward foreign
currency contracts ........................................................ (30,140)
Net change in unrealized appreciation/depreciation on investments............. (12,087,105)
CHANGES IN ASSETS AND LIABILITIES:
Decrease in interest receivable............................................... 300,440
Increase in dividends receivable.............................................. (360)
Decrease in prepaid expenses.................................................. 6,830
Increase in interest and fees on loan payable................................. 78,493
Decrease in investment advisory fees payable.................................. (5,988)
Increase in legal fees payable................................................ 152
Decrease in printing fees payable............................................. (1,513)
Decrease in administrative fees payable....................................... (28,328)
Increase in custodian fees payable............................................ 4,378
Increase in transfer agent fees payable....................................... 3,474
Decrease in Trustees' fees and expenses payable............................... (63)
Increase in other liabilities payable......................................... 9,151
-------------
CASH PROVIDED BY OPERATING ACTIVITIES............................................... $ 13,696,738
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of Common Shares................................................... (2,049,950)
Distributions to Common Shareholders from net investment income............... (7,537,587)
Distributions to Common Shareholders from return of capital................... (2,420,423)
Repayment of borrowing........................................................ (5,000,000)
-------------
CASH USED IN FINANCING ACTIVITIES................................................... (17,007,960)
-------------
Decrease in cash and foreign currency (a)........................................... (3,311,222)
Cash and foreign currency at beginning of period.................................... 5,905,250
-------------
Cash at end of period............................................................... $ 2,594,028
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees................................... $ 841,468
=============
-----------------------------
(a) Includes net change in unrealized appreciation (depreciation) on foreign
currency of $3,259.
See Notes to Financial Statements Page 17
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------
2016 2015 2014 2013 2012
------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period............... $ 14.15 $ 16.64 $ 17.52 $ 17.06 $ 16.17
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)....................... 1.09 1.24 1.38 1.48 1.52
Net realized and unrealized gain (loss)............ (0.10) (2.38) (0.82) 0.43 0.90
---------- ---------- ---------- ---------- ----------
Total from investment operations................... 0.99 (1.14) 0.56 1.91 2.42
---------- ---------- ---------- ---------- ----------
Net investment income.............................. (0.91) (1.15) (1.19) (0.66) (0.61)
Return of capital.................................. (0.29) (0.21) (0.25) (0.79) (0.94)
---------- ---------- ---------- ---------- ----------
Total distributions to Common Shareholders......... (1.20) (1.36) (1.44) (1.45) (1.55)
---------- ---------- ---------- ---------- ----------
Premiums from shares sold in Common Share
offering........................................ -- -- -- 0.00 (a) 0.02
Common Share repurchases........................... 0.05 0.01 -- -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of period..................... $ 13.99 $ 14.15 $ 16.64 $ 17.52 $ 17.06
========== ========== ========== ========== ==========
Market value, end of period........................ $ 12.14 $ 12.21 $ 15.60 $ 15.97 $ 17.69
========== ========== ========== ========== ==========
TOTAL RETURN BASED ON NET ASSET VALUE (b).......... 9.76% (6.04)% 4.03% 12.19% 16.11%
========== ========== ========== ========== ==========
TOTAL RETURN BASED ON MARKET VALUE (b)............. 10.38% (13.52)% 6.99% (1.38)% 34.16%
========== ========== ========== ========== ==========
-----------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............... $ 115,264 $ 119,296 $ 140,737 $ 148,238 $ 144,205
Ratio of total expenses to average net assets...... 2.44% 2.23% 2.34% 2.22% 2.52%
Ratio of total expenses to average net assets
excluding interest expense...................... 1.61% 1.57% 1.77% 1.71% 1.93%
Ratio of net investment income (loss) to
average net assets.............................. 8.09% 8.01% 8.00% 8.55% 9.52%
Portfolio turnover rate............................ 24% 30% 28% 27% 33%
INDEBTEDNESS:
Total loan outstanding (in 000's).................. $ 43,350 $ 48,350 $ 58,850 $ 55,400 $ 54,400
Asset coverage per $1,000 of
indebtedness (c)................................ $ 3,659 $ 3,467 $ 3,391 $ 3,676 $ 3,651
-----------------------------
(a) Amount represents less than $0.01 per share.
(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 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) Calculated by subtracting the Fund's total liabilities (not including the
loan outstanding) from the Fund's total assets, and dividing by the
outstanding loan balance in 000's.
Page 18 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
OCTOBER 31, 2016
1. ORGANIZATION
First Trust Strategic High Income Fund II (the "Fund") is a diversified,
closed-end management investment company organized as a Massachusetts business
trust on January 18, 2006, and is registered with the Securities and Exchange
Commission ("SEC") under the Investment Company Act of 1940, as amended (the
"1940 Act"). The Fund trades under the ticker symbol "FHY" on the New York Stock
Exchange ("NYSE").
The Fund's primary investment objective is to seek a high level of current
income. The Fund seeks capital growth as a secondary objective. The Fund seeks
to achieve its investment objectives by investing in a diversified portfolio of
below-investment grade and investment grade debt securities, and equity
securities that Brookfield Investment Management Inc. ("Brookfield" or the
"Sub-Advisor") believes offer attractive yield and/or capital appreciation
potential. The Fund may invest up to 100% of its Managed Assets in
below-investment grade debt securities (commonly referred to as "high-yield" or
"junk" bonds). Managed Assets means the average daily total asset value of the
Fund minus the sum of the Fund's liabilities other than the principal amount of
borrowings or reverse repurchase agreements, if any. There can be no assurance
that the Fund will achieve its investment objectives. The Fund may not be
appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund is considered an investment company and follows accounting and
reporting guidance under Financial Accounting Standards Board 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 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:
Corporate bonds, notes, U.S. government securities, mortgage-backed
securities, asset-backed securities and other debt securities are valued
on the basis of valuations provided by dealers who make markets in such
securities or by a third-party pricing service approved by the Fund's
Board of Trustees, which may use the following valuation inputs when
available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Common stocks 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 the asked price, if available, and
otherwise at their closing bid price.
Page 19
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
OCTOBER 31, 2016
The Senior Floating-Rate Loan interests ("Senior Loans")(1) held in the
Fund are not listed on any securities exchange or board of trade. Senior
Loans are typically bought and sold by institutional investors in
individually negotiated private transactions that function in many
respects like an over-the-counter secondary market, although typically no
formal market-makers exist. This market, while having grown substantially
since its inception, generally has fewer trades and less liquidity than
the secondary market for other types of securities. Some Senior Loans have
few or no trades, or trade infrequently, and information regarding a
specific Senior Loan may not be widely available or may be incomplete.
Accordingly, determinations of the market value of Senior Loans may be
based on infrequent and dated information. Because there is less reliable,
objective data available, elements of judgment may play a greater role in
valuation of Senior Loans than for other types of securities. Typically,
Senior Loans are fair valued using information provided by a third-party
pricing service. The third-party pricing service primarily uses
over-the-counter pricing from dealer runs and broker quotes from
indicative sheets to value the Senior Loans.
Forward foreign currency contracts are fair 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.
Fixed income and other debt securities having a remaining maturity of 60
days or less when purchased are fair valued at cost adjusted for
amortization of premiums and accretion of discounts (amortized cost),
provided the Advisor's Pricing Committee has determined that the use of
amortized cost is an appropriate reflection of fair value given market and
issuer-specific conditions existing at the time of the determination.
Factors that may be considered in determining the appropriateness of the
use of amortized cost include, but are not limited to, the following:
1) the credit conditions in the relevant market and changes thereto;
2) the liquidity conditions in the relevant market and changes thereto;
3) the interest rate conditions in the relevant market and changes
thereto (such as significant changes in interest rates);
4) issuer-specific conditions (such as significant credit
deterioration); and
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing Committee
may use last-obtained market-based data to assist it when valuing
portfolio securities using amortized cost.
