UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-23072
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First Trust Dynamic Europe Equity Income Fund
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(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)
Registrant's telephone number, including area code: (630) 765-8000
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Date of fiscal year end: December 31
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Date of reporting period: December 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
DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
ANNUAL REPORT
FOR THE YEAR ENDED
DECEMBER 31, 2016
HENDERSON
GLOBAL INVESTORS FIRST TRUST
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TABLE OF CONTENTS
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FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
ANNUAL REPORT
DECEMBER 31, 2016
Shareholder Letter.......................................................... 1
At a Glance................................................................. 2
Portfolio Commentary........................................................ 3
Portfolio of Investments.................................................... 5
Statement of Assets and Liabilities......................................... 10
Statement of Operations..................................................... 11
Statements of Changes in Net Assets......................................... 12
Statement of Cash Flows..................................................... 13
Financial Highlights........................................................ 14
Notes to Financial Statements............................................... 15
Report of Independent Registered Public Accounting Firm..................... 22
Additional Information...................................................... 23
Board of Trustees and Officers.............................................. 27
Privacy Policy.............................................................. 29
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Henderson Global Investors (North America) Inc.
("Henderson" or the "Sub-Advisor") and their respective representatives, taking
into account the information currently available to them. Forward-looking
statements include all statements that do not relate solely to current or
historical fact. For example, forward-looking statements include the use of
words such as "anticipate," "estimate," "intend," "expect," "believe," "plan,"
"may," "should," "would" or other words that convey uncertainty of future events
or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust Dynamic Europe Equity Income Fund (the "Fund") to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. When evaluating the information
included in this report, you are cautioned not to place undue reliance on these
forward-looking statements, which reflect the judgment of the Advisor and/or
Sub-Advisor and their respective representatives only as of the date hereof. We
undertake no obligation to publicly revise or update these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and future performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund
performance on the Fund's webpage at http://www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. It includes details about the Fund and presents data and analysis that
provide insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance during the period covered by this report. The statistical
information that follows may help you understand the Fund's performance compared
to that of relevant market benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
Henderson are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The material risks of investing in the
Fund are spelled out in the prospectus, the statement of additional information,
this report and other Fund regulatory filings.
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SHAREHOLDER LETTER
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FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU) ANNUAL
LETTER FROM THE CHAIRMAN AND CEO
DECEMBER 31, 2016
Dear Shareholders:
Now that 2016 is over, many will remember some of the historic events that
occurred during the year: from the Brexit vote in the UK to leave the European
Union, to the results of the U.S. Presidential Election which seemed unlikely at
the beginning of the year, to the first World Series Championship for the
Chicago Cubs in 108 years!
First Trust Advisors L.P. ("First Trust") is pleased to provide you with this
annual report which contains detailed information about your investment for the
12 months ended December 31, 2016, including a performance analysis and the
financial statements for you to review. We encourage you to read this report and
discuss it with your financial advisor.
On November 8, Donald J. Trump was elected to become the 45th president in our
country's history. While no one has a crystal ball and the ability to predict
how his presidency will shape the United States (and the world), there is no
doubt that his populist message resonated for many Americans. And his message of
improving lives for the "average" American, while reducing the size and scope of
the federal government, also won him millions of votes. Many of his supporters
believe that with his background in business, President Trump will make policy
changes that will continue to grow the economy and spur stock markets even
higher. Many analysts predicted the Dow Jones Industrial Average would hit a new
benchmark, 20,000, in the first days of the New Year. As with all change and a
new administration, only time will tell.
As of December 31, 2016, the S&P 500(R) Index was up 11.96% calendar
year-to-date, on a total return basis, as measured by Bloomberg. The current
bull market (measuring from March 9, 2009 through December 31, 2016) is the
second longest in history. We remain bullish on the economy, but continue to
have a long-term perspective. We believe investors should think long-term as
well, since no one can predict volatility and the inevitable ups and downs that
occur in the market.
