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 811-22452
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First Trust Series Fund
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(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)
Registrant's telephone number, including area code: (630) 765-8000
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Date of fiscal year end: 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
First Trust Preferred
Securities and Income Fund
-----------------------------------------
Annual Report
For the Year Ended
October 31, 2016
STONEBRIDGE
ADVISORS LLC
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TABLE OF CONTENTS
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FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
ANNUAL REPORT
OCTOBER 31, 2016
Shareholder Letter .......................................................... 1
At a Glance ................................................................. 2
Portfolio Commentary ........................................................ 4
Understanding Your Fund Expenses ............................................ 6
Portfolio of Investments .................................................... 7
Statement of Assets and Liabilities ......................................... 12
Statement of Operations ..................................................... 13
Statements of Changes in Net Assets ......................................... 14
Financial Highlights ........................................................ 15
Notes to Financial Statements ............................................... 20
Report of Independent Registered Public Accounting Firm...................... 27
Additional Information....................................................... 28
Board of Trustees and Officers............................................... 32
Privacy Policy............................................................... 34
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 Stonebridge Advisors LLC ("Stonebridge" 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 Preferred Securities and Income Fund (the "Fund") to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. When evaluating the information
included in this report, you are cautioned not to place undue reliance on these
forward-looking statements, which reflect the judgment of the Advisor and/or
Sub-Advisor and their respective representatives only as of the date hereof. We
undertake no obligation to publicly revise or update these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of 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 and net asset value will fluctuate and Fund shares, when sold, may be
worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund
performance on the Fund's webpage at http://www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. It includes details about the Fund and presents data and analysis that
provide insight into the Fund's performance and investment approach.
By reading the portfolio commentary from the Sub-Advisor 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 the Sub-Advisor
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 PREFERRED SECURITIES AND INCOME FUND ANNUAL
LETTER FROM THE CHAIRMAN AND CEO
OCTOBER 31, 2016
Dear Shareholders:
Thank you for your investment in First Trust Preferred Securities and Income
Fund.
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 PREFERRED SECURITIES AND INCOME FUND
"AT A GLANCE"
AS OF OCTOBER 31, 2016 (UNAUDITED)
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FUND STATISTICS
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FIRST TRUST PREFERRED SECURITIES NET ASSET
AND INCOME FUND VALUE (NAV)
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Class A (FPEAX) $21.63
Class C (FPECX) $21.67
Class F (FPEFX) $21.82
Class I (FPEIX) $21.71
Class R3 (FPERX) $21.61
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% OF TOTAL
TOP TEN HOLDINGS INVESTMENTS
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Liberty Mutual Group, Inc. 2.5%
Farm Credit Bank Of Texas, Series 1 2.5
Aquarius & Investments Plc For Swiss
Reinsurance Co., Ltd. 2.3
Zions Bancorporation, Series J 2.2
Wells Fargo & Co., Series K 2.1
Bank of America Corp., Series DD 2.1
Royal Bank of Scotland Group PLC 2.0
Reinsurance Group of America, inc. 2.0
Emera, Inc., Series 16-A 2.0
Friends Life Holdings PLC 1.8
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Total 21.5%
=======
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% OF TOTAL
SECTOR ALLOCATION INVESTMENTS
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Financials 74.6%
Utilities 6.5
Real Estate 6.4
Consumer Staples 5.1
Energy 2.6
Telecommunication Services 2.4
Industrials 1.9
Information Technology 0.5
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Total 100.0%
=======
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% OF TOTAL
CREDIT QUALITY(1) INVESTMENTS
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A+ 0.5%
A 3.5
A- 1.8
BBB+ 16.1
BBB 20.6
BBB- 20.2
BB+ 18.6
BB 5.7
BB- 5.0
B+ 2.6
B- 0.2
NR 5.2
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Total 100.0%
=======
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CLASS CLASS CLASS CLASS CLASS
DIVIDEND DISTRIBUTIONS A SHARES C SHARES F SHARES I SHARES R3 SHARES
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Current Monthly Distribution per Share(2) $0.0955 $0.0820 $0.0973 $0.1000 $0.0910
Current Distribution Rate on NAV(3) 5.30% 4.54% 5.35% 5.53% 5.05%
(1) 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 rating is 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 issuer of the underlying securities in the Fund
and not the Fund or its shares. Credit ratings are subject to change.
(2) Most recent distribution paid or declared through 10/31/2016. Subject to
change in the future.
(3) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
NAV as of 10/31/2016. Subject to change in the future.
NR Not Rated
Page 2
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
"AT A GLANCE" (CONTINUED)
AS OF OCTOBER 31, 2016 (UNAUDITED)
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PERFORMANCE OF A $10,000 INVESTMENT
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This chart compares your Fund's Class I performance to that
of the BofA Merrill Lynch Fixed Rate Preferred Securities
Index, the BofA Merrill Lynch U.S. Capital Securities Index
and the Blended Index(a) from 1/11/2011 through 10/31/2016.
First Trust Preferred BofA Merrill Lynch BofA Merrill Lynch
Securities and Income Fixed Rate Preferred U.S. Capital Securities Blended
Fund - Class I Shares Securities Index ("P0P1") Index ("C0CS") Index (a)
1/11/11 $10,000 $10,000 $10,000 $10,000
4/30/11 10,393 10,454 10,484 10,469
10/31/11 10,521 10,521 10,138 10,330
4/30/12 11,475 11,142 10,861 11,002
10/31/12 12,398 11,847 11,958 11,903
4/30/13 12,931 12,288 12,651 12,470
10/31/13 11,894 11,553 12,711 12,132
4/30/14 12,715 12,485 13,445 12,965
10/31/14 13,163 12,992 13,899 13,446
4/30/15 13,693 13,573 14,391 13,987
10/31/15 13,862 13,965 14,123 14,056
4/30/16 14,101 14,480 14,365 14,436
10/31/16 15,009 14,975 15,157 15,080
(a) The Blended Index return is a 50/50 split between the BofA Merrill Lynch
Fixed Rate Preferred Securities Index and BofA Merrill Lynch U.S. Capital
Securities Index.
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PERFORMANCE AS OF OCTOBER 31, 2016
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A SHARES C SHARES F SHARES I SHARES R3 SHARES BLENDED P0P1* C0CS*
Inception Inception Inception Inception Inception INDEX* BofA Merrill BofA Merrill
2/25/2011 2/25/2011 3/2/2011 1/11/2011 3/2/2011 Lynch Fixed Lynch U.S.
Rate Preferred Capital
Securities Index Securities Index
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W/MAX
1.00%
W/MAX CONTINGENT
W/O 4.50% W/O DEFERRED W/O W/O W/O W/O W/O W/O
AVERAGE ANNUAL SALES SALES SALES SALES SALES SALES SALES SALES SALES SALES
TOTAL RETURNS CHARGES CHARGE CHARGES CHARGE CHARGES CHARGES CHARGES CHARGES CHARGES CHARGES
1 Year 8.09% 3.23% 7.27% 6.27% 8.18% 8.33% 7.73% 7.28% 7.23% 7.31%
5 Year 7.10% 6.12% 6.30% 6.30% 7.33% 7.37% 6.80% 7.86% 7.31% 8.37%
Since Inception 6.86% 6.00% 6.09% 6.09% 7.03% 7.26% 6.49% 7.33% 7.21% 7.43%
30-Day SEC Yield(1) 4.58% 4.05% 4.93% 5.05% 4.41% N/A N/A N/A
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* Since inception return is based on the Class I Shares inception date.
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that the shareholder would pay on Fund distributions or
the redemption of Fund shares. The total returns would have been lower if
certain fees had not been waived and expenses reimbursed by the Advisor and
Sub-Advisor. An index is a statistical composite that tracks a specific
financial market or sector. Unlike the Fund, these indices do not actually hold
a portfolio of securities and therefore do not incur the expenses incurred by
the Fund. These expenses negatively impact the performance of the Fund. The
Fund's past performance does not predict future performance.
Performance of share classes will vary due to differences in sales charges and
expenses. Total return with sales charges includes payment of the maximum sales
charge of 4.50% for Class A Shares, a contingent deferred sales charge ("CDSC")
of 1.00% for Class C Shares in year one and 12b-1 service fees of 0.25% per year
of average daily net assets for Class A Shares and combined Rule 12b-1
distribution and service fees of 1.00% per year of average daily net assets for
Class C Shares. Class F, Class I and Class R3 Shares do not have a front-end
sales charge or a CDSC; therefore, performance is at net asset value. The Rule
12b-1 service fees are 0.15% of average daily net assets for Class F Shares and
combined Rule 12b-1 distribution and service fees are 0.50% of average daily net
assets for Class R3 Shares, while Class I Shares do not have these fees. Prior
to December 15, 2011, the combined Rule 12b-1 distribution and service fees for
Class R3 Shares were 0.75% of average daily net assets.
(1) 30-day SEC yield is calculated by dividing the net investment income per
share earned during the most recent 30-day period by the maximum offering
price per share on the last day of the period. The reported SEC yields are
subsidized. The subsidized yields reflect the fee waiver and/or
reimbursement of Fund expenses, which has the effect of lowering the
Fund's expense ratio and generating a higher yield.
Page 3
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PORTFOLIO COMMENTARY
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FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
ANNUAL REPORT
OCTOBER 31, 2016 (UNAUDITED)
SUB-ADVISOR
Stonebridge Advisors LLC ("Stonebridge" or the "Sub-Advisor") is the Sub-Advisor
to First Trust Preferred Securities and Income Fund (the "Fund") and is a
registered investment advisor based in Wilton, Connecticut. Stonebridge
specializes in the management of preferred securities and North American equity
income securities.
PORTFOLIO MANAGEMENT TEAM
SCOTT T. FLEMING - PRESIDENT AND CHIEF INVESTMENT OFFICER OF STONEBRIDGE
ADVISORS LLC
ROBERT WOLF - SENIOR VICE PRESIDENT AND SENIOR PORTFOLIO MANAGER
DANIELLE SALTERS, CFA - PORTFOLIO MANAGER AND CREDIT ANALYST
ANNUAL REPORT COMMENTARY
MARKET RECAP
The fiscal year ended October 31, 2016 was a period of solid returns for the
preferred and hybrid markets. Risk assets were initially weak during the period
in response to the Federal Reserve raising rates in December 2015 and the
dramatic sell-off in commodities in the first part of 2016. However, risk assets
recovered and performed well throughout the last three quarters of the period
due to the extended low rate environment and continued quantitative easing
around the globe. Positive performance in the preferred and hybrid markets was
also driven by continued investor demand for high income-producing securities
coupled with a positive market technical factor resulting from limited new issue
supply. The retail preferred market was pushed higher by inflows into the
passive preferred ETFs, while institutional hybrids lagged retail until the last
quarter of the period. For the fiscal year, the retail market earned 7.23% while
the institutional market earned 7.31%, according to The Bank of America Merrill
Lynch Fixed Rate Preferred Securities Index (P0P1) and The Bank of America
Merrill Lynch U.S. Capital Securities Index (C0CS), respectively.
PERFORMANCE ANALYSIS
The First Trust Preferred Securities & Income Fund (the "Fund") Class I Shares
produced a total return of 8.33% for the fiscal year ended October 31, 2016
compared to the blended benchmark's (a 50/50 blend of The BofA Merrill Lynch
Fixed Rate Preferred Securities Index (P0P1) and The BofA Merrill Lynch U.S.
Capital Securities Index (C0CS)) total return of 7.28%. The Fund's active
management, with a focus on security selection, enabled the Fund to outperform
during the bullish period despite its more conservative positioning and the
negative impacts of allocations. Throughout the period, the Fund maintained its
core strategy of investing in three types of more defensive securities: (1)
fixed-to-float or variable-rate securities, (2) regulatory-call candidates or
securities that are losing capital treatment and, thus, have an increased
likelihood of being redeemed in the short-to-intermediate-term, and (3)
securities with high coupons, relatively short call dates (generally within
three years) and a high likelihood of being redeemed.
The positive impacts of security selection were partially offset by allocation
impacts during the year. Negative allocation impacts included the Fund's bias
for lower duration securities, and its allocation to non-domestic securities,
particularly within the Eurozone. Long duration and fixed-for-life securities
outperformed during the period in which we saw a substantial rally in
treasuries. Additionally, volatility driven by concerns about European banks and
Brexit led to the underperformance of Eurozone securities. These negative
allocation impacts were partially offset by security selection within both
longer duration and Eurozone securities.
Outperformance during the period was driven by the Fund's security selection
within categories including fixed-for-life securities, variable-rate securities,
$25 par securities, $1000 par securities and domestic securities. The largest
contributor was security selection within the retail $25 par market where the
Fund's securities outperformed those in the blended benchmark by 6.5%. In the
$25 par market, in which performance can be driven by flows into and out of
funds that invest in these securities, including, indiscriminate buying by
passive ETFs can cause inefficient markets, leaving more room to add gains
through security selection. Security selection was aided by the Fund's focus on
structure, which includes the importance of high back-ends - securities with a
spread when they convert from fixed to float that are high relative to the
Page 4
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
ANNUAL REPORT
OCTOBER 31, 2016 (UNAUDITED)
market and the issuer's expected cost of capital. This focus also includes the
importance of excess spread to both government bonds and senior bonds within
variable-rate and fixed-rate securities. This focus drove the Fund's
outperformance during the bullish period despite having a more defensive
portfolio.
MARKET AND FUND OUTLOOK
Recent economic data in the U.S. shows modest strength and low inflation while
the rest of the world continues to show weak growth with markets supported by
accommodative monetary policies. Although U.S. interest rates moved higher
recently, they still remain low by historical standards. In this overall low
rate environment, credit spreads generally remain fairly wide, supported by
stable credit fundamentals within financials. Historically wide yield spreads of
preferred and hybrid securities relative to both U.S. Treasuries and other
credit spread products should drive positive performance in the asset class.
Furthermore, we expect issuance in the preferred and hybrid market over the next
year to be subdued relative to the first part of the Fund's fiscal year which
should be a positive market technical factor in preferred and hybrid securities.
We will continue to actively manage the Fund to protect against the downside
risks in the market while aiming to outperform in all market environments on a
risk adjusted basis. With the potential for rate volatility, we believe it is
prudent to maintain durations shorter than the blended benchmark, particularly
if we can do so while paying dividends comparable to the blended benchmark
yield. We also continue to favor structures with good rate protection and high
current yields. Despite our expectation that the Federal Reserve will soon raise
interest rates, we believe that a slowly growing U.S. economy, stable to
improving corporate credit, and limited supply of new preferred issuance
continue to be supportive of the preferred and hybrid markets.
Page 5
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
UNDERSTANDING YOUR FUND EXPENSES
OCTOBER 31, 2016 (UNAUDITED)
As a shareholder of the First Trust Preferred Securities and Income Fund, you
incur two types of costs: (1) transaction costs, including sales charges (loads)
on purchases of Class A Shares and contingent deferred sales charges on the
lesser of purchase price or redemption proceeds of Class C Shares; and (2)
ongoing costs, including management fees; distribution and/or service (12b-1)
fees, if any, and other Fund expenses. This Example is intended to help you
understand your ongoing costs (in U.S. dollars) of investing in the Fund and to
compare these costs with the ongoing costs of investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended October 31, 2016.
ACTUAL EXPENSES
The first three columns of the table below provide information about actual
account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid over the period. Simply divide your account value by $1,000 (for
example, an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the third column under the heading entitled "Expenses
Paid During Period" to estimate the expenses you paid on your account during the
period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The next three columns of the table below provide information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing cost of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or contingent deferred sales charges. Therefore, the
hypothetical section of the table is useful in comparing ongoing costs only, and
will not help you determine the relative total costs of owning different funds.
In addition, if these transactional costs were included, your costs would have
been higher.
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HYPOTHETICAL
ACTUAL EXPENSES (5% RETURN BEFORE EXPENSES)
------------------------------------------- ---------------------------------------
ENDING EXPENSES PAID BEGINNING ENDING EXPENSES PAID
BEGINNING ACCOUNT DURING PERIOD ACCOUNT ACCOUNT DURING PERIOD ANNUALIZED
ACCOUNT VALUE VALUE 5/1/2016 - VALUE VALUE 5/1/2016 - EXPENSE
5/1/2016 10/31/2016 10/31/2016 (a) 5/1/2016 10/31/2016 10/31/2016 (a) RATIOS (b)
------------------------------------------------------------------------------------------------------------------
Class A $ 1,000.00 $ 1,063.60 $ 7.26 $ 1,000.00 $ 1,018.10 $ 7.10 1.40%
Class C 1,000.00 1,059.50 11.13 1,000.00 1,014.33 10.89 2.15
Class F 1,000.00 1,064.10 6.74 1,000.00 1,018.60 6.60 1.30
Class I 1,000.00 1,064.70 5.97 1,000.00 1,019.36 5.84 1.15
Class R3 1,000.00 1,062.40 8.55 1,000.00 1,016.84 8.36 1.65
(a) Expenses are equal to the annualized expense ratios, multiplied by the
average account value over the period May 1, 2016 through October 31,
2016, multiplied by 184/366 (to reflect the six-month period).
(b) These expense ratios reflect expense caps.
Page 6
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2016
STATED STATED
SHARES DESCRIPTION RATE MATURITY VALUE
------------- --------------------------------------------------- --------- ------------ --------------
$25 PAR PREFERRED SECURITIES - 23.2%
BANKS - 8.1%
23,015 Bank of America Corp., Series W.................... 6.63% (a) $ 628,597
2,462 Bank of America Corp., Series Y.................... 6.50% (a) 66,203
30,000 Citigroup Capital XIII (b)......................... 7.26% 10/30/40 780,300
32,799 Citigroup, Inc., Series J (c)...................... 7.13% (a) 935,427
50,000 Citigroup, Inc., Series K (c)...................... 6.88% (a) 1,434,500
75,000 FNB Corp. (c)...................................... 7.25% (a) 2,234,250
65,000 GMAC Capital Trust I, Series 2 (b)................. 6.67% 02/15/40 1,659,450
22,130 Huntington Bancshares, Inc., Series D.............. 6.25% (a) 592,199
34,373 JPMorgan Chase & Co., Series BB.................... 6.15% (a) 916,728
64,200 People's United Financial, Inc., Series A (c)...... 5.63% (a) 1,675,620
17,530 PNC Financial Services Group, Inc., Series P (c)... 6.13% (a) 494,346
36,293 Regions Financial Corp., Series A.................. 6.38% (a) 942,892
38,930 Royal Bank of Scotland Group PLC, Series L......... 5.75% (a) 979,090
21,613 Royal Bank of Scotland Group PLC, Series S......... 6.60% (a) 549,619
25,000 Wells Fargo & Co. (c).............................. 5.85% (a) 666,000
54,369 Wintrust Financial Corp., Series D (c)............. 6.50% (a) 1,533,749
--------------
16,088,970
--------------
CAPITAL MARKETS - 1.6%
22,175 BGC Partners, Inc.................................. 8.13% 06/15/42 578,768
3,233 Goldman Sachs Group, Inc........................... 5.95% (a) 83,476
7,000 Morgan Stanley, Series E (c)....................... 7.13% (a) 204,260
50,000 State Street Corp., Series G (c)................... 5.35% (a) 1,338,500
33,015 Stifel Financial Corp., Series A................... 6.25% (a) 887,443
--------------
3,092,447
--------------
DIVERSIFIED FINANCIAL SERVICES - 1.1%
86,967 KKR Financial Holdings LLC, Series A............... 7.38% (a) 2,260,272
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.0%
20 Qwest Corp......................................... 7.00% 02/01/56 529
--------------
EQUITY REAL ESTATE INVESTMENT TRUSTS - 5.6%
82,060 American Homes 4 Rent, Series A (d)................ 5.00% (a) 2,256,650
85,975 American Homes 4 Rent, Series B (d)................ 5.00% (a) 2,407,300
65,000 American Homes 4 Rent, Series E.................... 6.35% (a) 1,701,700
11,300 DuPont Fabros Technology, Inc., Series C........... 6.63% (a) 310,750
38,740 EPR Properties, Series F........................... 6.63% (a) 1,007,240
64,603 Equity Commonwealth................................ 5.75% 08/01/42 1,635,748
12,060 Taubman Centers, Inc., Series J.................... 6.50% (a) 312,475
52,600 VEREIT, Inc., Series F............................. 6.70% (a) 1,410,732
--------------
11,042,595
--------------
FOOD PRODUCTS - 1.0%
34,974 CHS, Inc., Series 1................................ 7.88% (a) 1,096,785
32,002 CHS, Inc., Series 2 (c)............................ 7.10% (a) 947,259
--------------
2,044,044
--------------
INSURANCE - 5.1%
7,100 Amtrust Financial Services, Inc.................... 7.50% 09/15/55 189,428
6,800 Aspen Insurance Holdings Ltd....................... 5.63% (a) 173,876
20,573 Aspen Insurance Holdings Ltd. (c).................. 5.95% (a) 585,508
30,000 Aspen Insurance Holdings Ltd....................... 7.25% (a) 774,000
24,391 Endurance Specialty Holdings Ltd., Series C........ 6.35% (a) 649,776
See Notes to Financial Statements Page 7
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
STATED STATED
SHARES DESCRIPTION RATE MATURITY VALUE
------------- --------------------------------------------------- --------- ------------ --------------
$25 PAR PREFERRED SECURITIES (CONTINUED)
INSURANCE (CONTINUED)
50,000 Hartford Financial Services Group, Inc. (c)........ 7.88% 04/15/42 $ 1,564,000
14,443 National General Holdings Corp..................... 7.63% 09/15/55 371,907
12,232 PartnerRe Ltd., Series F........................... 5.88% (a) 317,420
20,650 PartnerRe Ltd., Series G........................... 6.50% (a) 587,906
18,759 PartnerRe Ltd., Series H........................... 7.25% (a) 559,018
21,000 Phoenix Companies, Inc............................. 7.45% 01/15/32 399,657
135,207 Reinsurance Group of America, Inc. (c)............. 5.75% 06/15/56 3,877,737
--------------
10,050,233
--------------
INTERNET SOFTWARE & SERVICES - 0.4%
32,787 EBay, Inc.......................................... 6.00% 02/01/56 870,495
--------------
WIRELESS TELECOMMUNICATION SERVICES - 0.3%
24,597 United States Cellular Corp........................ 7.25% 12/01/64 652,066
--------------
TOTAL $25 PAR PREFERRED SECURITIES............................................ 46,101,651
(Cost $43,952,788) --------------
$100 PAR PREFERRED SECURITIES - 3.9%
BANKS - 3.4%
27,000 CoBank ACB, Series G............................... 6.13% (a) 2,720,250
32,500 CoBank ACB, Series F (c)........................... 6.25% (a) 3,480,549
5,500 Farm Credit Bank Of Texas (c) (e).................. 6.75% (a) 595,547
--------------
6,796,346
--------------
CONSUMER FINANCE - 0.5%
20,000 SLM Corp., Series B (b)............................ 2.55% (a) 989,376
--------------
TOTAL $100 PAR PREFERRED SECURITIES........................................... 7,785,722
(Cost $7,184,925) --------------
$1,000 PAR PREFERRED SECURITIES - 5.4%
BANKS - 3.5%
500 AgStar Financial Services ACA (c) (e) (f).......... 6.75% (a) 530,437
4,000 Farm Credit Bank Of Texas, Series 1 (e)............ 10.00% (a) 4,890,000
1,261 Sovereign Real Estate Investment Trust (e) (f)..... 12.00% (a) 1,620,385
--------------
7,040,822
--------------
DIVERSIFIED FINANCIAL SERVICES - 0.2%
300 Pitney Bowes International Holdings, Inc.,
Series F (e) (f)................................ 6.13% (a) 300,844
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 1.5%
2,500 Centaur Funding Corp. (e) (f)...................... 9.08% 04/21/20 2,962,500
--------------
INSURANCE - 0.2%
490 XLIT Ltd., Series D (b)............................ 4.00% (a) 388,325
--------------
TOTAL $1,000 PAR PREFERRED SECURITIES......................................... 10,692,491
(Cost $11,021,612) --------------
Page 8 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PAR STATED STATED
AMOUNT DESCRIPTION RATE MATURITY VALUE
------------- --------------------------------------------------- --------- ------------ --------------
CAPITAL PREFERRED SECURITIES - 66.3%
BANKS - 30.0%
$ 1,500,000 Australia & New Zealand Banking Group
Ltd. (c) (g) (h)................................ 6.75% (a) $ 1,649,313
2,000,000 Banco Bilbao Vizcaya Argentaria S.A. (c) (h)....... 9.00% (a) 2,083,750
1,600,000 Banco Mercantil Del Norte S.A. (g) (h)............. 5.75% 10/04/31 1,550,000
3,750,000 Bank of America Corp., Series DD (c)............... 6.30% (a) 4,101,187
1,000,000 Bank of America Corp., Series M (c)................ 8.13% (a) 1,030,000
1,500,000 Bank of America Corp., Series Z (c)................ 6.50% (a) 1,629,375
500,000 Barclays PLC (c) (h)............................... 8.25% (a) 507,688
1,500,000 BNP Paribas S.A. (c) (g) (h)....................... 7.63% (a) 1,571,250
1,000,000 Citigroup, Inc., Series E (c) (e).................. 8.40% (a) 1,101,250
1,250,000 Citigroup, Inc., Series R (c)...................... 6.13% (a) 1,308,313
1,000,000 Citigroup, Inc., Series T (c)...................... 6.25% (a) 1,077,900
500,000 Citizens Financial Group, Inc. (c)................. 5.50% (a) 493,750
2,500,000 CoBank ACB, Series I (c)........................... 6.25% (a) 2,707,082
1,000,000 Commerzbank AG..................................... 8.13% 09/19/23 1,153,350
1,000,000 Cooperatieve Rabobank UA (c) (g)................... 11.00% (a) 1,208,650
753,000 Cooperatieve Rabobank UA (c)....................... 11.00% (a) 910,113
1,000,000 Credit Agricole S.A. (c) (g) (h)................... 8.13% (a) 1,076,920
2,000,000 Credit Agricole S.A. (c)........................... 8.38% (a) 2,261,560
2,000,000 Dresdner Funding Trust I........................... 8.15% 06/30/31 2,384,180
1,000,000 HSBC Capital Funding L.P. (c)...................... 10.18% (a) 1,512,500
1,000,000 JPMorgan Chase & Co., Series S (c)................. 6.75% (a) 1,111,250
500,000 KeyCorp Capital II (e)............................. 6.88% 03/17/29 557,233
1,700,000 KeyCorp, Series D (c).............................. 5.00% (a) 1,673,225
1,000,000 Lloyds Bank PLC (c) (g)............................ 12.00% (a) 1,366,250
1,500,000 M&T Bank Corporation, Series F (c)................. 5.13% (a) 1,513,125
1,800,000 Macquarie Bank Ltd. (c) (h)........................ 10.25% 06/20/57 1,889,010
1,298,000 Natixis S.A. (c)................................... 10.00% (a) 1,444,025
1,664,000 PNC Financial Services Group, Inc. (c)............. 6.75% (a) 1,849,120
1,000,000 PNC Financial Services, Series S (c)............... 5.00% (a) 1,001,020
4,000,000 Royal Bank of Scotland Group PLC (c) (h)........... 8.63% (a) 3,990,000
1,500,000 Societe Generale S.A. (c) (g) (h).................. 7.38% (a) 1,491,000
800,000 Standard Chartered PLC (c) (g) (h)................. 7.50% (a) 807,500
4,000,000 Wells Fargo & Co., Series K (c).................... 7.98% (a) 4,175,000
1,000,000 Wells Fargo & Co., Series U (c).................... 5.88% (a) 1,075,625
4,000,000 Zions Bancorporation, Series J (c)................. 7.20% (a) 4,285,000
--------------
59,546,514
--------------
CAPITAL MARKETS - 1.3%
87,000 Charles Schwab Corp. (c)........................... 7.00% (a) 102,116
1,000,000 Credit Suisse Group AG (c) (g) (h)................. 7.50% (a) 1,037,500
500,000 Goldman Sachs Group, Inc., Series L (c)............ 5.70% (a) 506,875
1,000,000 UBS Group AG (c) (h)............................... 7.13% (a) 1,026,250
--------------
2,672,741
--------------
DIVERSIFIED FINANCIAL SERVICES - 0.3%
665,000 Glen Meadow Pass-Through Trust (c) (g)............. 6.51% 02/12/67 525,350
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.6%
1,000,000 Koninklijke KPN N.V. (c)........................... 7.00% 03/28/73 1,095,250
--------------
ELECTRIC UTILITIES - 5.8%
3,500,000 Emera, Inc., Series 16-A (c)....................... 6.75% 06/15/76 3,874,563
3,000,000 Enel S.p.A. (c) (g)................................ 8.75% 09/24/73 3,508,500
1,500,000 PPL Capital Funding, Inc., Series A (c)............ 6.70% 03/30/67 1,345,959
See Notes to Financial Statements Page 9
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PAR STATED STATED
AMOUNT DESCRIPTION RATE MATURITY VALUE
------------- --------------------------------------------------- --------- ------------ --------------
CAPITAL PREFERRED SECURITIES (CONTINUED)
ELECTRIC UTILITIES (CONTINUED)
2,500,000 Southern California Edison Co., Series E (c)....... 6.25% (a) $ 2,796,875
--------------
11,525,897
--------------
ENERGY EQUIPMENT & SERVICES - 1.5%
2,800,000 Transcanda Trust, Series 16-A (c).................. 5.88% 08/15/76 3,003,000
--------------
FOOD PRODUCTS - 4.0%
1,300,000 Dairy Farmers of America (e) (f)................... 7.13% (a) 1,358,500
3,000,000 Land O'Lakes Capital Trust I (g)................... 7.45% 03/15/28 3,450,000
3,000,000 Land O'Lakes, Inc. (e) (f)......................... 8.00% (a) 3,180,000
--------------
7,988,500
--------------
INDEPENDENT POWER AND RENEWABLE ELECTRICITY PRODUCERS - 0.6%
1,075,000 AES Gener S.A. (c)................................. 8.38% 12/18/73 1,144,875
--------------
INDUSTRIAL CONGLOMERATES - 1.7%
966,000 General Electric Co. (c)........................... 6.38% 11/15/67 998,603
2,250,000 General Electric Co., Series D (c)................. 5.00% (a) 2,386,462
--------------
3,385,065
--------------
INSURANCE - 19.2%
1,000,000 AG Insurance S.A. N.V. (c)......................... 6.75% (a) 1,065,000
4,200,000 Aquarius & Investments PLC for Swiss
Reinsurance Co., Ltd. (c)....................... 8.25% (a) 4,522,442
1,215,000 Assured Guaranty Municipal Holdings, Inc. (c) (g).. 6.40% 12/15/66 1,001,160
500,000 Aviva PLC.......................................... 8.25% (a) 529,645
2,500,000 Catlin Insurance Co., Ltd. (c) (g)................. 7.25% (a) 2,018,750
1,000,000 CNP Assurances (c)................................. 6.88% (a) 1,076,918
2,500,000 CNP Assurances (c)................................. 7.50% (a) 2,680,440
3,300,000 Friends Life Holdings PLC (c)...................... 7.88% (a) 3,568,620
2,500,000 La Mondiale SAM (c)................................ 7.63% (a) 2,690,625
2,663,000 Liberty Mutual Group, Inc. (g)..................... 7.80% 03/15/37 3,135,683
3,285,000 Liberty Mutual Group, Inc. (c)..................... 10.75% 06/15/58 4,976,775
1,587,000 Metlife Capital Trust X (g)........................ 9.25% 04/08/38 2,315,433
1,250,000 Metlife, Inc....................................... 10.75% 08/01/39 2,046,875
1,000,000 Prudential Financial, Inc. (c)..................... 5.63% 06/15/43 1,076,250
1,500,000 QBE Capital Funding III Ltd. (c)................... 7.25% 05/24/41 1,700,625
500,000 QBE Capital Funding III Ltd. (c) (g)............... 7.25% 05/24/41 565,000
2,500,000 QBE Insurance Group Ltd. (c)....................... 6.75% 12/02/44 2,736,250
500,000 Sirius International Group Ltd. (c) (e) (f)........ 7.51% (a) 504,375
--------------
38,210,866
--------------
OIL, GAS & CONSUMABLE FUELS - 1.1%
1,000,000 Enbridge Energy Partners L.P. (c).................. 8.05% 10/01/37 911,450
1,155,000 Enterprise Products Operating LLC, Series B (c).... 7.03% 01/15/68 1,219,391
--------------
2,130,841
--------------
TRANSPORTATION INFRASTRUCTURE - 0.2%
400,000 AerCap Global Aviation Trust (c) (g)............... 6.50% 06/15/45 414,000
--------------
TOTAL CAPITAL PREFERRED SECURITIES............................................ 131,642,899
(Cost $130,005,067) --------------
TOTAL INVESTMENTS - 98.8%..................................................... 196,222,763
(Cost $192,164,392) (i)
NET OTHER ASSETS AND LIABILITIES - 1.2%....................................... 2,385,427
--------------
NET ASSETS - 100.0%........................................................... $ 198,608,190
==============
Page 10 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
(a) Perpetual maturity.
(b) Floating rate security. The interest rate shown reflects the rate in
effect at October 31, 2016.
(c) Fixed-to-floating or fixed-to-variable rate security. The interest rate
shown reflects the fixed rate in effect at October 31, 2016. At a
predetermined date, the fixed rate will change to a floating rate or a
variable rate.
(d) Step-up security. A security where the coupon increases or steps up at a
predetermined date. Interest rate shown reflects the rate in effect at
October 31, 2016.
(e) Pursuant to procedures adopted by the First Trust Series Fund's (the
"Trust") Board of Trustees, this security has been determined to be
illiquid by Stonebridge Advisors LLC, the Fund's sub-advisor (the
"Sub-Advisor").
(f) 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 Act, as amended ("the "1933 Act), and may be resold in
transactions exempt from registration, normally to qualified institutional
buyers (see Note 2C - Restricted Securities in the Notes to Financial
Statements).
(g) 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. Pursuant to procedures adopted by the
Trust's Board of Trustees, this security has been determined to be liquid
by the 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 $28,692,259 or 14.4% of net assets.
(h) This security is a contingent convertible capital security which may be
subject to conversion into common stock of the issuer under certain
circumstances. At October 31, 2016, securities noted as such amounted to
$18,680,181 or 9.4% of managed assets. Of these securities, 8.3%
originated in emerging markets and 91.7% originated in foreign markets.
(i) Aggregate cost for federal income tax purposes is $191,908,450. 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
$6,256,816 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$1,942,503.
-----------------------------
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
------------- ------------- ------------- -------------
$25 Par Preferred Securities:
Insurance......................................... $ 10,050,233 $ 9,650,576 $ 399,657 $ --
Other industry categories*........................ 36,051,418 36,051,418 -- --
------------- ------------- ------------- -------------
Total $25 Par Preferred Securities................... 46,101,651 45,701,994 399,657 --
$100 Par Preferred Securities:
Banks............................................. 6,796,346 -- 6,796,346 --
Consumer Finance.................................. 989,376 989,376 -- --
------------- ------------- ------------- -------------
Total $100 Par Preferred Securities.................. 7,785,722 989,376 6,796,346 --
$1,000 Par Preferred Securities*..................... 10,692,491 -- 10,692,491 --
Capital Preferred Securities*........................ 131,642,899 -- 131,642,899 --
------------- ------------- ------------- -------------
Total Investments.................................... $ 196,222,763 $ 46,691,370 $ 149,531,393 $ --
============= ============= ============= =============
* See the Portfolio of Investments for industry breakout.
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.