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 (the "1933 Act")) for which a third-party 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 third-party 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 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 current 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 fundamental business data relating to the borrower/issuer;
2) an evaluation of the forces which influence the market in which
these securities are purchased and sold;
3) the type, size and cost of a security;
4) the financial statements of the borrower/issuer;
5) the credit quality and cash flow of the borrower/issuer, based on
the Sub-Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities (or
equity securities) of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing
the security;
10) the business prospects of the issuer, including any ability to
obtain money or resources from a parent or affiliate and an
assessment of the borrower's/issuer's management;
11) the prospects for the borrower's/issuer's industry, and multiples
(of earnings and/or cash flows) being paid for similar businesses in
that industry;
12) the borrower's/issuer's competitive position within the industry;
13) the borrower's/issuer's ability to access additional liquidity
through public and/or private markets; and
14) other relevant factors.
-----------------------------
(1) The terms "security" and "securities" used throughout the Notes to
Financial Statements include Senior Loans.
Page 20
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
OCTOBER 31, 2016
The Fund invests a significant portion of its assets in below-investment grade
debt securities, including structured finance securities and corporate bonds.
Structured finance securities include: asset-backed securities, including home
equity, manufactured housing, etc.; commercial mortgage-backed securities;
residential mortgage-backed or private-label collateralized mortgage
obligations; and collateralized debt obligations. The value and related income
of these securities is sensitive to changes in economic conditions, including
delinquencies and/or defaults.
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 October 31, 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.
Interest income is recorded daily on the accrual basis. Amortization of premiums
and accretion of discounts are recorded using the effective interest method.
The Fund invests in certain lower credit quality securitized assets (for
example, asset-backed securities, collateralized mortgage obligations and
commercial mortgage-backed securities), that have contractual cash flows. For
these securities, if there is a change in the estimated cash flows, based on an
evaluation of current information, then the estimated yield is adjusted.
Additionally, if the evaluation of current information indicates a permanent
impairment of the security, the cost basis of the security is written down and a
loss is recognized. Debt obligations may be placed on non-accrual status, and
related interest income may be reduced by ceasing current accruals and
amortization/accretion and writing off interest receivables when the collection
of all or a portion of interest has become doubtful based on consistently
applied procedures. A debt obligation is removed from non-accrual status when
the issuer resumes interest payments or when collectability of interest is
reasonably assured.
Securities purchased on a when-issued, delayed-delivery or forward purchase
commitment basis may have extended settlement periods. The value of the security
so purchased is subject to market fluctuations during this period. The Fund
maintains liquid assets with a current value at least equal to the amount of its
when-issued, delayed-delivery or forward purchase commitments until payment is
made. At October 31, 2016, the Fund had no when-issued, delayed-delivery or
forward purchase commitments.
C. UNFUNDED LOAN COMMITMENTS
The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund is obligated to fund these loan commitments at the
borrower's discretion. The Fund did not have any unfunded delayed draw loan
commitments as of October 31, 2016.
D. RESTRICTED SECURITIES
The Fund invests in restricted securities, which are securities that may not be
offered for public sale without first being registered under the 1933 Act. Prior
to registration, restricted securities may only be resold in transactions exempt
from registration under Rule 144A under the 1933 Act, normally to qualified
institutional buyers. As of October 31, 2016, the Fund held restricted
securities as shown in the following table that the Sub-Advisor has deemed
illiquid pursuant to procedures adopted by the Fund's Board of Trustees.
Although market instability can result in periods of increased overall market
illiquidity, liquidity for each security is determined based on
Page 21
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
OCTOBER 31, 2016
security-specific factors and assumptions, which require subjective judgment.
The Fund does not have the right to demand that such securities be registered.
These securities are valued according to the valuation procedures as stated in
the Portfolio Valuation note (Note 2A) and are not expressed as a discount to
the carrying value of a comparable unrestricted security. There are no
unrestricted securities with the same maturity dates and yields for these
issuers.
% OF
ACQUISITION PRINCIPAL CARRYING NET
SECURITY DATE VALUE/SHARES PRICE COST VALUE ASSETS
-------------------------------------------------------------------------------------------------------------------------
ION Geophysical Corp., 12/15/21 4/28/16 $ 1,000,000 59.50 $ 580,313 $ 595,000 0.52%
LBC Tank Terminals Holding Netherlands BV,
05/15/23 9/03/14 $ 1,800,000 100.75 1,898,147 1,813,500 1.57
Preferred Term Securities XXV, Ltd.,
Zero Coupon, 06/22/37 03/27/07 $ 5,750,000 0.00* -- 1,797 0.00**
Preferred Term Securities XXVI, Ltd.,
Subordinated Note, Zero Coupon, 09/22/37 06/06/07 $ 2,500,000 0.00* -- 3,906 0.00**
Puma International Financing S.A. (USD),
02/1/21 01/28/14-09/08/15 $ 1,750,000 103.27 1,765,112 1,807,260 1.57
Soloso CDO, Ltd., Series 2005-1 04/24/06 4,000 0.31 -- 1,250 0.00**
Watco Cos. LLC/Watco Finance Corp.,
04/01/23 03/31/15-04/08/15 $ 1,800,000 102.00 1,814,756 1,836,000 1.60
----------- ----------- -----
$ 6,053,238 $ 6,058,713 5.26%
=========== =========== =====
* Amount is less than $0.01.
** Amount is less than 0.01%.
E. COLLATERALIZED DEBT OBLIGATIONS
A collateralized debt obligation ("CDO") is an asset-backed security whose
underlying collateral is typically a portfolio of bonds or bank loans. Where the
underlying collateral is a portfolio of bonds, a CDO is referred to as a
collateralized bond obligation ("CBO"). Where the underlying collateral is a
portfolio of bank loans, a CDO is referred to as a collateralized loan
obligation ("CLO"). Investors in CDOs bear the credit risk of the underlying
collateral. Multiple tranches of securities are issued by the CDO, offering
investors various maturity and credit risk characteristics. Tranches are
categorized as senior, mezzanine, and subordinated/equity, according to their
degree of risk. If there are defaults or the CDO's collateral otherwise
underperforms, scheduled payments to senior tranches take precedence over those
of mezzanine tranches, and scheduled payments to mezzanine tranches take
precedence over those to subordinated/equity tranches. CDOs, similar to other
asset-backed securities, are subject to prepayment risk.
F. FORWARD FOREIGN CURRENCY CONTRACTS
The Fund is subject to foreign currency risk in the normal course of pursuing
its investment objectives. 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
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. 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 is 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 reorganization proceeding. The Fund may obtain
only limited recovery or may obtain no recovery in such circumstances.
G. 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
Page 22
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
OCTOBER 31, 2016
"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
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 foreign currency
transactions" on the Statement of Operations.
H. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
The Fund will distribute to holders of its Common Shares monthly dividends of
all or a portion of its net income after the payment of interest and dividends
in connection with leverage, if any. Distributions will automatically be
reinvested into additional Common Shares pursuant to the Fund's Dividend
Reinvestment Plan unless cash distributions are elected by the shareholder.
Distributions from income and capital gains are determined in accordance with
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 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. Permanent differences
incurred during the fiscal year ended October 31, 2016, primarily as a result of
differing book/tax treatment on recognition of amortization/accretion on
portfolio holdings, have been reclassified at year end to reflect a decrease in
accumulated net investment income (loss) by $281,627, an increase in accumulated
net realized gain (loss) on investments by $228,883 and an increase in paid-in
capital of $52,744. Net assets were not affected by this reclassification.
The tax character of distributions paid during the fiscal years ended October
31, 2016 and 2015 was as follows:
Distributions paid from: 2016 2015
Ordinary income................................. $ 7,537,587 $ 9,735,535
Capital gain ................................... -- --
Return of capital............................... 2,420,423 1,768,527
As of October 31, 2016, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income .................. $ --
Undistributed capital gains..................... --
------------
Total undistributed earnings.................... --
Accumulated capital and other losses ........... (55,712,021)
Net unrealized appreciation (depreciation) ..... (11,535,281)
------------
Total accumulated earnings (losses) ............ (67,247,302)
Other........................................... --
Paid-in capital................................. 182,511,762
------------
Net assets ..................................... $115,264,460
============
I. INCOME TAXES
The Fund intends to continue 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.