Thank you for your investment in the First Trust Dynamic Europe Equity Income
Fund and for giving First Trust the opportunity to be a part of your investment
plan. We value our relationship with you and will continue our relentless focus
on bringing the types of investments that we believe could help you reach your
financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
"AT A GLANCE"
AS OF DECEMBER 31, 2016 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FDEU
Common Share Price $15.52
Common Share Net Asset Value ("NAV") $17.96
Premium (Discount) to NAV (13.59)%
Net Assets Applicable to Common Shares $309,454,883
Current Monthly Distribution per Common Share (1) $0.121
Current Annualized Distribution per Common Share $1.452
Current Distribution Rate on Common Share Price (2) 9.36%
Current Distribution Rate on NAV (2) 8.08%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
12/15 $17.16 $19.07
16.25 17.76
15.50 17.42
15.07 17.64
1/16 15.59 18.07
15.23 17.21
14.26 16.56
15.24 17.36
2/16 15.22 17.40
15.38 17.79
16.08 18.14
16.20 18.17
3/16 16.01 17.77
16.17 17.90
15.75 18.05
16.31 18.51
16.26 18.43
4/16 16.06 18.42
15.67 17.93
15.73 18.17
15.69 18.20
5/16 16.20 18.73
16.00 18.47
15.74 17.87
15.34 17.42
6/16 15.21 16.79
15.81 17.78
15.66 17.42
16.16 17.88
16.58 17.91
7/16 16.35 18.15
16.12 18.02
16.26 18.32
16.35 18.15
8/16 16.86 18.16
16.54 18.36
16.37 18.09
16.13 17.61
16.04 18.13
9/16 15.72 18.02
15.50 17.54
15.10 17.36
15.19 17.43
10/16 15.20 17.52
14.88 16.94
15.15 17.06
14.74 16.90
11/16 14.78 17.01
14.69 16.84
15.23 17.55
15.17 17.69
15.44 17.78
12/16 15.52 17.96
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PERFORMANCE
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Average Annual Total Return
---------------------------
1 Year Ended Inception (9/24/2015)
12/31/2016 to 12/31/2016
FUND PERFORMANCE (3)
NAV 3.30% 3.02%
Market Value -0.80% -11.46%
INDEX PERFORMANCE
MSCI Europe Index -0.40% 2.70%
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% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
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Novartis AG (CHF) 3.6%
Roche Holding AG (CHF) 3.5
Orange S.A. (EUR) 3.5
BP PLC (GBP) 3.3
Bayer AG (EUR) 3.1
Enel S.p.A. (EUR) 2.9
Siemens AG (EUR) 2.9
Deutsche Telekom AG (EUR) 2.9
Royal Dutch Shell PLC (EUR) 2.9
Vodafone Group PLC (GBP) 2.8
-----------------------------------------------------
Total 31.4%
======
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% OF TOTAL
COUNTRY ALLOCATION INVESTMENTS
-----------------------------------------------------
United Kingdom 32.3%
France 20.9
Germany 14.5
Switzerland 13.5
Netherlands 7.7
Italy 5.4
Spain 1.9
Norway 1.9
Portugal 1.9
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Total 100.0%
======
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% OF TOTAL
SECTOR CLASSIFICATION INVESTMENTS
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Financials 15.8%
Industrials 14.1
Consumer Staples 12.5
Health Care 11.6
Telecommunication Services 11.1
Consumer Discretionary 10.7
Energy 10.0
Real Estate 7.2
Utilities 7.0
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Total 100.0%
======
(1) Most recent distribution paid or declared through 12/31/2016. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share Price or NAV, as applicable, as of 12/31/2016. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per Common Share for NAV
returns and changes in Common Share Price for market value returns. Total
returns do not reflect sales load and are not annualized for periods of
less than one year. Past performance is not indicative of future results.
Page 2
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PORTFOLIO COMMENTARY
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FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
ANNUAL REPORT
DECEMBER 31, 2016 (UNAUDITED)
SUB-ADVISOR
Henderson Global Investors (North America) Inc. ("Henderson" or the
"Sub-Advisor") is an indirect, wholly owned subsidiary of Henderson Group Plc
("Henderson Group"), a London-based global investment management firm
established in 1934. Henderson Group provides a full spectrum of investment
products and services to clients around the world. First Trust Advisors L.P. and
Henderson have engaged Henderson Investment Management Limited, a registered
investment adviser and an indirect, wholly owned subsidiary of Henderson Group,
as the sub-sub-advisor responsible for certain investment decisions of the Fund.