See Notes to Financial Statements Page 11
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2016
ASSETS:
Investments, at value
(Cost $192,164,392)................................................................................ $ 196,222,763
Cash.................................................................................................. 1,183,122
Receivables:
Interest........................................................................................... 1,983,734
Investment securities sold......................................................................... 1,522,944
Fund shares sold................................................................................... 3,002,039
Dividends.......................................................................................... 93,360
Prepaid expenses...................................................................................... 2,096
Other assets.......................................................................................... 8,438
-------------
Total Assets....................................................................................... 204,018,496
-------------
LIABILITIES:
Payables:
Investment securities purchased.................................................................... 4,154,126
Fund shares repurchased............................................................................ 820,235
12b-1 distribution and service fees................................................................ 99,189
Distributions payable.............................................................................. 98,295
Investment advisory fees........................................................................... 84,506
Audit and tax fees................................................................................. 33,200
Transfer agent fees................................................................................ 32,157
Legal fees......................................................................................... 27,068
Printing fees...................................................................................... 25,886
Administrative fees................................................................................ 13,727
Registration fees.................................................................................. 7,070
Custodian fees..................................................................................... 4,459
Commitment fees.................................................................................... 3,710
Trustees' fees and expenses........................................................................ 1,458
Financial reporting fees........................................................................... 771
Other liabilities..................................................................................... 4,449
-------------
Total Liabilities.................................................................................. 5,410,306
-------------
NET ASSETS............................................................................................ $ 198,608,190
=============
NET ASSETS CONSIST OF:
Paid-in capital....................................................................................... $ 205,890,235
Par value ($0.01 per share with an unlimted number of shares authorized).............................. 91,578
Accumulated net investment income (loss).............................................................. 763,275
Accumulated net realized gain (loss) on investments................................................... (12,195,269)
Net unrealized appreciation (depreciation) on investments............................................. 4,058,371
-------------
NET ASSETS............................................................................................ $ 198,608,190
=============
MAXIMUM OFFERING PRICE PER SHARE:
CLASS A SHARES:
Net asset value and redemption price per share (Based on net assets of $35,468,437 and 1,639,751
shares of beneficial interest issued and outstanding)........................................... $ 21.63
Maximum sales charge (4.50% of offering price)..................................................... 1.02
-------------
Maximum offering price to public................................................................... $ 22.65
=============
CLASS C SHARES:
Net asset value and redemption price per share (Based on net assets of $51,004,490 and 2,353,552
shares of beneficial interest issued and outstanding)........................................... $ 21.67
=============
CLASS F SHARES:
Net asset value and redemption price per share (Based on net assets of $5,024,702 and 230,297
shares of beneficial interest issued and outstanding)........................................... $ 21.82
=============
CLASS I SHARES:
Net asset value and redemption price per share (Based on net assets of $106,393,100 and 4,901,035
shares of beneficial interest issued and outstanding)........................................... $ 21.71
=============
CLASS R3 SHARES:
Net asset value and redemption price per share (Based on net assets of $717,461 and 33,206
shares of beneficial interest issued and outstanding)........................................... $ 21.61
=============
Page 12 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2016
INVESTMENT INCOME:
Interest ............................................................................................. $ 7,852,543
Dividends ............................................................................................ 3,965,246
Other................................................................................................. 1,776
-------------
Total investment income............................................................................ 11,819,565
-------------
EXPENSES:
Investment advisory fees.............................................................................. 1,377,540
12b-1 distribution and/or service fees:
Class A............................................................................................ 75,342
Class C............................................................................................ 471,333
Class F............................................................................................ 6,615
Class R3........................................................................................... 1,656
Transfer agent fees................................................................................... 177,552
Registration fees..................................................................................... 145,891
Administrative fees................................................................................... 73,182
Legal fees............................................................................................ 60,033
Printing fees......................................................................................... 42,171
Expenses previously waived or reimbursed.............................................................. 40,603
Audit and tax fees.................................................................................... 34,351
Commitment fees....................................................................................... 33,626
Custodian fees........................................................................................ 28,933
Trustees' fees and expenses........................................................................... 17,739
Excise tax expense.................................................................................... 17,335
Financial reporting fees.............................................................................. 9,250
Listing expense....................................................................................... 3,000
Other................................................................................................. 6,500
-------------
Total expenses..................................................................................... 2,622,652
Fees waived or expenses reimbursed by the investment advisor....................................... (70,141)
-------------
Net expenses.......................................................................................... 2,552,511
-------------
NET INVESTMENT INCOME (LOSS).......................................................................... 9,267,054
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Net realized gain (loss) on investments............................................................ (1,017,162)
Net change in unrealized appreciation (depreciation)............................................... 4,709,234
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS)............................................................... 3,692,072
-------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS....................................... $ 12,959,126
=============
See Notes to Financial Statements Page 13
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE FOR THE
YEAR ENDED YEAR ENDED
10/31/2016 10/31/2015
------------- -------------
OPERATIONS:
Net investment income (loss)......................................................... $ 9,267,054 $ 8,701,285
Net realized gain (loss)............................................................. (1,017,162) 372,486
Net change in unrealized appreciation (depreciation)................................. 4,709,234 (1,448,520)
------------- -------------
Net increase (decrease) in net assets resulting from operations...................... 12,959,126 7,625,251
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A Shares....................................................................... (1,636,847) (1,690,247)
Class C Shares....................................................................... (2,206,079) (2,016,097)
Class F Shares....................................................................... (242,014) (152,397)
Class I Shares....................................................................... (5,104,605) (4,338,486)
Class R3 Shares...................................................................... (17,199) (19,214)
------------- -------------
(9,206,744) (8,216,441)
------------- -------------
CAPITAL TRANSACTIONS:
Proceeds from shares sold............................................................ 91,244,153 56,294,234
Proceeds from shares reinvested...................................................... 8,118,073 7,209,207
Cost of shares redeemed.............................................................. (67,454,788) (52,197,485)
------------- -------------
Net increase (decrease) in net assets resulting from capital transactions............ 31,907,438 11,305,956
------------- -------------
Total increase (decrease) in net assets.............................................. 35,659,820 10,714,766
NET ASSETS:
Beginning of period.................................................................. 162,948,370 152,233,604
------------- -------------
End of period........................................................................ $ 198,608,190 $ 162,948,370
============= =============
Accumulated net investment income (loss) at end of period............................ $ 763,275 $ 146,400
============= =============
Page 14 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------
CLASS A SHARES 2016 2015 2014 2013 2012
----------- ----------- ----------- ----------- -----------
Net asset value, beginning of period.......... $ 21.13 $ 21.20 $ 20.27 $ 22.42 $ 20.10
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss).................. 1.16 (a) 1.18 (a) 1.14 (a) 0.98 (a) 0.89 (a)
Net realized and unrealized gain (loss)....... 0.49 (0.13) 0.91 (1.91) 2.55
------- ------- ------- ------- -------
Total from investment operations.............. 1.65 1.05 2.05 (0.93) 3.44
------- ------- ------- ------- -------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income......................... (1.15) (1.12) (1.09) (0.98) (1.12)
Net realized gain............................. -- -- -- (0.09) (0.00) (b)
Return of capital............................. -- -- (0.03) (0.15) --
------- ------- ------- ------- -------
Total distributions........................... (1.15) (1.12) (1.12) (1.22) (1.12)
------- ------- ------- ------- -------
Net asset value, end of period................ $ 21.63 $ 21.13 $ 21.20 $ 20.27 $ 22.42
======= ======= ======= ======= =======
TOTAL RETURN (c).............................. 8.09% 5.05% 10.35% (4.36)% 17.60%
======= ======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's).......... $35,468 $28,585 $32,874 $90,286 $83,717
Ratio of total expenses to average net
assets..................................... 1.51% (d) 1.50% (d) 1.40% 1.44% 1.83%
Ratio of net expenses to average net assets... 1.41% (d) 1.41% (d) 1.40% 1.40% 1.40%
Ratio of net investment income (loss) to
average net assets......................... 5.50% 5.55% 5.47% 4.52% 4.13%
Portfolio turnover rate....................... 71% 123% 170% 60% 60%
(a) Based on average shares outstanding.
(b) Amount is less than $0.01.
(c) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge of 4.50% or contingent
deferred sales charge (CDSC). On purchases of $1 million or more, a CDSC
of 1% may be imposed on certain redemptions made within twelve months of
purchase. If the sales charges were included, total returns would be
lower. These returns include Rule 12b-1 service fees of 0.25% and do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares. The total returns would
have been lower if certain fees had not been waived and expenses
reimbursed by the investment advisor. Total return is calculated for the
time period presented and is not annualized for periods of less than one
year.
(d) For the years ended October 31, 2016, and 2015, ratios reflect excise tax
of 0.01% and 0.01%, respectively, which are not included in the expense
cap.
See Notes to Financial Statements Page 15
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------
CLASS C SHARES 2016 2015 2014 2013 2012
----------- ----------- ----------- ----------- -----------
Net asset value, beginning of period.......... $ 21.17 $ 21.24 $ 20.30 $ 22.45 $ 20.13
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss).................. 1.01 (a) 1.02 (a) 0.99 (a) 0.83 (a) 0.73 (a)
Net realized and unrealized gain (loss)....... 0.48 (0.13) 0.91 (1.93) 2.55
------- ------- ------- ------- -------
Total from investment operations.............. 1.49 0.89 1.90 (1.10) 3.28
------- ------- ------- ------- -------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income......................... (0.99) (0.96) (0.94) (0.84) (0.96)
Net realized gain............................. -- -- -- (0.08) (0.00) (b)
Return of capital............................. -- -- (0.02) (0.13) --
------- ------- ------- ------- -------
Total distributions........................... (0.99) (0.96) (0.96) (1.05) (0.96)
------- ------- ------- ------- -------
Net asset value, end of period................ $ 21.67 $ 21.17 $ 21.24 $ 20.30 $ 22.45
======= ======= ======= ======= =======
TOTAL RETURN (c).............................. 7.27% 4.26% 9.56% (5.03)% 16.70%
======= ======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's).......... $51,004 $45,093 $45,248 $55,376 $36,681
Ratio of total expenses to average net
assets..................................... 2.17% (d) 2.16% (d) 2.18% 2.17% 2.66%
Ratio of net expenses to average net assets... 2.16% (d) 2.16% (d) 2.15% 2.15% 2.15%
Ratio of net investment income (loss) to
average net assets......................... 4.76% 4.79% 4.75% 3.81% 3.36%
Portfolio turnover rate....................... 71% 123% 170% 60% 60%
(a) Based on average shares outstanding.
(b) Amount is less than $0.01.
(c) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 1%, charged on certain redemptions
made within one year of purchase. If the sales charge was included, total
returns would be lower. These returns include combined Rule 12b-1
distribution and service fees of 1% and do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption
of Fund shares. The total returns would have been lower if certain fees
had not been waived and expenses reimbursed by the investment advisor.
Total return is calculated for the time period presented and is not
annualized for periods of less than one year.
(d) For the years ended October 31, 2016 and 2015, ratios reflect excise tax
of 0.01% and 0.01%, respectively, which are not included in the expense
cap.
Page 16 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------
CLASS F SHARES 2016 2015 2014 2013 2012
----------- ----------- ----------- ----------- -----------
Net asset value, beginning of period.......... $ 21.31 $ 21.37 $ 20.42 $ 22.59 $ 20.12
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss).................. 1.18 (a) 1.23 (a) 1.18 (a) 1.02 (a) 0.89 (a)
Net realized and unrealized gain (loss)....... 0.50 (0.15) 0.91 (1.95) 2.72
------- ------- ------- ------- -------
Total from investment operations.............. 1.68 1.08 2.09 (0.93) 3.61
------- ------- ------- ------- -------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income......................... (1.17) (1.14) (1.11) (1.01) (1.14)
Net realized gain............................. -- -- -- (0.08) (0.00) (b)
Return of capital............................. -- -- (0.03) (0.15) --
------- ------- ------- ------- -------
Total distributions........................... (1.17) (1.14) (1.14) (1.24) (1.14)
------- ------- ------- ------- -------
Net asset value, end of period................ $ 21.82 $ 21.31 $ 21.37 $ 20.42 $ 22.59
======= ======= ======= ======= =======
TOTAL RETURN (c).............................. 8.18% 5.16% 10.48% (4.32)% 18.47%
======= ======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's).......... $ 5,025 $ 2,501 $ 2,617 $ 3,735 $ 4,012
Ratio of total expenses to average net
assets..................................... 1.70% (d) 1.92% 1.81% 1.58% 3.71%
Ratio of net expenses to average net assets... 1.31% (d) 1.30% 1.30% 1.30% 1.30%
Ratio of net investment income (loss) to
average net assets......................... 5.55% 5.70% 5.64% 4.63% 4.09%
Portfolio turnover rate....................... 71% 123% 170% 60% 60%
(a) Based on average shares outstanding.
(b) Amount is less than $0.01.
(c) Assumes reinvestment of all distributions for the period. These returns
include Rule 12b-1 service fees of 0.15% and do not reflect the deduction
of taxes that a shareholder would pay on Fund distributions or the
redemption of Fund shares. The total returns would have been lower if
certain fees had not been waived and expenses reimbursed by the investment
advisor. Total return is calculated for the time period presented and is
not annualized for periods of less than one year.
(d) For the year ended October 31, 2016, ratios reflect excise tax of 0.01%,
which is not included in the expense cap.
See Notes to Financial Statements Page 17
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------
CLASS I SHARES 2016 2015 2014 2013 2012
----------- ----------- ----------- ----------- -----------
Net asset value, beginning of period.......... $ 21.21 $ 21.27 $ 20.33 $ 22.47 $ 20.15
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss).................. 1.22 (a) 1.23 (a) 1.20 (a) 1.04 (a) 0.92 (a)
Net realized and unrealized gain (loss)....... 0.48 (0.12) 0.91 (1.91) 2.57
------- ------- ------- ------- -------
Total from investment operations.............. 1.70 1.11 2.11 (0.87) 3.49
------- ------- ------- ------- -------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income......................... (1.20) (1.17) (1.14) (1.03) (1.17)
Net realized gain............................. -- -- -- (0.09) (0.00) (b)
Return of capital............................. -- -- (0.03) (0.15) --
------- ------- ------- ------- -------
Total distributions........................... (1.20) (1.17) (1.17) (1.27) (1.17)
------- ------- ------- ------- -------
Net asset value, end of period................ $ 21.71 $ 21.21 $ 21.27 $ 20.33 $ 22.47
======= ======= ======= ======= =======
TOTAL RETURN (c).............................. 8.33% 5.35% 10.65% (4.06)% 17.84%
======= ======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's).......... $106,393 $86,412 $71,094 $58,700 $45,432
Ratio of total expenses to average net
assets..................................... 1.16% (d) 1.16% (d) 1.15% 1.23% 1.46%
Ratio of net expenses to average net assets... 1.16% (d) 1.16% (d) 1.15% 1.15% 1.15%
Ratio of net investment income (loss) to
average net assets......................... 5.74% 5.80% 5.74% 4.79% 4.20%
Portfolio turnover rate....................... 71% 123% 170% 60% 60%
(a) Based on average shares outstanding.
(b) Amount is less than $0.01.
(c) Assumes reinvestment of all distributions for the period. These returns do
not reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares. The total returns would
have been lower if certain fees had not been waived and expenses
reimbursed by the investment advisor. Total return is calculated for the
time period presented and is not annualized for periods of less than one
year.
(d) For the years ended October 31, 2016 and 2015, ratios reflect excise tax
of 0.01% and 0.01%, respectively, which are not included in the expense
cap.
Page 18 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED OCTOBER 31,
---------------------------------------------------------------
CLASS R3 SHARES 2016 2015 2014 2013 2012
----------- ----------- ----------- ----------- -----------
Net asset value, beginning of period.......... $ 21.13 $ 21.20 $ 20.26 $ 22.41 $ 20.11
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss).................. 1.11 (a) 1.13 (a) 1.09 (a) 0.93 (a) 0.80 (a)
Net realized and unrealized gain (loss)....... 0.47 (0.14) 0.92 (1.92) 2.56
------- ------- ------- ------- -------
Total from investment operations.............. 1.58 0.99 2.01 (0.99) 3.36
------- ------- ------- ------- -------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income......................... (1.10) (1.06) (1.04) (0.92) (1.06)
Net realized gain............................. -- -- -- (0.10) (0.00) (b)
Return of capital............................. -- -- (0.03) (0.14) --
------- ------- ------- ------- -------
Total distributions........................... (1.10) (1.06) (1.07) (1.16) (1.06)
------- ------- ------- ------- -------
Net asset value, end of period................ $ 21.61 $ 21.13 $ 21.20 $ 20.26 $ 22.41
======= ======= ======= ======= =======
TOTAL RETURN (c).............................. 7.73% 4.79% 10.14% (4.61)% 17.19%
======= ======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's).......... $ 717 $ 357 $ 401 $ 478 $ 615
Ratio of total expenses to average net
assets..................................... 7.42% (d) 6.56% (d) 5.74% 4.87% 11.51%
Ratio of net expenses to average net assets... 1.66% (d) 1.66% (d) 1.65% 1.65% 1.65%
Ratio of net investment income (loss) to
average net assets......................... 5.25% 5.30% 5.25% 4.25% 3.66%
Portfolio turnover rate....................... 71% 123% 170% 60% 60%
(a) Based on average shares outstanding.
(b) Amount is less than $0.01.
(c) Assumes reinvestment of all distributions for the period. These returns
include combined Rule 12b-1 distribution and service fees of 0.50%
effective December 15, 2011, and 0.75% prior to December 15, 2011, and do
not reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares. The total returns would
have been lower if certain fees had not been waived and expenses
reimbursed by the investment advisor. Total return is calculated for the
time period presented and is not annualized for periods of less than one
year.
(d) For the years ended October 31, 2016 and 2015, ratios reflect excise tax
of 0.01% and 0.01%, respectively, which are not included in the expense
cap.
See Notes to Financial Statements Page 19
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2016
1. ORGANIZATION
First Trust Preferred Securities and Income Fund (the "Fund") is a series of
First Trust Series Fund (the "Trust"), a Massachusetts business trust organized
on July 9, 2010, and is registered as a diversified, open-end management
investment company with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund offers
five classes of shares: Class A, Class C, Class F, Class I and Class R3. Each
class represents an interest in the same portfolio of investments but with a
different combination of sales charges, distribution and service (12b-1) fees,
eligibility requirements and other features.
The Fund's investment objective is to seek to provide current income and total
return. The Fund seeks to achieve its objective by investing, under normal
market conditions, at least 80% of its net assets (including investment
borrowings, if any) in preferred securities and other securities with similar
economic characteristics. There can be no assurance that the Fund will achieve
its investment objective. 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") for each class of shares of the Fund is determined
daily as of the close of trading on the New York Stock Exchange ("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 at the principal markets for those securities. The NAV for
each class is calculated by dividing the value of the Fund's total assets
attributable to such class (including accrued interest and dividends), less all
liabilities attributable to such class (including accrued expenses, dividends
declared but unpaid and any borrowings of the Fund), by the total number of
shares of the class outstanding. Differences in NAV of each class of the Fund's
shares are generally expected to be due to the daily expense accruals of the
specified distribution and service (12b-1) fees and transfer agency costs
applicable to such class of shares and the resulting differential in the
dividends that may be paid on each class of shares.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service, or are determined by the Pricing Committee of the Trust's
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor")
in accordance with valuation procedures adopted by the Trust'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:
Preferred 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.
Bonds, notes and other debt securities are fair valued on the basis of
valuations provided by dealers who make markets in such securities or by
an independent pricing service approved by the Trust'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.
Page 20
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2016
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
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 Trust'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 market quotations or official closing
prices on the applicable exchanges. A variety of factors may be considered in
determining the fair value of such securities, including, but not limited to,
the following:
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or third-party pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or the
appropriate stock exchange;
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might affect
the value of the security.
If the securities in question are foreign securities, the following additional
information may be considered:
1) the value of similar foreign securities traded on other foreign
markets;
2) ADR trading of similar securities;
3) closed-end fund trading of similar securities;
4) foreign currency exchange activity;
5) the trading prices of financial products that are tied to baskets of
foreign securities;
6) factors relating to the event that precipitated the pricing problem;
7) whether the event is likely to recur; and
8) whether the effects of the event are isolated or whether they affect
entire markets, countries or regions.
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.
Page 21
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2016
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.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
daily on the accrual basis, including the amortization of premiums and accretion
of discounts. Income is allocated on a pro rata basis to each class of shares.
The Fund may hold real estate investment trusts ("REITs"). Distributions from
such investments may include income, capital gains and return of capital. The
actual character of amounts received during the year is not known until after
the REITs' fiscal year end. The Fund records the character of distributions
received from the REITs during the year based on estimates available. The
characterization of distributions received by the Fund may be subsequently
revised based on information received from the REITs after their tax reporting
periods conclude.
C. 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 Stonebridge Advisors LLC
("Stonebridge" or the "Sub-Advisor") has deemed illiquid pursuant to procedures
adopted by the Trust's Board of Trustees. 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. 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 date and
yield for these issuers.
ACQUISITION SHARES/ CURRENT CARRYING % OF
SECURITY DATE PAR AMOUNT PRICE COST VALUE NET ASSETS
----------------------------------------------------------------------------------------------------------------------
AgStar Financial Services ACA, 6.75% 7/31/15 500 $1,060.87 $ 526,250 $ 530,437 0.27%
Centaur Funding Corp., 9.08%, 4/21/20 7/17/14-1/9/15 2,500 1,185.00 3,128,350 2,962,500 1.49
Dairy Farmers of America, 7.13% 9/15/16-10/4/16 $1,300,000 1.045 1,316,875 1,358,500 0.68
Land O'Lakes, Inc., 8.00% 7/9/15 $3,000,000 1.060 3,000,000 3,180,000 1.60
Pitney Bowes International Holdings,
Inc., Series F, 6.13% 4/7/15 300 1,002.81 315,375 300,844 0.15
Sirius International Group Ltd, 7.51% 5/19/15 $ 500,000 1.009 525,000 504,375 0.25
Sovereign Real Estate Investment
Trust, 12.00% 2/5/15-3/22/16 1,261 1,285.00 1,657,803 1,620,385 0.82
------------------------------------
$10,469,653 $10,457,041 5.26%
------------------------------------
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
The Fund will declare daily and pay monthly distributions of all or a portion of
its net income to holders of each class of shares. Distributions of any net
capital gains earned by the Fund will be distributed at least annually.
Distributions will automatically be reinvested into additional Fund shares
unless cash distributions are elected by the shareholder.
Distributions from net investment income and realized 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 time in the future.
Page 22
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2016
Permanent differences incurred during the year ended October 31, 2016, resulting
in book and tax accounting differences, have been reclassified at year end to
reflect an increase in accumulated net investment income (loss) of $556,565, a
decrease in accumulated net realized gain (loss) on investments of $539,230 and
a decrease to paid-in capital of $17,335. Net assets were not affected by these
reclassifications
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............................ $ 9,206,744 $ 8,216,441
As of October 31, 2016, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income.............. $ 298,497
Undistributed capital gains................ --
------------
Total undistributed earnings............... 298,497
Accumulated capital and other losses....... (11,986,433)
Net unrealized appreciation (depreciation). 4,314,313
------------
Total accumulated earnings (losses)........ (7,373,623)
Other...................................... --
Paid-in capital............................ 205,981,813
------------
Net assets................................. $198,608,190
============
E. 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.
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At October 31, 2016, for
federal income tax purposes, the Fund had a capital loss carryforward of
$11,986,433 available, to the extent provided by regulations, to offset future
capital gains.
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 ended 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.
F. EXPENSES
The Fund pays all expenses directly related to its operations. Expenses of the
Fund are allocated on a pro rata basis to each class of shares, except for
distribution and service (12b-1) fees and incremental transfer agency costs
which are unique to each class of shares.
G. NEW AND AMENDED FINANCIAL REPORTING RULES AND FORMS
On October 13, 2016 the Securities and Exchange Commission (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.
Page 23
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2016
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 supervising the selection and ongoing monitoring of the
Fund's investment portfolio, managing the Fund's business affairs and providing
certain administrative services necessary for the management of the Fund. For
these services, First Trust is entitled to a monthly fee calculated at an annual
rate of 0.80% of the Fund's average daily net assets. First Trust also provides
fund reporting services to the Fund for a flat annual fee in the amount of
$9,250.
Stonebridge, an affiliate of First Trust, serves as the Fund's sub-advisor and
manages the Fund's portfolio subject to First Trust's supervision. The
Sub-Advisor receives a monthly portfolio management fee calculated at an annual
rate of 0.40% of average daily net assets that is paid by First Trust out of its
investment advisory fee.
First Trust and Stonebridge have agreed to waive fees and/or pay Fund expenses
to the extent necessary to prevent the annual operating expenses of the Fund
(excluding 12b-1 distribution and service fees, interest expenses, taxes, fees
incurred in acquiring and disposing of portfolio securities and extraordinary
expenses) from exceeding 1.15% of average daily net assets of any class of
Shares of the Fund (the "Expense Cap") until February 28, 2018 and then will not
exceed 1.50% from March 1, 2018 to February 28, 2027 (the "Expense Cap
Termination Date"). Expenses borne and fees waived by First Trust and
Stonebridge are subject to recovery on a Fund class level by First Trust and
Stonebridge up to three years from the date the fee was waived or expense was
incurred, but no reimbursement payment will be made by the Fund at any time if
it would result in the Fund's expenses exceeding the applicable Expense Cap in
place at the time the expense was borne or the fee was waived by First Trust and
Stonebridge. Class I amounts are included as "Expenses previously waived or
reimbursed" on the Statement of Operations. The advisory fee waivers and expense
reimbursement for the year ended October 31, 2016 and the expenses borne by
First Trust and Stonebridge subject to recovery for the periods indicated were
as follows:
EXPENSES SUBJECT TO RECOVERY
----------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED
ADVISORY EXPENSE OCTOBER 31, OCTOBER 31, OCTOBER 31,
FEE WAIVER REIMBURSEMENT 2014 2015 2016 TOTAL
------------- ------------- ------------- ------------- ------------- -------------
$70,141 $ -- $50,893 $67,919 $70,141 $188,953
During the year ended October 31, 2016, First Trust recovered $40,603 of fees
that were previously waived.
Brown Brothers Harriman & Co. ("BBH") serves as the Fund's administrator, fund
accountant and custodian in accordance with certain fee arrangements. As
administrator and fund accountant, BBH is responsible for providing certain
administrative and accounting services to the Fund, including maintaining the
Fund's books of account, records of the Fund's securities transactions, and
certain other books and records. As custodian, BBH is responsible for custody of
the Fund's assets.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
transfer agent in accordance with certain fee arrangements. As transfer agent,
BNYM IS is responsible for maintaining shareholder records for the Fund. BNYM is
a subsidiary 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.
Trustees are reimbursed for travel and out-of-pocket expenses in connection with
all meetings. The Lead Independent Trustee and Committee Chairmen rotate every
three years. The officers and "Interested" Trustee receive no compensation from
the Trust for acting in such capacities.
Page 24
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2016
4. CAPITAL SHARE TRANSACTIONS
Capital transactions were as follows:
YEAR ENDED YEAR ENDED
OCTOBER 31, 2016 OCTOBER 31, 2015
SHARES VALUE SHARES VALUE
---------- ------------- ---------- -------------
Sales:
Class A 591,247 $ 12,534,279 465,300 $ 9,878,142
Class C 661,312 14,050,042 281,791 5,999,358
Class F 399,627 8,541,027 146,344 3,141,137
Class I 2,620,498 55,678,827 1,750,444 37,275,597
Class R3 20,424 439,978 -- --
---------- ------------- ---------- -------------
Total Sales: 4,293,108 $ 91,244,153 2,643,879 $ 56,294,234
========== ============= ========== =============
Dividend Reinvestment:
Class A 52,224 $ 1,104,127 52,174 $ 1,108,173
Class C 92,326 1,954,563 82,508 1,754,763
Class F 9,174 195,634 4,515 96,604
Class I 229,195 4,862,092 199,494 4,249,667
Class R3 77 1,657 -- --
---------- ------------- ---------- -------------
Total Dividend Reinvestment: 382,996 $ 8,118,073 338,691 $ 7,209,207
========== ============= ========== =============
Redemptions:
Class A (356,446) $ (7,531,465) (715,203) $ (15,165,198)
Class C (530,054) (11,218,663) (364,533) (7,754,300)
Class F (295,868) (6,275,621) (155,982) (3,333,308)
Class I (2,023,609) (42,340,985) (1,216,841) (25,901,934)
Class R3 (4,206) (88,054) (2,012) (42,745)
---------- ------------- ---------- -------------
Total Redemptions: (3,210,183) $ (67,454,788) (2,454,571) $ (52,197,485)
========== ============= ========== =============
5. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, other than short-term
investments, for the year ended October 31, 2016, were $153,260,263 and
$121,470,823, respectively.
6. BORROWINGS
The Trust, on behalf of the Fund, along with First Trust Exchange-Traded Fund
III and First Trust Exchange-Traded Fund IV entered into a $140 million Credit
Agreement with The Bank of Nova Scotia ("Scotia") as administrative agent for a
group of lenders. Scotia charges a commitment fee of 0.25% of the daily amount
of the excess of the commitment amount over the outstanding principal balance of
the loans. Prior to March 9, 2016, the commitment amount was $80,000,000 and the
commitment fee was 0.15% First Trust allocates the commitment fee amongst the
funds that have access to the credit line. To the extent that the Fund accesses
the credit line, there would also be an interest fee charged.
The Fund did not have any borrowings outstanding during the year ended October
31, 2016.
7. DISTRIBUTION AND SERVICE PLAN
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the share
classes of the Fund are authorized to pay an amount up to 0.25%, 1.00%, 0.15%
and 0.50% of their average daily net assets each year for Class A, Class C,
Class F and Class R3, respectively, to reimburse and compensate First Trust
Portfolios L.P. ("FTP"), the distributor of the Fund, for amounts expended to
finance activities primarily intended to result in the sale of Fund shares or
the provision of investor services. FTP may also use this amount to compensate
securities dealers or other persons for providing distribution assistance,
including broker-dealer and shareholder support and educational and promotional
services.
Page 25
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2016
8. 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.
9. 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 was
the following subsequent event:
On December 16, 2016, the commitment amount under the Credit Agreement with
Scotia was increased to $180 million.
Page 26
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST PREFERRED SECURITIES
AND INCOME FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust Preferred Securities and Income Fund (the "Fund"), a series of the First
Trust Series Fund, including the portfolio of investments, as of October 31,
2016, and the related statement of operations 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 and brokers; 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 Preferred Securities and Income Fund as of October 31, 2016, the results
of its operations 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 27
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2016 (UNAUDITED)
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Trust uses to determine
how to vote proxies and information on how the Fund voted proxies relating to
portfolio securities 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 at http://www.sec.gov.
PORTFOLIO HOLDINGS
The Trust 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-Qs
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
The Fund hereby designates as qualified dividend income 56.56% of its ordinary
income distributions (including short-term capital gains, if applicable) for the
period ended October 31, 2016. 33.04% of the ordinary income (including
short-term capital gain, if applicable) distributions made by the Fund during
the period ended October 31, 2016, qualify for corporate dividends received
deduction available to corporate shareholders.
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.
MARKET RISK: Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Securities are subject
to market fluctuations caused by such factors as economic, political, regulatory
or market developments, changes in interest rates and perceived trends in stock
prices. Overall stock values could decline generally or could underperform other
investments. Companies with smaller market capitalizations are generally subject
to additional market risk.
INTEREST RATE RISK: If interest rates rise, the prices of fixed-rate preferred
securities and other fixed-rate debt securities held by the Fund will fall.
PREFERRED SECURITIES RISK: Preferred securities combine some of the
characteristics of both common stocks and bonds. Preferred securities are
typically subordinated to bonds and other debt instruments in a company's
capital structure, in terms of priority to corporate income, and therefore will
be subject to greater credit risk than those debt instruments. Preferred
securities are also subject to credit risk, interest rate risk and income risk.
CONCENTRATION RISK: A fund concentrated in a single industry or sector is likely
to present more risks than a fund that is broadly diversified over several
industries or sectors. Compared to the broad market, an individual industry or
sector may be more strongly affected by changes in the economic climate, broad
market shifts, moves in a particular dominant stock, or regulatory changes.
CREDIT RISK: Credit risk is the risk that an issuer of a security may be unable
or unwilling to make dividend, interest and principal payments when due and the
related risk that the value of a security may decline because of concerns about
the issuer's ability or willingness to make such payments. In addition, parties
to other financial contracts with the Fund could default on their obligations.
CURRENCY RISK: Although the Fund's net asset value is determined on the basis of
U.S. dollars, because the Fund invests in foreign securities, you may lose money
if the local currency of a foreign market depreciates against the U.S. dollar,
even if the local currency value of the Fund's holdings goes up.
DEPOSITARY RECEIPTS RISK: Depositary receipts may be less liquid than the
underlying shares in their primary trading market. Any distributions paid to the
holders of depositary receipts are usually subject to a fee charged by the
depositary. Holders of depositary receipts may have limited voting rights, and
investment restrictions in certain countries may adversely impact the value of
depositary receipts because such restrictions may limit the ability to convert
equity share into depositary receipts and vice versa. Such restrictions may
cause equity shares of the underlying issuer to trade at a discount or premium
to the market price of the depositary receipts.
Page 28
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2016 (UNAUDITED)
FINANCIAL COMPANY RISK: The Fund invests in the securities of financial
companies, which may include banks, thrifts, brokerage firms, broker-dealers,
investment banks, finance companies, REITs and companies involved in the
insurance industry. Banks, thrifts and their holding companies are especially
subject to the adverse effects of economic recession; government regulation;
decreases in the availability of capital; volatile interest rates; portfolio
concentrations in geographic markets and in commercial and residential real
estate loans; and competition from new entrants in their fields of business.
ILLIQUID SECURITIES RISK: Illiquid securities involve the risk that the
securities will not be able to be sold at the time desired by the Fund or at
prices approximately the value at which the Fund is carrying the securities on
its books.
INCOME RISK: If interest rates fall, the income from the Fund's portfolio will
decline as the Fund invests the proceeds from new share sales, or from matured
or called debt securities, at interest rates that are below the portfolio's
current earnings rate.
NON-DIVERSIFICATION RISK: The Fund is classified as "non-diversified" under the
1940 Act. As a result, the Fund is only limited as to the percentage of its
assets which may be invested in the securities of any one issuer by the
diversification requirements imposed by the Code. The Fund may invest a
relatively high percentage of its assets in a limited number of issuers. As a
result, the Fund may be more susceptible to a single adverse economic or
regulatory occurrence affecting one or more of these issuers, experience
increased volatility and be highly concentrated in certain issuers.
REIT RISK: Investing in REITs involves risks related to their structure and
focus, which include, but are not limited to, dependency upon management skills,
limited diversification, the risks of locating and managing financing for
projects, heavy cash flow dependency, possible default by borrowers, the costs
and potential losses of self-liquidation of one or more holdings, the risk of a
possible lack of mortgage funds and associated interest rate risks,
overbuilding, property vacancies, increases in property taxes and operating
expenses, changes in zoning laws, losses due to environmental damages, changes
in neighborhood values and appeal to purchases, the possibility of failing to
maintain exemptions from registration under the 1940 Act and, in many cases,
relatively small market capitalization, which may result in less market
liquidity and greater price volatility. Fund shareholders indirectly pay REIT
fees and expenses.
NON U.S. SECURITIES RISK: The Fund may invest in securities of non U.S. issuers.
Such securities are subject to higher volatility than securities of domestic
issuers due to possible adverse political, social or economic developments;
restrictions on foreign investment or exchange of securities; lack of liquidity;
currency exchange rates; excessive taxation; government seizure of assets;
different legal or accounting standards; and less government supervision and
regulation of exchanges in foreign countries.
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING APPROVAL OF CONTINUATION OF INVESTMENT MANAGEMENT
AND INVESTMENT SUB-ADVISORY AGREEMENTS
The Board of Trustees of the First Trust Series Fund (the "Trust"), including
the Independent Trustees, unanimously approved the continuation of the
Investment Management Agreement (the "Advisory Agreement") between the Trust, on
behalf of the First Trust Preferred Securities and Income Fund (the "Fund"), and
First Trust Advisors L.P. (the "Advisor" or "First Trust") and the Investment
Sub Advisory Agreement (the "Sub Advisory Agreement" and together with the
Advisory Agreement, the "Agreements") among the Trust, on behalf of the Fund,
the Advisor and Stonebridge Advisors LLC (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 its affiliates, First Trust Portfolios L.P. ("FTP") and First Trust
Capital Partners, LLC ("FTCP"), 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
Page 29
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2016 (UNAUDITED)
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 Trust and the Advisor and among the Trust, the Advisor and the
Sub-Advisor continue to be reasonable business arrangements from the perspective
of the Fund and the Fund's 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 and knowing the
Fund's advisory fee.