Under the Regulated Investment Company Modernization Act of 2010 (the "Act"),
net capital losses arising in taxable years beginning after December 22, 2010,
may be carried forward indefinitely, and their character is retained as
short-term and/or long-term losses. Previously, net capital losses were carried
forward for up to eight years and treated as short-term losses. As a transition
rule, the Act requires that post-enactment net capital losses be used before
pre-enactment net capital losses. At October 31, 2016, for federal income tax
purposes, the Fund had capital loss carryforwards available that are shown in
the following table, to the extent provided by regulations, to offset future
capital gains through the years indicated. To the extent that these loss
carryforwards are used to offset future capital gains, it is probable that the
capital gains offset will not be distributed to Fund shareholders.
Page 23
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
OCTOBER 31, 2016
CAPITAL LOSS CAPITAL LOSS CAPITAL LOSS
AVAILABLE AVAILABLE AVAILABLE POST EFFECTIVE - TOTAL CAPITAL
THROUGH 2017 THROUGH 2018 THROUGH 2019 NO EXPIRATION LOSS AVAILABLE
-------------- -------------- -------------- ---------------- ---------------
$ 5,621,803 $ 15,342,938 $ 7,053,888 $ 27,693,392 $ 55,712,021
Of these losses, $27,053,613 is subject to loss limitation resulting from
reorganization activity. This limitation generally reduces the utilization of
these losses to a maximum of $4,318,194 per year.
The Fund is subject to certain limitations under the 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.
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. Taxable years ending 2013, 2014,
2015 and 2016 remain open to federal and state audit. As of October 31, 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.
J. EXPENSES
The Fund will pay all expenses directly related to its operations.
K. NEW AND AMENDED FINANCIAL REPORTING RULES AND FORMS
On October 13, 2016, the SEC adopted new rules and forms, and amended existing
rules and forms. The new and amended rules and forms are intended to modernize
the reporting of information provided by funds and to improve the quality and
type of information that funds provide to the SEC and investors. The new and
amended rules and forms will be effective for the First Trust funds, including
the Fund, for reporting periods beginning on and after June 1, 2018. Management
is evaluating the new and amended rules and forms to determine the impact to the
Fund.
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
investment management services, First Trust is entitled to a monthly fee
calculated at an annual rate of 0.90% 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.
Brookfield serves as the Fund's sub-advisor and manages the Fund's portfolio
subject to First Trust's supervision. The Sub-Advisor receives a portfolio
management fee at an annual rate of 0.45% of Managed Assets that is paid by
First Trust from its investment advisory fee.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
administrator, fund accountant and transfer agent in accordance with certain fee
arrangements. As administrator and fund accountant, BNYM IS 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 transfer agent, BNYM IS is
responsible for maintaining shareholder records for the Fund. The Bank of New
York Mellon ("BNYM") serves as the Fund's custodian in accordance with certain
fee arrangements. As custodian, BNYM is responsible for custody of the Fund's
assets. BNYM IS and BNYM are subsidiaries of The Bank of New York Mellon
Corporation, a financial holding company.
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. Prior to January 1, 2016, the fixed annual retainer was allocated pro
rata based on each fund's net assets. 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.
Independent 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 Fund for acting in such capacities.
Page 24
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
OCTOBER 31, 2016
4. PURCHASES AND SALES OF SECURITIES
The cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the year ended October 31, 2016, were $36,860,626
and $42,107,174, respectively.
5. DERIVATIVES TRANSACTIONS
The following table presents the amount of net realized gain (loss) and change
in net unrealized appreciation (depreciation) recognized for the year ended
October 31, 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 $ (5,420)
Net change in unrealized appreciation (depreciation) on
forward foreign currency contracts 30,140
During the year ended October 31, 2016, the notional values of forward foreign
currency contracts opened and closed were $877,760 and $5,482,361, respectively.
At October 31, 2016, the Fund had no open forward foreign currency contracts.
6. BORROWINGS
The Fund entered into a committed facility agreement with BNP Paribas Prime
Brokerage Inc. ("BNP") that has a maximum commitment amount of $66,000,000.
Absent certain events of default or failure to maintain certain collateral
requirements, BNP may not terminate the committed facility agreement except upon
180 calendar days' prior notice. Of the outstanding commitment, $13,850,000 is
fixed-rate financing of 2.79% for a seven-year period ending July 23, 2020. The
borrowing rate on the floating-rate financing amount is equal to 1-month LIBOR
plus 70 basis points. Under the facility, the Fund pays a commitment fee of
0.80% on the undrawn amount of such facility.
The average amount outstanding for the year ended October 31, 2016 was
$44,194,262 with a weighted average interest rate of 1.65%. As of October 31,
2016, the Fund had outstanding borrowings of $43,350,000 under this committed
facility agreement. On the floating-rate financing amount, the high and low
annual interest rates for the year ended October 31, 2016 were 1.25% and 0.89%,
respectively. The weighted average interest rate at October 31, 2016 was 1.73%.
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 to the Fund through
the date the financial statements were issued, and has determined that there
were the following subsequent events:
On November 21, 2016, the Fund declared a distribution of $0.09 per share to
Common Shareholders of record on December 5, 2016, payable December 12, 2016.
On December 7, 2016, the floating rate financing amount on the committed
facility agreement with BNP was reduced from $52,150,000 to $41,150,000 and the
borrowing rate increased from 1-month LIBOR plus 70 basis points to 1-month
LIBOR plus 100 basis points.
Page 25
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
We have audited the accompanying statement of assets and liabilities of First
Trust Strategic High Income Fund II (the "Fund"), including the portfolio of
investments, as of October 31, 2016, and the related statements of operations
and cash flows for the year then ended, the statements of changes in net assets
for each of the two years in the period then ended, and the financial highlights
for each of the five years in the period then ended. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of October 31, 2016, by correspondence with the Fund's
custodian, brokers, and agent banks; where replies were not received from
brokers, we performed other auditing procedures. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Trust Strategic High Income Fund II as of October 31, 2016, the results of its
operations and its cash flows for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
December 20, 2016
Page 26
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
OCTOBER 31, 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 BNY
Mellon Investment Servicing (US) Inc. (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 BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
--------------------------------------------------------------------------------
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 is
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 27
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
OCTOBER 31, 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 Form N-Q's
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.
TAX INFORMATION
Distributions paid to foreign shareholders between the period January 1, 2016
and October 31, 2016 that were properly designated by the Fund as
"interest-related dividends" or "short-term capital gain dividends," may not be
subject to federal income tax provided that the income was earned directly by
such foreign shareholders.
NYSE CERTIFICATION INFORMATION
In accordance with Section 303A-12 of the New York Stock Exchange ("NYSE")
Listed Company Manual, the Fund's President has certified to the NYSE that, as
of April 26, 2016, he was not aware of any violation by the Fund of NYSE
corporate governance listing standards. In addition, the Fund's reports to the
SEC on Forms N-CSR, N-CSRS, and N-Q contain certifications by the Fund's
principal executive officer and principal financial officer that relate to the
Fund's public disclosure in such reports and are required by Rule 30a-2 under
the 1940 Act.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, First Trust Energy
Income and Growth Fund, First Trust Enhanced Equity Income Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income Fund,
First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging
Opportunity Fund, First Trust Specialty Finance and Financial Opportunities
Fund, First Trust High Income Long/Short Fund, First Trust Energy Infrastructure
Fund, First Trust MLP and Energy Income Fund, First Trust Intermediate Duration
Preferred & Income Fund and First Trust New Opportunities MLP & Energy Fund was
held on April 22, 2016 (the "Annual Meeting"). At the Annual Meeting, James A.
Bowen and Niel B. Nielson were elected by the Common Shareholders of the First
Trust Strategic High Income Fund II as the Class III Trustees for a three-year
term expiring at the Fund's annual meeting of shareholders in 2019. The number
of votes cast in favor of Mr. Bowen was 6,206,832, the number of votes withheld
was 622,792 and the number of broker non-votes was 1,468,770. The number of
votes cast in favor of Mr. Nielson was 6,210,863, the number of votes withheld
was 618,761 and the number of broker non-votes was 1,468,770. Richard E.