With offices in 19 cities and more than 1,000 employees worldwide, Henderson
Group managed approximately $125 billion in assets as of December 31, 2016.
PORTFOLIO MANAGEMENT TEAM
ALEX CROOKE, HEAD OF GLOBAL EQUITY INCOME
BEN LOFTHOUSE, CFA, PORTFOLIO MANAGER
MARKET RECAP
The year started with a crash and ended with a bang, with a variety of political
market-moving events along the way. Overall, the MSCI Europe Index (the "Index")
returned -0.40% for the year ended December 31, 2016. The first two months of
the year, fears over a worsening Chinese economic slowdown saw European markets
fall as much as -17.5% before regaining some ground in March. The most severe
price action was in Energy and Commodities, as well as in the Bank sector as
investors feared lending exposure in those areas.
Broadly during 2016, the European economy strengthened. Activity indicators in
Germany and France in particular were healthy, while Southern Europe benefitted
from avoiding either a Greek or Italian banking crisis during the year. Ongoing
funding of the Greek deficit and the recapitalization of the Italian banking
system are processes underway and have reduced areas of high investor concern.
Political events in the second half of the year caused market volatility. The
"Brexit" vote in the United Kingdom to begin the process of leaving the European
Union, and then the election of Donald Trump as President of the United States,
both took markets by surprise. Both have ultimately led investors to expect a
more positive economic outlook in the United States as pro-business changes are
made to regulation and taxation. The Federal Reserve's stated intention to raise
U.S. interest rates has also been taken as a positive by markets. As a result,
the Index finished the year with a rally, moving up 10% after the U.S. election
by year end. This allowed the market to be roughly level for the year.
PERFORMANCE ANALYSIS
For the period, the equity holdings in the portfolio outperformed the Index. The
total return based on net asset value ("NAV") of the First Trust Dynamic Europe
Equity Income Fund (the "Fund") was 3.30% thanks to the effects of leverage and
the effects of borrowing in different currency and selling forward contracts to
protect against currency volatility. However, while the Fund's NAV made gains,
the Fund returned -0.80% on a share price basis, underperforming the Index.
Within the stock holdings, the stock selection effect was highly positive, while
sector allocation was negative, and the two almost entirely offset each other
when considered against the Index. We believe that this demonstrates the
fundamental, bottom-up approach of the portfolio manager was highly effective
this year.
Within the portfolio, the sectors with the strongest performance relative to the
Index were Industrials, Financials and Consumer Staples. The Fund was
underweight in all three of these sectors, on average, through the year but good
stock selection led to large positive contribution. In Industrials, Swiss
testing company, SGS performed very well in the first half of the year, as did
Deutsche Post, the German delivery company. Both had better than expected
capital returns to shareholders. In Financials, significantly increasing the
Fund's position in the sector during the dramatic sell-off in the first quarter
had a significant benefit. Large positions in the Dutch bank, ING Group, and
French asset manager, Natixis were big contributors. In Consumer Staples, an
underweight position in the sector was the correct call, as bond proxy sectors
were weak in the second half of the year. Stock selection in this sector was
also positive.
Page 3
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
ANNUAL REPORT
DECEMBER 31, 2016 (UNAUDITED)
The Fund's underweight position in the Materials and Energy sectors resulted in
the most significant underperformance relative to the Index. Both sectors were
very volatile but ultimately were strong performers on a recovery in commodity
prices. We believe dividend sustainability and growth are key criteria for
portfolio investments. The underweight position in the sectors was due to
uncertainty regarding the sustainability of companies' dividend yields. This
uncertainty proved to be well founded, as most mining companies, for example,
cut their dividends over the period, and the oil sector is struggling to grow
dividends, but low exposure has impacted short term performance. The Fund
remains cautiously positioned in the sectors. In Energy, the Portfolio Manager
increased weightings to Energy companies during the year, using a bottom-up
approach.
The weakest stock performers during the year included Vodafone, British Land,
and ITV Group, three companies all significantly impacted by the fall of the
British pound and associated fears over the UK economy, in the aftermath of
Brexit. The portfolio managers continue to monitor the Fund's exposure to the
British domestic economy on a stock by stock basis.