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
Trust and 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 objective 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 objective 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 considered that the
Advisor and Sub-Advisor agreed to extend the current expense caps for each share
class through February 28, 2018 and agreed to keep the long-term expense cap in
place from March 1, 2018 through February 28, 2027. The Board noted that fees
waived or expenses borne by the Advisor and Sub-Advisor are subject to
reimbursement by the Fund for up to three years from the date the expense was
incurred or fees were waived, but no reimbursement payment would be made by the
Fund if it would result in the Fund exceeding an expense ratio equal to the
expense cap in place at the time of the reimbursement or at the time the
expenses were borne or the fees were waived by the Advisor and Sub-Advisor. 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) some of the peer funds are part of a larger fund complex that may allow for
additional economies of scale; and (iii) only two of the peer funds employ an
advisor/sub-advisor management structure and none of the peer funds employs an
advisor/sub advisor management structure with an unaffiliated sub-advisor. The
Board took these limitations into account in considering the peer data. Based on
the information provided, the Board noted that the advisory fee rate payable by
the Fund was above the median advisory fee of the peer funds in the MPI Peer
Group. The Board noted that the Fund's total (net) expense ratio (Class A
shares) 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 a
blended benchmark index. 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, the Board noted that the Fund (Class A
shares) outperformed the MPI Peer Group average for the one-year period and
underperformed the MPI Peer Group average for the three year period ended
December 31, 2015. The Board also noted that the Fund (Class A shares)
outperformed the blended benchmark index for the one-year period and
underperformed the blended benchmark index for the three-year period ended
December 31, 2015.
Page 30
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2016 (UNAUDITED)
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 for the Fund 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 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 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. The Board considered
that the Advisor had identified as a fall out benefit to the Advisor and FTP
their exposure to investors and brokers who, absent their exposure to the Fund,
may have had no dealings with the Advisor or FTP. The Board considered the
ownership interest of FTCP in the Sub-Advisor and potential fall-out benefits to
the Advisor from such ownership interest. The Board noted that in addition to
the advisory fees paid by the Fund, FTP is compensated for services provided to
the Fund through 12b 1 distribution and service fees and that First Trust
receives compensation from the Fund for providing fund reporting services
pursuant to a separate Fund Reporting Services Agreement.
The Board considered the Sub-Advisor's expenses in providing investment services
to the Fund and noted the Sub-Advisor's recent hiring of additional personnel to
work on the Fund and commitment to add additional personnel if assets increase.
The Board considered that the sub-advisory fee rate was negotiated at arm's
length between the Advisor and the Sub-Advisor. 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 considered fall-out
benefits that may be realized by the Sub-Advisor from its relationship with the
Fund, including potential fall-out benefits to the Sub-Advisor from the
ownership interest of FTCP in the Sub-Advisor. The Board noted that the
Sub-Advisor does not maintain any soft-dollar arrangements.
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 31
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
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
THE FIRST TRUST DIRECTORSHIPS
NAME, ADDRESS, TERM OF OFFICE FUND COMPLEX HELD BY TRUSTEE
DATE OF BIRTH AND AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE TRUST SERVICE DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Indefinite 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 Trust Limited Partnership; Member, Sportsmed
Suite 400 LLC Inception (April 2007 to November 2015)
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Indefinite 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 Trust Inc. and ADM
Suite 400 Inception Investor Services
Wheaton, IL 60187 International and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Indefinite Term President, Hibs Enterprises (Financial 137 Director of Trust
c/o First Trust Advisors L.P. and Management Consulting) Company of
120 E. Liberty Drive, o Since Trust Illinois
Suite 400 Inception
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Indefinite 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 Trust Harapan Educational Foundation (Educational Transport, Inc.
Suite 400 Inception Products and Services); President and Chief (May 2003 to
Wheaton, IL 60187 Executive Officer (June 2012 to September May 2014)
D.O.B.: 03/54 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(1), Trustee o Indefinite 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 Trust L.P.; Chairman of the Board of Directors,
Suite 400 Inception BondWave LLC (Software Development Company)
Wheaton, IL 60187 and Stonebridge Advisors LLC (Investment
D.O.B.: 09/55 Advisor)
-----------------------------
(1) Mr. Bowen is deemed an "interested person" of the Trust due to his
position as Chief Executive Officer of First Trust Advisors L.P.,
investment advisor of the Trust.
Page 32
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
OCTOBER 31, 2016 (UNAUDITED)
POSITION AND TERM OF OFFICE
NAME, ADDRESS OFFICES AND LENGTH OF PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH TRUST SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(2)
------------------------------------------------------------------------------------------------------------------------------------
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 First
D.O.B.: 01/66 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 o Indefinite Term Senior Vice President (July 2016 to Present), Vice
120 E. Liberty Drive, Financial Officer and President (April 2012 to July 2016), First Trust
Suite 400 Chief 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 Trust Inception Counsel, BondWave LLC; Secretary of Stonebridge
Wheaton, IL 60187 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 July 2012), First
Suite 400 o Since Trust Inception 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 Trust
Inception
-----------------------------
(2) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 33
--------------------------------------------------------------------------------
PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
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 34
This Page Left Blank Intentionally.
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
Stonebridge Advisors, LLC
10 Westport Road
Suite C101
Wilton, CT 06897
ADMINISTRATOR,
FUND ACCOUNTANT &
CUSTODIAN
Brown Brothers Harriman & Co.
50 Post Office Square
Boston, MA 02110
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19810
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]
FIRST TRUST
First Trust/Confluence
Small Cap Value Fund
-----------------------------------------
Annual Report
For the Year Ended
October 31, 2016
CONFLUENCE INVESTMENT MANAGEMENT
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
ANNUAL REPORT
OCTOBER 31, 2016
Shareholder Letter .......................................................... 1
At a Glance ................................................................. 2
Portfolio Commentary ........................................................ 4
Understanding Your Fund Expenses ............................................ 6
Portfolio of Investments .................................................... 7
Statement of Assets and Liabilities ......................................... 9
Statement of Operations ..................................................... 10
Statements of Changes in Net Assets ......................................... 11
Financial Highlights ........................................................ 12
Notes to Financial Statements ............................................... 15
Report of Independent Registered Public Accounting Firm...................... 21
Additional Information....................................................... 22
Board of Trustees and Officers............................................... 26
Privacy Policy............................................................... 28
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 Confluence Investment Management LLC
("Confluence" 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/Confluence Small Cap Value Fund (the "Fund") to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. When evaluating the information
included in this report, you are cautioned not to place undue reliance on these
forward-looking statements, which reflect the judgment of the Advisor and/or
Sub-Advisor and their respective representatives only as of the date hereof. We
undertake no obligation to publicly revise or update these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of 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 and net asset value 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
Confluence 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.
--------------------------------------------------------------------------------
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
OCTOBER 31, 2016
Dear Shareholders:
Thank you for your investment in First Trust/Confluence Small Cap Value Fund.
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/CONFLUENCE SMALL CAP VALUE FUND
"AT A GLANCE"
AS OF OCTOBER 31, 2016 (UNAUDITED)
-----------------------------------------------------------
FUND STATISTICS
-----------------------------------------------------------
NET ASSET
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND VALUE (NAV)
-----------------------------------------------------------
Class A (FOVAX) $27.81
Class C (FOVCX) $25.61
Class I (FOVIX) $28.40
-----------------------------------------------------------
-----------------------------------------------------------
% OF TOTAL
TOP TEN HOLDINGS INVESTMENTS
-----------------------------------------------------------
MTS Systems Corp. 3.9%
Exponent, Inc. 3.8
Potbelly Corp. 3.8
Patterson Cos., Inc. 3.7
Raven Industries, Inc. 3.7
Bank of Marin Bancorp. 3.7
Snyder's-Lance, Inc. 3.5
Graco, Inc. 3.4
Gladstone Commercial Corp. 3.4
Advisory Board (The) Co. 3.4
-----------------------------------------------------------
Total 36.3%
=======
-----------------------------------------------------------
% OF TOTAL
SECTOR ALLOCATION INVESTMENTS
-----------------------------------------------------------
Industrials 35.7%
Financials 18.7
Health Care 18.2
Real Estate 9.9
Information Technology 6.9
Consumer Discretionary 5.4
Consumer Staples 5.2
-----------------------------------------------------------
Total 100.0%
=======
Page 2
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
"AT A GLANCE" (CONTINUED)
AS OF OCTOBER 31, 2016 (UNAUDITED)
-----------------------------------------------------------
PERFORMANCE OF A $10,000 INVESTMENT
-----------------------------------------------------------
This chart compares your Fund's Class I performance to that
of the Russell 2000(R) Value Index and the Russell 2000(R)
Index from 1/11/2011 through 10/31/2016.
First Trust/Confluence
Small Cap Value Fund - Russell 2000(R) Russell 2000(R)
Class I Shares Value Index ("R2000V") Index ("R2000")
1/11/11 $10,000 $10,000 $10,000
4/30/11 10,730 10,966 10,716
10/31/11 9,790 9,457 9,261
4/30/12 10,554 10,499 10,323
10/31/12 10,951 10,599 10,601
4/30/13 12,260 12,309 12,307
10/31/13 13,892 14,023 14,389
4/30/14 14,285 14,720 14,832
10/31/14 15,214 15,129 15,548
4/30/15 15,626 15,439 16,271
10/31/15 15,403 14,693 15,601
4/30/16 15,847 14,866 15,305
10/31/16 16,552 15,987 16,243
----------------------------------------------------------------------------------------------------------------------
PERFORMANCE AS OF OCTOBER 31, 2016
----------------------------------------------------------------------------------------------------------------------
A SHARES C SHARES I SHARES
Inception 2/24/2011 Inception 3/2/2011 Inception 1/11/2011 R2000V* R2000*
----------------------------------------------------------------------------------------------------------------------
W/MAX
1.00%
W/MAX CONTINGENT
W/O 5.50% W/O DEFERRED W/O W/O W/O
SALES SALES SALES SALES SALES SALES SALES
AVERAGE ANNUAL CHARGES CHARGE CHARGES CHARGE CHARGES CHARGES CHARGES
TOTAL RETURNS
1 Year 7.22% 1.32% 6.28% 5.28% 7.46% 8.81% 4.11%
5 Years 10.59% 9.35% 9.61% 9.61% 11.07% 11.63% 11.51%
Since Inception 8.72% 7.64% 7.18% 7.18% 9.07% 8.42% 8.72%
----------------------------------------------------------------------------------------------------------------------
* Since inception return is based on the Class I Shares inception date.
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that a shareholder would pay on Fund distributions or the
redemption of Fund shares. The total returns would have been lower if certain
fees had not been waived and expenses reimbursed by the Advisor. An index is a
statistical composite that tracks a specified financial market or sector. Unlike
the Fund, the indices do not actually hold a portfolio of securities and
therefore do not incur the expenses incurred by the Fund. These expenses
negatively impact the performance of the Fund. The Fund's past performance does
not predict future performance.
Performance of share classes will vary due to differences in sales charges and
expenses. Average annual total return with sales charges includes payment of the
maximum sales charge of 5.50% for Class A Shares, a contingent deferred sales
charge ("CDSC") of 1.00% for Class C Shares in year one and 12b-1 service fees
of 0.25% per year of average daily net assets for Class A Shares and combined
Rule 12b-1 distribution and service fees of 1.00% per year of average daily net
assets for Class C Shares. Class I Shares do not have a front-end sales charge
or a CDSC, nor do they pay distribution or service fees.
Page 3
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
ANNUAL REPORT
OCTOBER 31, 2016 (UNAUDITED)
SUB-ADVISOR
Confluence Investment Management LLC, a registered investment advisor
("Confluence" or the "Sub-Advisor"), located in St. Louis, Missouri, serves as
the sub-advisor to First Trust/Confluence Small Cap Value Fund (the "Fund"). The
investment professionals at Confluence have over 80 years of aggregate portfolio
management experience. Confluence professionals have invested in a wide range of
specialty finance and other financial company securities during various market
cycles, working to provide attractive risk-adjusted returns to clients.
PORTFOLIO MANAGEMENT TEAM
MARK KELLER, CFA - CHIEF EXECUTIVE OFFICER AND CHIEF INVESTMENT OFFICER
DANIEL WINTER, CFA - SENIOR VICE PRESIDENT AND PORTFOLIO MANAGER
CHRIS STEIN - VICE PRESIDENT AND PORTFOLIO MANAGER
THOMAS DUGAN, CFA - ASSOCIATE VICE PRESIDENT AND PORTFOLIO MANAGER
COMMENTARY
MARKET RECAP
For the Fund's fiscal year ended October 31, 2016, the small capitalization
equity markets faired relatively well despite a rather volatile year that
witnessed the Russell 2000(R) Index correct over -20% between December 2015 and
mid-February 2016, only to bounce back with gains in the Russell 2000(R) and
Russell 2000(R) Value Indexes of 4.11% and 8.81%, respectively.
The Fund's fiscal year started off rather ominously as investors kept all eyes
and ears fixated on the central banks around the world, and specifically the
Federal Reserve ("Fed"), as to their actions. Recall that the small cap markets
languished throughout the Fund's fiscal year 2015 as the Fed kept delaying the
first rate increase following the end of Quantitative Easing in December of
2014, finally raising rates in December 2015. Investors remained cautious in
early 2016 due to concerns about the pace and magnitude of future rate
increases. This anxiety caused the small cap markets to correct, with the
Russell 2000(R) and Russell 2000(R) Value Indexes down -20.15% and -17.47%,
respectively, from December 1, 2015 through February 11, 2016, only to rebound
strongly from mid-February 2016 through the end of September 2016, as the fear
of rate increases subsided with new economic data reflecting weak economic
activity.
Despite anemic economic growth that has produced flat to mixed sales and
earnings across the broad markets, the equity markets continued their march
upward. Given the economic backdrop and the anxiety over further Fed actions
entering 2016, equity investors have fared rather well thus far. However,
prudence should remain at this juncture of the cycle as investors striving for
returns and yield have been forced to the equity markets due to the continued
low interest rate environment that has limited return potential for safer
investments, such as Treasuries and insured Certificates of Deposits.
The Class I Shares of the Fund generated gains of 7.46% during the fiscal year
ended October 31, 2016, outperforming the Russell 2000(R) Index gain of 4.11%
while slightly underperforming the benchmark, Russell 2000(R) Value Index gain
of 8.81%. From inception (1/11/2011) through the end of October, the Fund is up
9.07% (on an annualized basis), slightly ahead of the performance of the Russell
2000(R) and Russell 2000(R) Value Indexes which posted annualized gains of 8.72%
and 8.42%, respectively, for the same period.
PERFORMANCE ANALYSIS
During the Fund's fiscal year ended October 31, 2016, sector results were rather
bifurcated. Even within the commodity-oriented sectors, Energy significantly
lagged while Materials posted strong returns. For the Fund, the relative
weightings and performance of the Consumer Discretionary, Energy, Industrial and
Real Estate sectors were positive contributors to relative performance. The
Information Technology sector was the main detractor to relative performance
(see Fund Attribution table). The large cash position was also a detractor to
relative performance.
Page 4
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
ANNUAL REPORT
OCTOBER 31, 2016 (UNAUDITED)
--------------------------------------------------------------------------------------------------------------------
RUSSELL 2000 VALUE RUSSELL 2000 FUND ATTRIBUTION
-------------------- ------------------ ------------------ -------------------
VS. RSL VS. RSL
SECTOR WGT RTN WGT RTN WGT RTN 2000V 2000
--------------------------------------------------------------------------------------------------------------------
Consumer Discretionary 13.44 (5.90) 10.13 (5.11) 6.49 31.17 3.12 2.88
Consumer Staples 3.38 10.18 3.31 18.65 3.35 0.13 (0.34) (0.62)
Energy 2.82 (16.20) 4.55 (17.16) 0.00 0.00 0.58 1.21
Financials 17.25 5.91 29.65 8.68 16.32 1.60 (0.72) (1.06)
Health Care 14.45 (7.40) 4.47 0.92 18.23 9.10 2.56 0.33
Industrials 13.15 7.00 12.06 11.82 28.97 13.93 2.43 1.02
Information Technology 17.84 11.12 10.50 18.76 4.41 (31.93) (2.81) (2.81)
Materials 4.12 16.53 3.80 30.71 0.00 0.00 (0.50) (0.81)
Real Estate 8.74 11.01 13.12 11.59 9.08 21.06 0.94 0.77
Telecom Services 0.82 4.55 0.83 3.45 0.00 0.00 (0.00) 0.05
Utilities 3.99 17.35 7.58 17.79 0.00 0.00 (0.52) (0.64)
Cash 0.00 0.00 0.00 0.00 13.15 0.14 (0.55) (1.22)
--------------------------------------------------------------------------------------------------------------------
Sources: Factset and Confluence Investment Management. Index Data is based on
the respective Exchange Traded Fund (iShares Russell 2000 and Russell 2000
Value).
Our investment approach is focused on understanding and valuing individual
businesses with the emphasis on owning quality businesses at bargain prices.
This is a fundamental approach that views risk as the probability of a permanent
loss of capital as opposed to tracking error of a benchmark. Businesses that
exhibit the attributes we seek (e.g., substantial competitive advantages and
pricing power, free cash flow generation, high returns on invested capital) are
often difficult to find in commodity-oriented or highly regulated businesses in
which pricing is contingent on factors outside management's control. This will
often result in over/underweighting certain areas of the market that either
offer more attractive valuations or have superior underlying attributes.
Subsequently, performance in any given time frame will be impacted by the
market's perception of the value of these individual businesses compared to the
benchmarks. It is with this approach that we would expect to outperform in down
markets as our focus is on managing risk. Our objective is to beat the broad
markets on average and over long periods, but in order to accomplish this goal
we must do something different which will ultimately result in tracking error,
good and bad, from time to time.
This approach is research intensive and deployed with a bottom-up focus of
investing in businesses in a relatively concentrated manner; therefore,
performance is ultimately driven by the underlying strength of the holdings of
the Fund and less influenced by macro or top-down sector weightings. The sector
weightings (over/under) are more of a byproduct of what the market is presenting
with an emphasis on owning a diversified portfolio of undervalued businesses.
During the Fund's fiscal year ended October 31, 2016, the small capitalization
markets were volatile, with a very strong downside to start the year followed by
a sharp upswing. The Fund performed relatively well on the downside but did lag
on the upside. Overall, the Fund performed relatively well and in line with our
underlying investment philosophy of managing risk.
In the Consumer Discretionary sector, the Fund benefited from solid returns from
Tumi Holdings, Inc. (TUMI), which was acquired by Samsonite, and Potbelly Corp.
(PBPB). In the Industrial sector, the Fund benefited from John Bean Technologies
Corp. (JBT) and Raven Industries, Inc. (RAVN).
The Fund's relative weakness in the Information Technology sector was driven by
underweighting and the performance of MTS Systems Corp. (MTSC) and Monotype
Imaging Holdings, Inc. (TYPE).
The Fund still maintains a large cash position as we prudently await
opportunities to deploy.
MARKET AND FUND OUTLOOK
Looking forward, we expect the markets to continue to be driven by the actions
of the Fed and the pace they select for raising interest rates. We continue to
work diligently to put cash to work in a prudent fashion but acknowledge that it
is taking a little longer than normal. As always, we remain focused on
company-specific fundamentals and growth prospects, and believe the current
market will continue to provide us with opportunities to buy quality companies
at reasonable prices.
Page 5
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
UNDERSTANDING YOUR FUND EXPENSES
AS OF OCTOBER 31, 2016 (UNAUDITED)
As a shareholder of the First Trust/Confluence Small Cap Value Fund, you incur
two types of costs: (1) transaction costs, including sales charges (loads) on
purchases of Class A Shares and contingent deferred sales charges on the lesser
of purchase price or redemption proceeds of Class C Shares; and (2) ongoing
costs, including management fees; distribution and/or service (12b-1) fees; and
other Fund expenses. This Example is intended to help you understand your
ongoing costs of investing in the Fund and to compare these costs with the
ongoing costs of investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended October 31, 2016.
ACTUAL EXPENSES
The first three columns of the table below provide information about actual
account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid over the period. Simply divide your account value by $1,000 (for
example, an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the third column under the heading entitled "Expenses
Paid During Period" to estimate the expenses you paid on your account during the
period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The next three columns of the table below provide information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing cost of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or contingent deferred sales charges. Therefore, the
hypothetical section of the table is useful in comparing ongoing costs only, and
will not help you determine the relative total costs of owning different funds.
In addition, if these transactional costs were included, your costs would have
been higher.
-----------------------------------------------------------------------------------------------------
HYPOTHETICAL
ACTUAL EXPENSES (5% RETURN BEFORE EXPENSES)
------------------------------------------- -----------------------------------------
ENDING EXPENSES PAID BEGINNING ENDING EXPENSES PAID
BEGINNING ACCOUNT DURING PERIOD ACCOUNT ACCOUNT DURING PERIOD ANNUALIZED
ACCOUNT VALUE VALUE 5/01/2016 - VALUE VALUE 5/01/2016 - EXPENSE
5/01/2016 10/31/2016 10/31/2016 (a) 5/01/2016 10/31/2016 10/31/2016 (a) RATIOS (b)
-----------------------------------------------------------------------------------------------------
Class A $ 1,000.00 $ 1,042.40 $ 8.21 $ 1,000.00 $ 1,017.09 $ 8.11 1.60%
Class C 1,000.00 1,038.10 12.04 1,000.00 1,013.32 11.89 2.35
Class I 1,000.00 1,044.50 6.94 1,000.00 1,018.35 6.85 1.35
(a) Expenses are equal to the annualized expense ratios, multiplied by the
average account value over the period (May 1, 2016 through October 31,
2016), multiplied by 184/366 (to reflect the six-month period).
(b) These expense ratios reflect expense caps.
Page 6
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2016
SHARES DESCRIPTION VALUE
------------- ---------------------------------------------------------------------------- --------------
COMMON STOCKS - 79.6%
AIR FREIGHT & LOGISTICS - 2.9%
6,322 Forward Air Corp............................................................ $ 261,225
--------------
BANKS - 3.1%
5,634 Bank of Marin Bancorp....................................................... 285,926
--------------
BEVERAGES - 1.4%
849 Boston Beer (The) Co., Inc. (a)............................................. 131,807
--------------
CAPITAL MARKETS - 5.6%
12,067 Donnelley Financial Solutions, Inc. (a)..................................... 258,837
3,524 Morningstar, Inc............................................................ 248,900
--------------
507,737
--------------
ELECTRICAL EQUIPMENT - 2.8%
13,971 Thermon Group Holdings, Inc. (a)............................................ 256,088
--------------
ELECTRONIC EQUIPMENT, INSTRUMENTS & COMPONENTS - 3.3%
6,323 MTS Systems Corp............................................................ 300,659
--------------
FOOD PRODUCTS - 3.0%
7,591 Snyder's-Lance, Inc......................................................... 270,012
--------------
HEALTH CARE EQUIPMENT & SUPPLIES - 7.6%
5,315 Haemonetics Corp. (a)....................................................... 177,574
7,764 Halyard Health, Inc. (a).................................................... 251,165
6,619 Natus Medical, Inc. (a)..................................................... 260,458
--------------
689,197
--------------
HEALTH CARE PROVIDERS & SERVICES - 5.8%
6,817 Patterson Cos., Inc......................................................... 291,154
3,895 VCA, Inc. (a)............................................................... 239,387
--------------
530,541
--------------
HOTELS, RESTAURANTS & LEISURE - 3.3%
22,753 Potbelly Corp. (a).......................................................... 296,927
--------------
INDUSTRIAL CONGLOMERATES - 3.2%
13,405 Raven Industries, Inc....................................................... 287,537
--------------
INSURANCE - 7.2%
6,695 Brown & Brown, Inc.......................................................... 246,778
4,788 National Interstate Corp. (a)............................................... 155,131
18,425 OneBeacon Insurance Group Ltd., Class A..................................... 253,159
--------------
655,068
--------------
LIFE SCIENCES TOOLS & SERVICES - 2.1%
1,832 Bio-Techne Corp............................................................. 190,510
--------------
MACHINERY - 11.9%
4,820 Franklin Electric Co., Inc.................................................. 175,689
3,550 Graco, Inc.................................................................. 265,895
3,186 John Bean Technologies Corp................................................. 254,402
7,254 Mueller Industries, Inc..................................................... 219,724
2,336 RBC Bearings, Inc. (a)...................................................... 166,673
--------------
1,082,383
--------------
See Notes to Financial Statements Page 7
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
SHARES DESCRIPTION VALUE
------------- ---------------------------------------------------------------------------- --------------
COMMON STOCKS (CONTINUED)
PROFESSIONAL SERVICES - 9.0%
6,606 Advisory Board (The) Co. (a)................................................ $ 262,919
5,371 CEB, Inc.................................................................... 261,299
5,192 Exponent, Inc............................................................... 297,242
--------------
821,460
--------------
REAL ESTATE MANAGEMENT & DEVELOPMENT - 2.8%
5,868 RE/MAX Holdings, Inc., Class A.............................................. 254,965
--------------
ROAD & RAIL - 0.7%
945 Landstar System, Inc........................................................ 67,237
--------------
SOFTWARE - 2.6%
12,464 Monotype Imaging Holdings, Inc.............................................. 238,062
--------------
TEXTILES, APPAREL & LUXURY GOODS - 1.3%
4,293 Culp, Inc................................................................... 120,204
--------------
TOTAL COMMON STOCKS......................................................... 7,247,545
(Cost $6,642,513) --------------
REAL ESTATE INVESTMENT TRUSTS - 5.7%
EQUITY REAL ESTATE INVESTMENT TRUSTS - 5.7%
14,850 Gladstone Commercial Corp................................................... 265,073
9,388 Rayonier, Inc............................................................... 251,786
--------------
TOTAL REAL ESTATE INVESTMENT TRUSTS......................................... 516,859
(Cost $478,445) --------------
TOTAL INVESTMENTS - 85.3%................................................... 7,764,404
(Cost $7,120,958) (b)
NET OTHER ASSETS AND LIABILITIES - 14.7%.................................... 1,341,408
--------------
NET ASSETS - 100.0%......................................................... $ 9,105,812
==============
-----------------------------
(a) Non-income producing security.
(b) Aggregate cost for financial reporting purposes is $7,117,595. 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
$876,134 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$229,325.
-----------------------------
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
------------- ------------- ------------- -------------
Common Stocks*..................................... $ 7,247,545 $ 7,247,545 $ -- $ --
Real Estate Investment Trusts*..................... 516,859 516,859 -- --
------------- ------------- ------------- -------------
Total Investments.................................. $ 7,764,404 $ 7,764,404 $ -- $ --
============= ============= ============= =============
* See the Portfolio of Investments for industry breakout.
All transfers in and out of the Levels are assumed to be on the last day of the
period at their current value. There were no transfers between Levels at October
31, 2016.
Page 8 See Notes to Financial Statements
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2016
ASSETS:
Investments, at value
(Cost $7,120,958)........................................................................... $ 7,764,404
Cash........................................................................................... 1,490,949
Prepaid expenses............................................................................... 29,947
Receivables:
From investment advisor..................................................................... 20,577
Dividends................................................................................... 2,042
Fund shares sold............................................................................ 39
---------------
Total Assets................................................................................ 9,307,958
---------------
LIABILITIES:
Payables:
Investment securities purchased............................................................. 79,972
Fund shares repurchased..................................................................... 44,636
Audit and tax fees.......................................................................... 32,800
Transfer agent fees......................................................................... 10,796
Printing fees............................................................................... 9,579
Administrative fees......................................................................... 8,750
Registration fees........................................................................... 4,198
12b-1 distribution and service fees......................................................... 3,549
Commitment fees............................................................................. 2,400
Legal fees.................................................................................. 1,569
Trustees' fees and expenses................................................................. 1,433
Financial reporting fees.................................................................... 771
Custodian fees.............................................................................. 376
Other liabilities.............................................................................. 1,317
---------------
Total Liabilities........................................................................... 202,146
---------------
NET ASSETS..................................................................................... $ 9,105,812
===============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $ 8,320,467
Par value...................................................................................... 3,359
Accumulated net investment income (loss)....................................................... 3,363
Accumulated net realized gain (loss) on investments............................................ 135,177
Net unrealized appreciation (depreciation) on investments...................................... 643,446
---------------
NET ASSETS..................................................................................... $ 9,105,812
===============
MAXIMUM OFFERING PRICE PER SHARE:
CLASS A SHARES:
Net asset value and redemption price per share (Based on net assets of $3,767,438 and 135,494
shares of beneficial interest issued and outstanding)....................................... $ 27.81
Maximum sales charge (5.50% of offering price)................................................. 1.61
---------------
Maximum offering price to public............................................................... $ 29.42
===============
CLASS C SHARES:
Net asset value and redemption price per share (Based on net assets of $3,237,313 and 126,428
shares of beneficial interest issued and outstanding)....................................... $ 25.61
===============
CLASS I SHARES:
Net asset value and redemption price per share (Based on net assets of $2,101,061 and 73,992
shares of beneficial interest issued and outstanding)....................................... $ 28.40
===============
See Notes to Financial Statements Page 9
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2016
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $142)............................................. $ 73,623
Interest....................................................................................... 1,293
---------------
Total investment income..................................................................... 74,916
---------------
EXPENSES:
Transfer agent fees............................................................................ 64,704
Investment advisory fees....................................................................... 61,158
Registration fees.............................................................................. 51,897
Administrative fees............................................................................ 48,125
Audit and tax fees............................................................................. 33,951
12b-1 distribution and/or service fees:........................................................
Class A..................................................................................... 5,097
Class C..................................................................................... 27,092
Commitment fees................................................................................ 22,990
Trustees' fees and expenses.................................................................... 17,172
Printing fees.................................................................................. 13,520
Financial reporting fees....................................................................... 9,250
Custodian fees................................................................................. 2,741
Listing expense................................................................................ 1,800
Legal fees..................................................................................... 1,000
Excise tax expense............................................................................. 335
Other.......................................................................................... 2,200
---------------
Total expenses.............................................................................. 363,032
Fees waived and expenses reimbursed by the investment advisor............................... (247,943)
---------------
Net expenses................................................................................... 115,089
---------------
NET INVESTMENT INCOME (LOSS)................................................................... (40,173)
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments..................................................... 186,076
Net change in unrealized appreciation (depreciation) on investments......................... 193,900
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ 379,976
---------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ 339,803
===============
Page 10 See Notes to Financial Statements
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
10/31/2016 10/31/2015
--------------- ---------------
OPERATIONS:
Net investment income (loss)................................................... $ (40,173) $ (7,166)
Net realized gain (loss)....................................................... 186,076 90,481
Net change in unrealized appreciation (depreciation)........................... 193,900 (43,891)
--------------- ---------------
Net increase (decrease) in net assets resulting from operations................ 339,803 39,424
--------------- ---------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET REALIZED GAIN:
Class A Shares................................................................. (25,931) (80,157)
Class C Shares................................................................. (38,306) (153,521)
Class I Shares................................................................. (12,475) (40,367)
Class R3 Shares................................................................ -- (102)
--------------- ---------------
Total distributions to shareholders............................................ (76,712) (274,147)
--------------- ---------------
CAPITAL TRANSACTIONS:
Proceeds from shares sold...................................................... 5,824,877 1,949,851
Proceeds from shares reinvested................................................ 67,615 239,525
Cost of shares redeemed........................................................ (1,522,634) (1,196,598)
--------------- ---------------
Net increase (decrease) in net assets resulting from capital transactions...... 4,369,858 992,778
--------------- ---------------
Total increase (decrease) in net assets........................................ 4,632,949 758,055
NET ASSETS:
Beginning of period............................................................ 4,472,863 3,714,808
--------------- ---------------
End of period.................................................................. $ 9,105,812 $ 4,472,863
=============== ===============
Accumulated net investment income (loss) at end of period...................... $ 3,363 $ (2,440)
=============== ===============
See Notes to Financial Statements Page 11
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------
CLASS A SHARES 2016 2015 2014 2013 2012
--------- --------- --------- --------- ---------
Net asset value, beginning of period............ $ 26.34 $ 28.03 $ 26.77 $ 21.58 $ 19.54
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (a)................ (0.10) 0.04 0.00 (b) 0.10 0.23
Net realized and unrealized gain (loss)......... 1.97 0.31 2.39 5.46 1.85
------- ------- ------- ------- -------
Total from investment operations................ 1.87 0.35 2.39 5.56 2.08
------- ------- ------- ------- -------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income........................... -- -- -- (0.27) (0.04)
Net realized gain............................... (0.40) (2.04) (1.13) (0.10) --
------- ------- ------- ------- -------
Total distributions............................. (0.40) (2.04) (1.13) (0.37) (0.04)
------- ------- ------- ------- -------
Net asset value, end of period.................. $ 27.81 $ 26.34 $ 28.03 $ 26.77 $ 21.58
======= ======= ======= ======= =======
TOTAL RETURN (c)................................ 7.22% 1.22% 9.23% 26.16% 10.61%
======= ======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............ $ 3,767 $ 1,413 $ 1,144 $ 1,288 $ 651
Ratio of total expenses to average net assets... 5.69% 7.61% 8.65% 11.29% 23.94%
Ratio of net expenses to average net assets..... 1.61% (d) 1.60% 1.60% 1.60% 1.60%
Ratio of net investment income (loss) to
average net assets........................... (0.38)% 0.16% 0.00% (e) 0.42% 1.10%
Portfolio turnover rate......................... 15% 17% 39% 31% 11%
(a) Per share amounts have been calculated based on the average shares method.
(b) Amount is less than $0.01.
(c) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge of 5.50% or contingent
deferred sales charge (CDSC). On purchases of $1 million or more, a CDSC
of 1% may be imposed on certain redemptions made within twelve months
of purchase. If the sales charges were included, total returns would be
lower. These returns include Rule 12b-1 service fees of 0.25% and do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares. The total returns would
have been lower if certain fees had not been waived and expenses
reimbursed by the investment advisor. Total return is calculated for the
time period presented and is not annualized for periods of less than one
year.
(d) Includes excise tax. If this excise tax expense was not included, the net
expense would have been 1.60%.
(e) Amount is less than 0.01%.
Page 12 See Notes to Financial Statements
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------
CLASS C SHARES 2016 2015 2014 2013 2012
--------- --------- --------- --------- ---------
Net asset value, beginning of period............ $ 24.51 $ 26.44 $ 25.51 $ 20.59 $ 18.81
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (a)................ (0.28) (0.14) (0.19) (0.10) 0.05
Net realized and unrealized gain (loss)......... 1.78 0.25 2.25 5.23 1.73
------- ------- ------- ------- -------
Total from investment operations................ 1.50 0.11 2.06 5.13 1.78
------- ------- ------- ------- -------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income........................... -- -- -- (0.11) --
Net realized gain............................... (0.40) (2.04) (1.13) (0.10) --
------- ------- ------- ------- -------
Total distributions............................. (0.40) (2.04) (1.13) (0.21) --
------- ------- ------- ------- -------
Net asset value, end of period.................. $ 25.61 $ 24.51 $ 26.44 $ 25.51 $ 20.59
======= ======= ======= ======= =======
TOTAL RETURN (b)................................ 6.28% 0.33% 8.36% 25.11% 9.46%
======= ======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............ $ 3,237 $ 2,247 $ 1,977 $ 1,956 $ 615
Ratio of total expenses to average net assets... 6.28% 7.93% 8.81% 10.45% 26.69%
Ratio of net expenses to average net assets..... 2.36% (c) 2.35% 2.35% 2.35% 2.35%
Ratio of net investment income (loss) to
average net assets........................... (1.12)% (0.57)% (0.73)% (0.43)% 0.25%
Portfolio turnover rate......................... 15% 17% 39% 31% 11%
(a) Per share amounts have been calculated based on the average shares method.