Erickson, Thomas R. Kadlec and Robert F. Keith are the other current and
continuing Trustees.
RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some 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. Security prices can fluctuate for several reasons including
the general condition of the securities markets, or when political or economic
events affecting the issuers occur, including the risk that borrowers do not pay
their mortgages. When the Advisor or Sub-Advisor determines that it is
temporarily unable to follow the Fund's investment strategy or that it is
impractical to do so (such as when a market disruption event has occurred and
trading in the securities is extremely limited or absent), the Advisor or
Sub-Advisor may take temporary defensive positions.
RESIDENTIAL MORTGAGE-BACKED SECURITIES RISK: MBS's may have less potential for
capital appreciation than comparable fixed-income securities due to the
likelihood of increased prepayments of mortgages as interest rates decline. If
the Fund buys MBS's at a premium, mortgage foreclosures and prepayments of
principal by mortgagors (which usually may be made at any time without penalty)
may result in some loss of the Fund's principal investment to the extent of the
premium paid. Alternatively, in a rising interest rate environment, the value of
MBS's may be adversely affected when payments on underlying mortgages do not
occur as anticipated, resulting in the extension of the security's effective
maturity and the related increase in interest rate sensitivity of a longer-term
Page 28
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
OCTOBER 31, 2016 (UNAUDITED)
instrument. The value of MBS's may Also change due to shifts in the market's
perception of issuers and regulatory or tax changes adversely affecting the
markets as a whole. In addition, mbs's are subject to the credit risk associated
with the performance of the underlying mortgage properties. In certain
instances, third-party guarantees or other forms of credit support can reduce
the credit risk. The fund may also invest in mbs's which are interest-only
securities ("io") and principal-only ("po") securities. Generally speaking, when
interest rates are falling and prepayment rates are increasing, the value of a
po security will rise and the value of an io security will fall. Conversely,
when interest rates are rising and prepayment rates are decreasing, generally
the value of a po will fall and the value of an io security will rise. In
addition to the foregoing, residential mbs's are subject to additional risks,
including, but not limited to: (i) the United States residential mortgage market
has recently encountered various difficulties and changed economic conditions.
In addition, recently, residential property values in various states have
declined or remained stable after extended periods of appreciation. A continued
decline or an extended flattening in those values may result in additional
increases in delinquencies and losses on residential mortgage loans generally;
(ii) if a residential mortgage obligation is secured by a junior lien it will be
subordinate to the rights of the mortgagees or beneficiaries under the related
senior mortgages or deeds of trust; and (iii) depending on the length of a
residential mortgage obligation underling a residential MBS, unscheduled or
early payments of principal and interest may shorten the security's effective
maturity and prevailing interest rates may be higher or lower than the current
yield of the Fund's portfolio at the time the Fund receives the payments for
reinvestment.
VALUE INVESTING RISK: The Sub-Advisor focuses the Fund's investments on
securities that they believe are undervalued or inexpensive relative to other
investments. Such securities are subject to the risk of misestimating certain
fundamental factors. Disciplined adherence to a "value" investment mandate
during periods in which that style is "out of favor" can result in significant
underperformance relative to overall market indices and other managed investment
vehicles that pursue growth style investments and/or flexible style mandates.
BELOW-INVESTMENT GRADE SECURITIES RISK: The Fund invests in below-investment
grade securities. The market values for high-yield securities tend to be very
volatile, and these securities are less liquid than investment grade debt
securities. For these reasons, an investment in the Fund is subject to the
following specific risks: (a) increased price sensitivity to changing interest
rates and to a deteriorating economic environment; (b) greater risk of loss due
to default or declining credit quality; (c) adverse issuer specific events are
more likely to render the issuer unable to make interest and/or principal
payments; and (d) a negative perception of the high-yield market may depress the
price and liquidity of high-yield securities.
DISTRESSED SECURITIES RISK: The Fund may invest in securities issued by
companies in a bankruptcy reorganization proceeding, subject to some other form
of a public or private debt restructuring or otherwise in default or in
significant risk of default in the payment of interest or repayment of principal
or trading at prices substantially below other below-investment grade debt
securities of companies in similar industries. Distressed securities frequently
do not produce income while they are outstanding. The Fund may be required to
incur certain extraordinary expenses in order to protect and recover its
investment. Therefore, to the extent the Sub-Advisor seeks capital appreciation
through investment in distressed securities; the ability to achieve current
income may be diminished.
ECONOMIC CONDITIONS RISK: Adverse changes in economic conditions are more likely
to lead to a weakened capacity of a high-yield issuer to make principal payments
and interest payments than an investment grade issuer. An economic downturn
could severely affect the ability of highly leveraged issuers to service their
debt obligations or to repay their obligations upon maturity. Under adverse
market or economic conditions, the secondary market for high-yield securities
could contract further, independent of any specific adverse changes in the
condition of a particular issuer and these securities may become illiquid. As a
result, the Sub-Advisor could find it more difficult to sell these securities or
may be able to sell the securities only at prices lower than if such securities
were widely traded.
FIXED-INCOME SECURITIES RISK: Debt securities, including high yield securities,
are subject to certain risks, including: (i) issuer risk, which is the risk that
the value of fixed-income securities may decline for a number of reasons which
directly relate to the issuer, such as management performance, financial
leverage and reduced demand for the issuer's goods and services or, in the case
of asset-backed issuers, a decline in the value and/or cash flows of the
underlying assets; (ii) reinvestment risk, which is the risk that income from
the Fund's portfolio will decline if the proceeds from matured, traded or called
bonds are reinvested at market interest rates that are below the portfolio's
current earnings rate; (iii) prepayment risk, which is the risk that during
periods of declining interest rates, the issuer of a security may exercise its
option to prepay principal earlier than scheduled, forcing the reinvestment in
lower yielding securities; and (iv) credit risk, which is the risk that a
security in the Fund's portfolio will decline in price or the issuer fails to
make interest payments when due because the issuer of the security experiences a
decline in its financial status.
INTEREST RATE RISK: The Fund's portfolio is also subject to interest rate risk.
Interest rate risk is the risk that fixed-income securities will decline in
value because of changes in market interest rates. Investments in debt
securities with long-term maturities may experience significant price declines
if long-term interest rates increase.
Page 29
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
OCTOBER 31, 2016 (UNAUDITED)
LEVERAGE RISK: The Fund may borrow an amount up to 33-1/3% (or such other
percentage as permitted by law) of its assets (including the amount borrowed)
less liabilities other than borrowings. The Fund may use leverage for investment
purposes and to meet cash requirements. Its leveraged capital structure creates
special risks not associated with unleveraged funds having similar investment
objectives and policies. These include the possibility of higher volatility of
the NAV of the Fund. The Fund previously leveraged its assets through the use of
reverse repurchase agreements. Reverse repurchase agreements are subject to the
risks that the market value of the securities sold by the Fund may decline below
the price of the securities the Fund is obligated to repurchase, and that the
securities may not be returned to the Fund. The Fund may from time to time
consider changing the amount of the leverage in response to actual or
anticipated changes in interest rates or the value of the Fund's investment
portfolio. There can be no assurance that the leverage strategies will be
successful.
FOREIGN SECURITIES RISK: The Fund may invest in securities (equity or debt) of
foreign issuers. Investing in securities of foreign issuers, which are generally
denominated in foreign currencies, 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 foreign issuers or
markets due to less rigorous disclosure or accounting standards or regulatory
practices; (ii) foreign 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 foreign 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 foreign countries may impose
restrictions on the ability of foreign issuers to make payments of principal and
interest to investors located in the United States due to blockage of foreign
currency exchanges or otherwise; and (vii) withholding and other foreign taxes
may decrease the Fund's return. These risks may be more pronounced to the extent
that the Fund invests a significant amount of its assets in companies located in
one region and to the extent that the Fund invests in securities of issuers in
emerging markets.