The Fund utilizes a dynamic currency hedging process to mitigate the risk of
adverse currency movements on the portfolio. Throughout the period, the Fund
borrowed in euros and utilized foreign currency forward contracts to provide
some protection against the euro weakness versus the U.S. dollar over the
period. In December 2015, a forward currency contract was put in place to
mitigate the risk of sterling weakness due to concerns regarding the UK's
potential referendum on European Union membership. The currency hedging
activities were a positive contributor to performance over the period, and
achieved the overall aim of minimizing volatility from foreign currency.
To generate additional income, the Fund writes (or sells) call options on
portfolio equity securities and certain broad-based securities indices in an
amount up to 40% of the value of its Managed Assets. During this performance
period, the options portfolio management team overwrote approximately 30% of the
Fund's Managed Assets. The option strategy was executed on the broad-based Euro
Stoxx 50 Index, selling one to three month call options, approximately
at-the-money to slightly out-of-the-money. The option strategy added to the
total return of the Fund during the period as gains from the option portfolio
were strong in the first half of the fiscal period. Gains occurred as the Euro
Stoxx 50 Index traded down and then sideways during the first half of the year.
The option portfolio continued to benefit the Fund in the second half of the
year, until December when the Euro Stoxx 50 rallied strongly. The strong rally
in December negated the option gains from July through November, resulting in a
small negative impact on performance to the Fund in the second half of the year.
Overall, performance was beneficial to the Fund during the fiscal period.
MARKET AND FUND OUTLOOK
As the result of political events, European equity market returns have lagged
many other regions this year, despite continuing signs of improving economic
growth. As a result of this underperformance valuations in many sectors and
stocks are attractive. There are more important elections in the regions this
year, but we remain hopeful that once these are out of the way, the market will
focus on the fundamental attractions of the portfolio's investments. The
investment team will strive to use the investment flexibility offered by the
Fund's investment mandate to take advantage of volatility to generate capital
and income returns for investors.
Page 4
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 2016
SHARES DESCRIPTION VALUE
------------ --------------------------------------------------- --------------
COMMON STOCKS - 119.9% (a)
AEROSPACE & DEFENSE - 2.1%
887,774 BAE Systems PLC.................................... $ 6,471,558
--------------
AIR FREIGHT & LOGISTICS - 4.0%
476,332 CTT-Correios de Portugal S.A....................... 3,231,593
274,679 Deutsche Post AG................................... 9,031,314
--------------
12,262,907
--------------
AUTOMOBILES - 3.1%
33,472 Bayerische Motoren Werke AG........................ 3,127,044
44,334 Daimler AG......................................... 3,300,374
35,792 Renault S.A........................................ 3,184,037
--------------
9,611,455
--------------
BANKS - 7.1%
656,323 ING Groep N.V. (b)................................. 9,237,044
4,447,230 Lloyds Banking Group PLC........................... 3,426,027
1,660,838 Natixis S.A........................................ 9,370,787
--------------
22,033,858
--------------
BEVERAGES - 4.9%
184,173 Coca-Cola European Partners PLC.................... 5,819,969
354,833 Diageo PLC......................................... 9,226,949
--------------
15,046,918
--------------
BUILDING PRODUCTS - 3.4%
225,643 Cie de Saint-Gobain................................ 10,511,585
--------------
CAPITAL MARKETS - 1.1%
394,065 Intermediate Capital Group PLC..................... 3,399,520
--------------
CONSUMER FINANCE - 2.1%
87,632 Cembra Money Bank AG............................... 6,385,441
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 10.6%
663,583 Deutsche Telekom AG................................ 11,424,305
922,591 Orange S.A......................................... 14,018,772
504,737 Telenor ASA........................................ 7,540,062
--------------
32,983,139
--------------
ELECTRIC UTILITIES - 6.2%
2,606,133 Enel S.p.A......................................... 11,489,132
403,015 Red Electrica Corp., S.A........................... 7,604,390
--------------
19,093,522
--------------
FOOD PRODUCTS - 3.0%
130,756 Nestle S.A......................................... 9,380,070
--------------
GAS UTILITIES - 1.9%