(b) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 1%, charged on certain redemptions
made within one year of purchase. If the sales charge was included, total
returns would be lower. These returns include combined Rule 12b-1
distribution and service fees of 1% and do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption
of Fund shares. The total returns would have been lower if certain fees
had not been waived and expenses reimbursed by the investment advisor.
Total return is calculated for the time period presented and is not
annualized for periods of less than one year.
(c) Includes excise tax. If this excise tax expense was not included, the net
expense would have been 2.35%.
See Notes to Financial Statements Page 13
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------
CLASS I SHARES 2016 2015 2014 2013 2012
--------- --------- --------- --------- ---------
Net asset value, beginning of period............ $ 26.84 $ 28.52 $ 27.15 $ 21.81 $ 19.58
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (a)................ (0.05) 0.10 0.08 0.16 0.26
Net realized and unrealized gain (loss)......... 2.01 0.26 2.42 5.60 2.05
------- ------- ------- ------- -------
Total from investment operations................ 1.96 0.36 2.50 5.76 2.31
------- ------- ------- ------- -------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income........................... -- -- -- (0.32) (0.08)
Net realized gain............................... (0.40) (2.04) (1.13) (0.10) --
------- ------- ------- ------- -------
Total distributions............................. (0.40) (2.04) (1.13) (0.42) (0.08)
------- ------- ------- ------- -------
Net asset value, end of period.................. $ 28.40 $ 26.84 $ 28.52 $ 27.15 $ 21.81
======= ======= ======= ======= =======
TOTAL RETURN (b)................................ 7.46% 1.23% 9.51% 26.85% 11.85%
======= ======= ======= ======= =======
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............ $ 2,101 $ 813 $ 592 $ 276 $ 141
Ratio of total expenses to average net assets... 5.63% 8.46% 11.05% 17.52% 41.80%
Ratio of net expenses to average net assets..... 1.35% 1.35% 1.35% 1.35% 1.35%
Ratio of net investment income (loss) to
average net assets........................... (0.16)% 0.38% 0.28% 0.66% 1.28%
Portfolio turnover rate......................... 15% 17% 39% 31% 11%
(a) Per share amounts have been calculated based on the average shares method.
(b) Assumes reinvestment of all distributions for the period. These returns do
not reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares. The total return would
have been lower if certain fees had not been waived and expenses
reimbursed by the investment advisor. Total return is calculated for the
time period presented and is not annualized for periods of less than one
year.
Page 14 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2016
1. ORGANIZATION
First Trust/Confluence Small Cap Value Fund (the "Fund") is a series of the
First Trust Series Fund (the "Trust"), a Massachusetts business trust organized
on July 9, 2010, and is registered as a diversified open-end management
investment company with the Securities and Exchange Commission (the "SEC") under
the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund offers
three classes of shares: Class A, Class C and Class I. Each class represents an
interest in the same portfolio of investments but with a different combination
of sales charges, distribution and service (12b-1) fees, eligibility
requirements and other features.
The Fund's investment objective is to seek to provide long-term capital
appreciation. The Fund seeks to achieve its investment objective by investing,
under normal market conditions, at least 80% of its net assets (including
investment borrowings, if any) in equity securities of U.S. listed companies
with small market capitalizations at the time of investment that Confluence
Investment Management LLC ("Confluence" or the "Sub-Advisor") believes have
produced solid returns over extended periods of time. There can be no assurance
that the Fund will achieve its investment objective. 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 each class of shares of the Fund is determined
daily as of the close of regular trading on the New York Stock Exchange
("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. The NAV for each class is calculated by dividing the value of the
Fund's total assets attributable to such class (including accrued interest and
dividends), less all liabilities attributable to such class (including accrued
expenses, dividends declared but unpaid and any borrowings of the Fund), by the
total number of shares of the class outstanding. Differences in NAV of each
class of the Fund's shares are generally expected to be due to the daily expense
accruals of the specified distribution and service (12b-1) fees and transfer
agency costs applicable to such class of shares and the resulting differential
in the dividends that may be paid on each class of shares.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Pricing Committee of the Trust's
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"),
in accordance with valuation procedures adopted by the Trust's Board of
Trustees, and in accordance with provisions of the 1940 Act. Investments valued
by the Advisor's Pricing Committee, if any, are footnoted as such in the
footnotes to the Portfolio of Investments. The Fund's investments are valued as
follows:
Common stocks, real estate investment trusts ("REITs") and other
securities listed on any national or foreign exchange (excluding The
Nasdaq Stock Market LLC ("Nasdaq") and the London Stock Exchange
Alternative Investment Market ("AIM")) are valued at the last sale price
on the exchange on which they are principally traded or, for Nasdaq and
AIM securities, the official closing price. Securities traded on more than
one securities exchange are valued at the last sale price or official
closing price, as applicable, at the close of the securities exchange
representing the principal market for such securities.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Trust's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a 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 market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to, the following:
Page 15
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2016
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or third-party pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or the
appropriate stock exchange;
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might affect
the value of the security.
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.
Dividend income is recorded on the ex-dividend date. Interest income, if any, is
recorded daily on the accrual basis, including the amortization of premiums and
the accretion of discounts. Income is allocated on a pro rata basis to each
class of shares.
The Fund may hold shares of business development companies ("BDCs"). The tax
character of distributions received from these securities may vary when reported
by the issuer after its tax reporting period concludes.
The Fund may hold REITs. Distributions from such investments may be comprised of
return of capital, capital gains and income. The actual character of amounts
received during the year is not known until after the REIT's fiscal year end.
The Fund records the character of distributions received from REITs during the
year based on estimates available. The characterization of distributions
received by the Fund may be subsequently revised based on information received
from the REITs after their tax reporting periods conclude.
C. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
The Fund will distribute to holders of its shares semi-annual dividends of all
or a portion of its net income. Distributions of any net capital gains earned by
the Fund will be distributed at least annually. Distributions will automatically
be reinvested into additional Fund shares unless cash distributions are elected
by the shareholder.
Distributions from net investment income and realized 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 year ended October 31, 2016, resulting
in book and tax accounting differences, have been reclassified at year end to
reflect an increase in accumulated net investment income (loss) of $45,976, a
decrease in accumulated net realized gain (loss) on investments of $45,641, and
a decrease in paid-in capital of $335. Net assets were not affected by this
reclassification.
Page 16
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2016
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............................ $ -- $ 95,195
Capital gain............................... 76,712 178,952
Return of capital.......................... -- --
As of October 31, 2016, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income.............. 38,045
Undistributed capital gains................ 97,132
------------
Total undistributed earnings............... 135,177
Accumulated capital and other losses....... --
Net unrealized appreciation (depreciation). 646,809
------------
Total accumulated earnings (losses)........ 781,986
Other...................................... --
Paid-in capital............................ 8,323,826
------------
Net assets................................. 9,105,812
============
D. 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.
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At October 31, 2016, the
Fund had no non-expiring capital loss carryforwards for federal income tax
purposes.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ended 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.
E. EXPENSES
The Fund will pay all expenses directly related to its operations. Expenses of
the Fund are allocated on a pro rata basis to each class of shares, except for
distribution and service (12b-1) fees and incremental transfer agency costs
which are unique to each class of shares.
F. 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 on the
Fund.
Page 17
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2016
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 1.00% of the Fund's average daily net assets.
First Trust also provides fund reporting services to the Fund for a flat annual
fee in the amount of $9,250.
Confluence 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 0.50% of the Fund's average daily net assets
that is paid by First Trust from its investment advisory fee.
First Trust and Confluence have agreed to waive fees and/or pay Fund expenses to
the extent necessary to prevent the annual operating expenses of the Fund
(excluding 12b-1 distribution and service fees, interest expenses, taxes,
acquired fund fees and expenses, fees incurred in acquiring and disposing of
portfolio securities and extraordinary expenses) from exceeding 1.35% of average
daily net assets of any class of shares of the Fund (the "Expense Cap") until
February 28, 2018 and then will not exceed 1.70% from March 1, 2018 to February
28, 2027 (the "Expense Cap Termination Date"). Expenses borne and fees waived by
First Trust and Confluence are subject to recovery by First Trust and Confluence
up to three years from the date the fee or expense was incurred, but no
reimbursement payment will be made by the Fund at any time if it would result in
the Fund's expenses exceeding the Expense Cap in place at the time the expense
was borne or the fee was waived by First Trust and Confluence. These amounts
would be included in "Expenses previously waived or reimbursed" on the Statement
of Operations. The advisory fee waivers and expense reimbursement for the year
ended October 31, 2016 and the expenses borne by First Trust and Confluence
subject to recovery were as follows:
EXPENSES SUBJECT TO RECOVERY
------------------------------------------------------
ADVISORY FEE EXPENSE YEAR ENDED YEAR ENDED YEAR ENDED
WAIVER REIMBURSEMENT OCTOBER 31, 2014 OCTOBER 31, 2015 OCTOBER 31, 2016 TOTAL
------------ ------------- ---------------- ---------------- ---------------- -------------
$ 61,158 $ 186,785 $ 283,909 $ 267,934 $ 247,943 $ 799,786
Brown Brothers Harriman & Co. ("BBH") serves as the Fund's administrator, fund
accountant and custodian in accordance with certain fee arrangements. As
administrator and fund accountant, BBH is responsible for providing certain
administrative and accounting services to the Fund, including maintaining the
Fund's books of account, records of the Fund's securities transactions, and
certain other books and records. As custodian, BBH is responsible for custody of
the Fund's assets.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
transfer agent in accordance with certain fee arrangements. As transfer agent,
BNYM IS is responsible for maintaining shareholder records for the Fund. BNYM IS
is a subsidiary 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 Trust for acting in such capacities.
Page 18
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2016
4. CAPITAL SHARE TRANSACTIONS
Capital transactions were as follows:
YEAR ENDED YEAR ENDED
OCTOBER 31, 2016 OCTOBER 31, 2015
SHARES VALUE SHARES VALUES
---------- ------------- ---------- -------------
Sales:
Class A 101,204 $ 2,795,429 46,377 $ 1,205,524
Class C 58,513 1,482,383 14,150 356,344
Class I 55,851 1,547,065 14,064 387,983
Class R3* -- -- -- --
---------- ------------- ---------- -------------
Total Sales: 215,568 $ 5,824,877 74,591 $ 1,949,851
========== ============= ========== =============
Dividend Reinvestment:
Class A 752 $ 19,256 2,231 $ 59,057
Class C 1,533 36,400 5,746 142,694
Class I 457 11,959 1,400 37,774
Class R3* -- -- -- --
---------- ------------- ---------- -------------
Total Dividend Reinvestment: 2,742 $ 67,615 9,377 $ 239,525
========== ============= ========== =============
Redemptions:
Class A (20,115) $ (511,985) (35,778) $ (957,963)
Class C (25,290) (649,466) (2,998) (75,107)
Class I (12,603) (361,183) (5,946) (162,207)
Class R3* -- -- (50) (1,321)
---------- ------------- ---------- -------------
Total Redemptions: (58,008) $ (1,522,634) (44,772) $ (1,196,598)
========== ============= ========== =============
* Effective March 20, 2015, all outstanding Class R3 Shares were redeemed
and no Class R3 Shares are currently available for purchase.
5. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investments, excluding short-term
investments, for the year ended October 31, 2016, were $4,111,246 and $811,294,
respectively.
6. BORROWINGS
The Trust, First Trust Exchange-Traded Fund III and First Trust Exchange-Traded
Fund IV have an $140 million Credit Agreement with The Bank of Nova Scotia
("Scotia") as administrative agent for a group of lenders. Scotia charges a
commitment fee of 0.25% of the daily amount of exess of the commitment amount
over the outstanding principal balance of the loans. Prior to March 9, 2016, the
commitment was $80 million and the commitment fee was 0.15%. First Trust
allocates the commitment fee amongst the funds that have access to the credit
line. To the extent that the Fund accesses the credit line, there would also be
an interest fee charged. The Fund did not have any borrowings outstanding during
the year ended October 31, 2016.
7. DISTRIBUTION AND SERVICE PLANS
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the share
classes of the Fund are authorized to pay an amount up to 0.25% and 1.00% of
their average daily net assets each year for Class A and Class C, respectively,
to reimburse First Trust Portfolios L.P. ("FTP"), the distributor of the Fund,
for amounts expended to finance activities primarily intended to result in the
sale of Fund shares or the provision of investor services. FTP may also use this
amount to compensate securities dealers or other persons for providing
distribution assistance, including broker-dealer and shareholder support and
educational and promotional services. Class I shares have no 12b-1 fees.
Page 19
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2016
8. 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.
9. 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 was
the following subsequent event:
On December 16, 2016, the commitment amount under the Credit Agreement with
Scotia was increased to $180 million.
Page 20
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST/CONFLUENCE SMALL CAP
VALUE FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust/Confluence Small Cap Value Fund (the "Fund"), a series of the First Trust
Series Fund, including the portfolio of investments, as of October 31, 2016, and
the related statement of operations 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 and brokers; 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/Confluence Small Cap Value Fund as of October 31, 2016, the results of its
operations 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 21
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2016 (UNAUDITED)
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Trust uses to determine
how to vote proxies and information on how the Fund voted proxies relating to
portfolio securities 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 at http://www.sec.gov.
PORTFOLIO HOLDINGS
The Trust 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-Qs
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
The Fund hereby designates as qualified dividend income 0.00% of its ordinary
income distributions (including short-term capital gains, if applicable) for the
period ended October 31, 2016. 0.00% of the ordinary income (including
short-term capital gain, if applicable) distributions made by the Fund during
the period ended October 31, 2016, qualify for corporate dividends received
deduction available to corporate shareholders.
For the year ended October 31, 2016, the amount of long-term capital gain
distributions designated by the Fund was $76,712 which is taxable at a maximum
rate of 15% for federal income tax purposes.
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.
BDC RISK: The Fund may invest in BDCs which may carry risks similar to those of
a private equity or venture capital fund. BDCs are not redeemable at the option
of the shareholder and they may trade in the market at a discount to their net
asset value. The BDCs held by the Fund may employ the use of leverage their
portfolios through borrowings or the issuance of preferred stock. While leverage
often serves to increase the yield of a BDC, this leverage also subjects a BDC
to increased risks, including the likelihood of increased volatility and the
possibility that a BDC's common share income will fall if the dividend rate of
the preferred shares or the interest rate on any borrowings rises.
CONCENTRATION RISK: A fund concentrated in a single industry or sector is likely
to present more risks than a fund that is broadly diversified over several
industries or sectors. Compared to the broad market, an individual industry or
sector may be more strongly affected by changes in the economic climate, broad
market shifts, moves in a particular dominant stock, or regulatory changes.
EQUITY SECURITIES RISK: Because the Fund invests in equity securities, the value
of Fund shares will fluctuate with changes in the value of these equity
securities. Equity securities prices fluctuate for several reasons, including
changes in investors' perceptions of the financial condition of an issuer or the
general condition of the relevant stock market, such as the current market
volatility, or when political or economic events affecting the issuers occur. In
addition, common stock prices may be particularly sensitive to rising interest
rates, as the cost of capital rises and borrowing costs increase.
FINANCIAL COMPANIES RISK: Financial companies are especially subject to the
adverse effects of economic recession, currency exchange rates, government
regulation, decreases in the availability of capital, volatile interest rates,
portfolio concentrations in geographic markets and in commercial and residential
real estate loans, and competition from new entrants in their fields of
business.
INDUSTRIALS AND PRODUCER DURABLES COMPANIES RISK: The Fund invests in the
securities of industrials and producer durables companies, which convert
unfinished goods into finished durables used to manufacture other goods or
provide services. These companies produce electrical equipment and components,
industrial products, manufactured housing and telecommunications equipment.
General risks of these companies include the general state of the economy,
intense competition, consolidation, domestic and international politics, excess
capacity and consumer demand and spending trends. In addition, they may also be
significantly affected by overall capital spending levels, economic cycles,
technical obsolescence, delays in modernization, labor relations, government
regulations and e-commerce initiatives.
INVESTMENT COMPANIES RISK: If the Fund invests in investment companies, Fund
shareholders bear both their proportionate share of Fund expenses and,
indirectly, the expenses of the investment companies. Also, the investment
companies are subject to the risks of the underlying securities that they hold.
In addition, the Fund will incur brokerage costs when purchasing and selling
shares of ETFs and closed-end investment companies. Closed-end investment
companies may be leveraged, in which case the value and/or yield of their shares
Page 22
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2016 (UNAUDITED)
will tend to be more volatile than shares of unleveraged funds. in addition, for
index-based ETFs, the performance of an ETF may diverge from the performance of
such index (commonly known as tracking error). Moreover, shares of closed-end
investment companies and ETFs may be sold at a discount from their net asset
value.
MARKET CAPITALIZATION RISK: The Fund normally invests at least 80% of its assets
in Small-Cap Companies. Because the market capitalization is measured at the
time of its initial purchase, the Fund will not be forced to sell a stock
because the stock has exceeded or fallen below the market capitalization range.
Because of market movement, there can be no assurance that the securities held
by the Fund will stay within the given market capitalization range. As a result,
the Fund may be exposed to additional risk or investors may not be given the
opportunity to invest fully in a certain market capitalization range.
MARKET RISK: Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Securities are subject
to market fluctuations caused by such factors as economic, political, regulatory
or market developments, changes in interest rates and perceived trends in
securities prices. Shares of the Fund could decline in value or underperform
other investments.
REAL ESTATE INVESTMENT RISK: The Fund invests in companies in the real estate
industry, including REITs. Therefore, the Fund is subject to the risks
associated with investing in real estate, which may include, but are not limited
to, fluctuations in the value of underlying properties; defaults by borrowers or
tenants; market saturation; changes in general and local economic conditions;
decreases in market rates for rents; increases in competition, property taxes,
capital expenditures or operating expenses; and other economic, political or
regulatory occurrences affecting companies in the real estate industry.
REIT INVESTMENT RISK: Because the Fund invests in REITs, the Fund is subject to
the risks associated with investing in real estate, which may include, but are
not limited to, fluctuations in the value of underlying properties; defaults by
borrowers or tenants; market saturation; changes in general and local operating
expenses; and other economic, political or regulatory occurrences affecting
companies in the real estate industry. In addition to risks related to
investments in real estate generally, investing in REITs involves certain other
risks related to their structure and focus, which include, but are not limited
to, dependency upon management skills, limited diversification, the risks of
locating and managing financing for projects, heavy cash flow dependency,
possible default by borrowers, the costs and potential losses of
self-liquidation of one or more holdings, the risk of a possible lack of
mortgage funds and associated interest rate risks, overbuilding, property
vacancies, increases in property taxes and operating expenses, changes in zoning
laws, losses due to environmental damages, changes in neighborhood values and
appeal to purchasers, the possibility of failing to maintain exemptions from
registration under the 1940 Act and, in many cases, relatively small market
capitalization, which may result in less market liquidity and greater price
volatility. REITs are also subject to the risk that the real estate market may
experience an economic downturn generally, which may have a material effect on
the real estate in which the REITs invest and their underlying portfolio
securities.
SMALL CAP RISK: The Fund invests in Small-Cap Companies. Such companies may be
more vulnerable to adverse general market or economic developments, and their
securities may be less liquid and may experience greater price volatility than
larger, more established companies as a result of several factors, including
limited trading volumes, products or financial resources, management
inexperience and dependence on a few key people, and less publicly available
information. Accordingly, such companies are generally subject to greater market
risk than larger, more established companies. The market movements of equity
securities issued by issuers with smaller capitalizations may be more abrupt or
erratic than the market movements of equity securities of larger, more
established companies or the stock market in general. Historically, smaller
capitalization companies have sometimes gone through extended periods when they
did not perform as well as larger companies. In addition, equity securities of
Small-Cap Companies may be less liquid than those of larger companies.
SMALL FUND RISK: The Fund currently has fewer assets than larger funds, and like
other relatively smaller funds, large inflows and outflows may impact the Fund's
market exposure for limited periods of time. This impact may be positive or
negative, depending on the direction of market movement during the period
affected.
VALUE INVESTING RISK: The Fund focuses its investments on securities that the
portfolio managers believe are undervalued or inexpensive relative to other
investments. These types of securities may present risks in addition to the
general risks associated with investing in them. These securities generally are
selected on the basis of an issuer's business and economic fundamentals or the
securities' current and projected credit profiles, relative to current market
price. 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.
Page 23
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2016 (UNAUDITED)
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING APPROVAL OF CONTINUATION OF INVESTMENT MANAGEMENT
AGREEMENT AND SUB-ADVISORY AGREEMENT
The Board of Trustees (the "Board") of the First Trust Series Fund (the
"Trust"), including the Independent Trustees, unanimously approved the
continuation of the Investment Management Agreement (the "Advisory Agreement")
between the Trust, on behalf of the First Trust/Confluence Small Cap Value Fund
(the "Fund"), and First Trust Advisors L.P. (the "Advisor" or "First Trust") and
the Investment Sub-Advisory Agreement (the "Sub-Advisory Agreement" and together
with the Advisory Agreement, the "Agreements") among the Trust, on behalf of the
Fund, the Advisor and Confluence Investment Management LLC (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 its affiliate, First Trust Portfolios L.P. ("FTP"), 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 Trust and the Advisor and
among the Trust, the Advisor and the Sub-Advisor continue to be reasonable
business arrangements from the perspective of the Fund and the Fund's
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 and knowing the Fund's advisory fee.
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
Trust and 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 objective 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, in addition to the written
materials provided by the Sub-Advisor, at the June 13, 2016 meeting, the Board
also received a presentation from representatives of the Sub-Advisor, including
one of the portfolio managers, discussing the services that the Sub-Advisor
provides to the Fund and how the Sub-Advisor manages 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 objective 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 considered that the
Advisor and Sub-Advisor agreed to extend the current expense caps for each share
class through February 28, 2018 and agreed to keep the long-term expense cap in
place from March 1, 2018 through February 28, 2027. The Board noted that fees
waived or expenses borne by the Advisor and Sub-Advisor are subject to
reimbursement by the Fund for up to three years from the date the expense was
incurred or fees were waived, but no reimbursement payment would be made by the
Page 24
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2016 (UNAUDITED)
Fund if it would result in the Fund exceeding an expense ratio equal to the
expense cap in place at the time of the reimbursement or at the time the
expenses were borne or the fees were waived by the Advisor and Sub-Advisor. 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) all 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 and (ii)
most of the peer funds do not employ an advisor/sub-advisor management
structure. The Board took these limitations into account in considering the peer
data. Based on the information provided, the Board noted that the advisory fee
rate payable by the Fund was above the median advisory fee of the peer funds in
the MPI Peer Group. The Board noted that the Fund's total (net) expense ratio
(Class A shares) 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. Based on the information provided, the Board noted that the
Fund (Class A shares) outperformed the MPI Peer Group average and both benchmark
indexes for the one-year period ended December 31, 2015 and underperformed the
MPI Peer Group average and both benchmark indexes for the three-year period
ended December 31, 2015.
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 for the Fund 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 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 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. The Board considered
that the Advisor had identified as a fall out benefit to the Advisor and FTP
their exposure to investors and brokers who, absent their exposure to the Fund,
may have had no dealings with the Advisor or FTP. The Board noted that in
addition to the advisory fees paid by the Fund, FTP is compensated for services
provided to the Fund through 12b-1 distribution and service fees and that First
Trust receives compensation from the Fund for providing fund reporting services
pursuant to a separate Fund Reporting Services Agreement.
The Board considered that many of the Sub-Advisor's costs are fixed, allowing
for economies of scale with regard to certain costs. 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 as 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 considered fall-out
benefits that may be realized by the Sub-Advisor and one of its affiliates from
their relationship with the Fund, including that the Sub-Advisor may enter into
soft dollar and commission sharing arrangements, and considered a summary of
such arrangements.
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 25
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
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
THE FIRST TRUST DIRECTORSHIPS
NAME, ADDRESS, TERM OF OFFICE FUND COMPLEX HELD BY TRUSTEE
DATE OF BIRTH AND AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE TRUST SERVICE DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Indefinite 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 Trust Limited Partnership; Member, Sportsmed
Suite 400 LLC Inception (April 2007 to November 2015)
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Indefinite 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 Trust Inc. and ADM
Suite 400 Inception Investor Services
Wheaton, IL 60187 International and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Indefinite Term President, Hibs Enterprises (Financial 137 Director of Trust
c/o First Trust Advisors L.P. and Management Consulting) Company of
120 E. Liberty Drive, o Since Trust Illinois
Suite 400 Inception
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Indefinite 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 Trust Harapan Educational Foundation (Educational Transport, Inc.
Suite 400 Inception Products and Services); President and Chief (May 2003 to
Wheaton, IL 60187 Executive Officer (June 2012 to September May 2014)
D.O.B.: 03/54 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(1), Trustee o Indefinite 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 Trust L.P.; Chairman of the Board of Directors,
Suite 400 Inception BondWave LLC (Software Development Company)
Wheaton, IL 60187 and Stonebridge Advisors LLC (Investment
D.O.B.: 09/55 Advisor)
-----------------------------
(1) Mr. Bowen is deemed an "interested person" of the Trust due to his
position as Chief Executive Officer of First Trust Advisors L.P.,
investment advisor of the Trust.
Page 26
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
OCTOBER 31, 2016 (UNAUDITED)
POSITION AND TERM OF OFFICE
NAME, ADDRESS OFFICES AND LENGTH OF PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH TRUST SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(2)
------------------------------------------------------------------------------------------------------------------------------------
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 First
D.O.B.: 01/66 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 o Indefinite Term Senior Vice President (July 2016 to Present), Vice
120 E. Liberty Drive, Financial Officer and President (April 2012 to July 2016), First Trust
Suite 400 Chief 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 Trust Inception Counsel, BondWave LLC; Secretary of Stonebridge
Wheaton, IL 60187 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 July 2012), First
Suite 400 o Since Trust Inception 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 Trust
Inception
-----------------------------
(2) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 27
--------------------------------------------------------------------------------
PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
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 28
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Confluence Investment Management LLC
20 Allen Avenue, Suite 300
Saint Louis, MO 63119
ADMINISTRATOR,
FUND ACCOUNTANT &
CUSTODIAN
Brown Brothers Harriman & Co.
50 Post Office Square
Boston, MA 02110
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
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]
FIRST TRUST
First Trust Short Duration
High Income Fund
-----------------------------------------
Annual Report
For the Year Ended October 31, 2016
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
ANNUAL REPORT
OCTOBER 31, 2016
Shareholder Letter........................................................... 1
At a Glance.................................................................. 2
Portfolio Commentary......................................................... 4
Understanding Your Fund Expenses............................................. 7
Portfolio of Investments..................................................... 8
Statement of Assets and Liabilities.......................................... 23
Statement of Operations...................................................... 24
Statements of Changes in Net Assets.......................................... 25
Financial Highlights......................................................... 26
Notes to Financial Statements................................................ 29
Report of Independent Registered Public Accounting Firm...................... 35
Additional Information....................................................... 36
Board of Trustees and Officers............................................... 40
Privacy Policy............................................................... 42
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 its 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 Short Duration High Income Fund (the "Fund") to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. When evaluating the information
included in this report, you are cautioned not to place undue reliance on these
forward-looking statements, which reflect the judgment of the Advisor and its
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 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 and net asset value will fluctuate and Fund shares, when sold, may be
worth more or less than their original cost.
The Advisors may also periodically provide additional information on Fund
performance on the Fund's webpage at http://www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. It includes details about the Fund and presents data and analysis that
provide insight into the Fund's performance.
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
First Trust 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.
--------------------------------------------------------------------------------
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND ANNUAL
LETTER FROM THE CHAIRMAN AND CEO
OCTOBER 31, 2016
Dear Shareholders:
Thank you for your investment in First Trust Short Duration High Income Fund
("the Fund").
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 SHORT DURATION HIGH INCOME FUND
"AT A GLANCE"
AS OF OCTOBER 31, 2016 (UNAUDITED)
-----------------------------------------------------------
FUND STATISTICS
-----------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH NET ASSET
INCOME FUND VALUE (NAV)
-----------------------------------------------------------
Class A (FDHAX) $19.97
Class C (FDHCX) $19.95
Class I (FDHIX) $19.97
-----------------------------------------------------------
-----------------------------------------------------------
% OF TOTAL
CREDIT QUALITY(1) INVESTMENTS
-----------------------------------------------------------
BBB 1.1%
BBB- 2.0
BB+ 4.1
BB 8.6
BB- 18.6
B+ 20.0
B 21.8
B- 12.4
CCC+ 8.7
CCC 1.8
CCC- 0.1
CC 0.3
NR 0.2
Private 0.3
-------
Total 100.0%
=======
-----------------------------------------------------------
% OF TOTAL
TOP TEN HOLDINGS INVESTMENTS
-----------------------------------------------------------
Tenet Healthcare Corp. 2.4%
Valeant Pharmaceuticals International, Inc. 2.2
New HB Acquisition LLC 2.1
Reynolds Group Holdings, Inc. 2.1
BJ's Wholesale Club, Inc. 2.1
Portillo's Holdings LLC 2.0
Univision Communications, Inc. 1.9
Caesars Growth Partners LLC 1.8
Endo Pharmaceuticals Holdings, Inc. 1.8
Amaya Holdings B.V. 1.7
-------
Total 20.1%
=======
-----------------------------------------------------------
% OF TOTAL
INDUSTRY CLASSIFICATION INVESTMENTS
-----------------------------------------------------------
Health Care Providers & Services 13.1%
Hotels, Restaurants & Leisure 12.0
Media 10.6
Pharmaceuticals 10.4
Software 6.0
Food Products 4.0
Life Sciences Tools & Services 4.0
Food & Staples Retailing 3.7
Containers & Packaging 3.3
Diversified Telecommunication Services 2.7
Specialty Retail 2.6
Electric Utilities 2.1
Semiconductors & Semiconductor Equipment 2.1
Health Care Equipment & Supplies 1.9
Commercial Services & Supplies 1.9
Insurance 1.9
Diversified Consumer Services 1.8
Professional Services 1.6
Wireless Telecommunication Services 1.5
Oil, Gas & Consumable Fuels 1.2
Technology Hardware, Storage & Peripherals 1.2
Real Estate Management & Development 1.2
Aerospace & Defense 1.1
Beverages 1.1
Building Products 1.0
Diversified Financial Services 0.7
Diversified Business Services 0.6
Consumer Finance 0.6
Equity Real Estate Investment Trusts (REITs) 0.5
Auto Components 0.5
Capital Markets 0.4
Independent Power and Renewable Electricity
Producers 0.4
Road & Rail 0.4
Machinery 0.3
Automobiles 0.3
Health Care Technology 0.3
Chemicals 0.3
Industrial Conglomerates 0.3
Distributors 0.2
Metals & Mining 0.1
Trading Companies & Distributors 0.1
-------
Total 100.0%
=======
--------------------------------------------------------------------------------
CLASS CLASS CLASS
DIVIDEND DISTRIBUTIONS A SHARES C SHARES I SHARES
--------------------------------------------------------------------------------
Current Monthly Distribution per Share (2) $0.0758 $0.0634 $0.0800
Current Distribution Rate on NAV (3) 4.55% 3.81% 4.81%
(1) The ratings are by Standard & Poor's. A credit rating is an assessment
provided by a nationally recognized statistical rating organization
(NRSRO) of the creditworthiness of an issuer with respect to its debt
obligations. Ratings are measured on a scale that generally ranges from
AAA (highest) to D (lowest). Investment grade is defined as those issuers
that have a long-term credit rating of BBB- or higher. "NR" indicates the
issue is not rated. The credit ratings shown relate to the
creditworthiness of the issuers of the underlying securities in the Fund,
and not the Fund or its shares. Credit ratings are subject to change.
(2) Most recent distribution paid or declared through 10/31/2016. Subject to
change in the future.
(3) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
NAV as of 10/31/2016. Subject to change in the future.
Page 2
FIRST TRUST SHORT DURATION HIGH INCOME FUND
"AT A GLANCE" (CONTINUED)
AS OF OCTOBER 31, 2016 (UNAUDITED)
-----------------------------------------------------------
PERFORMANCE OF A $10,000 INVESTMENT
-----------------------------------------------------------
This chart compares your Fund's Class I performance to that
of the BofA Merrill Lynch US High Yield Constrained Index,
the S&P/LSTA Leveraged Loan Index and the Blended Index(a)
from 11/1/2012 through 10/31/2016.
First Trust Bank of America
Short Duration Merrill Lynch U.S.
High Income Fund - Blended High Yield Master II S&P/LSTA Leveraged
Class I Shares Index (a) Constrained Index ("HUC0") Loan Index ("SPBDAL")
1/11/12 $10,000 $10,000 $10,000 $10,000
4/30/13 10,613 10,548 10,713 10,384
10/31/13 10,811 10,705 10,869 10,542
4/30/14 11,037 11,082 11,386 10,783
10/31/14 11,178 11,198 11,504 10,896
4/30/15 11,460 11,411 11,679 11,144
10/31/15 11,282 11,112 11,270 10,947
4/30/16 11,511 11,326 11,524 11,120
10/31/16 11,929 12,042 12,418 11,664
(a) The Blended Index return is a 50/50 split between the BofA Merrill Lynch US
High Yield Constrained Index and the S&P/LSTA Leveraged Loan Index returns.
------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE AS OF OCTOBER 31, 2016
------------------------------------------------------------------------------------------------------------------------------
A SHARES C SHARES I SHARES BLENDED
Inception 11/1/2012 Inception 11/1/2012 Inception 11/1/2012 INDEX* HUC0* SPBDAL*
------------------------------------------------------------------------------------------------------------------------------
W/MAX
1.00%
W/MAX CONTINGENT
W/O 3.50% W/O DEFERRED W/O W/O W/O W/O
AVERAGE ANNUAL TOTAL SALES SALES SALES SALES SALES SALES SALES SALES
RETURNS CHARGES CHARGE CHARGES CHARGE CHARGES CHARGES CHARGES CHARGES
1 Year 5.47% 1.78% 4.69% 3.69% 5.74% 8.37% 10.18% 6.54%
Since Inception 4.25% 3.32% 3.46% 3.46% 4.50% 4.76% 5.57% 3.92%
30-Day SEC Yield(1) 3.76% 3.15% 4.15% N/A N/A N/A
* Since inception return is based on inception date of the Fund.
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that the shareholder would pay on Fund distributions or
the redemption of Fund shares. The total returns would have been lower if
certain fees had not been waived and expenses reimbursed by the Advisor. An
index is a statistical composite that tracks a specific financial market or
sector. Unlike the Fund, the indices do not actually hold a portfolio of
securities and therefore do not incur the expenses incurred by the Fund. These
expenses negatively impact the performance of the Fund. The Fund's past
performance does not predict future performance.
Performance of share classes will vary due to differences in sales charges and
expenses. Total returns with sales charges include payment of the maximum sales
charge of 3.50% for Class A Shares, a contingent deferred sales charge ("CDSC")
of 1.00% for Class C Shares in year one and 12b-1 service fees of 0.25% per year
of average daily net assets for Class A Shares and combined Rule 12b-1
distribution and service fees of 1.00% per year of average daily net assets for
Class C Shares. Class I Shares do not have a front-end sales charge or a CDSC,
nor do they pay distribution or service fees.
(1) 30-day SEC yield is calculated by dividing the net investment income per
share earned during the most recent 30-day period by the maximum offering
price per share on the last day of the period. The reported SEC yields are
subsidized. The subsidized yields reflect the waiver and/or a
reimbursement of Fund expenses, which has the effect of lowering the
Fund's expense ratio and generating a higher yield.
Page 3
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
ANNUAL REPORT
OCTOBER 31, 2016 (UNAUDITED)
INVESTMENT MANAGER
The First Trust Advisors L.P. ("First Trust" or the "Advisors") Leveraged
Finance Team is comprised of fourteen experienced investment professionals
specializing in below investment grade securities. The team is comprised of
portfolio management, research, trading and operations. As of October 31, 2016,
the First Trust Leveraged Finance Team managed or supervised approximately $2.55
billion in senior secured bank loans and high-yield bonds. These assets are
managed across various strategies, including a closed-end fund, an open-end
fund, four exchange-traded funds, one UCITS fund and a series of unit investment
trusts on behalf of retail and institutional clients.