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING APPROVAL OF INVESTMENT MANAGEMENT AND INVESTMENT
SUB-ADVISORY AGREEMENTS
The Board of Trustees of First Trust Strategic High Income Fund II (the "Fund"),
including the Independent Trustees, unanimously approved the continuation of the
Investment Management Agreement (the "Advisory Agreement") between the Fund and
First Trust Advisors L.P. (the "Advisor") and the Investment Sub-Advisory
Agreement (the "Sub-Advisory Agreement" and together with the Advisory
Agreement, the "Agreements") among the Fund, the Advisor and Brookfield
Investment Management Inc. (the "Sub-Advisor") for a one-year period ending June
30, 2017 at a meeting held on June 13, 2016. The Board determined that the
continuation of the Agreements is in the best interests of the Fund in light of
the extent and quality of the services provided and such other matters as the
Board considered to be relevant in the exercise of its reasonable business
judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. At meetings held on April 22, 2016 and June 13, 2016, the
Board, including the Independent Trustees, reviewed materials provided by the
Advisor and the Sub-Advisor responding to requests for information from counsel
to the Independent Trustees that, among other things, outlined the services
provided by the Advisor and the Sub-Advisor to the Fund (including the relevant
personnel responsible for these services and their experience); the advisory fee
rate payable by the Fund and the sub-advisory fees for the Fund as compared to
fees charged to a peer group of funds compiled by Management Practice, Inc.
("MPI"), an independent source (the "MPI Peer Group"), and as compared to fees
charged to other clients of the Advisor and the Sub-Advisor; expenses of the
Fund as compared to expense ratios of the funds in the MPI Peer Group;
performance information for the Fund; the nature of expenses incurred in
providing services to the Fund and the potential for economies of scale, if any;
financial data on the Advisor and the Sub-Advisor; any fall out benefits to the
Advisor and the Sub-Advisor; and information on the Advisor's and the
Sub-Advisor's compliance programs. The Board reviewed initial materials with the
Advisor at a special meeting held on April 22, 2016, prior to which the
Independent Trustees and their counsel met separately to discuss the information
provided by the Advisor and the Sub-Advisor. Following the April meeting,
independent legal counsel on behalf of the Independent Trustees requested
certain clarifications and supplements to the materials provided, and the
information provided in response to those requests was considered at an
executive session of the Independent Trustees and independent legal counsel held
prior to the June 13, 2016 meeting, as well as at the meeting held that day. The
Board applied its business judgment to determine whether the arrangements
between the Fund and the Advisor and among the Fund, the Advisor and the
Sub-Advisor continue to be reasonable business arrangements from the Fund's
perspective as well as from the perspective of shareholders. The Board
determined that, given the totality of the information provided with respect to
the Agreements, the Board had received sufficient information to renew the
Agreements. The Board considered that shareholders chose to invest or remain
invested in the Fund knowing that the Advisor and the Sub-Advisor manage the
Fund.
Page 30
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
OCTOBER 31, 2016 (UNAUDITED)
In reviewing the Agreements, the Board considered the nature, extent and quality
of the services provided by the Advisor and the Sub-Advisor under the
Agreements. With respect to the Advisory Agreement, the Board considered that
the Advisor is responsible for the overall management and administration of the
Fund and reviewed all of the services provided by the Advisor to the Fund,
including the oversight of the Sub-Advisor, as well as the background and
experience of the persons responsible for such services. In reviewing the
services provided, the Board noted the compliance program that had been
developed by the Advisor and considered that it includes a robust program for
monitoring the Advisor's, the Sub-Advisor's and the Fund's compliance with the
1940 Act, as well as the Fund's compliance with its investment objectives and
policies. In addition, as part of the Board's consideration of the Advisor's
services, the Advisor, in its written materials and at the April 22, 2016
meeting, described to the Board the scope of its ongoing investment in
additional infrastructure and personnel to maintain and improve the quality of
services provided to the Fund and the other funds in the First Trust Fund
Complex. With respect to the Sub-Advisory Agreement, the Board reviewed the
materials provided by the Sub-Advisor and considered the services that the
Sub-Advisor provides to the Fund, including the Sub-Advisor's day-to-day
management of the Fund's investments. In considering the Sub-Advisor's
management of the Fund, the Board noted the background and experience of the
Sub-Advisor's portfolio management team. In light of the information presented
and the considerations made, the Board concluded that the nature, extent and
quality of the services provided to the Fund by the Advisor and the Sub-Advisor
under the Agreements have been and are expected to remain satisfactory and that
the Sub-Advisor, under the oversight of the Advisor, has managed the Fund
consistent with its investment objectives and policies.
The Board considered the advisory and sub-advisory fee rates payable under the
Agreements for the services provided. The Board noted that the sub-advisory fee
is paid by the Advisor from its advisory fee. The Board received and reviewed
information showing the advisory fee rates and expense ratios of the peer funds
in the MPI Peer Group, as well as advisory fee rates charged by the Advisor and
the Sub-Advisor to other fund and non-fund clients, as applicable. With respect
to the MPI Peer Group, the Board discussed with representatives of the Advisor
the limitations in creating a relevant peer group for the Fund, including that
(i) the Fund is unique in its composition, which makes assembling peers with
similar strategies and asset mix difficult; (ii) peer funds may use different
amounts and types of leverage with different costs associated with them or may
use no leverage; (iii) none of the peer funds employs an advisor/sub-advisor
management structure with an unaffiliated sub-advisor; and (iv) most of the peer
funds are larger than the Fund, which causes the Fund's fixed expenses to be
higher on a percentage basis as compared to the larger peer funds, and some of
the peer funds are part of a larger fund complex that may allow for additional
economies of scale. The Board took these limitations into account in considering
the peer data, and noted that the advisory fee rate payable by the Fund, based
on average net assets, was above the median of the MPI Peer Group. With respect
to fees charged to other clients, the Board considered differences between the
Fund and other clients that limited their comparability. In considering the
advisory fee rate overall, the Board also considered the Advisor's statement
that it seeks to meet investor needs through innovative and value-added
investment solutions and the Advisor's description of its long-term commitment
to the Fund.
The Board considered performance information for the Fund. The Board noted the
process it has established for monitoring the Fund's performance and portfolio
risk on an ongoing basis, which includes quarterly performance reporting from
the Advisor and Sub-Advisor for the Fund. The Board determined that this process
continues to be effective for reviewing the Fund's performance. The Board
received and reviewed information comparing the Fund's performance for periods
ended December 31, 2015 to the performance of the MPI Peer Group and to two
benchmark indexes. In reviewing the Fund's performance as compared to the
performance of the MPI Peer Group, the Board took into account the limitations
described above with respect to creating a relevant peer group for the Fund.
Based on the information provided on net asset value performance, the Board
noted that the Fund underperformed the MPI Peer Group average for the one- and
three-year periods and outperformed the MPI Peer Group average for the five-year
period ended December 31, 2015. The Board also noted that the Fund
underperformed the benchmark indexes for the one- and three-year periods and
outperformed the benchmark indexes for the five-year period ended December 31,
2015. In addition, the Board considered information provided by the Advisor on
the impact of leverage on the Fund's returns. The Board also received
information on the Fund's annual distribution rate as of December 31, 2015 and
the Fund's average trading discount during 2015 and comparable information for
the peer group.
On the basis of all the information provided on the fees, expenses and
performance of the Fund and the ongoing oversight by the Board, the Board
concluded that the advisory and sub-advisory fees continue to be reasonable and
appropriate in light of the nature, extent and quality of the services provided
by the Advisor and the Sub-Advisor to the Fund under the Agreements.
The Board considered information and discussed with the Advisor whether there
were any economies of scale in connection with providing advisory services to
the Fund and noted the Advisor's statement that it expects its expenses to
increase over the next twelve months as the Advisor continues to make
investments in personnel and infrastructure. The Board determined that due to
the Fund's closed-end structure, the potential for realization of economies of
scale as Fund assets grow was not a material factor to be considered. The Board
considered the revenues and allocated costs (including the allocation
methodology) of the Advisor in serving as investment advisor to the Fund for the
twelve months ended December 31, 2015 and the estimated profitability level for
the Fund calculated by the Advisor based on such data, as well as complex-wide
and product-line profitability data for the same period. The Board noted the
Page 31
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
OCTOBER 31, 2016 (UNAUDITED)
inherent limitations in the profitability analysis, and concluded that, based on
the information provided, the Advisor's profitability level for the Fund was not
unreasonable. In addition, the Board considered fall-out benefits described by
the Advisor that may be realized from its relationship with the Fund, including
the Advisor's compensation for fund reporting services pursuant to a separate
Fund Reporting Services Agreement.