221,798 Italgas S.p.A. (c)................................. 872,732
1,203,825 Snam S.p.A......................................... 4,959,846
--------------
5,832,578
--------------
HOUSEHOLD DURABLES - 1.0%
87,902 Berkeley Group Holdings PLC........................ 3,041,918
--------------
See Notes to Financial Statements Page 5
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2016
SHARES DESCRIPTION VALUE
------------ --------------------------------------------------- --------------
COMMON STOCKS (CONTINUED) (a)
INDUSTRIAL CONGLOMERATES - 3.7%
93,026 Siemens AG......................................... $ 11,437,502
--------------
INSURANCE - 9.8%
42,366 Allianz SE......................................... 7,001,661
259,315 Assicurazioni Generali S.p.A....................... 3,854,307
303,502 AXA S.A............................................ 7,662,761
274,194 Prudential PLC..................................... 5,499,594
187,737 SCOR SE............................................ 6,487,909
--------------
30,506,232
--------------
MEDIA - 9.6%
3,249,534 ITV PLC............................................ 8,265,753
284,487 Lagardere SCA...................................... 7,904,385
717,766 NOS SGPS S.A....................................... 4,259,827
409,879 WPP PLC............................................ 9,173,249
--------------
29,603,214
--------------
MULTI-UTILITIES - 2.4%
645,977 National Grid PLC.................................. 7,575,707
--------------
OIL, GAS & CONSUMABLE FUELS - 11.2%
2,071,602 BP PLC............................................. 13,010,303
417,196 Royal Dutch Shell PLC (b).......................... 11,411,608
199,174 TOTAL S.A.......................................... 10,214,660
--------------
34,636,571
--------------
PERSONAL PRODUCTS - 3.1%
230,391 Unilever N.V. (b).................................. 9,486,212
--------------
PHARMACEUTICALS - 14.9%
102,739 AstraZeneca PLC.................................... 5,618,565
116,932 Bayer AG........................................... 12,201,760
196,140 Novartis AG........................................ 14,272,782
61,403 Roche Holding AG................................... 14,025,668
--------------
46,118,775
--------------
PROFESSIONAL SERVICES - 4.8%
142,424 Adecco Group AG.................................... 9,321,968
334,377 RELX N.V........................................... 5,628,191
--------------
14,950,159
--------------
REAL ESTATE MANAGEMENT & DEVELOPMENT - 1.3%
87,404 Nexity S.A......................................... 4,090,579
--------------
TOBACCO - 5.1%
123,080 British American Tobacco PLC (b)................... 7,010,066
200,748 Imperial Brands PLC................................ 8,764,210
--------------
15,774,276
--------------
WIRELESS TELECOMMUNICATION SERVICES - 3.5%
4,421,576 Vodafone Group PLC (b)............................. 10,890,126
--------------
TOTAL COMMON STOCKS................................ 371,123,822
(Cost $377,496,464) --------------
Page 6 See Notes to Financial Statements
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2016
SHARES DESCRIPTION VALUE
------------ --------------------------------------------------- --------------
REAL ESTATE INVESTMENT TRUSTS - 8.0% (a)
EQUITY REAL ESTATE INVESTMENT TRUSTS - 8.0%
800,581 British Land (The) Co., PLC........................ $ 6,210,873
162,666 Eurocommercial Properties N.V...................... 6,264,463
430,898 Hammerson PLC...................................... 3,042,852
127,105 ICADE.............................................. 9,070,104
--------------
TOTAL REAL ESTATE INVESTMENT TRUSTS................ 24,588,292
(Cost $28,245,457) --------------
TOTAL INVESTMENTS - 127.9%......................... 395,712,114
(Cost $405,741,921) (d) --------------
NUMBER OF
CONTRACTS DESCRIPTION VALUE
------------ --------------------------------------------------- --------------
CALL OPTIONS WRITTEN - (1.7%)
EURO STOXX 50 PRICE
762 @ 3,075 due January 2017......................... (1,708,066)
709 @ 3,150 due January 2017......................... (981,838)
581 @ 3,325 due February 2017........................ (289,478)
758 @ 3,100 due February 2017........................ (1,644,316)
644 @ 3,325 due March 2017........................... (567,082)
--------------
TOTAL CALL OPTIONS WRITTEN......................... (5,190,780)
(Premiums received $2,432,848) --------------
OUTSTANDING LOAN - (27.7%)......................... (85,790,973)
NET OTHER ASSETS AND LIABILITIES - 1.5%............ 4,724,522
--------------
NET ASSETS - 100.0%................................ $ 309,454,883
==============
(a) All or a portion of these securities serve as collateral on the
outstanding loan.