PORTFOLIO MANAGEMENT TEAM
WILLIAM HOUSEY, CFA - SENIOR VICE PRESIDENT, SENIOR PORTFOLIO MANAGER SCOTT D.
FRIES, CFA - SENIOR VICE PRESIDENT, PORTFOLIO MANAGER PETER FASONE, CFA - VICE
PRESIDENT, PORTFOLIO MANAGER
COMMENTARY
MARKET RECAP
The last 12 months were exceptionally strong for the high-yield bond and senior
loan market with trailing twelve month returns of 10.18% and 6.54% for the BofA
Merrill Lynch US High Yield Constrained Index and the S&P/LSTA Leveraged Loan
Index, respectively. In fact, high-yield bonds and senior loans outperformed
nearly every other major asset class over the prior year period. For context,
the total return of the S&P 500(R) Index over the period was only 4.51%. The
high-yield bond market is on pace to post its highest calendar year return since
emerging from the global financial crisis in 2009, in our view. We believe the
strong returns in the high-yield bond and senior loan markets are due to a
number of contributing factors. In our view, accommodative central banks around
the globe and a rebound in commodity prices have been a catalyst for risk
assets. In addition, U.S. yields remain attractive relative to foreign yields,
although yields in the U.S. remain low by historical standards. As a result, the
hunt for yield continues to attract foreign investors to the U.S. Consider the
fact that at the end of October, the German Bund 10-year yield was 0.16% and the
Japanese 10-year Government bond yield was -0.05%. When compared to the 10-year
U.S. Treasury bond yield of 1.83%, one can quickly discern why the foreign
investment into U.S. Treasury assets is continuing unabated.
High-Yield Bond Market
The BofA Merrill Lynch US High Yield Constrained Index returned 10.18% for the
12 month period. Additionally, the high-yield bond market ended the period with
nine consecutive positive monthly returns.
Lower quality high-yield bonds outperformed higher quality high-yield bonds in
the period. Lower quality CCC rated issues returned 16.57%, significantly
outperforming the returns of higher quality B rated issues return of 6.98% and
BB rated issues return of 6.73% in the period. The average price of high-yield
bonds in the market entered the period at $94.19, fell to an average price of
$86.64 at the end of February in the wake of eroding commodity prices, and
recovered to end the period with an average price of $99.10 as commodity prices
rebounded.
Senior Loan Market
The S&P/LSTA Leveraged Loan Index returned 6.54% for the 12 month period.
Similar to the high-yield bond market, the senior loan market ended the period
with eight consecutive positive return months.
Lower quality senior loans outperformed higher quality senior loans in the
period. Lower quality CCC rated issues returned 14.48%, significantly
outperforming the returns of lower quality B rated issues return of 6.77% and BB
rated issues return of 5.16%. The average price of senior loans in the market
began the period at $93.68, dipped down to $89.44 at the end of February as
broader markets sold off, and rallied hard to end the period with an average
price of $97.17.
Default Rates
During the period, default rates increased within both the JP Morgan High-Yield
Bond Universe and the S&P/LSTA Leveraged Loan Index. Default rates within the
high-yield bond market ended the period at 3.59% compared to the 2.21% default
rate one year ago. Default activity was driven higher by companies in the energy
and metals/mining industries as commodity prices were volatile during this time.
Page 4
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
ANNUAL REPORT
OCTOBER 31, 2016 (UNAUDITED)
Excluding those industries, the trailing 12 month default rate was a mere 0.46%.
A similar theme was experienced within the senior loan market, though far less
dramatic, as the senior loan market has lower exposure to those industries.
Senior loan default rates ended the 12-month period at 1.95% compared to the
1.27% default rate one year ago.
We believe that default rates may trend lower given the strength of corporate
balance sheets today, the lack of near-term debt maturities, access to robust
capital markets, and our view that the commodity sector has bottomed within the
senior loans and high-yield bond markets. Our prior view regarding default rates
within the high-yield bond and senior loan markets was correct, as corporate
defaults did in fact increase, but were contained within these cyclical
commodity sectors and not systemic to the overall market.
FUND PERFORMANCE
The Fund's I share class returned 5.74% over the last twelve months, which
underperformed the Blended Index return of 8.37% (comprised of 50% S&P/LSTA
Leveraged Loan Index and 50% BofA Merrill Lynch US High Yield Constrained Index)
over the same time period.
The Fund's monthly distribution payment was increased over the last 12 months to
$0.08 per share from $0.078 per share in October 2015. While current income
remains the primary investment objective, we are also focused on total return
and are pleased with the performance of the Fund. At the end of the period, the
effective yield based on the distributions for the trailing 12 months was 4.79%
for the I-shares.
The Fund's underweight allocation to high-yield bonds was the main driver
contributing to the underperformance of the Fund during the period. The Fund
began the period with a 43.0% allocation to high-yield bonds and ended the
period with a 33.6% allocation. During the period, high-yield bond spreads
tightened significantly, led by the energy sector. In fact, high-yield bond
spreads tightened so significantly that over the period we began to view senior
loans as more attractive on a relative value basis and positioned the Fund
accordingly. Additionally, the Fund's underweight allocation to the banking
industry contributed to returns as banks underperformed during the period. More
than offsetting those benefits to performance was the Fund's above average level
of cash during the period and its overweight position within the healthcare
industry. The healthcare industry is a defensive industry and the more
defensive, non-cyclical industries tend to lag during periods of market
tightening, which was indeed the case. Within the healthcare industry,
pharmaceutical companies were specifically under pressure as there were various
high profile Congressional hearings into drug pricing practices and potential
policy threats from the Presidential nominees to regulate drug pricing in the
industry. Finally, hospitals were under pressure and experienced slowing
admissions growth from the impact of the implementation of the Affordable Care
Act, which has since stabilized. We believe the Fund is well positioned to
outperform going into the next year.
MARKET AND FUND OUTLOOK
Looking ahead to 2017, we believe the market is not pricing in the potential for
higher inflation in the U.S. However, commodity inflation remains relatively
benign and, unless global central bank activity shifts to a tightening posture
(reduced quantitative easing), we believe that even improving wage inflation
will not cause the Federal Reserve (the "Fed") to move towards a more aggressive
pace of rate increases. However, we will continue to monitor inflation closely
due to the potential impact on the yield curve, which has flattened
significantly this year. In this case, the flattening yield curve has been
significantly influenced by the U.S. Fed slowly increasing rates coupled with
foreign demand for U.S. bonds tamping down long term interest rates, which we
believe may mitigate the typical concerns associated with a flattening curve.
High-yield bond spreads over U.S. Treasuries are tight to historical norms at
T+491 basis points ("bps") as of October 31, 2016. The long-term average spread
over U.S. Treasuries is T+595 bps (December 1997 - October 2016). From the
recent spread highs of T+777 bps at January 31, 2016, high-yield spreads have
tightened significantly, and, as a result, valuations have normalized from the
significantly depressed levels early in the year. When considering the
high-yield bond spread relative to valuations within the senior loan market,
where the discounted spread to a three-year life was L+492 bps at the end of
October, we have viewed this relationship as an opportunity to reduce exposure
to high-yield bonds and migrate some exposure into secured, floating-rate senior
loans. High-yield bond spreads still remain wide of the tight spreads of T+245
bps in May 2007, and as such, we do continue to find value in certain parts of
the market.
Page 5
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
ANNUAL REPORT
OCTOBER 31, 2016 (UNAUDITED)
After several years of senior loan outflows, retail investors have finally begun
to find favor with the senior loan asset class. According to JP Morgan, the
senior loan asset class ended the period with four consecutive monthly inflows
totaling $4.2 billion. The senior loan asset class has not experienced a string
of inflows like this since a stretch of 21 consecutive monthly inflows between
July 2012 and March 2014. Flows into the asset class for the year-to-date period
now sit at -$2.2 billion, compared to -$21.7 billion in 2015 and -$23.8 billion
in 2014. We believe there are several factors that are contributing to the
positive inflow trend. First, LIBOR has been increasing and has climbed from 61
bps to 88 bps year-to-date. For reference, LIBOR was a mere 33 bps one year ago.
We believe the increase in LIBOR has increased the attractiveness of senior
loans, especially when compared to longer duration, high interest rate risk
bonds. Moreover, we believe that with the potential for additional interest rate
hikes on the horizon, LIBOR should continue to migrate higher. Additionally,
current senior loan spreads compare favorably to the pre-credit crisis average
spread of L+372 (December 1997 - June 2007) and remain in-line with the
long-term average spread of L+526 (December 1997 - October 2016). We believe
senior loans, given their senior secured position in the capital structure,
floating interest rate, attractive income and low default rate are
well-positioned as we move through the remainder of 2016 and into 2017.
We believe that in the near term, volatility may be elevated due to the
headwinds identified above but, at this point in the economic cycle, it will
likely be short lived. As a result, we believe near term volatility should
provide compelling opportunities in the U.S. high-yield bond and senior loan
markets and specifically within actively managed strategies where opportunities
can be taken advantage of and risk can be appropriately managed. We believe
credit selection will be paramount to driving strong returns over the remainder
of this economic cycle. In the early years of the economic recovery, returns
came relatively easily. We believe returns can still be healthy for this portion
of the cycle, however, they will be harder to come by, with greater volatility
in the markets in the short term. In a market where equity volatility is high,
investors may benefit from moving up the corporate capital structure into
high-yield bonds and senior loans, where competitive yields and lower volatility
are typical. As we evaluate new investment opportunities, decisions will
continue to be rooted in our rigorous bottom-up credit analysis and focus on the
opportunities that we believe offer the best risk and reward balance. Despite
the many distractions that ebb and flow every quarter, we remain firmly focused
on finding value in the high-yield bond and senior loan markets.
Page 6
FIRST TRUST SHORT DURATION HIGH INCOME FUND
UNDERSTANDING YOUR FUND EXPENSES
OCTOBER 31, 2016 (UNAUDITED)
As a shareholder of the First Trust Short Duration High Income Fund, you incur
two types of costs: (1) transaction costs, including sales charges (loads) on
purchases of Class A Shares and contingent deferred sales charges on the lesser
of purchase price or redemption proceeds of Class C Shares; and (2) ongoing
costs, including management fees; distribution and/or service (12b-1) fees; and
other Fund expenses. This Example is intended to help you understand your
ongoing costs (in U.S. dollars) of investing in the Fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended October 31, 2016.
ACTUAL EXPENSES
The first three columns of the table below provide information about actual
account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid over the period. Simply divide your account value by $1,000 (for
example, an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the third column under the heading entitled "Expenses
Paid During Period" to estimate the expenses you paid on your account during the
period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The next three columns of the table below provide information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing cost of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or contingent deferred sales charges. Therefore, the
hypothetical section of the table is useful in comparing ongoing costs only, and
will not help you determine the relative total costs of owning different funds.
In addition, if these transactional costs were included, your costs would have
been higher.
-----------------------------------------------------------------------------------------------------------
HYPOTHETICAL
ACTUAL EXPENSES (5% RETURN BEFORE EXPENSES)
--------------------------------------------- ---------------------------------------------
BEGINNING ENDING EXPENSES PAID BEGINNING ENDING EXPENSES PAID
ACCOUNT ACCOUNT DURING PERIOD ACCOUNT ACCOUNT DURING PERIOD ANNUALIZED
VALUE VALUE 5/1/2016 - VALUE VALUE 5/1/2016 - EXPENSE
5/1/2016 10/31/2016 10/31/2016 (a) 5/1/2016 10/31/2016 10/31/2016 (a) RATIOS (b)
-----------------------------------------------------------------------------------------------------------
Class A $ 1,000.00 $ 1,035.00 $ 6.39 $ 1,000.00 $ 1,018.85 $ 6.34 1.25%
Class C 1,000.00 1,031.20 10.26 1,000.00 1,015.03 10.18 2.01
Class I 1,000.00 1,036.30 5.32 1,000.00 1,019.91 5.28 1.04
(a) Expenses are equal to the annualized expense ratios as indicated in the
table, multiplied by the average account value over the period (May 1, 2016
through October 31, 2016), multiplied by 184/366 (to reflect the six-month
period).
(b) These expense ratios reflect expense caps.
Page 7
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2016
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
------------- --------------------------------------------------- ---------- -------------- --------------
SENIOR FLOATING-RATE LOAN INTERESTS - 62.8%
AEROSPACE & DEFENSE - 0.6%
$ 100,000 B/E Aerospace, Inc., Term Loan B................... 3.85% 12/16/21 $ 100,563
1,155,358 Transdigm, Inc., Term Loan F - Extended............ 3.75% 06/29/23 1,150,309
--------------
1,250,872
--------------
ALTERNATIVE CARRIERS - 0.1%
103,567 Level 3 Financing, Inc., Tranche B-II 2022 Term
Loan............................................ 3.50% 05/31/22 103,956
--------------
APPAREL RETAIL - 0.2%
339,022 Neiman Marcus Group, Inc., The, Other Term Loan.... 4.25% 10/25/20 311,476
--------------
APPLICATION SOFTWARE - 2.0%
795,985 Epicor Software Corp., Term B Loan................. 4.75% 06/01/22 786,282
710,769 Informatica Corp. (Ithacalux S.A.R.L), Dollar
Term Loan....................................... 4.50% 08/05/22 697,314
263,636 JDA Software Group (RP Crown Parent, Inc.),
Term Loan B..................................... 4.50% 10/12/23 263,449
912,000 Kronos, Inc., 1st Lien Term Loan................... 5.00% 11/01/23 915,630
949,557 Mitchell International, Inc., Initial Term Loan.... 4.50% 10/13/20 945,702
225,570 Triple Point Technologies, Inc., Term Loan......... 5.25% 07/10/20 201,321
--------------
3,809,698
--------------
ASSET MANAGEMENT & CUSTODY BANKS - 0.4%
121,250 Guggenheim Partners Investment Management
Holdings LLC, Term Loan B....................... 3.75% 07/22/23 121,427
475,769 Hamilton Lane Advisors LLC, Term Loan B............ 4.25% 07/08/22 476,759
197,260 Victory Capital Holdings (VCH Holdings LLC),
Initial Term Loan............................... 8.50% 10/29/21 194,745
--------------
792,931
--------------
AUTO PARTS & EQUIPMENT - 0.3%
133,333 Cooper Standard Holdings (CS Intermediate
Holdco 2 LLC), Term Loan B...................... 3.59% 11/02/23 133,751
394,889 Tower Automotive Holdings USA LLC, Initial
Term Loan (2014)................................ 4.00% 04/23/20 393,901
--------------
527,652
--------------
AUTOMOTIVE RETAIL - 0.1%
229,081 KAR Auction Services, Inc., Tranche B-3 Term Loan.. 4.38% 03/09/23 231,443
--------------
BROADCASTING - 1.7%
46,192 Cumulus Media Holdings, Inc., Term Loan............ 4.25% 12/23/20 31,757
340,035 Media General, Inc., Term Loan B................... 4.00% 07/31/20 339,964
13,091 Nexstar Broadcasting, Inc., Mission Term Loan...... 3.88% 10/31/23 13,140
146,909 Nexstar Broadcasting, Inc., Nexstar Term Loan...... 3.88% 10/31/23 147,460
330,290 Tribune Media Co., Term B Loan..................... 3.75% 12/27/20 331,859
1,476,775 Univision Communications, Inc., 2013 Incremental
Term Loan....................................... 4.00% 03/01/20 1,478,163
994,690 Univision Communications, Inc., Replacement
First-Lien Term Loan............................ 4.00% 03/01/20 996,242
--------------
3,338,585
--------------
Page 8 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
------------- --------------------------------------------------- ---------- -------------- --------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
BUILDING PRODUCTS - 0.4%
$ 700,000 Quikrete Holdings, Inc., Initial Loan (First
Lien)........................................... 4.00% 09/28/20 $ 700,294
--------------
CABLE & SATELLITE - 1.2%
1,151,316 Cablevision Systems Corp. (CSC Holdings,
Inc.), TL B..................................... 3.88% 10/11/24 1,154,919
545,298 Cequel Communications LLC (Altice US
Finance I Corp.), Term Loan B................... 3.88% 01/15/25 546,798
600,000 UPC Financing Partnership, Term Loan AN............ 4.08% 08/31/24 602,748
--------------
2,304,465
--------------
CASINOS & GAMING - 4.7%
196,875 Amaya Holdings B.V., 2nd Lien TL................... 8.00% 07/31/22 195,890
2,872,491 Amaya Holdings B.V., Initial Term B Loan
(First Lien).................................... 5.00% 08/01/21 2,868,441
250,000 Boyd Gaming Corp., Term Loan B2.................... 3.53% 09/15/23 251,735
2,774,525 Caesars Growth Partners LLC, Term B Loan
(First Lien).................................... 6.25% 05/01/21 2,769,892
749,038 Caesars Entertainment Resort Properties LLC,
Term B Loan..................................... 7.00% 10/11/20 752,784
754,755 CityCenter Holdings LLC, Term B Loan............... 4.25% 10/16/20 758,688
1,396,500 Station Casinos, Inc., Term Loan B................. 3.75% 06/08/23 1,402,491
--------------
8,999,921
--------------
COAL & CONSUMABLE FUELS - 0.0%
67,243 Arch Coal, Inc., PIK Exit Term Loan (c)............ 10.00% 10/04/21 68,644
--------------
CONSUMER FINANCE - 0.6%
164,475 Altisource Solutions S.A.R.L., Term B Loan......... 4.50% 12/09/20 158,718
1,034,226 Walter Investment Management Corp., Tranche B
Term Loan....................................... 4.75% 12/18/20 967,002
--------------
1,125,720
--------------
DISTRIBUTORS - 0.2%
375,000 HD Supply, Inc., New Term Loan B................... 3.63% 10/17/23 375,236
--------------
DIVERSIFIED CHEMICALS - 0.1%
196,999 Ineos US Finance LLC, 2022 Dollar Term Loan........ 4.25% 03/31/22 198,009
--------------
DIVERSIFIED SUPPORT SERVICES - 0.5%
746,810 Brickman Group Holdings, Inc, Initial Term Loan
(First Lien).................................... 4.00% 12/18/20 745,152
166,667 Brickman Group Holdings, Inc, Second Lien
Term Loan....................................... 7.50% 12/17/21 166,093
--------------
911,245
--------------
EDUCATION SERVICES - 0.1%
122,813 Bright Horizons Family Solutions, Inc., Term B-1
Loan............................................ 4.25% 01/30/20 123,120
--------------
ELECTRIC UTILITIES - 1.9%
758,333 Dayton Power & Light Co., Term Loan B.............. 4.00% 08/24/22 763,702
205,063 Energy Future Intermediate Holding Co., DIP
Term Loan....................................... 4.25% 06/30/17 206,132
2,149,714 TEX Operations Co., LLC, Exit Term Loan B (d)...... 5.00% 08/04/23 2,168,524
See Notes to Financial Statements Page 9
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
------------- --------------------------------------------------- ---------- -------------- --------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
ELECTRIC UTILITIES (CONTINUED)
$ 490,286 TEX Operations Co., LLC, Exit Term Loan C (d)...... 5.00% 08/04/23 $ 494,576
--------------
3,632,934
--------------
ENVIRONMENTAL & FACILITIES SERVICES - 1.0%
147,375 PSSI (Packers Holdings LLC), Term Loan............. 4.75% 12/02/21 147,743
931,985 ServiceMaster Co., Initial Term Loan............... 4.25% 07/01/21 932,572
778,000 WTG Holdings III Corp. (EWT Holdings III Corp.),
Term Loan (First Lien).......................... 4.75% 01/15/21 779,945
--------------
1,860,260
--------------
FOOD DISTRIBUTORS - 0.2%
299,250 US Foods, Inc., Term Loan B........................ 4.00% 06/30/23 301,013
--------------
FOOD RETAIL - 1.3%
2,438,181 Albertsons LLC, New Term Loan B4................... 4.50% 08/25/21 2,455,443
--------------
HEALTH CARE EQUIPMENT - 0.6%
651,750 DJO Finance LLC (ReAble Therapeutics Finance
LLC), Initial Term Loan......................... 4.25% 06/08/20 644,418
532,624 Kinetic Concepts, Inc., Term Loan F................ 5.00% 11/01/20 536,289
--------------
1,180,707
--------------
HEALTH CARE FACILITIES - 1.9%
203,276 Acadia Healthcare Co., Inc., Term Loan B1.......... 3.75% 02/11/22 203,276
124,063 Acadia Healthcare Co., Inc., Term Loan B2.......... 3.75% 02/15/23 124,425
994,962 CHS/Community Health Systems, Inc., Incremental
2021 Term H Loan................................ 4.00% 01/27/21 938,498
370,231 Concentra, Inc. (MJ Acquisition Corp.), Term
Loan B.......................................... 4.00%-5.50% 05/01/22 368,073
877,809 Kindred Healthcare, Inc., New Term Loan............ 4.25% 04/09/21 877,080
500,000 Select Medical Corp., Series E Tranche B Term Loan. 6.00% 06/01/18 500,940
727,993 Select Medical Corp., Term Loan F.................. 6.00%-7.50% 02/28/21 731,029
--------------
3,743,321
--------------
HEALTH CARE SERVICES - 4.1%
590,516 21st Century Oncology, Inc., Tranche B Term Loan... 7.13% 04/30/22 543,275
743,119 Air Medical Group Holdings, Inc., Initial Term Loan. 4.25% 04/28/22 736,156
99,750 Air Medical Group Holdings, Inc., Term Loan B1..... 5.00% 04/28/22 100,498
138,542 AMAG Pharmaceuticals, Inc., Initial Term Loan...... 4.75% 08/17/21 138,542
730,990 CareCore National LLC, Term Loan................... 5.50% 03/05/21 718,198
298,500 CHG Healthcare Services, Inc, Term Loan B......... 4.75% 06/07/23 300,664
985,000 Curo Health Services Holdings, Inc., Term B Loan
(First Lien).................................... 6.50% 02/07/22 987,049
248,125 Envision Healthcare Corp. (Emergency Medical
Services Corp.), Tranche B-2 Term Loan.......... 4.50% 10/28/22 248,902
200,000 ExamWorks Group, Inc., Term Loan B................. 4.75% 07/27/23 201,166
1,307,281 Healogics, Inc. (CDRH Parent, Inc.), Initial Term
Loan (First Lien)............................... 5.25% 07/01/21 1,026,215
786,002 Surgery Centers Holdings, Inc., Term Loan B........ 4.75% 11/03/20 787,967
328,333 Surgical Care Affiliates LLC, Term Loan B.......... 3.75% 03/17/22 329,154
355,936 Team Health, Inc., Term Loan B..................... 3.75% 11/23/22 356,270
1,536,497 U.S. Renal Care, Inc., Term Loan B................. 5.25% 12/30/22 1,469,752
--------------
7,943,808
--------------
Page 10 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
------------- --------------------------------------------------- ---------- -------------- --------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
HEALTH CARE SUPPLIES - 0.1%
$ 148,936 ConvaTec, Inc., Term Loan B........................ 3.25% 10/25/23 $ 149,185
--------------
HEALTH CARE TECHNOLOGY - 0.3%
503,032 Cotiviti Corp., Term Loan B........................ 3.61% 09/22/23 503,349
--------------
HOTELS, RESORTS & CRUISE LINES - 0.2%
480,000 Extended Stay America (ESH Hospitality, Inc.),
Term Loan B..................................... 3.75% 08/31/23 482,462
--------------
HYPERMARKETS & SUPER CENTERS - 2.0%
479,949 BJ's Wholesale Club, Inc., 2013 (November)
Replacement Loan (Second Lien).................. 8.50% 03/26/20 481,149
3,282,143 BJ's Wholesale Club, Inc., New 2013 (November)
Replacement Loan (First Lien)................... 4.50% 09/26/19 3,285,229
--------------
3,766,378
--------------
INDUSTRIAL CONGLOMERATES - 0.2%
456,558 Gardner Denver, Inc., Initial Dollar Term Loan..... 4.25% 07/30/20 442,756
--------------
INSURANCE BROKERS - 1.6%
330,499 Amwins Group LLC, Term Loans (First Lien).......... 4.75% 09/06/19 332,254
1,041,667 Confie Seguros Holding II Co., Term Loan B......... 5.75% 04/19/22 1,029,510
1,045,809 HUB International Ltd., Initial Term Loan (New).... 4.00% 10/02/20 1,045,088
595,351 USI, Inc. (Compass Investors, Inc.), Initial Term
Loan............................................ 4.25% 12/27/19 595,226
--------------
3,002,078
--------------
INTEGRATED TELECOMMUNICATION SERVICES - 0.9%
1,416,216 Numericable U.S. LLC (Altice France S.A.),
Term Loan B10................................... 4.04% 01/14/25 1,409,531
411,876 Numericable U.S. LLC (Altice France S.A.), USD
TLB-7 Loan...................................... 5.13% 01/15/24 415,274
--------------
1,824,805
--------------
LEISURE FACILITIES - 1.2%
1,024,541 ClubCorp Club Operations, Inc., Term Loan B........ 4.00% 12/15/22 1,029,233
576,377 Life Time Fitness, Inc., Closing Date Term Loan.... 4.25% 06/10/22 575,927
636,983 Planet Fitness Holdings LLC, Term Loan............. 4.50% 03/31/21 636,983
--------------
2,242,143
--------------
LIFE SCIENCES TOOLS & SERVICES - 2.5%
628,769 Immucor, Inc., Term B-2 Loan....................... 5.00% 08/19/18 613,678
1,587,302 InVentiv Health, Inc., Term Loan B................. 4.75% 11/09/23 1,586,445
260,730 Millennium Laboratories LLC (New Millennium
Holdco.), Closing Date Term Loan (e)............ 7.50% 12/21/20 163,824
1,058,958 Ortho-Clinical Diagnostics, Inc. (Crimson Merger
Sub, Inc.), Initial Term Loan................... 4.75% 06/30/21 1,033,363
979,600 Pharmaceutical Product Development, Inc., Initial
Term Loan....................................... 4.25% 08/18/22 978,023
396,000 Sterigenics International (STHI Intermediate
Holding Corp.), Initial Term Loan............... 4.25% 05/16/22 394,020
--------------
4,769,353
--------------
See Notes to Financial Statements Page 11
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
------------- --------------------------------------------------- ---------- -------------- --------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
MANAGED HEALTH CARE - 0.2%
$ 306,167 MultiPlan, Inc. (MPH Acquisition Holdings LLC),
Term Loan B..................................... 5.00% 06/15/23 $ 309,324
--------------
METAL & GLASS CONTAINERS - 0.6%
447,798 Anchor Glass Container Corp., Term Loan............ 4.75% 07/01/22 451,855
734,488 Berlin Packaging LLC, Initial Term Loan (First
Lien)........................................... 4.50% 10/01/21 737,243
--------------
1,189,098
--------------
MOVIES & ENTERTAINMENT - 1.2%
133,333 AMC Entertainment, Inc., Term Loan B1.............. 3.35% 12/15/23 133,667
393,025 Creative Artists Agency LLC (CAA Holdings LLC),
Term Loan B..................................... 5.00% 12/17/21 395,481
1,092,717 Formula One (Delta 2 Lux S.A.R.L.), Facility B3
(USD)........................................... 4.75% 07/30/21 1,094,236
400,000 Live Nation Entertainment, Inc., Term Loan B....... 3.34% 10/31/23 400,000
243,420 WME IMG Worldwide, Inc., Term Loan (First
Lien)........................................... 5.25% 05/06/21 244,455
--------------
2,267,839
--------------
OIL & GAS EXPLORATION & PRODUCTION - 0.1%
400,000 American Energy Marcellus Holdings LLC (Ascent
Resources - Marcellus LLC), Initial Loan
(First Lien).................................... 5.25% 08/04/20 225,252
472,222 American Energy Marcellus Holdings LLC (Ascent
Resources - Marcellus LLC), Initial Loan
(Second Lien)................................... 8.50% 08/04/21 41,910
--------------
267,162
--------------
OTHER DIVERSIFIED FINANCIAL SERVICES - 0.4%
798,000 Wex, Inc., Term Loan B............................. 4.25% 06/30/23 806,483
--------------
PACKAGED FOODS & MEATS - 2.9%
1,500,000 Amplify Snack Brands, Inc., Term Loan B............ 6.50% 08/31/23 1,494,840
227,595 B&G Foods, Inc., Tranche B Term Loan............... 3.75% 11/02/22 229,491
2,332,331 New HB Acquisition LLC, Term B Loan (First
Lien)........................................... 4.50% 08/03/22 2,347,631
1,532,061 New HB Acquisition LLC, Term B Loan (Second
Lien)........................................... 8.50% 08/03/23 1,540,686
--------------
5,612,648
--------------
PAPER PACKAGING - 1.6%
3,000,000 Reynolds Group Holdings, Inc., 2016 US Term
Loans........................................... 4.25% 02/05/23 3,006,690
--------------
PHARMACEUTICALS - 6.9%
330,206 Akorn, Inc., Loan.................................. 5.25% 04/16/21 332,270
1,553,024 Amneal Pharmaceuticals LLC, Term Loan B............ 4.50% 11/01/19 1,561,767
1,303,338 Catalent Pharma Solutions, Inc., Dollar Term
Loan............................................ 4.25% 05/20/21 1,309,490
2,669,131 Concordia Healthcare Corp., Initial Dollar Term
Loan............................................ 5.25% 10/21/21 2,387,430
1,245,612 Endo Pharmaceuticals Holdings, Inc., 2015
Incremental Term B Loan......................... 3.75% 09/25/22 1,243,595
1,200,000 Horizon Pharma, Inc., Incremental Term Loan........ 5.50% 05/07/21 1,201,500
Page 12 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
------------- --------------------------------------------------- ---------- -------------- --------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
PHARMACEUTICALS (CONTINUED)
$ 991,535 Horizon Pharma, Inc., Term Loan B.................. 4.50% 04/30/21 $ 991,535
1,085,224 Patheon, Inc (JLL/Delta Dutch Newco B.V.),
Initial Dollar Term Loan........................ 4.25% 03/11/21 1,085,680
3,162,912 Valeant Pharmaceuticals International, Inc.,
Series F-1 Tranche B Term Loan.................. 5.50% 04/01/22 3,151,051
--------------
13,264,318
--------------
PROPERTY & CASUALTY INSURANCE - 0.5%
567,159 Cunningham Lindsey U.S., Inc., Initial Term Loan
(First Lien).................................... 5.00% 12/10/19 474,525
600,000 Sedgwick Claims Management Services, Inc.,
Initial Loan (Second Lien)...................... 6.75% 02/28/22 594,750
--------------
1,069,275
--------------
REAL ESTATE SERVICES - 0.7%
1,283,750 DTZ Worldwide LTD., 2015-1 Additional Term Loan.... 4.25% 11/04/21 1,280,001
--------------
RESEARCH & CONSULTING SERVICES - 1.5%
1,499,515 Acosta, Inc., Term Loan B.......................... 4.25% 09/26/21 1,441,033
1,128,304 Advantage Sales & Marketing, Inc., Initial Term
Loan (First Lien)............................... 4.25% 07/23/21 1,116,547
402,431 Information Resources, Inc., Term Loan............. 4.75% 09/30/20 403,940
--------------
2,961,520
--------------
RESTAURANTS - 2.4%
148,478 Focus Brands, Inc., Term Loan...................... 5.00% 10/05/23 150,025
480,000 Landry's Restaurants, Inc., Term Loan B............ 4.00% 10/04/23 482,601
1,000,000 Portillo's Holdings LLC, Second Lien Term Loan..... 9.00% 08/15/22 995,000
2,601,724 Portillo's Holdings LLC, Term B Loan (First Lien).. 5.50% 08/02/21 2,580,598
420,000 Red Lobster Management LLC, Initial Term Loan
(First Lien).................................... 6.25% 07/28/21 421,575
--------------
4,629,799
--------------
RETAIL REITS - 0.1%
200,000 Capital Automotive LLC, Term Loan (Second
Lien)........................................... 6.00% 04/30/20 201,000
--------------
SEMICONDUCTORS - 2.0%
1,956,686 Avago Technologies Cayman Ltd. (BC Luxembourg
S.A.R.L.), Term Loan B3......................... 3.53% 02/01/23 1,975,979
454,361 Micron Technology, Inc., Term Loan B............... 4.29% 04/26/22 456,919
666,501 NXP B.V., Tranche F Term Loan...................... 3.41% 12/07/20 668,540
718,200 Western Digital Corp., Term Loan B................. 4.50% 04/29/23 725,892
--------------
3,827,330
--------------
SOFT DRINKS - 1.0%
1,873,688 Keurig Green Mountain, Inc. (Maple Holdings
Acquisition Corp.), Term B USD Loan............. 5.25% 03/03/23 1,896,640
--------------
SPECIALIZED CONSUMER SERVICES - 1.3%
247,576 Asurion LLC, Incremental Tranche B-1 Term Loan..... 5.00% 05/24/19 247,621
887,991 Asurion LLC, Incremental Tranche B-4 Term Loan..... 5.00% 08/04/22 891,881
602,941 Asurion LLC, Term Loan (Second Lien)............... 8.50% 03/03/21 607,210
See Notes to Financial Statements Page 13
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED
VALUE DESCRIPTION RATE (a) MATURITY (b) VALUE
------------- --------------------------------------------------- ---------- -------------- --------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
SPECIALIZED CONSUMER SERVICES (CONTINUED)
$ 858,752 Asurion LLC, Term Loan B5.......................... 4.75% 11/03/23 $ 858,752
--------------
2,605,464
--------------
SPECIALIZED FINANCE - 0.8%
396,000 AlixPartners LLP, Term Loan B...................... 4.00% 07/28/22 396,618
1,138,567 Duff & Phelps Corp., Initial Term Loan............. 4.75% 04/23/20 1,139,512
--------------
1,536,130
--------------
SPECIALTY CHEMICALS - 0.1%
98,004 Platform Specialty Products Corp. (fka: Macdermid,
Inc.), Term Loan B.............................. 5.00% 10/31/23 98,739
98,750 Trinseo Materials Operating S.C.A., Term Loan B.... 4.25% 11/05/21 99,318
--------------
198,057
--------------
SPECIALTY STORES - 1.7%
256,757 Coinstar, Inc., Term Loan B........................ 5.25% 09/27/23 259,111
689,976 Party City Holdings, Inc., Term Loan B............. 3.75 - 4.24% 08/19/22 691,797
1,494,342 PetSmart, Inc., Term Loan B........................ 4.00% 03/10/22 1,497,271
483,778 Toys "R" US-Delaware, Inc., Term B-2 Loan.......... 5.25% 05/25/18 453,943
502,956 Toys "R" US-Delaware, Inc., Term B4 Loan........... 9.75% 04/25/20 459,264
--------------
3,361,386
--------------
SYSTEMS SOFTWARE - 2.7%
224,222 Applied Systems, Inc., Initial Term Loan (First
Lien)........................................... 4.00% 01/25/21 224,558
218,154 Applied Systems, Inc., Initial Term Loan (Second
Lien)........................................... 7.50% 01/24/22 219,450
839,130 Avast Software B.V. (Sybil Software LLC), Initial
Dollar Term Loan................................ 5.00% 09/30/22 846,683
2,218,805 BMC Software Finance, Inc., Initial US Term
Loan............................................ 5.00% 09/10/20 2,183,437
774,056 Compuware Corp., Term Loan B....................... 6.25% 12/15/19 775,751
75,000 Rocket Software, Inc., Term Loan................... 5.25% 10/14/23 75,313
800,000 Vertafore, Inc., Term Loan......................... 4.75% 06/30/23 802,376
80,000 Virtu Financial, Inc., TL B........................ 4.25% 11/30/23 80,150
--------------
5,207,718
--------------
TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS - 0.9%
833,333 Dell, Inc. (Diamond 1 Finance Corp.), Term
Loan B.......................................... 4.00% 09/07/23 839,025
831,940 Vertiv, Inc. (Cortes NP Acquisition), Term Loan B.. 6.00% 03/24/21 826,740
--------------
1,665,765
--------------
TOTAL SENIOR FLOATING-RATE LOAN INTERESTS........................................ 120,636,909
(Cost $121,748,395) --------------
Page 14 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- --------------------------------------------------- ---------- -------------- --------------
CORPORATE BONDS AND NOTES - 26.2%
ALTERNATIVE CARRIERS - 0.3%
$ 600,000 Level 3 Communications, Inc........................ 5.75% 12/01/22 $ 619,500
--------------
ALUMINUM - 0.1%
250,000 Alcoa Nederland Holding BV (f)..................... 6.75% 09/30/24 259,375
--------------
APPLICATION SOFTWARE - 0.5%
1,000,000 Infor (US), Inc.................................... 6.50% 05/15/22 1,038,750
--------------
AUTO PARTS & EQUIPMENT - 0.2%
78,000 Cooper-Standard Automotive, Inc. (f)............... 5.63% 11/15/26 78,585
250,000 MPG Holdco I, Inc.................................. 7.38% 10/15/22 255,938
--------------
334,523
--------------
AUTOMOBILE MANUFACTURERS - 0.3%
500,000 Fiat Chrysler Automobiles N.V...................... 5.25% 04/15/23 511,875
--------------
BROADCASTING - 2.4%
1,105,000 Gray Television, Inc. (f).......................... 5.88% 07/15/26 1,102,237
375,000 Lin Television Corp................................ 5.88% 11/15/22 394,219
188,000 Nexstar Broadcasting, Inc.......................... 6.88% 11/15/20 195,285
100,000 Nexstar Broadcasting, Inc. (f)..................... 6.13% 02/15/22 103,000
500,000 Nexstar Escrow Corp. (f)........................... 5.63% 08/01/24 497,500
1,000,000 Sinclair Television Group, Inc. (f)................ 5.63% 08/01/24 1,015,000
215,000 Sinclair Television Group, Inc. (f)................ 5.88% 03/15/26 222,525
100,000 Sinclair Television Group, Inc. (f)................ 5.13% 02/15/27 96,000
1,000,000 Univision Communications, Inc. (f)................. 6.75% 09/15/22 1,057,550
--------------
4,683,316
--------------
CABLE & SATELLITE - 2.0%
972,000 Altice US Finance I Corp. (f)...................... 5.50% 05/15/26 993,870
131,000 CSC Holdings, Inc. (f)............................. 5.50% 04/15/27 133,211
1,500,000 CCO Holdings LLC/CCO Holdings Capital Corp......... 5.75% 01/15/24 1,590,000
200,000 CCO Holdings LLC/CCO Holdings Capital
Corp. (f)....................................... 5.88% 04/01/24 212,000
1,000,000 Cequel Communications Holdings I LLC/Cequel
Capital Corp. (f)............................... 5.13% 12/15/21 990,000
--------------
3,919,081
--------------
CASINOS & GAMING - 1.8%
550,000 Caesars Growth Properties Holdings LLC/Caesars
Growth Properties Finance, Inc.................. 9.38% 05/01/22 587,125
1,850,000 MGM Resorts International.......................... 7.75% 03/15/22 2,146,000