The Board noted the Sub-Advisor's expenses in providing investment services to
the Fund and considered the Sub-Advisor's statement that it does not expect
economies of scale to be present in connection with its provision of services to
the Fund but that there may be economic efficiencies achieved from aggregate
trade orders. The Board considered that the sub advisory fee rate was negotiated
at arm's length between the Advisor and the Sub-Advisor, an unaffiliated third
party. The Board also considered information provided by the Sub-Advisor with
respect to the profitability of the Sub Advisory Agreement to the Sub-Advisor.
The Board noted the inherent limitations in the profitability analysis and
concluded that the profitability analysis for the Advisor was more relevant. The
Board noted that the Sub-Advisor does not maintain any soft-dollar arrangements
and that the Sub-Advisor indicated that it does not anticipate any material fall
out benefits from its relationship to the Fund.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, unanimously determined that the terms
of the Agreements continue to be fair and reasonable and that the continuation
of the Agreements is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
Page 32
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BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
OCTOBER 31, 2016 (UNAUDITED)
The Trust's statement of additional information includes additional information
about the Trustees and is available, without charge, upon request, by calling
(800) 988-5891.
Number of Other
Portfolios in Trusteeships or
Term of Office the First Trust Directorships
Name, Address, and Year First Fund Complex Held by Trustee
Date of Birth and Elected or Principal Occupations Overseen by During Past
Position with the Fund Appointed (1) During Past 5 Years Trustee 5 Years
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Three Year Term Physician; President, Wheaton Orthopedics; 137 None
c/o First Trust Advisors L.P. Limited Partner, Gundersen Real Estate
120 E. Liberty Drive, o Since Fund Limited Partnership; Member, Sportsmed LLC
Suite 400 Inception (April 2007 to November 2015)
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Three Year Term President, ADM Investor Services, Inc. 137 Director of ADM
c/o First Trust Advisors L.P. (Futures Commission Merchant) Investor Services,
120 E. Liberty Drive, o Since Fund Inc., ADM
Suite 400 Inception Investor Services
Wheaton, IL 60187 International, and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Three Year Term President, Hibs Enterprises (Financial and 137 Director of Trust
c/o First Trust Advisors L.P. Management Consulting) Company of
120 E. Liberty Drive, o Since June, 2006 Illinois
Suite 400
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Three Year Term Managing Director and Chief Operating 137 Director of
c/o First Trust Advisors L.P. Officer (January 2015 to Present), Pelita Covenant
120 E. Liberty Drive, o Since Fund Harapan Education Foundation (Education Transport, Inc.
Suite 400 Inception Products and Services); (May 2003 to
Wheaton, IL 60187 President and Chief May 2014)
D.O.B.: 03/54 Executive Officer (June 2012 to September
2014), Servant Interactive LLC
(Educational Products and Services);
President and Chief Executive Officer
(June 2012 to September 2014), Dew
Learning LLC (Educational Products and
Services); President (June 2002 to June
2012), Covenant College
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(2), Trustee o Three Year Term Chief Executive Officer, First Trust 137 None
and Chairman of the Board Advisors L.P. and First Trust Portfolios
120 E. Liberty Drive, o Since Fund L.P.; Chairman of the Board of Directors,
Suite 400 Inception BondWave LLC (Software Development
Wheaton, IL 60187 Company) and Stonebridge Advisors LLC
D.O.B.: 09/55 (Investment Advisor)
-----------------------------
(1) Currently, Robert F. Keith, as a Class I Trustee, is serving as a trustee
until the Fund's 2017 annual meeting of shareholders. Richard E. Erickson
and Thomas R. Kadlec, as Class II Trustees, are serving as trustees until
the Fund's 2018 annual meeting of shareholders. James A. Bowen and Niel B.
Nielson, as Class III Trustees, are serving as trustees until the Fund's
2019 annual meeting of shareholders.
(2) Mr. Bowen is deemed an "interested person" of the Fund due to his position
of Chief Executive Officer of First Trust Advisors L.P., investment
advisor of the Fund.
Page 33
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
OCTOBER 31, 2016 (UNAUDITED)
Name, Address Position and Offices Term of Office and Principal Occupations
and Date of Birth with Fund Length of Service During Past 5 Years
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(1)
------------------------------------------------------------------------------------------------------------------------------------
James M. Dykas President and Chief o Indefinite term Managing Director and Chief Financial Officer
120 E. Liberty Drive, Executive Officer (January 2016 to Present), Controller (January 2011
Suite 400 o Since January 2016 to January 2016), Senior Vice President (April 2007
Wheaton, IL 60187 to January 2016), First Trust Advisors L.P. and
D.O.B.: 01/66 First Trust Portfolios L.P.; Chief Financial Officer,
BondWave LLC (Software Development Company)
(January 2016 to Present) and Stonebridge
Advisors LLC (Investment Advisor) (January 2016
to Present)
Donald P. Swade Treasurer, Chief Financial o Indefinite term Senior Vice President (July 2016 to Present), Vice
120 E. Liberty Drive, Officer and Chief President (April 2012 to July 2016), First Trust
Suite 400 Accounting Officer o Since January 2016 Advisors L.P. and First Trust Portfolios L.P., Vice
Wheaton, IL 60187 President (September 2006 to April 2012),
D.O.B.: 08/72 Guggenheim Funds Investment Advisors,
LLC/Claymore Securities, Inc.
W. Scott Jardine Secretary and Chief o Indefinite term General Counsel, First Trust Advisors L.P. and First
120 E. Liberty Drive, Legal Officer Trust Portfolios L.P.; Secretary and General
Suite 400 o Since Fund Inception Counsel, BondWave LLC; and Secretary of
Wheaton, IL 60187 Stonebridge Advisors LLC
D.O.B.: 05/60
Daniel J. Lindquist Vice President o Indefinite term Managing Director (July 2012 to Present), Senior
120 E. Liberty Drive, Vice President (September 2005 to Present), First
Suite 400 o Since September 2005 Trust Advisors L.P. and First Trust Portfolios L.P.
Wheaton, IL 60187
D.O.B: 02/70
Kristi A. Maher Chief Compliance o Indefinite term Deputy General Counsel, First Trust Advisors L.P.
120 E. Liberty Drive, Officer and and First Trust Portfolios L.P.
Suite 400 Assistant Secretary o Chief Compliance
Wheaton, IL 60187 Officer Since
D.O.B.: 12/66 January 2011
o Assistant Secretary
Since Fund Inception
-----------------------------
(3) Officers of the Fund have an indefinite term. The term "officer" means the
president, vice president, secretary, treasurer, controller or any other
officer who performs a policy making function.
Page 34
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PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
OCTOBER 31, 2016 (UNAUDITED)
PRIVACY POLICY
First Trust values our relationship with you and considers your privacy an
important priority in maintaining that relationship. We are committed to
protecting the security and confidentiality of your personal information.
SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and your broker-dealer, investment
advisor or financial representative through interviews,
applications, agreements or other forms;
o Information about your transactions with us, our affiliates or
others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies".
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians
and trustees, or that assist us in the distribution of investor
materials such as trustees, banks, financial representatives, proxy
services, solicitors and printers.
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information within First Trust.
PRIVACY ONLINE
We allow third-party companies, including AddThis (a social media sharing
service), to collect certain anonymous information when you visit our website.
These companies may use non-personally identifiable information during your
visits to this and other websites in order to provide advertisements about goods
and services likely to be of greater interest to you. These companies typically
use a cookie, third party web beacon or pixel tags, to collect this information.
To learn more about this behavioral advertising practice, you can visit
www.networkadvertising.org.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, First Trust restricts access to
your nonpublic personal information to those First Trust employees who need to
know that information to provide products or services to you. We maintain
physical, electronic and procedural safeguards to protect your nonpublic
personal information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time, however, if we do change
it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).