(b) All or a portion of this security is pledged to cover index call options
written.
(c) Non-income producing security.
(d) Aggregate cost for federal income tax purposes is $406,073,748. As of
December 31, 2016, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$30,144,812 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$40,506,446.
See Notes to Financial Statements Page 7
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2016
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of December 31,
2016 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
12/31/2016 PRICES INPUTS INPUTS
------------- ------------- ------------- -------------
Common Stocks*..................................... $ 371,123,822 $ 371,123,822 $ -- $ --
Real Estate Investment Trusts*..................... 24,588,292 24,588,292 -- --
------------- ------------- ------------- -------------
Total Investments.................................. 395,712,114 395,712,114 -- --
Forward Foreign Currency Contracts**............... 2,289,114 -- 2,289,114 --
------------- ------------- ------------- -------------
Total ............................................. $ 398,001,228 $ 395,712,114 $ 2,289,114 $ --
============= ============= ============= =============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
12/31/2016 PRICES INPUTS INPUTS
------------- ------------- ------------- -------------
Call Options Written............................... $ (5,190,780) $ -- $ (5,190,780) $ --
============= ============= ============= =============
* See Portfolio of Investments for industry breakout.
** See the Forward Foreign Currency Contracts table for contract and currency
detail.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. As of December
31, 2016, the Fund transferred investments valued at $226,243,599 from Level 2
to Level 1 of the fair value hierarchy. The investments that transferred from
Level 2 to Level 1 did so as a result of being valued based on quoted prices at
December 31, 2016. Previously, these investments were fair valued using a factor
provided by a third-party pricing service due to the change in value between the
foreign markets' close and the New York Stock Exchange close on December 31,
2015, exceeding a certain threshold. The inputs or methodology used for valuing
securities and classifying them in one of the three levels of the fair value
hierarchy are not necessarily an indication of the risk associated with
investing in those securities.
Page 8 See Notes to Financial Statements
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2016
FORWARD FOREIGN CURRENCY CONTRACTS (see Note 2C - Forward Foreign Currency
Contracts in the Notes to Financial Statements):
FORWARD FOREIGN CURRENCY CONTRACTS
-------------------------------------------------------------
PURCHASE SALE UNREALIZED
SETTLEMENT AMOUNT AMOUNT VALUE AS OF VALUE AS OF APPRECIATION
DATE COUNTERPARTY PURCHASED SOLD DECEMBER 31, 2016 DECEMBER 31, 2016 (DEPRECIATION)
------------- ------------ ------------------ -------------------- ----------------- ----------------- --------------
2/03/17 BNS USD 26,064,994 GBP 21,097,742 $26,064,994 $26,023,527 $ 41,467
2/03/17 BNS USD 40,983,867 EUR 36,738,051 40,983,867 38,736,220 2,247,647
--------------
Net Unrealized Appreciation (Depreciation)....................................................................... $ 2,289,114
==============
Counterparty Abbreviations:
BNS Bank of Nova Scotia
Currency Abbreviations:
EUR Euro
GBP British Pound Sterling
USD United States Dollar
CURRENCY EXPOSURE % OF TOTAL
DIVERSIFICATION INVESTMENTS (1)
-------------------------------------------------
Euro 46.6%
British Pound Sterling 21.3
United States Dollar 16.8
Swiss Franc 13.4
Norwegian Krone 1.9
-------------------------------------------------
Total 100.0%
======
(1) The weightings include the impact of currency forwards.