600,000 Station Casinos LLC................................ 7.50% 03/01/21 631,730
--------------
3,364,855
--------------
COMPUTER & ELECTRONICS RETAIL - 0.1%
100,000 Energizer Holdings, Inc. (f)....................... 5.50% 06/15/25 101,500
--------------
CONSTRUCTION MACHINERY & HEAVY TRUCKS - 0.2%
300,000 CNH Industrial N.V................................. 4.50% 08/15/23 302,250
--------------
DIVERSIFIED REAL ESTATE ACTIVITIES - 0.5%
500,000 Meritage Homes Corp................................ 7.00% 04/01/22 560,500
355,000 TRI Pointe Group, Inc./TRI Pointe Homes, Inc....... 5.88% 06/15/24 369,644
--------------
930,144
--------------
See Notes to Financial Statements Page 15
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- --------------------------------------------------- ---------- -------------- --------------
CORPORATE BONDS AND NOTES (CONTINUED)
FOOD RETAIL - 0.1%
$ 165,000 Albertson's Cos. LLC/Safeway Inc./New Albertson's
Inc./Albertson's LLC (f)........................ 5.75% 03/15/25 $ 163,299
--------------
HEALTH CARE EQUIPMENT - 1.1%
2,050,000 DJO Finco, Inc./DJO Finance LLC/DJO Finance
Corp. (f)....................................... 8.13% 06/15/21 1,891,125
300,000 Hill-Rom Holdings, Inc. (f)........................ 5.75% 09/01/23 316,500
--------------
2,207,625
--------------
HEALTH CARE FACILITIES - 5.6%
1,375,000 CHS/Community Health Systems, Inc.................. 8.00% 11/15/19 1,216,875
1,100,000 CHS/Community Health Systems, Inc.................. 6.88% 02/01/22 844,250
375,000 HCA, Inc........................................... 5.38% 02/01/25 383,231
600,000 Healthsouth Corp................................... 5.75% 11/01/24 621,750
1,250,000 Kindred Healthcare, Inc............................ 8.00% 01/15/20 1,243,750
500,000 Kindred Healthcare, Inc............................ 6.38% 04/15/22 464,690
1,500,000 Select Medical Corp................................ 6.38% 06/01/21 1,488,750
500,000 Tenet Healthcare Corp.............................. 5.00% 03/01/19 487,345
500,000 Tenet Healthcare Corp.............................. 6.75% 02/01/20 491,250
3,500,000 Tenet Healthcare Corp.............................. 8.13% 04/01/22 3,438,750
--------------
10,680,641
--------------
HEALTH CARE SERVICES - 0.6%
600,000 AmSurg Corp........................................ 5.63% 07/15/22 614,250
510,000 Surgical Care Affiliates LLC, Inc. (f)............. 6.00% 04/01/23 532,950
--------------
1,147,200
--------------
HOMEFURNISHING RETAIL - 0.1%
100,000 Serta Simmons Bedding LLC (f)...................... 8.13% 10/01/20 103,943
--------------
HOTELS, RESORTS & CRUISE LINES - 0.5%
850,000 Felcor Lodging L.P................................. 6.00% 06/01/25 886,125
--------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS - 0.4%
268,000 NRG Energy, Inc.................................... 7.88% 05/15/21 281,400
500,000 NRG Energy, Inc.................................... 6.25% 07/15/22 503,750
--------------
785,150
--------------
INDUSTRIAL MACHINERY - 0.1%
142,000 SPX Flow, Inc. (f)................................. 5.63% 08/15/24 144,308
142,000 SPX Flow, Inc. (f)................................. 5.88% 08/15/26 144,485
--------------
288,793
--------------
INTEGRATED TELECOMMUNICATION SERVICES - 0.4%
125,000 Frontier Communications Corp....................... 8.88% 09/15/20 133,281
110,000 Frontier Communications Corp....................... 6.25% 09/15/21 105,050
500,000 Frontier Communications Corp....................... 8.75% 04/15/22 496,250
--------------
734,581
--------------
LIFE SCIENCES TOOLS & SERVICES - 1.3%
237,000 Double Eagle Acquisition Sub, Inc. (f)............. 7.50% 10/01/24 244,702
900,000 Jaguar Holding Co. II/Pharmaceutical Product
Development, Inc. (f)........................... 6.38% 08/01/23 907,200
Page 16 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- --------------------------------------------------- ---------- -------------- --------------
CORPORATE BONDS AND NOTES (CONTINUED)
LIFE SCIENCES TOOLS & SERVICES (CONTINUED)
$ 1,500,000 Ortho-Clinical Diagnostics, Inc./Ortho-Clinical
Diagnostics S.A. (f)............................ 6.63% 05/15/22 $ 1,290,000
--------------
2,441,902
--------------
MANAGED HEALTH CARE - 0.1%
100,000 Centene Corp....................................... 5.63% 02/15/21 105,151
100,000 Centene Corp....................................... 6.13% 02/15/24 106,750
--------------
211,901
--------------
METAL & GLASS CONTAINERS - 0.1%
100,000 Owens-Brockway Glass Container, Inc. (f)........... 5.88% 08/15/23 106,750
--------------
MOVIES & ENTERTAINMENT - 0.6%
930,000 AMC Entertainment, Inc............................. 5.75% 06/15/25 936,975
61,000 AMC Entertainment, Inc. (f)........................ 5.88% 11/15/26 61,381
125,000 Cinemark USA, Inc.................................. 4.88% 06/01/23 125,781
--------------
1,124,137
--------------
OIL & GAS EXPLORATION & PRODUCTION - 0.2%
200,000 Murphy Oil Corp.................................... 6.88% 08/15/24 211,242
125,000 Sanchez Energy Corp................................ 6.13% 01/15/23 107,500
134,000 Tallgrass Energy Partners LP/Tallgrass Energy
Finance Corp. (f)............................... 5.50% 09/15/24 133,665
--------------
452,407
--------------
OIL & GAS REFINING & MARKETING - 0.1%
250,000 CITGO Petroleum Corp. (f).......................... 6.25% 08/15/22 256,875
--------------
OIL & GAS STORAGE & TRANSPORTATION - 0.4%
575,000 Crestwood Midstream Partners L.P./Crestwood
Midstream Finance Corp.......................... 6.13% 03/01/22 590,812
75,000 Holly Energy Partners L.P./Holly Energy Finance
Corp. (f)....................................... 6.00% 08/01/24 78,375
188,000 Summit Midstream Holdings LLC/Summit
Midstream Finance Corp.......................... 5.50% 08/15/22 183,300
--------------
852,487
--------------
PACKAGED FOODS & MEATS - 0.7%
250,000 JBS USA LUX S.A./JBS USA Finance, Inc. (f)......... 7.25% 06/01/21 257,500
380,000 JBS USA LUX S.A./JBS USA Finance, Inc (f).......... 5.88% 07/15/24 383,800
150,000 Pilgrim's Pride Corp. (f).......................... 5.75% 03/15/25 154,125
350,000 Post Holdings, Inc. (f)............................ 5.00% 08/15/26 340,375
225,000 TreeHouse Foods, Inc. (f).......................... 6.00% 02/15/24 242,775
--------------
1,378,575
--------------
PAPER PACKAGING - 0.4%
789,000 Reynolds Group Issuer, Inc./Reynolds Group Issuer
LLC/Reynolds Group Issuer Lu (f)................ 7.00% 07/15/24 844,723
--------------
PHARMACEUTICALS - 1.2%
180,000 Concordia International Corp. (f).................. 9.00% 04/01/22 176,175
1,420,000 Endo Ltd./Endo Finance LLC/Endo Finco, Inc. (f).... 6.00% 07/15/23 1,242,500
915,000 Endo Ltd./Endo Finance LLC/Endo Finco, Inc. (f).... 6.50% 02/01/25 775,462
200,000 Quintiles IMS Health, Inc. (f)..................... 5.00% 10/15/26 207,250
--------------
2,401,387
--------------
See Notes to Financial Statements Page 17
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- --------------------------------------------------- ---------- -------------- --------------
CORPORATE BONDS AND NOTES (CONTINUED)
RESTAURANTS - 0.3%
$ 239,000 Brinker International, Inc. (f).................... 5.00% 10/01/24 $ 243,780
413,000 Landry's, Inc. (f)................................. 6.75% 10/15/24 422,293
--------------
666,073
--------------
SPECIALIZED REITS - 0.4%
500,000 Geo Group, (The) Inc............................... 5.88% 01/15/22 473,750
250,000 Geo Group, (The) Inc............................... 5.88% 10/15/24 218,125
--------------
691,875
--------------
SPECIALTY CHEMICALS - 0.1%
100,000 Valvoline, Inc. (f)................................ 5.50% 07/15/24 105,750
--------------
SPECIALTY STORES - 0.4%
675,000 PetSmart, Inc. (f)................................. 7.13% 03/15/23 707,906
--------------
SYSTEMS SOFTWARE - 0.4%
500,000 BMC Software, Inc.................................. 7.25% 06/01/18 500,000
375,000 BMC Software Finance, Inc. (f)..................... 8.13% 07/15/21 345,000
--------------
845,000
--------------
TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS - 0.3%
500,000 Diamond 1 Finance Corp./Diamond 2 Finance
Corp. (f)....................................... 7.13% 06/15/24 548,165
--------------
TRADING COMPANIES & DISTRIBUTORS - 0.1%
209,000 BlueLine Rental Finance Corp. (f).................. 7.00% 02/01/19 183,398
61,000 United Rentals North America, Inc.................. 5.50% 05/15/27 60,771
--------------
244,169
--------------
TRUCKING - 0.4%
600,000 Avis Budget Car Rental LLC/Avis Budget Finance,
Inc. (f)........................................ 5.13% 06/01/22 590,250
125,000 Avis Budget Car Rental LLC/Avis Budget Finance,
Inc............................................. 5.50% 04/01/23 124,219
--------------
714,469
--------------
WIRELESS TELECOMMUNICATION SERVICES - 1.4%
320,000 SBA Communications Corp. (f)....................... 4.88% 09/01/24 320,800
500,000 Sprint Communications, Inc......................... 7.00% 08/15/20 521,250
1,350,000 Sprint Communications, Inc. (f).................... 9.00% 11/15/18 1,488,375
200,000 T-Mobile USA, Inc.................................. 6.00% 03/01/23 211,000
200,000 T-Mobile USA, Inc.................................. 6.63% 04/01/23 213,036
--------------
2,754,461
--------------
TOTAL CORPORATE BONDS AND NOTES.................................................. 50,411,538
(Cost $51,123,547) --------------
Page 18 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------- --------------------------------------------------- ---------- -------------- --------------
FOREIGN CORPORATE BONDS AND NOTES - 5.7%
AEROSPACE & DEFENSE - 0.4%
$ 750,000 Bombardier, Inc. (f)............................... 7.75% 03/15/20 $ 765,000
--------------
ALTERNATIVE CARRIERS - 0.3%
1,750,000 Intelsat Luxembourg S.A............................ 7.75% 06/01/21 577,500
--------------
BUILDING PRODUCTS - 0.6%
1,020,000 Cemex S.A.B de C.V. (f)............................ 7.25% 01/15/21 1,098,744
--------------
CABLE & SATELLITE - 0.9%
500,000 Virgin Media Finance PLC (f)....................... 6.00% 10/15/24 509,375
1,036,000 Ziggo Bond Finance B.V. (f)........................ 6.00% 01/15/27 1,019,813
250,000 Ziggo Secured Finance B.V. (f)..................... 5.50% 01/15/27 247,500
--------------
1,776,688
--------------
CASINOS & GAMING - 0.3%
250,000 MCE Finance Ltd. (f)............................... 5.00% 02/15/21 250,918
310,000 Wynn Macau Ltd. (f)................................ 5.25% 10/15/21 312,632
--------------
563,550
--------------
INTEGRATED TELECOMMUNICATION SERVICES - 0.5%
1,000,000 SFR Group S.A. (f)................................. 6.00% 05/15/22 1,029,070
--------------
METAL & GLASS CONTAINERS - 0.5%
114,706 Ardagh Packaging Finance PLC/Ardagh Holdings
USA, Inc. (f)................................... 7.00% 11/15/20 118,721
750,000 Ardagh Packaging Finance PLC/Ardagh Holdings
USA, Inc. (f)................................... 6.75% 01/31/21 776,250
--------------
894,971
--------------
PACKAGED FOODS & MEATS - 0.1%
250,000 Fage International S.A./Fage USA Diary Industry,
Inc. (f)........................................ 5.63% 08/15/26 258,750
--------------
PHARMACEUTICALS - 1.7%
928,000 Capsugel S.A. (f) (g).............................. 7.00% 05/15/19 928,464
1,000,000 Mallinckrodt International Finance S.A. S.A./
Mallinckrodt CB LLC (f)......................... 5.75% 08/01/22 952,500
250,000 Mallinckrodt International Finance S.A. S.A./
Mallinckrodt CB LLC (f)......................... 5.63% 10/15/23 236,250
250,000 Mallinckrodt International Finance S.A. S.A./
Mallinckrodt CB LLC (f)......................... 5.50% 04/15/25 232,500
1,000,000 Valeant Pharmaceuticals International, Inc. (f).... 5.38% 03/15/20 870,000
--------------
3,219,714
--------------
SECURITY & ALARM SERVICES - 0.4%
750,000 Garda World Security Corp. (f)..................... 7.25% 11/15/21 720,000
--------------
TOTAL FOREIGN CORPORATE BONDS AND NOTES.......................................... 10,903,987
(Cost $12,294,901) --------------
See Notes to Financial Statements Page 19
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
SHARES DESCRIPTION VALUE
------------- --------------------------------------------------------------------------------- --------------
COMMON STOCKS - 0.3%
COAL & CONSUMABLE FUELS - 0.2%
4,840 Arch Coal, Inc. (c) (h).......................................................... $ 355,159
--------------
ELECTRIC UTILITIES - 0.1%
14,134 TCEH Corp. (Texas Competitive Electric Holdings Co. LLC) (d) (h)................. 214,837
--------------
LIFE SCIENCES TOOLS & SERVICES - 0.0%
7,900 New Millennium Holdco, Inc. (e) (f) (h).......................................... 13,825
--------------
TOTAL COMMON STOCKS.............................................................. 583,821
(Cost $582,005) --------------
RIGHTS - 0.0%
ELECTRIC UTILITIES - 0.0%
22,964 TCEH Corp. (Texas Competitive Electric Holdings Co. LLC) Claim (d) (h) (i)....... 0
14,763 TCEH Corp. (Texas Competitive Electric Holdings Co. LLC) (d) (h)................. 25,835
--------------
25,835
--------------
LIFE SCIENCES TOOLS & SERVICES - 0.0%
1 New Millennium Holdco, Inc., Corporate Claim Trust (e) (h) (i) (j)............... 0
1 New Millennium Holdco, Inc., Lender Claim Trust (e) (h) (i) (j).................. 0
--------------
0
--------------
TOTAL RIGHTS..................................................................... $ 25,835
(Cost $25,651) --------------
TOTAL INVESTMENTS - 95.0%........................................................ 182,562,090
(Cost $185,774,499) (k)
NET OTHER ASSETS AND LIABILITIES - 5.0%.......................................... 9,562,417
--------------
NET ASSETS - 100.0%.............................................................. $ 192,124,507
==============
-----------------------------
(a) Senior Floating-Rate Loan Interests ("Senior Loans") in which the Fund
invests pay interest at rates which are periodically predetermined by
reference to a base lending rate plus a premium. These base lending rates
are generally (i) the lending rate offered by one or more major European
banks, such as the London Inter-Bank Offered Rate ("LIBOR"), (ii) the
prime rate offered by one or more United States banks or (iii) the
certificate of deposit rate. Certain Senior Loans are subject to a LIBOR
floor that establishes a minimum LIBOR rate. The interest rate shown
reflects the rate in effect at October 31, 2016. When a range of rates is
disclosed, the Fund holds more than one contract within the same tranche
at varying rates.
(b) Senior Loans generally are subject to mandatory and/or optional
prepayment. As a result, the actual remaining maturity of Senior Loans may
be substantially less than the stated maturities shown.
(c) On October 4, 2016, Arch Coal, Inc. completed a Bankruptcy Plan of
Reorganization. In connection with the Plan of Reorganization, each lender
received a portion of a new term loan equal to its closing date term loan
percentage pursuant to the new credit agreement and a pro rata share of
the newly issued common equity shares in the new company. The company also
made a cash distribution to first lien creditors.
(d) On October 3, 2016, Texas Competitive Electric Holdings (TCEH), completed
their reorganization in the form of a tax free spin off from their parent
company, Energy Future Holdings. As part of the reorganization, first lien
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 up to the parent company, Energy Future Holdings.
(e) On December 21, 2015, Millennium Laboratories LLC completed a Bankruptcy
Plan of Reorganization. As part of the Bankruptcy Plan of Reorganization,
the holders of Millennium Laboratories LLC, Tranche B Term Loan received a
portion of a new term loan and a pro rata share of the newly issued common
equity shares in New Millennium Holdco, Inc., the new company. Each lender
was also issued a beneficial interest in the Corporate Claim Trust
Page 20 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
entitling it, as holder of such beneficial interest, to receive Corporate
Claim Trust Distributions when and if net cash proceeds from the pursuit
of Retained Corporate Causes of Action are available to make such a
distribution. In addition, each lender was issued a beneficial interest in
the Lender Claim Trust entitling it, as holder of such beneficial
interest, to receive Lender Claim Trust Distributions when and if net cash
proceeds from the pursuit of Retained Corporate Causes of Action are
available to make such a distribution.
(f) 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 First Trust Series Fund's
(the "Trust") Board of Trustees, this security has been determined to be
liquid by First Trust Advisors L.P. ("First Trust" or the "Advisors").
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
$33,158,625 or 17.3% of net assets.
(g) These notes are Senior Payment-in-Kind ("PIK") Toggle Notes whereby the
issuer may, at its option, elect to pay interest on the notes (1) entirely
in cash or (2) entirely in PIK interest. Interest paid in cash will accrue
at the rate of 7.00% per annum ("Cash Interest Rate") and PIK interest
will accrue on the notes at a rate per annum equal to the Cash Interest
Rate plus 75 basis points. For year ended October 31, 2016, this security
paid all of its interest in cash.
(h) Non-income producing security.
(i) This security is fair valued by the Advisor's Pricing Committee in
accordance with procedures adopted by the Trust's Board of Trustees, and
in accordance with the provisions of the Investment Company Act of 1940,
as amended. At October 31, 2016, investments noted as such are valued at
$0 or 0.0% of net assets.
(j) Pursuant to procedures adopted by the Trust's Board of Trustees, this
security has been determined to be illiquid by First Trust, the Fund's
advisor.
(k) Aggregate cost for federal income tax purposes is $186,176,854. 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
$1,539,048 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$5,153,812.
-----------------------------
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
------------- ------------- ------------- -------------
Senior Floating-Rate Loan Interests*............... $ 120,636,909 $ -- $ 120,636,909 $ --
Corporate Bonds and Notes*......................... 50,411,538 -- 50,411,538 --
Foreign Corporate Bonds and Notes*................. 10,903,987 -- 10,903,987 --
Common Stocks:
Life Sciences Tools & Services.................. 13,825 -- 13,825 --
Other Common Stocks*............................ 569,996 569,996 -- --
Rights:
Electric Utilities.............................. 25,835 -- 25,835 --**
Life Sciences Tools & Services.................. --** -- -- --**
------------- ------------- ------------- -------------
Total Investments.................................. $ 182,562,090 $ 569,996 $ 181,992,094 $ --**
============= ============= ============= =============
* See Portfolio of Investments for industry breakout. Industry categories
are only shown separately if they include holdings in two or more levels
or have holdings in only Level 3.
** Investment is valued at $0.
There were no transfers between Level 1 and Level 2 at October 31, 2016.
See Notes to Financial Statements Page 21
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
All transfers in and out of Level 3 during the period are assumed to be
transferred on the last day of the period at their current value. As of October
31, 2016, the Fund transferred Senior Floating-Rate Loan Interests valued at
$474,525 from Level 3 to Level 2 of the fair value hierarchy. The Senior
Floating-Rate Loan Interests that transferred from Level 3 to Level 2 did so
primarily as a result of a change in information obtained from an independent
third-party pricing service relating to the market activity of individual Senior
Floating-Rate Loan Interests.
Level 3 Senior Floating-Rate Loan Interests and Rights are fair valued by the
Advisor's Pricing Committee. Level 3 Senior Floating-Rate Loan Interests are
valued based on either third-party pricing service prices obtained from dealer
runs and indicative sheets from brokers or are valued using broker quotes. The
Level 3 Senior Floating Rate Loan Interest and Rights values are based on
unobservable and non-quantitative inputs. The Trust's Board of Trustees has
adopted valuation procedures that are utilized by the Advisor's Pricing
Committee to oversee 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 service prices by comparing sales prices of the Fund's investments to
prior day 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.
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
Senior Floating-Rate Loan Interests $ 997,297
Rights --
Net Realized Gain (Loss)
Senior Floating-Rate Loan Interests 1,213
Net Change in Unrealized Appreciation/Depreciation
Senior Floating-Rate Loan Interests 45,744
Purchases --
Rights --**
Sales
Senior Floating-Rate Loan Interests (569,729)
Transfers Out
Senior Floating-Rate Loan Interests (474,525)
-------------
ENDING BALANCE AT OCTOBER 31, 2016
Senior Floating-Rate Loan Interests --
Rights --**
-------------
Total Level 3 holdings $ --**
=============
** Investment is valued at $0.
There was no net change in unrealized appreciation (depreciation) from Level 3
investments held as of October 31, 2016.
Page 22 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2016
ASSETS:
Investments, at value
(Cost $185,774,499)......................................................................... $182,562,090
Cash........................................................................................... 13,470,470
Receivables:
Investment securities sold.................................................................. 9,583,755
Interest.................................................................................... 1,477,097
Fund shares sold............................................................................ 394,405
------------
Total Assets................................................................................ 207,487,817
------------
LIABILITIES:
Payables:
Investment securities purchased............................................................. 14,590,831
Fund Shares repurchased..................................................................... 384,515
Investment advisory fees.................................................................... 112,951
Distributions payable....................................................................... 100,773
Audit and tax fees.......................................................................... 58,200
12b-1 distributions and service fees........................................................ 32,012
Transfer agent fees......................................................................... 23,404
Custodian fees.............................................................................. 16,596
Administrative fees......................................................................... 12,806
Printing fees............................................................................... 12,315
Registration fees........................................................................... 8,640
Interest and fees on loan................................................................... 2,514
Legal fees.................................................................................. 1,890
Trustees' fees and expenses................................................................. 1,511
Financial reporting fees.................................................................... 773
Other liabilities.............................................................................. 3,579
------------
15,363,310
------------
NET ASSETS..................................................................................... $192,124,507
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $198,101,940
Par value...................................................................................... 96,226
Accumulated net investment income (loss)....................................................... 705,239
Accumulated net realized gain (loss) on investments............................................ (3,566,489)
Net unrealized appreciation (depreciation) on investments...................................... (3,212,409)
------------
NET ASSETS..................................................................................... $192,124,507
============
MAXIMUM OFFERING PRICE PER SHARE:
(Net assets are rounded to the nearest whole dollar and share are rounded to the nearest full share)
CLASS A SHARES:
Net asset value and redemption price per share (Based on net assets of $55,640,199 and
2,786,589 shares of beneficial interest issued and outstanding)............................. $ 19.97
Maximum sales charge (3.50% of offering price)................................................. 0.72
============
Maximum offering price to public............................................................... $ 20.69
============
CLASS C SHARES:
Net asset value and redemption price per share (Based on net assets of $23,840,452 and
1,195,058 shares of beneficial interest issued and outstanding)............................. $ 19.95
============
CLASS I SHARES:
Net asset value and redemption price per share (Based on net assets of $112,643,856 and
5,640,947 shares of beneficial interest issued and outstanding)............................. $ 19.97
============
See Notes to Financial Statements Page 23
FIRST TRUST SHORT DURATION HIGH INCOME FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2016
INVESTMENT INCOME:
Interest....................................................................................... $ 9,817,330
Other.......................................................................................... 14,295
------------
Total investment income..................................................................... 9,831,625
------------
EXPENSES:
Investment advisory fees....................................................................... 1,117,579
12b-1 distribution and/or service fees
Class A..................................................................................... 122,189
Class C..................................................................................... 239,657
Transfer agent fees............................................................................ 149,950
Administrative fees............................................................................ 122,126
Registration fees.............................................................................. 67,018
Audit and tax fees............................................................................. 62,352
Legal fees..................................................................................... 43,720
Excise tax expense............................................................................. 40,800
Printing fees.................................................................................. 40,463
Custodian fees................................................................................. 33,681
Interest and fees on loan...................................................................... 32,066
Trustees' fees and expenses.................................................................... 17,879
Expenses previously waived or reimbursed....................................................... 10,874
Financial reporting fees....................................................................... 9,252
Other.......................................................................................... 12,958
------------
Total expenses.............................................................................. 2,122,564
------------
NET INVESTMENT INCOME (LOSS)................................................................... 7,709,061
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Investments................................................................................. (3,197,036)
Net change in unrealized appreciation (depreciation) on investments......................... 3,902,696
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ 705,660
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ 8,414,721
============
Page 24 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
10/31/2016 10/31/2015
------------- -------------
OPERATIONS:
Net investment income (loss)................................................... $ 7,709,061 $ 7,504,095
Net realized gain (loss)....................................................... (3,197,036) (166,375)
Net change in unrealized appreciation (depreciation)........................... 3,902,696 (6,525,815)
------------- -------------
Net increase (decrease) in net assets resulting from operations................ 8,414,721 811,905
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A Shares................................................................. (2,261,813) (1,790,616)
Class C Shares................................................................. (935,313) (789,673)
Class I Shares................................................................. (4,827,752) (4,083,110)
------------- -------------
(8,024,878) (6,663,399)
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET REALIZED GAIN:
Class A Shares................................................................. -- (98,912)
Class C Shares................................................................. -- (50,651)
Class I Shares................................................................. -- (200,327)
------------- -------------
-- (349,890)
------------- -------------
Total distributions to shareholders............................................ (8,024,878) (7,013,289)
------------- -------------
CAPITAL TRANSACTIONS:
Proceeds from Shares sold...................................................... 82,990,512 85,496,905
Proceeds from Shares reinvested................................................ 6,913,108 6,034,789
Cost of Shares redeemed........................................................ (80,469,500) (83,897,426)
------------- -------------
Net increase (decrease) in net assets resulting from capital transactions...... 9,434,120 7,634,268
------------- -------------
Total increase (decrease) in net assets........................................ 9,823,963 1,432,884
NET ASSETS:
Beginning of period............................................................ 182,300,544 180,867,660
------------- -------------
End of period.................................................................. $ 192,124,507 $ 182,300,544
============= =============
Accumulated net investment income (loss) at end of period...................... $ 705,239 $ 815,397
============= =============
See Notes to Financial Statements Page 25
FIRST TRUST SHORT DURATION HIGH INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED OCTOBER 31, FOR THE PERIOD
-------------------------------------------- ENDED
CLASS A SHARES 2016 2015 2014 10/31/2013 (a)
------------ ------------ ------------ --------------
Net asset value, beginning of period............ $ 19.83 $ 20.54 $ 20.68 $ 20.00
-------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (b)................ 0.87 0.90 0.76 0.65
Net realized and unrealized gain (loss)......... 0.18 (0.77) (0.12) 0.90
-------- -------- -------- --------
Total from investment operations................ 1.05 0.13 0.64 1.55
-------- -------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income........................... (0.91) (0.80) (0.78) (0.70)
Net realized gain............................... -- (0.04) -- --
Return of capital............................... -- -- -- (0.17)
-------- -------- -------- --------
Total from distributions........................ (0.91) (0.84) (0.78) (0.87)
-------- -------- -------- --------
Net asset value, end of period.................. $ 19.97 $ 19.83 $ 20.54 $ 20.68
======== ======== ======== ========
TOTAL RETURN (c)................................ 5.47% 0.63% 3.14% 7.87% (d)
======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............ $ 55,640 $ 53,433 $ 53,304 $ 44,819
Ratio of total expenses to average net assets... 1.27% 1.26% 1.38% 1.54% (f)
Ratio of net expenses to average net assets..... 1.27% (e) 1.25% 1.25% 1.25% (f)
Ratio of net investment income (loss) to
average net assets........................... 4.44% 4.43% 3.68% 3.20% (f)
Portfolio turnover rate......................... 62% 58% 109% 89%
(a) Class A Shares were initially seeded and commenced operations on November
1, 2012.
(b) Per share amounts have been calculated using the average shares method.
(c) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge of 3.50% or contingent
deferred sales charge (CDSC). On purchases of $1 million or more, a CDSC
of 1% may be imposed on certain redemptions made within twelve months of
purchase. If the sales charges were included, total returns would be
lower. These returns include Rule 12b-1 service fees of 0.25% and do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares. The total returns would
have been lower if certain fees had not been waived and expenses
reimbursed by the investment advisor. Total return is calculated for the
time period presented and is not annualized for periods of less than one
year.
(d) The Fund received a payment from First Trust Advisors L.P. (the "Advisor")
in the amount of $1,079 in connection with a trade error. The payment from
the Advisor represents less than $0.01 per share and had no effect on the
total return of the Class A Shares.
(e) Includes excise tax. If this excise tax expense was not included, the net
expense ratio would have been 1.25%.
(f) Annualized.
Page 26 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED OCTOBER 31, FOR THE PERIOD
-------------------------------------------- ENDED
CLASS C SHARES 2016 2015 2014 10/31/2013 (a)
------------ ------------ ------------ --------------
Net asset value, beginning of period............ $ 19.81 $ 20.52 $ 20.66 $ 20.00
-------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (b)................ 0.72 0.75 0.60 0.50
Net realized and unrealized gain (loss)......... 0.18 (0.77) (0.11) 0.89
-------- -------- -------- --------
Total from investment operations................ 0.90 (0.02) 0.49 1.39
-------- -------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income........................... (0.76) (0.65) (0.63) (0.59)
Net realized gain............................... -- (0.04) -- --
Return of capital............................... -- -- -- (0.14)
-------- -------- -------- --------
Total from distributions........................ (0.76) (0.69) (0.63) (0.73)
-------- -------- -------- --------
Net asset value, end of period.................. $ 19.95 $ 19.81 $ 20.52 $ 20.66
======== ======== ======== ========
TOTAL RETURN (c)................................ 4.69% (0.12)% 2.38% 7.04% (d)
======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............ $ 23,841 $ 25,213 $ 24,531 $ 13,522
Ratio of total expenses to average net assets... 2.02% 2.01% 2.13% 2.29% (f)
Ratio of net expenses to average net assets..... 2.02% (e) 2.00% 2.00% 2.00% (f)
Ratio of net investment income (loss) to
average net assets........................... 3.70% 3.68% 2.93% 2.45% (f)
Portfolio turnover rate......................... 62% 58% 109% 89%
(a) Class C Shares were initially seeded and commenced operations on November
1, 2012.
(b) Per share amounts have been calculated using the average shares method.
(c) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 1% charged on certain redemptions
made within once year of purchase. If the sales charges were included,
total returns would be lower. These returns include combined Rule 12b-1
distribution and service fees of 1% and do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption
of Fund shares. The total returns would have been lower if certain fees
had not been waived and expenses reimbursed by the investment advisor.
Total return is calculated for the time period presented and is not
annualized for periods of less than one year.
(d) The Fund received a payment from First Trust Advisors L.P. (the "Advisor")
in the amount of $1,079 in connection with a trade error. The payment from
the Advisor represents less than $0.01 per share and had no effect on the
total return of the Class C Shares.
(e) Includes excise tax. If this excise tax expense was not included, the net
expense ratio would have been 2.00%.
(f) Annualized.
See Notes to Financial Statements Page 27
FIRST TRUST SHORT DURATION HIGH INCOME FUND
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR ENDED OCTOBER 31, FOR THE PERIOD
-------------------------------------------- ENDED
CLASS I SHARES 2016 2015 2014 10/31/2013 (a)
------------ ------------ ------------ --------------
Net asset value, beginning of period............ $ 19.83 $ 20.54 $ 20.68 $ 20.00
-------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (b)................ 0.92 0.95 0.81 0.70
Net realized and unrealized gain (loss)......... 0.18 (0.77) (0.12) 0.90
-------- -------- -------- --------
Total from investment operations................ 1.10 0.18 0.69 1.60
-------- -------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income........................... (0.96) (0.85) (0.83) (0.74)
Net realized gain............................... -- (0.04) -- --
Return of capital............................... -- -- -- (0.18)
-------- -------- -------- --------
Total from distributions........................ (0.96) (0.89) (0.83) (0.92)
-------- -------- -------- --------
Net asset value, end of period.................. $ 19.97 $ 19.83 $ 20.54 $ 20.68
======== ======== ======== ========
TOTAL RETURN (c)................................ 5.74% 0.88% 3.40% 8.11% (d)
======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............ $112,644 $ 103,655 $ 103,033 $ 43,395
Ratio of total expenses to average net assets... 1.02% 1.01% 1.13% 1.29% (f)
Ratio of net expenses to average net assets..... 1.02% (e) 1.00% 1.00% 1.00% (f)
Ratio of net investment income (loss) to
average net assets........................... 4.69% 4.68% 3.93% 3.45% (f)
Portfolio turnover rate......................... 62% 58% 109% 89%
(a) Class I Shares were initially seeded and commenced operations on November
1, 2012.