March 2016
Page 35
This Page Left Blank Intentionally.
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Brookfield Investment Management Inc.
Brookfield Place
250 Vesey Street, 15th Floor
New York, NY 10281
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
The Bank of New York Mellon
101 Barclay Street, 20th Floor
New York, NY 10286
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.
(a) The registrant, as of the end of the period covered by this report, has
adopted a code of ethics that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions, regardless
of whether these individuals are employed by the registrant or a third
party.
(c) There have been no amendments, during the period covered by this report,
to a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or
a third party, and that relates to any element of the code of ethics
description.
(d) The registrant has not granted any waivers, including an implicit waiver,
from a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or
a third party, that relates to one or more of the items set forth in
paragraph (b) of this item's instructions.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the Registrant's board of
trustees has determined that Thomas R. Kadlec and Robert F. Keith are qualified
to serve as audit committee financial experts serving on its audit committee and
that each of them is "independent," as defined by Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees (Registrant) -- The aggregate fees billed for each of the last
two fiscal years for professional services rendered by the principal
accountant for the audit of the registrant's annual financial statements
or services that are normally provided by the accountant in connection
with statutory and regulatory filings or engagements for those fiscal
years were $65,000 for the fiscal year ended October 31, 2015 and $65,000
for the fiscal year ended October 31, 2016.
(b) Audit-Related Fees (Registrant) -- The aggregate fees billed in each of
the last two fiscal years for assurance and related services by the
principal accountant that are reasonably related to the performance of the
audit of the registrant's financial statements and are not reported under
paragraph (a) of this Item were $0 for the fiscal year ended October 31,
2015 and $3,000 for the fiscal year ended October 31, 2016. The 2016
audit-related fees reflect fees for auditing data after migration to new
fund accounting software.
Audit-Related Fees (Investment Advisor) -- The aggregate fees billed in
each of the last two fiscal years for assurance and related services by
the principal accountant that are reasonably related to the performance of
the audit of the registrant's financial statements and are not reported
under paragraph (a) of this Item were $0 for the fiscal year ended October
31, 2015 and $0 for the fiscal year ended October 31, 2016.
(c) Tax Fees (Registrant) -- The aggregate fees billed in each of the last two
fiscal years for professional services rendered by the principal
accountant for tax compliance, tax advice, and tax planning were $5,200
for the fiscal year ended October 31, 2015 and $5,200 for the fiscal year
ended October 31, 2016. These fees were for tax return preparation and
review.
Tax Fees (Investment Advisor) -- The aggregate fees billed in each of the
last two fiscal years for professional services rendered by the principal
accountant for tax compliance, tax advice, and tax planning were $0 for
the fiscal year ended October 31, 2015 and $0 for the fiscal year ended
October 31, 2016.
(d) All Other Fees (Registrant) -- The aggregate fees billed in each of the
last two fiscal years for products and services provided by the principal
accountant to the Registrant, other than the services reported in
paragraphs (a) through (c) of this Item were $0 for the fiscal year ended
October 31, 2015 and $0 for the fiscal year ended October 31, 2016.
All Other Fees (Investment Adviser) The aggregate fees billed in each of
the last two fiscal years for products and services provided by the
principal accountant to the Registrant, other than the services reported
in paragraphs (a) through (c) of this Item were $0 for the fiscal year
ended October 31, 2015 and $0 for the fiscal year ended October 31, 2016.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
Pursuant to its charter and its Audit and Non-Audit Services Pre-Approval
Policy, the Audit Committee (the "Committee") is responsible for the
pre-approval of all audit services and permitted non-audit services (including
the fees and terms thereof) to be performed for the registrant by its
independent auditors. The Chairman of the Committee is authorized to give such
pre-approvals on behalf of the Committee up to $25,000 and report any such
pre-approval to the full Committee.
The Committee is also responsible for the pre-approval of the independent
auditor's engagements for non-audit services with the registrant's adviser (not
including a sub-adviser whose role is primarily portfolio management and is
sub-contracted or overseen by another investment adviser) and any entity
controlling, controlled by or under common control with the investment adviser
that provides ongoing services to the registrant, if the engagement relates
directly to the operations and financial reporting of the registrant, subject to
the de minimis exceptions for non-audit services described in Rule 2-01 of
Regulation S-X. If the independent auditor has provided non-audit services to
the registrant's adviser (other than any sub-adviser whose role is primarily
portfolio management and is sub-contracted with or overseen by another
investment adviser) and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to its policies, the Committee
will consider whether the provision of such non-audit services is compatible
with the auditor's independence.
(e)(2) The percentage of services described in each of paragraphs (b) through
(d) for the Registrant and the Registrant's investment adviser of this
Item that were approved by the audit committee pursuant to the
pre-approval exceptions included in paragraph (c)(7)(i)(c) or paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X are as follows:
(b) 0%
(c) 0%
(d) 0%
(f) The percentage of hours expended on the principal accountant's engagement
to audit the registrant's financial statements for the most recent fiscal
year that were attributed to work performed by persons other than the
principal accountant's full-time, permanent employees was less than fifty
percent.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's
investment adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another
investment adviser), and any entity controlling, controlled by, or under
common control with the adviser that provides ongoing services to the
registrant for the Registrant's fiscal year ended October 31, 2015 were
$5,200 for the Registrant and $12,500 for the Registrant's investment
adviser and for the Registrant's fiscal year ended October 31, 2016 were
$5,200 for the Registrant and $13,000 for the Registrant's investment
adviser.
(h) The registrant's audit committee of the board of directors has considered
whether the provision of non-audit services that were rendered to the
registrant's investment adviser (not including any sub-adviser whose role
is primarily portfolio management and is subcontracted with or overseen by
another investment adviser), and any entity controlling, controlled by, or
under common control with the investment adviser that provides ongoing
services to the registrant that were not pre-approved pursuant to
paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with
maintaining the principal accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(a) The Registrant has a separately designated audit committee consisting of
all the independent directors of the Registrant. The members of the audit
committee are: Thomas R. Kadlec, Niel B. Nielson, Richard E. Erickson and
Robert F. Keith.
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.
The Proxy Voting Policies are attached herewith.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(A)(1) IDENTIFICATION OF PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBERS
Information provided as of January 5, 2017.
Brookfield Investment Management Inc. ("Brookfield") serves as the Fund's
Sub-Advisor.
Dana E. Erikson, CFA, Managing Director
Mr. Erikson is a co-portfolio manager of the registrant responsible for the
day-to-day management of the portfolio. He is responsible for security analysis,
trading and the overall management of the portfolio's exposures.
Mark Shipley
Mark Shipley is a co-portfolio manager responsible for the day-to-day management
of the portfolio. He is responsible for security analysis, trading and the
overall management of the portfolio's exposures.
(A)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBER
AND POTENTIAL CONFLICTS OF INTEREST
Information provided as of October 31, 2016.
# of Accounts Total Assets
Total Managed for which for which
Advisory Fee is Advisory Fee
Name of Portfolio Manager or # of Accounts Based on is Based on
Team Member Type of Accounts* Managed Total Assets Performance Performance
----------------------------- ---------------------------------- ------------- ------------ ----------------- -------------
1. Dana Erikson Registered Investment Companies: 6 $932 M 0 $ 0
Other Pooled Investment Vehicles: 3 $ 56 M 1 $35 M
Other Accounts: 2 $3 M 0 $ 0
2. Mark Shipley Registered Investment Companies: 6 $932 M 0 $ 0
Other Pooled Investment Vehicles: 3 $ 56 M 1 $35 M
Other Accounts: 2 $3 M 0 $ 0
PORTFOLIO MANAGER POTENTIAL CONFLICTS OF INTERESTS
Potential conflicts of interest may arise when a fund's portfolio manager has
day-to-day management responsibilities with respect to one or more other funds
or other accounts, as is the case for the portfolio managers of the Fund. These
potential conflicts may include:
Allocation of Limited Time and Attention. A portfolio manager who is responsible
for managing multiple funds and/or accounts may devote unequal time and
attention to the management of those funds and/or accounts. As a result, the
portfolio manager may not be able to formulate as complete a strategy or
identify equally attractive investment opportunities for each of those accounts
as the case may be if he or she were to devote substantially more attention to
the management of a single fund. The effects of this potential conflict may be
more pronounced where funds and/or accounts overseen by a particular portfolio
manager have different investment strategies.