See Notes to Financial Statements Page 9
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2016
ASSETS:
Investments, at value
(Cost $405,741,921)......................................................................... $395,712,114
Cash........................................................................................... 1,451,442
Foreign currency (Cost $370,559)............................................................... 370,915
Unrealized appreciation on forward foreign currency contracts.................................. 2,289,114
Receivables:
Dividend reclaims........................................................................... 1,034,467
Dividends................................................................................... 490,966
Prepaid expenses............................................................................... 5,077
------------
Total Assets................................................................................ 401,354,095
------------
LIABILITIES:
Outstanding loan............................................................................... 85,790,973
Options written, at value (Premiums received $2,432,848)....................................... 5,190,780
Payables:
Investment advisory fees.................................................................... 360,862
Administrative fees......................................................................... 234,250
Interest and fees due on loan............................................................... 150,642
Custodian fees.............................................................................. 98,668
Audit and tax fees.......................................................................... 44,608
Printing fees............................................................................... 22,069
Legal fees.................................................................................. 2,616
Transfer agent fees......................................................................... 1,627
Financial reporting fees.................................................................... 771
Trustees' fees and expenses................................................................. 122
Other liabilities.............................................................................. 1,224
------------
Total Liabilities........................................................................... 91,899,212
------------
NET ASSETS..................................................................................... $309,454,883
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $322,878,190
Par value...................................................................................... 172,319
Accumulated net investment income (loss)....................................................... (2,468,927)
Accumulated net realized gain (loss) on investments, options, forward foreign
currency contracts and foreign currency transactions......................................... (4,273,538)
Net unrealized appreciation (depreciation) on investments, options, forward
foreign currency contracts, and foreign currency translation................................. (6,853,161)
------------
NET ASSETS..................................................................................... $309,454,883
============
NET ASSET VALUE, per share..................................................................... $ 17.96
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 17,231,908
============
Page 10 See Notes to Financial Statements
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2016
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $2,128,944)....................................... $ 18,255,348
Interest....................................................................................... 23,511
Other.......................................................................................... 23
------------
Total investment income..................................................................... 18,278,882
------------
EXPENSES:
Investment advisory fees....................................................................... 4,386,135
Interest and fees on loan...................................................................... 743,714
Administrative fees............................................................................ 188,946
Legal fees..................................................................................... 79,862
Custodian fees................................................................................. 69,692
Audit and tax fees............................................................................. 44,911
Printing fees.................................................................................. 26,300
Listing expense................................................................................ 21,367
Trustees' fees and expenses.................................................................... 17,777
Transfer agent fees............................................................................ 17,347
Financial reporting fees....................................................................... 9,250
Commitment fees................................................................................ 6,302
Other.......................................................................................... 12,789
------------
Total expenses.............................................................................. 5,624,392
------------
NET INVESTMENT INCOME (LOSS)................................................................... 12,654,490
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments................................................................................. (13,244,723)
Written option transactions................................................................. 9,011,794
Forward foreign currency contracts.......................................................... 5,609,791
Foreign currency transactions............................................................... (557,867)
------------
Net realized gain (loss)....................................................................... 818,995
------------
Net change in unrealized appreciation (depreciation) on:
Investments................................................................................. (7,223,890)
Written options held........................................................................ (4,310,962)
Forward foreign currency contracts.......................................................... 1,349,397
Foreign currency translation................................................................ 2,467,753
------------
Net change in unrealized appreciation (depreciation)........................................... (7,717,702)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ (6,898,707)
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ 5,755,783
============
See Notes to Financial Statements Page 11
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
STATEMENTS OF CHANGES IN NET ASSETS
YEAR PERIOD
ENDED ENDED
12/31/2016 12/31/2015 (a)
-------------- --------------
OPERATIONS:
Net investment income (loss)...................................................... $ 12,654,490 $ 704,128
Net realized gain (loss).......................................................... 818,995 694,763
Net change in unrealized appreciation (depreciation).............................. (7,717,702) 864,541
------------ ------------
Net increase (decrease) in net assets resulting from operations................... 5,755,783 2,263,432
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................................. (19,529,780) (1,206,937)
Net realized gain................................................................. -- (878,124)
Return of capital................................................................. (5,490,950) --
------------ ------------
Total distributions to shareholders............................................... (25,020,730) (2,085,061)
------------ ------------
SHAREHOLDER TRANSACTIONS:
Proceeds from shares sold......................................................... -- 329,129,443
Cost of shares redeemed........................................................... -- --
Offering costs.................................................................... 72,016 (660,000)
------------ ------------
Net increase (decrease) in net assets resulting from shareholder transactions..... 72,016 328,469,443
------------ ------------
Total increase (decrease) in net assets........................................... (19,192,931) 328,647,814
NET ASSETS:
Beginning of period............................................................... 328,647,814 --
------------ ------------
End of period..................................................................... $309,454,883 $328,647,814
============ ============
Accumulated net investment income (loss) at end of period......................... $ (2,468,927) $ (645,561)
============ ============
CHANGES IN SHARES OUTSTANDING:
Shares outstanding, beginning of period........................................... 17,231,908 --
Shares sold....................................................................... -- 17,231,908
------------ ------------
Shares outstanding, end of period................................................. 17,231,908 17,231,908
============ ============
(a) The Fund was seeded on August 20, 2015 and commenced operations on
September 24, 2015.