(b) Per share amounts have been calculated using the average shares method.
(c) Assumes reinvestment of all distributions for the period. These returns do
not reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares. The total returns would
have been lower if certain fees had not been waived and expenses
reimbursed by the investment advisor. Total return is calculated for the
time period presented and is not annualized for periods of less than one
year.
(d) The Fund received a payment from First Trust Advisors L.P. (the "Advisor")
in the amount of $1,079 in connection with a trade error. The payment from
the Advisor represents less than $0.01 per share and had no effect on the
total return of the Class I Shares.
(e) Includes excise tax. If this excise tax expense was not included, the net
expense ratio would have been 1.00%.
(f) Annualized.
Page 28 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2016
1. ORGANIZATION
First Trust Short Duration High Income Fund (the "Fund") is a series of the
First Trust Series Fund (the "Trust"), a Massachusetts business trust organized
on July 9, 2010, and is registered as a diversified open-end management
investment company with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund offers
three classes of shares: Class A, Class C and Class I. Each class represents an
interest in the same portfolio of investments but with a different combination
of sales charges, distribution and service (12b-1) fees, eligibility
requirements and other features.
The Fund's primary investment objective is to seek to provide a high level of
current income. As a secondary objective, the Fund seeks capital appreciation.
The Fund seeks to achieve its investment objectives by investing, under normal
market conditions, at least 80% of its net assets (including investment
borrowings) in high-yield debt securities and bank loans that are rated
below-investment grade or unrated. High-yield debt securities are
below-investment grade debt securities, commonly known as "junk bonds." For
purposes of determining whether a security is below-investment grade, the lowest
available rating is used. 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 and 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") for each class of shares of the Fund is determined
daily as of the close of regular trading on the New York Stock Exchange
("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 NAV for each class is calculated by dividing the value of the
Fund's total assets attributable to such class (including accrued interest and
dividends), less all liabilities attributable to such class (including accrued
expenses, dividends declared but unpaid and any borrowings of the Fund), by the
total number of shares of the class outstanding. Differences in NAV of each
class of the Fund's shares are generally expected to be due to the daily expense
accruals of the specified distribution and service (12b-1) fees, if any, and
transfer agency costs applicable to such class of shares and the resulting
differential in the dividends that may be paid on each class of shares.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Pricing Committee of the Trust's
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"),
in accordance with valuation procedures adopted by the Trust'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:
The Senior Floating-Rate Loan Interests ("Senior Loans")1 in which the
Fund invests 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.
-----------------------------
1 The terms "security" and "securities" used throughout the Notes to
Financial Statements include Senior Loans.
Page 29
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2016
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 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.
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.
Corporate bonds, corporate notes and other debt securities are fair 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 Trust'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.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Trust's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a 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 market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to, the following:
1) the 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 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 borrower/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) borrower's/issuer's competitive position within the industry;
13) borrower's/issuer's ability to access additional liquidity through
public and/or private markets; and
14) other relevant factors.
Page 30
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2016
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.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
daily on the accrual basis. Market premiums and discounts are amortized over the
expected life of each respective borrowing. Amortization of premiums and the
accretion of discounts are recorded using the effective interest method.
Securities purchased or sold 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. Due
to the nature of the Senior Loan market, the actual settlement date may not be
certain at the time of the purchase or sale for some of the Senior Loans.
Interest income on such Senior Loans is not accrued until settlement date. 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. The Fund
did not have any when-issued, delayed-delivery or forward purchase commitments
as of October 31, 2016.
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. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
The Fund will declare daily and pay monthly distributions of all or a portion of
its net income to holders of each class of shares. Distributions of any net
capital gains earned by the Fund will be distributed at least annually.
Distributions will automatically be reinvested into additional Fund shares
unless cash distributions are elected by the shareholder.
Distributions from net investment income and realized 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 net asset value 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 an increase in accumulated net investment income (loss) by $205,659,
a decrease in accumulated net realized gain (loss) on investments by $160,726
and a decrease to paid-in capital of $44,933. Net assets were not affected by
this reclassification.
Page 31
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2016
The tax character of distributions paid during the fiscal year ended October 31,
2016, and 2015, was as follows:
Distributions paid from: 2016 2015
Ordinary income................................. $ 8,024,878 $ 6,915,557
Capital gain.................................... -- 97,732
Return of capital............................... -- --
As of October 31, 2016, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income................... $ 1,107,594
Undistributed capital gains..................... --
-------------
Total undistributed earnings.................... 1,107,594
Accumulated capital and other losses............ (3,566,489)
Net unrealized appreciation (depreciation)...... (3,614,764)
-------------
Total accumulated earnings (losses)............. (6,073,659)
Other........................................... --
Paid-in capital................................. 198,198,166
-------------
Net assets...................................... $ 192,124,507
=============
E. 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 or state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At October 31, 2016, the
Fund had non-expiring capital loss carryforwards of $3,566,489 for federal
income tax purposes.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ended 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.
F. EXPENSES
The Fund will pay all expenses directly related to its operations. Expenses of
the Fund are allocated on a pro rata basis to each class of shares, except for
distribution and service (12b-1) fees and incremental transfer agency costs
which are unique to each class of shares.
G. NEW AND AMENDED FINANCIAL REPORTING RULES AND FORMS
On October 13, 2016, the Securities and Exchange Commission (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.
Page 32
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2016
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 0.65% of the Fund's average daily net assets.
First Trust also provides fund reporting services to the Fund for a flat annual
fee in the amount of $9,250.
First Trust has agreed to waive fees and/or pay Fund expenses to the extent
necessary to prevent the annual operating expenses of the Fund (excluding 12b-1
distribution and service fees, interest expenses, taxes, fees incurred in
acquiring and disposing of portfolio securities and extraordinary expenses) from
exceeding 1.00% of average daily net assets of any class of shares of the Fund
(the "Expense Cap") until February 28, 2018, and then will not exceed 1.35% from
March 1, 2018 through February 28, 2027 (the "Expense Cap Termination Date").
Expenses borne and fees waived by First Trust are subject to recovery by First
Trust up to three years from the date the fee was waived or expense was
incurred, but no reimbursement payment will be made by the Fund at any time if
it would result in the Fund's expenses exceeding the applicable Expense Cap in
place for the most recent fiscal year for which such Expense Cap was in place.
These amounts are included in "Expenses previously waived or reimbursed" on the
Statement of Operations. The advisory fee waivers and expense reimbursement for
the year ended October 31, 2016, and the expenses borne by First Trust subject
to recovery were as follows:
EXPENSES SUBJECT TO RECOVERY
-------------------------------------------------------------------------
ADVISORY FEE EXPENSE PERIOD ENDED YEAR ENDED YEAR ENDED
WAIVER REIMBURSEMENTS OCTOBER 31, 2014 OCTOBER 31, 2015 OCTOBER 31, 2016 TOTAL
------------ -------------- ---------------- ---------------- ---------------- --------------
$ -- $ -- $188,551 $11,894 $ -- $200,445
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 Trust for acting in such capacities.
Page 33
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2016
4. CAPITAL SHARE TRANSACTIONS
Capital transactions were as follows:
YEAR ENDED YEAR ENDED
OCTOBER 31, 2016 OCTOBER 31, 2015
SHARES VALUE SHARES VALUE
---------- ------------- ---------- -------------
Sales:
Class A 1,404,733 $ 27,590,019 1,258,674 $ 25,202,422
Class C 281,113 5,492,853 348,495 7,101,059
Class I 2,547,774 49,907,640 2,616,387 53,193,424
---------- ------------- ---------- -------------
Total Sales: 4,233,620 $ 82,990,512 4,223,556 $ 85,496,905
========== ============= ========== =============
Dividend Reinvestment:
Class A 97,760 $ 1,914,417 76,276 $ 1,547,654
Class C 41,163 805,286 35,343 716,170
Class I 214,036 4,193,405 185,889 3,770,965
---------- ------------- ---------- -------------
Total Dividend Reinvestment: 352,959 $ 6,913,108 297,508 $ 6,034,789
========== ============= ========== =============
Redemptions:
Class A (1,410,230) $ (27,208,886) (1,235,840) $ (25,035,811)
Class C (399,642) (7,806,593) (306,658) (6,230,308)
Class I (2,347,504) (45,454,021) (2,591,742) (52,631,307)
---------- ------------- ---------- -------------
Total Redemptions: (4,157,376) $ (80,469,500) (4,134,240) $ (83,897,426)
========== ============= ========== =============
5. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investments, excluding short-term
investments, for the year ended October 31, 2016, were $113,664,425 and
$102,498,968, respectively.
6. BORROWINGS
The Trust, on behalf of the Fund, along with First Trust Variable Insurance
Trust and First Trust Exchange-Traded Fund IV, has a $135 million Credit
Agreement (the "BNYM Line of Credit") with BNYM to be a liquidity backstop
during periods of high redemption volume. Prior to November 10, 2015, the BNYM
Line of Credit was $80 million. A commitment fee of 0.15% of the daily amount of
the excess of the commitment amount over the outstanding principal balance of
the loans will be charged by BNYM, which First Trust allocates amongst the funds
that have access to the BNYM Line of Credit. These fees are reflected on the
Statement of Operations in the Commitment fees line item. To the extent that the
Fund accesses the BNYM Line of Credit, there would also be an interest fee
charged. As of October 31, 2016, the Fund did not have any outstanding
borrowings under the Line of Credit.
7. DISTRIBUTION AND SERVICE PLAN
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the share
classes of the Fund are authorized to pay an amount up to 0.25% and 1.00% of
their average daily net assets each year for Class A and Class C, respectively,
to reimburse and compensate First Trust Portfolios L.P. ("FTP"), the distributor
of the Fund, for amounts expended to finance activities primarily intended to
result in the sale of Fund shares or the provision of investor services. FTP may
also use this amount to compensate securities dealers or other persons for
providing distribution assistance, including broker-dealer and shareholder
support and educational and promotional services. Class I shares have no 12b-1
fees.
8. 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.
9. 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 no subsequent events requiring recognition or disclosure in the financial
statements that have not already been disclosed.
Page 34
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST SHORT DURATION HIGH
INCOME FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust Short Duration High Income Fund (the "Fund"), a series of the First Trust
Series Fund, including the portfolio of investments, as of October 31, 2016, and
the related statement of operations 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 periods presented. 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 Short Duration High Income Fund as of October 31, 2016, the results of its
operations 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 periods presented, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
December 20, 2016
Page 35
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2016 (UNAUDITED)
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 securities 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 at http://www.sec.gov.
PORTFOLIO HOLDINGS
The Trust 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 Trust's Forms N-Q
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR") in
Washington, DC. Information regarding the operation of the PRR may be obtained
by calling (800) SEC-0330.
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
subjected to federal income tax provided that the income was earned directly by
such foreign shareholders.
Of the ordinary income (including short-term capital gain, if applicable)
distributions made by the Fund during the period ended October 31, 2016, none
qualify for the corporate dividends received deduction available to corporate
shareholders or as qualified dividend income.
RISK CONSIDERATIONS
RISKS ARE INHERENT IN ALL INVESTING. THE FOLLOWING SUMMARIZES SOME, BUT NOT ALL,
OF THE RISKS THAT SHOULD BE CONSIDERED FOR THE FUND. FOR ADDITIONAL INFORMATION
ABOUT THE RISKS ASSOCIATED WITH INVESTING IN THE FUND, PLEASE SEE THE FUND'S
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION, AS WELL AS OTHER FUND
REGULATORY FILINGS.
HIGH-YIELD SECURITIES RISK: High-yield securities, or "junk bonds," are subject
to greater market fluctuations and risk of loss than securities with higher
investment ratings. These securities are issued by companies that may have
limited operating history, narrowly focused operations, and/or other impediments
to the timely payment of periodic interest and principal at maturity. If the
economy slows down or dips into recession, the issuers of high-yield securities
may not have sufficient resources to continue making timely payment of periodic
interest and principal at maturity. The market for high-yield securities is
smaller and less liquid than that for investment grade securities. High-yield
securities are generally not listed on a national securities exchange but trade
in the over-the-counter markets. Due to the smaller, less liquid market for
high-yield securities, the bid-offer spread on such securities is generally
greater than it is for investment grade securities and the purchase or sale of
such securities may take longer to complete.
CREDIT RISK: Credit risk is the risk that an issuer of a security may be unable
or unwilling to make dividend, interest and principal payments when due and the
related risk that the value of a security may decline because of concerns about
the issuer's ability or willingness to make such payments. Credit risk may be
heightened for the Fund because it invests a substantial portion of its net
assets in high-yield or "junk" debt; such securities, while generally offering
higher yields than investment grade debt with similar maturities, involve
greater risks, including the possibility of dividend or interest deferral,
default or bankruptcy, and are regarded as predominantly speculative with
respect to the issuer's capacity to pay dividends or interest and repay
principal. Credit risk is heightened for loans in which the Fund invests because
companies that issue such loans tend to be highly leveraged and thus are more
susceptible to the risks of interest deferral, default and/or bankruptcy.
INTEREST RATE RISK: Interest rate risk is the risk that the value of the debt
securities held by the Fund will decline because of rising market interest
rates. Interest rate risk is generally lower for shorter term investments and
higher for longer term investments. Duration is a common measure of interest
rate risk, which measures a bond's expected life on a present value basis,
taking into account the bond's yield, interest payments and final maturity.
Duration is a reasonably accurate measure of a bond's price sensitivity to
changes in interest rates. The longer the duration of a bond, the greater the
bond's price sensitivity is to changes in interest rates.
MARKET RISK: Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Securities are subject
to market fluctuations caused by such factors as economic, political, regulatory
or market developments, changes in interest rates and perceived trends in stock
prices. Overall stock values could decline generally or could underperform other
investments.
Page 36
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2016 (UNAUDITED)
BANK LOANS RISK: An investment in bank loans subjects the Fund to credit risk,
which is heightened for loans in which the Fund invests because companies that
issue such loans tend to be highly leveraged and thus are more susceptible to
the risks of interest deferral, default and/or bankruptcy. Senior floating rate
loans, in which the Fund invests, are usually rated below-investment grade but
may also be unrated. As a result, the risks associated with these loans are
similar to the risks of below-investment grade fixed income instruments. An
economic downturn would generally lead to a higher non-payment rate, and a
senior floating rate loan may lose significant market value before a default
occurs. Moreover, any specific collateral used to secure a senior floating rate
loan may decline in value or become illiquid, which would adversely affect the
loan's value. Unlike the securities markets, there is no central clearinghouse
for loan trades, and the loan market has not established enforceable settlement
standards or remedies for failure to settle. Therefore, portfolio transactions
in loans may have uncertain settlement time periods. Senior floating rate loans
are subject to a number of risks described elsewhere in this Prospectus,
including liquidity risk and the risk of investing in below-investment grade
fixed income instruments.
LIQUIDITY RISK: The Fund invests a substantial portion of its assets in
lower-quality debt issued by companies that are highly leveraged. Lower-quality
debt tends to be less liquid than higher-quality debt. Moreover, smaller debt
issues tend to be less liquid than larger debt issues. If the economy
experiences a sudden downturn, or if the debt markets for such companies become
distressed, the Fund may have particular difficulty selling its assets in
sufficient amounts, at reasonable prices and in a sufficiently timely manner to
raise the cash necessary to meet any potentially heavy redemption requests by
Fund shareholders.
CONVERTIBLE BONDS RISK: The market values of convertible bonds tend to decline
as interest rates increase and, conversely, to increase as interest rates
decline. A convertible bond's market value also tends to reflect the market
price of the common stock of the issuing company.
NON-U.S. SECURITIES RISK: Non-U.S. securities are subject to higher volatility
than securities of domestic issuers due to possible adverse political, social or
economic developments; restrictions on foreign investment or exchange of
securities; lack of liquidity; currency exchange rates; excessive taxation;
government seizure of assets; different legal or accounting standards; and less
government supervision and regulation of exchanges in foreign countries.
CURRENCY RISK: Because the Fund's net asset value ("NAV") is determined on the
basis of U.S. dollars and the Fund invests in foreign securities, you may lose
money if the local currency of a foreign market depreciates against the U.S.
dollar, even if the local currency value of the Fund's holdings goes up.
PREPAYMENT RISK: Loans and other fixed income investments are subject to
prepayment risk. The degree to which borrowers prepay loans, whether as a
contractual requirement or at their election, may be affected by general
business conditions, the financial condition of the borrower and competitive
conditions among loan investors, among others. As such, prepayments cannot be
predicted with accuracy. Upon a prepayment, either in part or in full, the
actual outstanding debt on which the Fund derives interest income will be
reduced. The Fund may not be able to reinvest the proceeds received on terms as
favorable as the prepaid loan.
INCOME RISK: If interest rates fall, the income from the Fund's portfolio may
decline as the Fund generally holds floating rate debt that will adjust lower
with falling interest rates. For loans, interest rates typically reset every 30
to 90 days.
MANAGEMENT RISK: The Fund is subject to management risk because it is an
actively managed portfolio. In managing the Fund's investment portfolio, the
Advisor will apply investment techniques and risk analyses that may not have the
desired result. There can be no guarantee that the Fund will meet its investment
objectives.
CALL RISK: If an issuer calls higher-yielding securities held by the Fund,
performance could be adversely impacted.
ILLIQUID SECURITIES RISK:Illiquid securities involve the risk that the
securities will not be able to be sold at the time desired by the Fund or at
prices approximately the value at which the Fund is carrying the securities on
its books.
OTHER DEBT SECURITIES RISK: Secured loans that are not first lien loans that are
unsecured and debt securities are subject to many of the same risks that affect
senior floating rate loans; however they are often unsecured and/or lower in the
issuer's capital structure than senior floating rate loans, and thus may be
exposed to greater risk of default and lower recoveries in the event of a
default. This risk can be further heightened in the case of below investment
grade instruments. Additionally, most fixed income securities are fixed rate and
thus are generally more susceptible than floating rate loans to price volatility
related to changes in prevailing interest rates.
Page 37
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2016 (UNAUDITED)
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING CONTINUATION OF INVESTMENT MANAGEMENT AGREEMENT
The Board of Trustees of the First Trust Series Fund (the "Trust"), including
the Independent Trustees, unanimously approved the continuation of the
Investment Management Agreement (the "Agreement") between the Trust, on behalf
of the First Trust Short Duration High Income Fund (the "Fund"), and First Trust
Advisors L.P. (the "Advisor" or "First Trust") 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 Agreement 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 responding to requests for information from counsel to the Independent
Trustees that, among other things, outlined the services provided by the Advisor
to the Fund (including the relevant personnel responsible for these services and
their experience); the advisory fee rate payable by 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; 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; any fall out
benefits to the Advisor and its affiliate, First Trust Portfolios L.P. ("FTP");
and information on the Advisor's compliance program. 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. 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 arrangement between the Trust and the
Advisor continues to be a reasonable business arrangement from the perspective
of the Fund and the Fund's shareholders. The Board determined that, given the
totality of the information provided with respect to the Agreement, the Board
had received sufficient information to renew the Agreement. The Board considered
that shareholders chose to invest or remain invested in the Fund knowing that
the Advisor manages the Fund and knowing the Fund's advisory fee.
In reviewing the Agreement, the Board considered the nature, extent and quality
of the services provided by the Advisor under the Agreement. The Board
considered that the Advisor is responsible for the overall management and
administration of the Trust and the Fund, and reviewed all of the services
provided by the Advisor to the Fund, as well as the background and experience of
the persons responsible for such services. The Board noted that the Advisor's
Leveraged Finance Investment Team is responsible for the day-to-day management
of the Fund's investments and considered the background and experience of the
members of the Leveraged Finance Investment Team. The Board considered the
Advisor's statement that it applies the same oversight model internally with its
Leveraged Finance Investment Team as it uses for overseeing external
sub-advisors. 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 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. 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 under the Agreement have been and are expected to remain
satisfactory and that the Advisor has managed the Fund consistent with its
investment objectives and policies.
The Board considered the advisory fee rate payable under the Agreement for the
services provided. The Board considered that the Advisor agreed to extend the
current expense caps for each share class through February 28, 2018 and agreed
to keep the long-term expense cap in place from March 1, 2018 through February
28, 2027. The Board noted that fees waived or expenses borne by the Advisor are
subject to reimbursement by the Fund for up to three years from the date the
expense was incurred or fees were waived, but no reimbursement payment would be
made by the Fund if it would result in the Fund exceeding an expense ratio equal
to the expense cap in place at the time of the reimbursement or at the time the
expenses were borne or the fees were waived by the Advisor. 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 to other fund and non-fund clients. Based on the information
provided, the Board noted that the advisory fee rate payable by the Fund was
above the median advisory fee of the peer funds in the MPI Peer Group. The Board
noted that the Fund's total (net) expense ratio (Class A shares) was above the
median of the MPI Peer Group. The Board discussed with representatives of the
Advisor the limitations in creating a relevant peer group for the Fund and took
these limitations into account in considering the peer data. With respect to
Page 38
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2016 (UNAUDITED)
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 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 benchmark indexes, including one
blended benchmark index. Based on the information provided, the Board noted that
the Fund (Class A shares) outperformed the MPI Peer Group average and two of the
benchmark indexes, including the blended benchmark index, and underperformed the
other benchmark index for the one-year period ended December 31, 2015. The Board
noted that the Fund (Class A shares) outperformed the MPI Peer Group average and
all three benchmark indexes for the three-year period ended December 31, 2015.
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 fee for the Fund continues to be reasonable and
appropriate in light of the nature, extent and quality of the services provided
by the Advisor to the Fund under the Agreement.
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 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 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. The Board considered
that the Advisor had identified as a fall out benefit to the Advisor and FTP
their exposure to investors and brokers who, absent their exposure to the Fund,
may have had no dealings with the Advisor or FTP. The Board noted that in
addition to the advisory fees paid by the Fund, FTP is compensated for services
provided to the Fund through 12b-1 distribution and service fees and that First
Trust receives compensation from the Fund for providing fund reporting services
pursuant to a separate Fund Reporting Services Agreement. The Board also noted
that the Advisor does not utilize soft dollars in connection with its management
of the Fund's portfolio.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, unanimously determined that the terms
of the Agreement continue to be fair and reasonable and that the continuation of
the Agreement is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
Page 39
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BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
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
THE FIRST TRUST DIRECTORSHIPS
NAME, ADDRESS, TERM OF OFFICE FUND COMPLEX HELD BY TRUSTEE
DATE OF BIRTH AND AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE TRUST SERVICE DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Indefinite 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 Trust Limited Partnership; Member, Sportsmed
Suite 400 LLC Inception (April 2007 to November 2015)
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Indefinite 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 Trust Inc. and ADM
Suite 400 Inception Investor Services
Wheaton, IL 60187 International and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Indefinite Term President, Hibs Enterprises (Financial 137 Director of Trust
c/o First Trust Advisors L.P. and Management Consulting) Company of
120 E. Liberty Drive, o Since Trust Illinois
Suite 400 Inception
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Indefinite 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 Trust Harapan Educational Foundation (Educational Transport, Inc.
Suite 400 Inception Products and Services); President and Chief (May 2003 to
Wheaton, IL 60187 Executive Officer (June 2012 to September May 2014)
D.O.B.: 03/54 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(1), Trustee o Indefinite 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 Trust L.P.; Chairman of the Board of Directors,
Suite 400 Inception BondWave LLC (Software Development Company)
Wheaton, IL 60187 and Stonebridge Advisors LLC (Investment
D.O.B.: 09/55 Advisor)
-----------------------------
(1) Mr. Bowen is deemed an "interested person" of the Trust due to his
position as Chief Executive Officer of First Trust Advisors L.P.,
investment advisor of the Trust.
Page 40
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BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
OCTOBER 31, 2016 (UNAUDITED)
POSITION AND TERM OF OFFICE
NAME, ADDRESS OFFICES AND LENGTH OF PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH TRUST SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(2)
------------------------------------------------------------------------------------------------------------------------------------
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 First
D.O.B.: 01/66 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 o Indefinite Term Senior Vice President (July 2016 to Present), Vice
120 E. Liberty Drive, Financial Officer and President (April 2012 to July 2016), First Trust
Suite 400 Chief 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 Trust Inception Counsel, BondWave LLC; Secretary of Stonebridge
Wheaton, IL 60187 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 July 2012), First
Suite 400 o Since Trust Inception 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 Trust
Inception
-----------------------------
(2) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 41
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PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST SHORT DURATION HIGH INCOME FUND
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 42
This Page Left Blank Intentionally.
This Page Left Blank Intentionally.
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
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]
FIRST TRUST
First Trust AQA(R) Equity Fund
-----------------------------------------
Annual Report
For the Period November 10, 2015
(Commencement Of Operations)
Through October 31, 2016
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST AQA(R) EQUITY FUND
ANNUAL REPORT
OCTOBER 31, 2016
Shareholder Letter........................................................... 1
At a Glance.................................................................. 2
Portfolio Commentary......................................................... 4
Understanding Your Fund Expenses............................................. 6
Portfolio of Investments..................................................... 7
Statement of Assets and Liabilities.......................................... 9
Statement of Operations...................................................... 10
Statement of Changes in Net Assets........................................... 11
Financial Highlights......................................................... 12
Notes to Financial Statements................................................ 15
Report of Independent Registered Public Accounting Firm...................... 20
Additional Information....................................................... 21
Board of Trustees and Officers............................................... 22
Privacy Policy............................................................... 24
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 J.J.B. Hilliard, W.L. Lyons, LLC ("Hilliard
Lyons" 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 AQA(R) Equity Fund (the "Fund") to be materially different from any
future results, performance or achievements expressed or implied by the
forward-looking statements. When evaluating the information included in this
report, you are cautioned not to place undue reliance on these forward-looking
statements, which reflect the judgment of the Advisor and/or Sub-Advisor and
their respective representatives only as of the date hereof. We undertake no
obligation to publicly revise or update these forward-looking statements to
reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of 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 and net asset value will fluctuate and Fund shares, when sold, may be
worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund
performance on the Fund's webpage at http://www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. It includes details about the Fund and presents data and analysis that
provide insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. 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 personell of
Hilliard Lyons 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.
--------------------------------------------------------------------------------
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
FIRST TRUST AQA(R) EQUITY FUND
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
OCTOBER 31, 2016
Dear Shareholders:
Thank you for your investment in First Trust AQA(R) Equity Fund (the "Fund").
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
period from the Fund's inception (November 10, 2015) through 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 still 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 AQA(R) EQUITY FUND
"AT A GLANCE"
AS OF OCTOBER 31, 2016 (UNAUDITED)
-----------------------------------------------------------
FUND STATISTICS
-----------------------------------------------------------
NET ASSET
FIRST TRUST AQA(R) EQUITY FUND VALUE (NAV)
-----------------------------------------------------------
Class A (AQAAX) $20.42
Class C (AQACX) $20.29
Class I (AQAIX) $20.30
-----------------------------------------------------------
-----------------------------------------------------------
% OF TOTAL
TOP TEN HOLDINGS INVESTMENTS
-----------------------------------------------------------
Monolithic Power Systems, Inc. 4.3%
MSCI, Inc. 4.0
Skyworks Solutions, Inc. 4.0
Cognex Corp. 3.8
SYNNEX Corp. 3.8
ABIOMED, Inc. 3.8
LAM Research Corp. 3.7
Winnebago Industries, Inc. 3.6
Trex Co., Inc. 3.3
Saia, Inc. 3.3
-------
Total 37.6%
=======
-----------------------------------------------------------
% OF TOTAL
SECTOR ALLOCATION INVESTMENTS
-----------------------------------------------------------
Consumer Discretionary 31.3%
Information Technology 24.3
Industrials 17.7
Health Care 12.0
Energy 5.5
Financials 4.0
Materials 2.7
Consumer Staples 2.5
-------
Total 100.0%
=======
Page 2
FIRST TRUST AQA(R) EQUITY FUND
"AT A GLANCE" (CONTINUED)
AS OF OCTOBER 31, 2016 (UNAUDITED)
-----------------------------------------------------------
PERFORMANCE OF A $10,000 INVESTMENT
-----------------------------------------------------------
This chart compares your Fund's Class I performance to that
of the Russell 3000(R) Value Index and the Russell 3000(R)
Index from 11/10/2015 through 10/31/2016.
First Trust AQA(R) Equity Russell 3000(R) Russell 3000(R)
Fund - Class I Shares Value Index Index
11/10/15 $10,000 $10,000 $10,000
4/30/16 9,940 10,119 9,964
10/31/16 10,150 10,583 10,382
----------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE AS OF OCTOBER 31, 2016
----------------------------------------------------------------------------------------------------------------------------------
A SHARES C SHARES I SHARES RUSSELL 3000(R) RUSSELL 3000(R)
Inception 11/10/2015 Inception 11/10/2015 Inception 11/10/2015 VALUE INDEX* INDEX*
----------------------------------------------------------------------------------------------------------------------------------
W/MAX
1.00%
W/MAX CONTINGENT
W/O 5.50% W/O DEFERRED W/O W/O W/O
SALES SALES SALES SALES SALES SALES SALES
CUMULATIVE TOTAL RETURNS CHARGES CHARGE CHARGES CHARGE CHARGES CHARGES CHARGES
Since Inception 2.10% -3.52% 1.45% 0.45% 1.50% 5.84% 3.82%
----------------------------------------------------------------------------------------------------------------------------------
* Since inception return is based on the Class I Shares inception date.
Performance figures assume reinvestment of all distributions and do not reflect
the deduction of taxes that the shareholder would pay on Fund distributions or
the redemption of Fund shares. The total returns would have been lower if
certain fees had not been waived and expenses reimbursed by the Advisor. An
index is a statistical composite that tracks a specific financial market or
sector. Unlike the Fund, these indices do not actually hold a portfolio of
securities and therefore do not incur the expenses incurred by the Fund. These
expenses negatively impact the performance of the Fund. The Fund's past
performance does not predict future performance.
Performance of share classes will vary due to differences in sales charges and
expenses. Total return with sales charges includes payment of the maximum sales
charge of 5.50% for Class A Shares, a contingent deferred sales charge ("CDSC")
of 1.00% for Class C Shares in year one and 12b-1 service fees of 0.25% per year
of average daily net assets for Class A Shares and combined Rule 12b-1
distribution and service fees of 1.00% per year of average daily net assets for
Class C Shares. Class I Shares do not have a front-end sales charge or a CDSC,
nor do they pay distribution or service fees.
Page 3
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY
--------------------------------------------------------------------------------
FIRST TRUST AQA(R) EQUITY FUND
ANNUAL REPORT
OCTOBER 31, 2016 (UNAUDITED)
SUB-ADVISOR
J.J.B. Hilliard, W.L. Lyons, LLC ("Hilliard Lyons" or the "Sub-Advisor") is the
sub-advisor to the First Trust AQA(R) Equity Fund (the "Fund") and is a
registered investment adviser located in Louisville, Kentucky. Hilliard Lyons
manages the Fund using its proprietary quantitative methodology called the
Automated Quantitative Analysis ("AQA(R)") program.
PORTFOLIO MANAGEMENT TEAM
ALAN MOREL - SENIOR VICE PRESIDENT, SENIOR PORTFOLIO MANAGER OF HILLIARD LYONS
CORY GERKIN - PORTFOLIO MANAGER OF HILLIARD LYONS
COMMENTARY
MARKET RECAP
Volatility without a trend historically means sideways movement in the market
with ample opportunity for loss. In the period from the Fund's inception through
October 31, 2016, there have been economic uncertainties generated by
fluctuations in oil prices, speculation on Federal Reserve intervention,
Britain's vote to exit from the European Union ("Brexit"), and a bipolar
election process. A stagnant workforce, increased regulation and limited capital
investment have led to lackluster economic performance and an increased reliance
on technology to boost productivity.
While there is always uncertainty in the marketplace, the last 18 months have
been particularly prone to rapid change. We believe an essential ingredient for
long term investment is reliable information. We also believe that the basis for
stock ownership is value versus price, but market volatility over a sustained
period indicates a temporary disregard for value and a move toward momentum
investing, in our view.
The First Trust AQA(R) Equity Fund (the "Fund") has procedures in place designed
to resist changes in macro investing styles. When markets gyrate, it is prices
that move, not necessarily the underlying value of companies. We believe using
current value as a reference point provides a baseline against which price can
be measured. Our investment process precludes the Fund from selling stocks whose
prices decline if this results in a wider positive discrepancy between value and
price. If prices rise in relation to value, then the Fund is free to sell.
PERFORMANCE ANALYSIS
Since the Fund's inception, November 10, 2015, through October 31, 2016, the
median rate of internal growth for stocks in the Fund was 15.53%, versus 12.38%
in the immediately preceding four quarters. Net asset value ("NAV") of Class I
shares of the Fund over the same period is up 1.50%. Should the market
stabilize, we expect the growing discrepancy between value and price for the
portfolio to be recognized by the market.
Since inception, through October 31, 2016, the number of stocks in the portfolio
has dropped from 49 to 34. There were 23 sells and eight buys. The market
volatility discussed above has the same effect on the Fund as a rapidly falling
market: if stock prices move in unison, there is less opportunity for changes in
the relative valuation of stocks, and no mechanism for existing undervalued
stocks to be displaced by new entrants. On the sell side, the processes that
generate sells are unaffected and the net result is fewer stocks in the
portfolio. Our automated measurement of balance sheets and income statements
precludes information that cannot be used for comparative analysis. One
consequence of this approach is a random and diversified population within the
portfolio, which should not be penalized through changes in portfolio size. At
the end of the fiscal year under discussion the portfolio represented 23
industries and eight sectors. Turnover during the period was 57%, and
distribution of assets in the portfolio has been stable, with the top ten stocks
representing 38% and the bottom ten representing 22%.
Throughout the year, the sector contributing most to the Fund's return was
information technology. The Fund had multiple holdings posting strong returns,
with Cognex (CGNX), Lam Research (LRCX), and Monolithic Power Systems (MPWR)
appreciating 29%, 21%, and 20%, respectively, during the period covered by this
report. While the Fund was underweighted in energy relative to the benchmarks,
it underperformed due to many of the Fund's holdings being affected by turmoil
in the commodity markets. These include Atwood Oceanics (ATW), which fell by
16.9% over the period, and Archrock (AROC), which was liquidated for a 7.5% loss
during the period. We continue to see value in the companies that the Fund
holds, and do not intend to liquidate positions on the basis of predicting when
commodity markets may or may not recover. One bright spot for the energy sector
was Superior Energy Services (SPN), which the Fund sold for a 20% gain.
Page 4
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST AQA(R) EQUITY FUND
ANNUAL REPORT
OCTOBER 31, 2016 (UNAUDITED)
Class I Fund Shares generated a total return of 1.50% for the Fund's period
ended October 31, 2016, underperforming the Russell 3000(R) Index and Russell
3000(R) Value Index (the "benchmarks"). Period-to-date through October 31, 2016,
the Russel 3000(R) Index and the Russell 3000(R) Value Index returned 3.82% and
5.84%, respectively. The Fund's underperformance relative to the benchmarks can
be attributed to weak performance in the calendar quarter ended June 30, 2016,
in which we trailed the benchmarks by a margin of 3.98% and 5.92%, respectively.
The Fund was positively affected by certain corporate events in the companies
held. Outerwall (OUTR) was taken private by Apollo Global Management in
September, allowing us to realize a gain of 36.35% in the company. The Fund's
best performing holding for the year was Winnebago Industries (WGO), in which
the Fund had a return of 36.73% during the period.
The Fund's return was negatively affected by its holdings of Skechers (SKX),
Sonic Corp (SONC), and Cal-Maine Foods (CALM) which fell by 25.5%, 20.3%, and
16.1%, respectively, over the period.
MARKET AND FUND OUTLOOK
Over the last 18 months the market has gone nowhere, but has taken the long way
around. Volatility has increased investors' exposure to risk but with little
upside reward.