Allocation of Limited Investment Opportunities. If a portfolio manager
identifies a limited investment opportunity that may be suitable for multiple
funds and/or accounts, the opportunity may be allocated among these several
funds or accounts, which may limit a client's ability to take full advantage of
the investment opportunity.
Pursuit of Differing Strategies. At times, a portfolio manager may determine
that an investment opportunity may be appropriate for only some of the funds
and/or accounts for which he or she exercises investment responsibility, or may
decide that certain of the funds and/or accounts should take differing positions
with respect to a particular security. In these cases, the portfolio manager may
place separate transactions for one or more funds or accounts which may affect
the market price of the security or the execution of the transaction, or both,
to the detriment or benefit of one or more other funds and/or accounts.
Variation in Compensation. A conflict of interest may arise where the financial
or other benefits available to the portfolio manager differ among the funds
and/or accounts that he or she manages. If the structure of the investment
adviser's management fee and/or the portfolio manager's compensation differs
among funds and/or accounts (such as where certain funds or accounts pay higher
management fees or performance-based management fees), the portfolio manager
might be motivated to help certain funds and/or accounts over others. The
portfolio manager might be motivated to favor funds and/or accounts in which he
or she has an interest or in which the investment advisor and/or its affiliates
have interests. Similarly, the desire to maintain or raise assets under
management or to enhance the portfolio manager's performance record or to derive
other rewards, financial or otherwise, could influence the portfolio manager to
lend preferential treatment to those funds and/or accounts that could most
significantly benefit the portfolio manager.
Related Business Opportunities. The investment adviser or its affiliates may
provide more services (such as distribution or recordkeeping) for some types of
funds or accounts than for others. In such cases, a portfolio manager may
benefit, either directly or indirectly, by devoting disproportionate attention
to the management of fund and/or accounts that provide greater overall returns
to the investment manager and its affiliates.
Brookfield Investment Management Inc. ("Brookfield") has adopted compliance
policies and procedures that are designed to address the various conflicts of
interest that may arise for it and the individuals that it employs. For example,
Brookfield seeks to minimize the effects of competing interests for the time and
attention of portfolio managers by assigning portfolio managers to manage funds
and accounts that share a similar investment style. Brookfield also has adopted
trade allocation procedures that are designed to facilitate the fair allocation
of limited investment opportunities among multiple funds and accounts.
(A)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBERS
PORTFOLIO MANAGER COMPENSATION
Information provided as of October 31, 2016.
Brookfield compensates its portfolio managers based on the scale and complexity
of their portfolio responsibilities, the total return performance of funds and
accounts managed by the portfolio manager on an absolute basis and versus
appropriate peer groups of similar size and strategy, as well as the management
skills displayed in managing their subordinates and the teamwork displayed in
working with other members of the firm. Since the portfolio managers are
responsible for multiple funds and accounts, investment performance is evaluated
on an aggregate basis almost equally weighted among performance, management and
teamwork. Base compensation for Brookfield's portfolio managers varies in line
with a portfolio manager's seniority and position. The compensation of portfolio
managers with other job responsibilities (such as acting as an executive officer
of Brookfield or supervising various departments) includes consideration of the
scope of such responsibilities and the portfolio manager's performance in
meeting them. Brookfield seeks to compensate portfolio managers commensurate
with their responsibilities and performance, and competitive with other firms
within the investment management industry. Salaries, bonuses and stock-based
compensation also are influenced by the operating performance of Brookfield and
its parent company, Brookfield Asset Management Inc. While the salaries of
Brookfield's portfolio managers are comparatively fixed, cash bonuses and
stock-based compensation may fluctuate significantly from year to year. Bonuses
are determined on a discretionary basis by the senior executives of Brookfield
and measured by individual and team-oriented performance guidelines. The amount
of the Long Term Incentive Plan (LTIP) is approved by the board of directors
annually and there is a rolling vesting schedule to aid in retention of key
people. A key component of this program is achievement of client objectives in
order to properly align interests with our clients. Further, the incentive
compensation of all investment personnel who work on each strategy is directly
tied to the relative performance of the strategy and its clients.
The compensation structure of each Portfolio Manager and other investment
professionals has four primary components:
o A base salary;
o An annual cash bonus;
o If applicable, long-term compensation consisting of restricted stock
units or stock options of the Investment Adviser's ultimate parent
company, Brookfield Asset Management, Inc. and
o If applicable, long term compensation consisting of restricted stock
units in private funds managed by the investment professional
Each Portfolio Manager also receives certain retirement, insurance, and other
benefits that are broadly available to all employees. Compensation of each
Portfolio Manager is reviewed on an annual basis by senior management.
(A)(4) DISCLOSURE OF SECURITIES OWNERSHIP
Information provided as of October 31, 2016.
Dollar Range of Fund Shares
Name Beneficially Owned
Dana Erikson $0
Mark Shipley $0
(B) Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
REGISTRANT PURCHASES OF EQUITY SECURITIES
(A) TOTAL (C) TOTAL NUMBER OF (D) MAXIMUM NUMBER (OR
NUMBER OF (B) AVERAGE SHARES (OR UNITS) APPROXIMATE DOLLAR VALUE) OF
SHARES (OR PRICE PAID PURCHASED AS PART OF SHARES (OR UNITS) THAT MAY YET
UNITS) PER SHARE PUBLICLY ANNOUNCED BE PURCHASED UNDER THE PLANS
PERIOD PURCHASED (OR UNIT) PLANS OR PROGRAMS OR PROGRAMS
-------------------------------------------------------------------------------------------------------------
Month #1
(11/01/2015 -
11/30/2015) 50,887 $ 11.76 77,675 345,268
Month #2
(12/01/2015 - 27,727 $ 11.19 105,402 317,541
12/31/2015)
Month #3
(01/01/2016 - 62,351 $ 10.56 167,753 255,190
01/31/2016)
Month #4
(02/01/2016 - 30,653 $ 10.37 198,406 224,537
02/29/2016)
Month #5
(03/01/2016 - 0 0 198,406 224,537
03/31/2016)
Month #6
(04/01/2016 - 0 0 198,406 224,537
04/30/2016)
Month #7
(05/01/2016 - 0 0 198,406 224,537
05/31/2016)
Month #8
(06/01/2016 - 0 0 198,406 224,537
06/30/2016)
Month #9
(07/01/2016 - 0 0 198,406 224,537
07/31/2016)
Month #10
(08/01/2016 - 0 0 198,406 224,537
08/31/2016)
Month #11
(09/01/2016 - 0 0 198,406 224,537
09/30/2016)
Month #12
(10/01/2016 - 20,581 $12.196 218,987 203,956
10/31/2016)
Total 192,199 $11.115 218,987 203,956
-------------------------------------------------------------------------------------------------------------
On September 15, 2015, the Fund commenced a share repurchase program. The
program originally expired on March 15, 2016, but on March 15, 2016, the Fund
announced that the Board of Trustees of the Fund (the "Board") authorized the
continuation of the Fund's share repurchase program. The program again expired
on September 15, 2016, but on September 15, 2016, the Fund again announced that
the Board authorized the continuation of the Fund's share repurchase program.
For the year ended October 31, 2016, and the year ended October 31, 2015, the
Fund repurchased 192,199 and 26,788, respectively, of its shares at a
weighted-average discount of 15.33% and 14.92%, respectively, from net asset
value per share. The Fund expects to continue to repurchase its outstanding
shares until the earlier of (i) the repurchase of an additional 203,956 common
shares (for an aggregate of 422,943), or (ii) March 15, 2017.
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) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(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 Strategic High Income Fund II
----------------------------------------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: December 20, 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: December 20, 2016
-------------------
By (Signature and Title)* /s/ Donald P. Swade
----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: December 20, 2016
-------------------
* Print the name and title of each signing officer under his or her signature.