Some economic stabilization has occurred. Oil prices are off their lows and the
Organization of Petroleum Exporting Countries ("OPEC") is intent on maintaining
current output, but global economic recovery will increase demand. Increased oil
prices will be an incentive for shale oil producers, and their additional,
profitable production will be at the expense of OPEC's market share, in our
view. We believe that North America will become the largest oil producer and
foreign currency will be exchanged for U.S. dollars. Increased purchasing power
of the dollar may lower the cost of imported raw materials and increase capital
investment.
We believe interest rates will rise as private borrowing increases. We expect
that bond prices will likely fall and the Federal Reserve (the "Fed") may have
to raise short term rates in response to market forces. We believe the Fed will
no longer control interest rates, which will likely be driven by market forces.
Interest rates set by the market, though higher, should encourage additional
capital investment.
In our opinion, Brexit will become a template for smaller nations to leave the
European Economic Community (the "EEC"). We believe the advantages of a common
currency will likely be outweighed by taxation without representation.
The General Election in the U.S. has signaled a shift from ideology to
pragmatism, in our view. We expect that majorities for Republicans in both
houses will likely control spending and lower the impact of government
regulation.
We foresee that continued and increased investment in productivity gains will
nullify the effect of a stronger dollar, and needed goods at a reasonable price
will likely re-open global markets to U.S. goods. The Fund is heavily weighted
in areas essential to productivity and service, and we believe these are likely
to be the major beneficiaries at source, in a general increase in global trade.
We believe the market cannot long tread water as the value of its underlying
constituents continues to increase. When the market responds to increased
incentives and a smaller government burden, we believe it must reflect that
positive environment. In addition, we believe the stock market should overcome
the valuation deficit created in the last two years. The Fund process has
typically increased its population of stocks in similar environments, building a
portfolio of active participating companies as the recognition process
accelerates.
Page 5
FIRST TRUST AQA(R) EQUITY FUND
UNDERSTANDING YOUR FUND EXPENSES
OCTOBER 31, 2016 (UNAUDITED)
As a shareholder of the First Trust AQA(R) Equity Fund, you incur two types of
costs: (1) transaction costs, including sales charges (loads) on purchases of
Class A Shares and contingent deferred sales charges on the lesser of purchase
price or redemption proceeds of Class C Shares; and (2) ongoing costs, including
management fees; distribution and/or service (12b-1) fees, if any, and other
Fund expenses. This Example is intended to help you understand your ongoing
costs of investing in the Fund and to compare these costs with the ongoing costs
of investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended October 31, 2016.
ACTUAL EXPENSES
The first three columns of the table below provide information about actual
account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid over the period. Simply divide your account value by $1,000 (for
example, an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the third column under the heading entitled "Expenses
Paid During Period" to estimate the expenses you paid on your account during the
period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The next three columns of the table below provide information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing cost of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or contingent deferred sales charges. Therefore, the
hypothetical section of the table is useful in comparing ongoing costs only, and
will not help you determine the relative total costs of owning different funds.
In addition, if these transactional costs were included, your costs would have
been higher.
HYPOTHETICAL
ACTUAL EXPENSES (5% RETURN BEFORE EXPENSES)
-------------------------------------------- -------------------------------------------
BEGINNING ENDING EXPENSES PAID BEGINNING ENDING EXPENSES PAID
ACCOUNT ACCOUNT DURING PERIOD ACCOUNT ACCOUNT DURING PERIOD ANNUALIZED
VALUE VALUE 5/1/2016 - VALUE VALUE 5/1/2016 - EXPENSE
5/1/2016 10/31/2016 10/31/2016 (a) 5/1/2016 10/31/2016 10/31/2016 (a) RATIOS (b)
-------------------------------------------------------------------------------------------------------
Class A $ 1,000.00 $ 1,019.50 $ 8.12 $ 1,000.00 $ 1,017.09 $ 8.11 1.60%
Class C 1,000.00 1,016.00 11.91 1,000.00 1,013.32 11.89 2.35
Class I 1,000.00 1,021.10 6.86 1,000.00 1,018.35 6.85 1.35
(a) Expenses are equal to the annualized expense ratios, multiplied by the
average account value over the period (May 1, 2016 through October 31,
2016), multiplied by 184/366 (to reflect the six-month period).
(b) These expense ratios reflect expense caps.
Page 6
FIRST TRUST AQA(R) EQUITY FUND
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2016
SHARES DESCRIPTION VALUE
------------- ---------------------------------------------------------------------------------- --------------
COMMON STOCKS - 96.8%
AIRLINES - 5.3%
15,604 Delta Air Lines, Inc.............................................................. $ 651,779
17,402 Southwest Airlines Co............................................................. 696,950
--------------
1,348,729
--------------
AUTO COMPONENTS - 2.9%
47,693 Dana, Inc......................................................................... 738,288
--------------
AUTOMOBILES - 3.5%
31,014 Winnebago Industries, Inc......................................................... 876,145
--------------
BIOTECHNOLOGY - 2.2%
7,680 Gilead Sciences, Inc.............................................................. 565,478
--------------
BUILDING PRODUCTS - 3.2%
15,202 Trex Co., Inc. (a)................................................................ 818,020
--------------
CAPITAL MARKETS - 3.9%
12,417 MSCI, Inc......................................................................... 995,719
--------------
CHEMICALS - 2.6%
42,074 Calgon Carbon Corp................................................................ 664,769
--------------
ELECTRONIC EQUIPMENT, INSTRUMENTS & COMPONENTS - 7.4%
18,137 Cognex Corp....................................................................... 935,869
9,111 SYNNEX Corp....................................................................... 934,242
--------------
1,870,111
--------------
ENERGY EQUIPMENT & SERVICES - 2.4%
41,292 Atwood Oceanics, Inc.............................................................. 315,058
42,266 Tesco Corp........................................................................ 289,522
--------------
604,580
--------------
FOOD PRODUCTS - 2.4%
15,950 Cal-Maine Foods, Inc.............................................................. 616,467
--------------
HEALTH CARE EQUIPMENT & SUPPLIES - 9.4%
14,891 Abaxis, Inc....................................................................... 710,896
8,897 ABIOMED, Inc. (a)................................................................. 934,096
17,075 Anika Therapeutics, Inc. (a)...................................................... 757,447
--------------
2,402,439
--------------
HOTELS, RESTAURANTS & LEISURE - 2.8%
30,466 Sonic Corp........................................................................ 697,976
--------------
HOUSEHOLD DURABLES - 5.7%
52,701 KB Home........................................................................... 766,272
37,310 PulteGroup, Inc................................................................... 693,966
--------------
1,460,238
--------------
IT SERVICES - 1.5%
1,906 Alliance Data Systems Corp........................................................ 389,720
--------------
MACHINERY - 5.4%
9,827 Graco, Inc........................................................................ 736,042
30,110 Trinity Industries, Inc........................................................... 642,849
--------------
1,378,891
--------------
MEDIA - 5.6%
13,440 CBS Corp., Class B................................................................ 760,973
24,828 Twenty-First Century Fox, Inc., Class A........................................... 652,231
--------------
1,413,204
--------------
See Notes to Financial Statements Page 7
FIRST TRUST AQA(R) EQUITY FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2016
SHARES DESCRIPTION VALUE
------------- ---------------------------------------------------------------------------------- --------------
COMMON STOCKS (CONTINUED)
MULTILINE RETAIL - 5.3%
15,324 Big Lots, Inc..................................................................... $ 665,062
9,866 Dollar General Corp............................................................... 681,642
--------------
1,346,704
--------------
OIL, GAS & CONSUMABLE FUELS - 2.9%
12,507 Valero Energy Corp................................................................ 740,915
--------------
ROAD & RAIL - 3.2%
22,529 Saia, Inc. (a).................................................................... 803,159
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 11.6%
9,530 LAM Research Corp................................................................. 923,076
13,354 Monolithic Power Systems, Inc..................................................... 1,052,429
12,814 Skyworks Solutions, Inc........................................................... 985,909
--------------
2,961,414
--------------
SOFTWARE - 3.0%
28,493 Progress Software Corp............................................................ 766,747
--------------
SPECIALTY RETAIL - 2.5%
15,816 Bed Bath & Beyond, Inc............................................................ 639,283
--------------
TEXTILES, APPAREL & LUXURY GOODS - 2.1%
25,658 Skechers U.S.A., Inc., Class A (a)................................................ 539,588
--------------
TOTAL INVESTMENTS - 96.8%......................................................... 24,638,584
(Cost $23,880,197) (b)
NET OTHER ASSETS AND LIABILITIES - 3.2%........................................... 804,646
--------------
NET ASSETS - 100.0%............................................................... $ 25,443,230
==============
-----------------------------
(a) Non-income producing security.
(b) Aggregate cost for for federal income tax purposes is $23,880,494. 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
$1,661,650 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$903,560.
-----------------------------
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
------------- ------------- ------------- -------------
Common Stocks*..................................... $ 24,638,584 $ 24,638,584 $ -- $ --
============= ============= ============= =============
* See the Portfolio of Investments for industry breakout.
All transfers in and out of the Levels during the period are assumed to be on
the last day of the period at their current value. There were no transfers
between Levels at October 31, 2016.
Page 8 See Notes to Financial Statements
FIRST TRUST AQA(R) EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2016
ASSETS:
Investments, at value
(Cost $23,880,197).......................................................................... $ 24,638,584
Cash........................................................................................... 882,188
Receivables:
Fund shares sold............................................................................ 146,159
Dividends................................................................................... 3,243
------------
Total Assets................................................................................ 25,670,174
------------
LIABILITIES:
Payables:
Due to investment advisor................................................................... 89,648
Audit and tax fees.......................................................................... 28,000
Administrative fees......................................................................... 26,982
Registration fees........................................................................... 15,274
Printing fees............................................................................... 14,179
Transfer agent fees......................................................................... 13,164
12b-1 distribution and service fees......................................................... 12,767
Legal fees.................................................................................. 9,185
Custodian fees.............................................................................. 7,578
Fund shares redeemed........................................................................ 2,099
Trustees' fees and expenses................................................................. 1,433
Financial reporting fees.................................................................... 771
Other liabilities.............................................................................. 5,864
------------
Total Liabilities........................................................................... 226,944
------------
NET ASSETS..................................................................................... $ 25,443,230
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $ 24,328,138
Par value...................................................................................... 12,506
Accumulated net investment income (loss)....................................................... --
Accumulated net realized gain (loss) on investments............................................ 344,199
Net unrealized appreciation (depreciation) on investments...................................... 758,387
------------
NET ASSETS..................................................................................... $ 25,443,230
============
MAXIMUM OFFERING PRICE PER SHARE:
CLASS A SHARES:
Net asset value and redemption price per share (Based on net assets of $10,527,254 and
515,501 shares of beneficial interest issued and outstanding)............................... $ 20.42
Maximum sales charge (5.50% of offering price)................................................. 1.19
------------
Maximum offering price to public............................................................... $ 21.61
============
CLASS C SHARES:
Net asset value and redemption price per share (Based on net assets of $12,415,818 and
611,910 shares of beneficial interest issued and outstanding)............................... $ 20.29
============
CLASS I SHARES:
Net asset value and redemption price per share (Based on net assets of $2,500,158 and
123,167 shares of beneficial interest issued and outstanding)............................... $ 20.30
============
See Notes to Financial Statements Page 9
FIRST TRUST AQA(R) EQUITY FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED OCTOBER 31, 2016 (A)
INVESTMENT INCOME:
Dividends...................................................................................... $ 184,322
Interest....................................................................................... 1,939
Other.......................................................................................... 53
------------
Total investment income..................................................................... 186,314
------------
EXPENSES:
Investment advisory fees....................................................................... 157,797
12b-1 distribution and/or service fees:
Class A..................................................................................... 16,058
Class C..................................................................................... 75,614
Registration fees.............................................................................. 61,290
Transfer agent fees............................................................................ 44,195
Audit and tax fees............................................................................. 28,750
Administrative fees............................................................................ 26,982
Printing fees.................................................................................. 23,000
Trustees' fees and expenses.................................................................... 18,522
Legal fees..................................................................................... 10,000
Financial reporting fees....................................................................... 9,250
Custodian fees................................................................................. 7,578
Listing expense................................................................................ 2,050
Other.......................................................................................... 7,500
------------
Total expenses.............................................................................. 488,586
Fees waived and expenses reimbursed by the investment advisor............................... (183,866)
------------
Net expenses................................................................................ 304,720
------------
NET INVESTMENT INCOME (LOSS)................................................................... (118,406)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments..................................................... 462,605
Net change in unrealized appreciation (depreciation) on investments......................... 758,387
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ 1,220,992
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ 1,102,586
============
(a) The Fund was initially seeded on November 9, 2015 and commenced operations
on November 10, 2015.
Page 10 See Notes to Financial Statements
FIRST TRUST AQA(R) EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
PERIOD
ENDED
10/31/2016 (a)
--------------
OPERATIONS:
Net investment income (loss)................................................... $ (118,406)
Net realized gain (loss)....................................................... 462,605
Net change in unrealized appreciation (depreciation)........................... 758,387
------------
Net increase (decrease) in net assets resulting from operations................ 1,102,586
------------
CAPITAL TRANSACTIONS:
Proceeds from shares sold...................................................... 25,528,862
Redemptions of shares.......................................................... (1,188,218)
------------
Net increase (decrease) in net assets resulting from capital transactions...... 24,340,644
------------
Total increase (decrease) in net assets........................................ 25,443,230
NET ASSETS:
Beginning of period............................................................ --
------------
End of period.................................................................. $ 25,443,230
============
Accumulated net investment income (loss) at end of period...................... $ --
============
(a) The Fund was initially seeded on November 9, 2015 and commenced operations
on November 10, 2015.
See Notes to Financial Statements Page 11
FIRST TRUST AQA(R) EQUITY FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
PERIOD
ENDED
CLASS A SHARES 10/31/2016 (a)
--------------
Net asset value, beginning of period ........... $ 20.00
---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (b)................ (0.08)
Net realized and unrealized gain (loss) ........ 0.50
---------
Total from investment operations................ 0.42
---------
Net asset value, end of period ................. $ 20.42
=========
TOTAL RETURN (c)................................ 2.10%
=========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ........... $ 10,527
Ratio of total expenses to average net assets... 2.65% (d)
Ratio of net expenses to average net assets ... 1.60% (d)
Ratio of net investment income (loss) to average
net assets .................................. (0.42)% (d)
Portfolio turnover rate ........................ 57%
(a) Class A Shares were initially seeded on November 9, 2015 and commenced
operations on November 10, 2015.
(b) Per share amount has been calculated using the average shares method.
(c) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge of 5.50% or contingent
deferred sales charge (CDSC). On purchases of $1 million or more, a CDSC
of 1% may be imposed on certain redemptions made within twelve months of
purchase. If the sales charges were included, total returns would be
lower. This return includes Rule 12b-1 service fees of 0.25% and does not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares. The total return would
have been lower if certain fees had not been waived and expenses
reimbursed by the investment advisor. Total return is calculated for the
time period presented and is not annualized for periods of less than one
year.
(d) Annualized.
Page 12 See Notes to Financial Statements
FIRST TRUST AQA(R) EQUITY FUND
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
PERIOD
ENDED
CLASS C SHARES 10/31/2016 (a)
--------------
Net asset value, beginning of period ........... $ 20.00
---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (b)................ (0.23)
Net realized and unrealized gain (loss) ........ 0.52
---------
Total from investment operations................ 0.29
---------
Net asset value, end of period ................. $ 20.29
=========
TOTAL RETURN (c)................................ 1.45%
=========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) .......... $ 12,416
Ratio of total expenses to average net assets... 3.48% (d)
Ratio of net expenses to average net assets .... 2.35% (d)
Ratio of net investment income (loss) to average
net assets .................................. (1.17)% (d)
Portfolio turnover rate ........................ 57%
(a) Class C Shares were initially seeded on November 9, 2015 and commenced
operations on November 10, 2015.
(b) Per share amount has been calculated using the average shares method.
(c) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 1%, charged on certain redemptions
made within one year of purchase. If the sales charge was included, total
returns would be lower. This return includes combined Rule 12b-1
distribution and service fees of 1% and does not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption
of Fund shares. The total return would have been lower if certain fees had
not been waived and expenses reimbursed by the investment advisor. Total
return is calculated for the time period presented and is not annualized
for periods of less than one year.
(d) Annualized.
See Notes to Financial Statements Page 13
FIRST TRUST AQA(R) EQUITY FUND
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
PERIOD
ENDED
CLASS I SHARES 10/31/2016 (a)
--------------
Net asset value, beginning of period ........... $ 20.00
---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (b)................ (0.03)
Net realized and unrealized gain (loss) ........ 0.33
---------
Total from investment operations................ 0.30
---------
Net asset value, end of period ................. $ 20.30
=========
TOTAL RETURN (c)................................ 1.50%
=========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ........... $ 2,500
Ratio of total expenses to average net assets... 3.08% (d)
Ratio of net expenses to average net assets .... 1.35% (d)
Ratio of net investment income (loss) to average
net assets .................................. (0.15)% (d)
Portfolio turnover rate ........................ 57%
(a) Class I Shares were initially seeded on November 9, 2015 and commenced
operations on November 10, 2015.
(b) Per share amount has been calculated using the average shares method.
(c) Assumes reinvestment of all distributions for the period. This return does
not reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares. The total return would
have been lower if certain fees had not been waived and expenses
reimbursed by the investment advisor. Total return is calculated for the
time period presented and is not annualized for periods of less than one
year.
(d) Annualized.
Page 14 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST AQA(R) EQUITY FUND
OCTOBER 31, 2016
1. ORGANIZATION
First Trust AQA(R) Equity Fund (the "Fund") is a series of the First Trust
Series Fund (the "Trust"), a Massachusetts business trust organized on July 9,
2010, and is registered as a diversified open-end management investment company
with the Securities and Exchange Commission (the "SEC") under the Investment
Company Act of 1940, as amended (the "1940 Act"). The Fund offers three classes
of shares: Class A, Class C and Class I. Each class represents an interest in
the same portfolio of investments but with a different combination of sales
charges, distribution and service (12b-1) fees, eligibility requirements and
other features.
The Fund's investment objective is to seek capital appreciation. Under normal
market conditions, the Fund invests at least 80% of its net assets (including
investment borrowings, if any) in equity securities (specifically, common
stocks) of U.S. companies. First Trust Advisors L.P. ("First Trust" or the
"Advisor") typically selects common stocks for investment by the Fund using
information produced by a proprietary quantitative methodology developed by the
Fund's sub-advisor called the Automated Quantitative Analysis ("AQA(R)")
program. In general, the stocks chosen for investment by the Fund are those
considered by AQA(R) to be the most undervalued at the time the portfolio was
selected based on a set of pre-determined proprietary screens and evaluations.
There can be no assurance that the Fund will achieve its investment objective.
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 the financial statements. The preparation of
the 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 each class of shares of the Fund is determined
daily as of the close of regular trading on the New York Stock Exchange
("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. The NAV for each class is calculated by dividing the value of the
Fund's total assets attributable to such class (including accrued interest and
dividends), less all liabilities attributable to such class (including accrued
expenses, dividends declared but unpaid and any borrowings of the Fund), by the
total number of shares of the class outstanding. Differences in NAV of each
class of the Fund's shares are generally expected to be due to the daily expense
accruals of the specified distribution and service (12b-1) fees and transfer
agency costs applicable to such class of shares and the resulting differential
in the dividends that may be paid on each class of shares.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Pricing Committee of the Fund's
investment advisor, First Trust, in accordance with valuation procedures adopted
by the Trust's Board of Trustees, and in accordance with provisions of the 1940
Act. Investments valued by the Advisor's Pricing Committee, if any, are
footnoted as such in the footnotes to the Portfolio of Investments. The Fund's
investments are valued as follows:
Common stocks and other securities listed on any national or foreign
exchange (excluding The Nasdaq Stock Market LLC ("Nasdaq") and the London
Stock Exchange Alternative Investment Market ("AIM")) are valued at the
last sale price on the exchange on which they are principally traded or,
for Nasdaq and AIM securities, the official closing price. Securities
traded on more than one securities exchange are valued at the last sale
price or official closing price, as applicable, at the close of the
securities exchange representing the principal market for such securities.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Trust's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a 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
Page 15
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST AQA(R) EQUITY FUND
OCTOBER 31, 2016
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 market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to, the following:
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or third-party pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or the
appropriate stock exchange;
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might affect
the value of the security.
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.
Dividend income is recorded on the ex-dividend date. Interest income, if any, is
recorded daily on the accrual basis, including the amortization of premiums and
the accretion of discounts. Income is allocated on a pro rata basis to each
class of shares.
C. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
The Fund will distribute to holders of its shares annual dividends of all or a
portion of its net income. Distributions of any net capital gains earned by the
Fund will be distributed at least annually. Distributions will automatically be
reinvested into additional Fund shares unless cash distributions are elected by
the shareholder.
Distributions from net investment income and realized 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 period ended October 31, 2016,
resulting in book and tax accounting differences, have been reclassified at
period end to reflect an increase in accumulated net investment income (loss) of
$118,406 and a decrease in accumulated net realized gain (loss) on investments
of $118,406. Net assets were not affected by this reclassification.
Page 16
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST AQA(R) EQUITY FUND
OCTOBER 31, 2016
The tax character of distributions paid during the fiscal period ended October
31, 2016 was as follows:
Distributions paid from:
Ordinary income.................................... $ --
Capital gain....................................... --
Return of capital.................................. --
As of October 31, 2016, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income...................... $ 344,496
Undistributed capital gains........................ --
------------
Total undistributed earnings....................... 344,496
Accumulated capital and other losses............... --
Net unrealized appreciation (depreciation)......... 758,090
------------
Total accumulated earnings (losses)................ 1,102,586
Other.............................................. --
Paid-in capital.................................... 24,340,644
------------
Net assets......................................... $ 25,443,230
============
D. INCOME TAXES
The Fund intends to qualify as a regulated investment company by complying with
the requirements under Subchapter M of the Internal Revenue Code of 1986, as
amended, which includes distributing substantially all of its net investment
income and net realized gains to shareholders. Accordingly, no provision has
been made for federal and state income taxes. However, due to the timing and
amount of distributions, the Fund may be subject to an excise tax of 4% of the
amount by which approximately 98% of the Fund's taxable income exceeds the
distributions from such taxable income for the calendar year.
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At October 31, 2016, the
Fund had no non-expiring capital loss carryforwards for federal income tax
purposes.
Certain losses realized during the current fiscal year may be deferred and
treated as occurring on the first day of the following fiscal year for federal
income tax purposes. For the period ended October 31, 2016, the Fund did not
defer any net ordinary losses.
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 year ended 2016 remains
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.
E. EXPENSES
The Fund will pay all expenses directly related to its operations. Expenses of
the Fund are allocated on a pro rata basis to each class of shares, except for
distribution and service (12b-1) fees and incremental transfer agency costs
which are unique to each class of shares.
F. 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.
Page 17
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST AQA(R) EQUITY FUND
OCTOBER 31, 2016
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 1.00% of the Fund's average daily net assets.
First Trust also provides fund reporting services to the Fund for a flat annual
fee in the amount of $9,250.
J.J.B. Hilliard, W.L. Lyons, LLC ("Hilliard Lyons" or the "Sub-Advisor") serves
as the Fund's sub-advisor and manages the Fund's portfolio subject to First
Trust's supervision. The Sub-Advisor receives a portfolio management fee at an
annual rate of 0.50% of the Fund's average daily net assets that is paid by
First Trust from its investment advisory fee.
First Trust and Hilliard Lyons have agreed to waive fees and/or pay Fund
expenses to the extent necessary to prevent the annual operating expenses of the
Fund (excluding 12b-1 distribution and service fees, interest expenses, taxes,
acquired fund fees and expenses, fees incurred in acquiring and disposing of
portfolio securities and extraordinary expenses) from exceeding 1.35% of average
daily net assets of any class of shares of the Fund (the "Expense Cap") until
February 28, 2018. Expenses borne and fees waived by First Trust and Hilliard
Lyons are subject to recovery by First Trust and Hilliard Lyons up to three
years from the date the fee or expense was incurred, but no reimbursement
payment will be made by the Fund at any time if it would result in the Fund's
expenses exceeding the Expense Cap in place at the time the expense was borne or
the fee was waived by First Trust and Hilliard Lyons. These amounts would be
included in "Expenses previously waived or reimbursed" on the Statement of
Operations. The advisory fee waivers and expense reimbursement for the period
ended October 31, 2016 and the expenses borne by First Trust and Hilliard Lyons
subject to recovery were as follows:
EXPENSES SUBJECT TO
ADVISORY FEE WAIVER EXPENSE REIMBURSEMENT RECOVERY
------------------- --------------------- -------------------
$ 157,797 $ 26,069 $ 183,866
Brown Brothers Harriman & Co. ("BBH") serves as the Fund's administrator, fund
accountant and custodian in accordance with certain fee arrangements. As
administrator and fund accountant, BBH is responsible for providing certain
administrative and accounting services to the Fund, including maintaining the
Fund's books of account, records of the Fund's securities transactions, and
certain other books and records. As custodian, BBH is responsible for custody of
the Fund's assets.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
transfer agent in accordance with certain fee arrangements. As transfer agent,
BNYM IS is responsible for maintaining shareholder records for the Fund.
At a meeting held on December 7, 2015, the Board of Trustees accepted Mr. Mark
Bradley's resignation from his position as the President and Chief Executive
Officer of the Trust, effective December 31, 2015. At the same meeting, the
Board of Trustees elected Mr. James Dykas, formerly Chief Financial Officer and
Treasurer of the Trust, to serve as the President and Chief Executive Officer,
and Mr. Donald Swade, formerly an Assistant Treasurer of the Trust, to serve as
the Treasurer, Chief Financial Officer and Chief Accounting Officer of the
Trust.
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 Trust for acting in such capacities.
Page 18
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST AQA(R) EQUITY FUND
OCTOBER 31, 2016
4. CAPITAL SHARE TRANSACTIONS
For the period ended October 31, 2016, transactions were as follows:
SHARES VALUE
---------- -------------
Sales:
Class A 531,588 $ 10,344,389
Class C 628,518 12,270,092
Class I 149,057 2,914,381
---------- -------------
Total Sales 1,309,163 $ 25,528,862
========== =============
Dividend Reinvestment:
Class A -- $ --
Class C -- --
Class I -- --
---------- -------------
Total Dividend Reinvestment -- $ --
========== =============
Redemptions:
Class A (16,087) $ (313,316)
Class C (16,608) (338,194)
Class I (25,890) (536,708)
---------- -------------
Total Redemptions (58,585) $ (1,188,218)
========== =============
5. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investments, excluding short-term
investments, for the period ended October 31, 2016, were $32,475,159 and
$9,057,567, respectively.
6. DISTRIBUTION AND SERVICE PLANS
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the share
classes of the Fund are authorized to pay an amount up to 0.25% and 1.00% of
their average daily net assets each year for Class A and Class C, respectively,
to reimburse First Trust Portfolios L.P. ("FTP"), the distributor of the Fund,
for amounts expended to finance activities primarily intended to result in the
sale of Fund shares or the provision of investor services. FTP may also use this
amount to compensate securities dealers or other persons for providing
distribution assistance, including broker-dealer and shareholder support and
educational and promotional services. Class I shares have no 12b-1 fees.
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 no subsequent events requiring recognition or disclosure in the financial
statements that have not already been disclosed.
Page 19
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST AQA(R) EQUITY FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust AQA(R) Equity Fund (the "Fund"), a series of the First Trust Series Fund,
including the portfolio of investments, as of October 31, 2016, and the related
statements of operations and changes in net assets and the financial highlights
for the period from November 10, 2015 (commencement of operations) through
October 31, 2016. 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 audit 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 audit 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 and brokers; 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 AQA(R) Equity Fund as of October 31, 2016, and the results of its
operations, changes in its net assets, and the financial highlights for the
period from November 10, 2015 (commencement of operations) through October 31,
2016, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
December 20, 2016
Page 20
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST AQA(R) EQUITY FUND
OCTOBER 31, 2016 (UNAUDITED)
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Trust uses to determine
how to vote proxies and information on how the Fund voted proxies relating to
portfolio securities 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 at http://www.sec.gov.
PORTFOLIO HOLDINGS
The Trust 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-Qs
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR") in
Washington, DC. Information regarding the operation of the PRR may be obtained
by calling (800) SEC-0330.
RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some 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.
EQUITY SECURITIES RISK. Because the Fund invests in equity securities, the value
of the Fund's shares will fluctuate with changes in the value of these equity
securities. Equity securities prices fluctuate for several reasons, including
changes in investors' perceptions of the financial condition of an issuer or the
general condition of the relevant stock market, such as market volatility, or
when political or economic events affecting the issuers occur. In addition,
common stock prices may be particularly sensitive to rising interest rates, as
the cost of capital rises and borrowing costs increase.
LIQUIDITY RISK. The Fund invests in equity securities that may have limited
liquidity despite being listed on a securities exchange. Equity securities that
are less liquid or that trade less can be more difficult or more costly to buy,
or to sell, compared to other more liquid or active investments. This liquidity
risk is a factor of the trading volume of a particular security, as well as the
size and liquidity of the market for such security. The prices at which the
equity securities are held in the Fund will be adversely affected if trading
markets for the equity securities are limited or absent.
MARKET RISK. Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Securities are subject
to market fluctuations caused by such factors as economic, political, regulatory
or market developments, changes in interest rates and perceived trends in
securities prices. Shares of the Fund could decline in value or underperform
other investments.
MODEL RISK. The Fund relies heavily on a proprietary quantitative model that
uses information and data supplied by third parties. When the model and data
prove to be incorrect or incomplete, any decisions made in reliance thereon
expose the Fund to potential risks.
NEW FUND RISK. The Fund currently has fewer assets than larger funds, and like
other relatively new funds, large inflows and outflows may impact the Fund's
market exposure for limited periods of time. This impact may be positive or
negative, depending on the direction of market movement during the period
affected. Also, during the initial invest-up period, the Fund may depart from
its principal investment strategies and invest a larger amount or all of its
assets in cash equivalents or it may hold cash.
SMALLER COMPANIES RISK. The Fund invests in small and/or mid capitalization
companies. Such companies may be more vulnerable to adverse general market or
economic developments, and their securities may be less liquid and may
experience greater price volatility than larger, more established companies as a
result of several factors, including limited trading volumes, products or
financial resources, management inexperience and less publicly available
information. Accordingly, such companies are generally subject to greater market
risk than larger, more established companies.
VALUE INVESTING RISK. The Fund focuses its investments on securities that the
proprietary quantitative model on which the Fund is based considers to be
undervalued or inexpensive relative to other investments. These types of
securities may present risks in addition to the general risks associated with
investing in them. These securities are selected on the basis of an issuer's
business and economic fundamentals or a security's current credit profile,
relative to current market practice. Disciplined adherence to a "value"
investment mandate during period 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.
Page 21
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST AQA(R) EQUITY FUND
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
THE FIRST TRUST DIRECTORSHIPS
NAME, ADDRESS, TERM OF OFFICE FUND COMPLEX HELD BY TRUSTEE
DATE OF BIRTH AND AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE TRUST SERVICE DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Indefinite 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 Trust Limited Partnership; Member, Sportsmed
Suite 400 LLC Inception (April 2007 to November 2015)
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Indefinite 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 Trust Inc. and ADM
Suite 400 Inception Investor Services
Wheaton, IL 60187 International and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Indefinite Term President, Hibs Enterprises (Financial 137 Director of Trust
c/o First Trust Advisors L.P. and Management Consulting) Company of
120 E. Liberty Drive, o Since Trust Illinois
Suite 400 Inception
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Indefinite 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 Trust Harapan Educational Foundation (Educational Transport, Inc.
Suite 400 Inception Products and Services); President and Chief (May 2003 to
Wheaton, IL 60187 Executive Officer (June 2012 to September May 2014)
D.O.B.: 03/54 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(1), Trustee o Indefinite 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 Trust L.P.; Chairman of the Board of Directors,
Suite 400 Inception BondWave LLC (Software Development Company)
Wheaton, IL 60187 and Stonebridge Advisors LLC (Investment
D.O.B.: 09/55 Advisor)
-----------------------------
(1) Mr. Bowen is deemed an "interested person" of the Trust due to his
position as Chief Executive Officer of First Trust Advisors L.P.,
investment advisor of the Trust.
Page 22
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST AQA(R) EQUITY FUND
OCTOBER 31, 2016 (UNAUDITED)
POSITION AND TERM OF OFFICE
NAME, ADDRESS OFFICES AND LENGTH OF PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH TRUST SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(2)
------------------------------------------------------------------------------------------------------------------------------------
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 First
D.O.B.: 01/66 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 o Indefinite Term Senior Vice President (July 2016 to Present), Vice
120 E. Liberty Drive, Financial Officer and President (April 2012 to July 2016), First Trust
Suite 400 Chief 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 Trust Inception Counsel, BondWave LLC; Secretary of Stonebridge
Wheaton, IL 60187 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 July 2012), First
Suite 400 o Since Trust Inception 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 Trust
Inception
-----------------------------
(2) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 23
--------------------------------------------------------------------------------
PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST AQA(R) EQUITY FUND
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 24
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
J.J.B. Hilliard, W.L. Lyons, LLC
500 West Jefferson Street
Louisville, KY 40202
ADMINISTRATOR,
FUND ACCOUNTANT &
CUSTODIAN
Brown Brothers Harriman & Co.
50 Post Office Square
Boston, MA 02110
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19810
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 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
were $109,000 for 2015 and $133,000 for 2016.
Audit Fees (Investment Advisor and Distributor) -- The aggregate fees
billed 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 were $0 for 2015 and $0 for 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 2015 and $3,000 for 2016. The 2016 audit-related fees
reflect fees for auditing data after migration to new fund accounting software.
Audit-Related Fees (Investment Adviser and Distributor) -- The aggregate
fees billed 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, including conducting the seed audit and preparation of the
seed audit consent, and are not reported under paragraph (a) of this Item were
$0 for the Investment Adviser and $0 for the Distributor for 2015 and $0 for the
Investment Adviser and $0 for the Distributor 2016.
(c) Tax Fees (Registrant) -- The aggregate fees billed for professional
services rendered by the principal accountant for tax compliance, tax advice,
and tax planning to the registrant were $15,200 for 2015 and $15,950 for 2016.
Tax Fees (Investment Adviser and Distributor) -- The aggregate fees billed
for professional services rendered by the principal accountant for tax
compliance, tax advice, and tax planning to the registrant's adviser and
distributor were $0 for the Investment Adviser and $0 for the Distributor for
2015 and $0 for the Investment Adviser and $0 for the Distributor 2016.
(d) All Other Fees (Registrant) -- The aggregate fees billed 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
2015 and $0 for 2016.
All Other Fees (Investment Adviser and Distributor) -- The aggregate fees
billed for products and services provided by the principal accountant to the
registrant's investment adviser and distributor, other than the services
reported in paragraphs (a) through (c) of this Item were $0 for the Investment
Adviser and $0 for the Distributor for 2015 and $0 for the Investment Adviser
and $0 for the Distributor for 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 and
distributor 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:
Registrant: Adviser and Distributor:
----------- ------------------------
(b) 0% (b) 0%
(c) 0% (c) 0%
(d) 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 were $15,200 for the
registrant, $12,500 for the registrant's investment adviser, $3,000 for the
registrant's sub-advisor and $36,500 for the registrant's distributor for 2015;
and $18,950 for the registrant, $13,000 for the registrant's investment adviser,
$3,000 for the registrant's sub-advisor and $31,500 for the registrant's
distributor for 2016.
(h) The registrant's audit committee of its Board of Trustees has
determined that 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.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the registrant's
disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR
270.30a-3(c))) are effective, as of a date within 90 days of the filing
date of the report that includes the disclosure required by this
paragraph, based on their evaluation of these controls and procedures
required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and
Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as
amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the 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 Series Fund
---------------------------------------
By (Signature and Title)* /s/ James M. Dykas
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James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: December 20, 2016
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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
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James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: December 20, 2016
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By (Signature and Title)* /s/ Donald P. Swade
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Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: December 20, 2016
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* Print the name and title of each signing officer under his or her signature.