Page 12 See Notes to Financial Statements
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations................. $ 5,755,783
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by operating activities:
Purchases of investments.................................................. (168,620,149)
Sales of investments...................................................... 159,151,653
Proceeds from written options............................................. 13,465,663
Amount paid to close written options...................................... (5,728,812)
Net realized gain/loss on investments and written options................. 4,232,929
Net change in unrealized appreciation/depreciation on investments
and written options.................................................... 11,534,852
Net change in unrealized appreciation (depreciation) on forward foreign
currency contracts..................................................... (1,349,397)
CHANGES IN ASSETS AND LIABILITIES:
Increase in dividends reclaims receivable................................. (1,034,467)
Decrease in dividends receivable.......................................... 18,630
Decrease in prepaid expenses.............................................. 792
Increase in interest and fees on loan payable............................. 17,591
Decrease in investment advisory fees payable.............................. (29,696)
Decrease in audit and tax fees payable.................................... (92)
Increase in legal fees payable............................................ 2,616
Decrease in printing fees payable......................................... (15,246)
Increase in administrative fees payable................................... 188,946
Increase in custodian fees payable........................................ 69,692
Decrease in transfer agent fees payable................................... (6,952)
Decrease in Trustees' fees and expenses payable........................... (74)
Decrease in other liabilities............................................. (1,564)
------------
CASH PROVIDED BY OPERATING ACTIVITIES........................................... $ 17,652,698
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders from net investment income........... (19,529,780)
Distributions to Common Shareholders from return of capital............... (5,490,950)
Offering costs............................................................ (185,984)
Repayment of Euro Borrowings.............................................. (7,892,850)
Proceeds from Euro Borrowings............................................. 7,088,575
Effect of exchange rate changes on Euro Loan (a).......................... (2,518,250)
------------
CASH USED BY FINANCING ACTIVITIES............................................... (28,529,239)
------------
Decrease in cash and foreign currency (b)....................................... (10,876,541)
Cash and foreign currency at beginning of period................................ 12,698,898
------------
CASH AND FOREIGN CURRENCY AT END OF PERIOD...................................... $ 1,822,357
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees............................... $ 726,123
============
(a) This amount is a component of net change in unrealized appreciation
(depreciation) on foreign currency translation as shown on the Statement
of Operations.
(b) Includes net change in unrealized appreciation (depreciation) on foreign
currency of $(50,497), which does not include the effect of exchange rate
changes on Euro borrowings.
See Notes to Financial Statements Page 13
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD
FOR THE PERIOD
YEAR 9/24/2015 (a)
ENDED THROUGH
12/31/2016 12/31/2015
------------ --------------
Net asset value, beginning of period........ $ 19.07 $ 19.10
---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)................ 0.73 0.04
Net realized and unrealized gain (loss)..... (0.39) 0.05
---------- ----------
Total from investment operations............ 0.34 0.09
---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income....................... (1.13) (0.07)
Net realized gain........................... -- (0.05)
Return of capital........................... (0.32) --
---------- ----------
Total distributions......................... (1.45) (0.12)
---------- ----------
Net asset value, end of period.............. $ 17.96 $ 19.07
========== ==========
Market value, end of period................. $ 15.52 $ 17.16
========== ==========
TOTAL RETURN BASED ON NET ASSET VALUE (b)... 3.30% 0.52%
========== ==========
TOTAL RETURN BASED ON MARKET VALUE (b)...... (0.80)% (13.61)%
========== ==========
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........ $ 309,455 $ 328,648
Ratio of total expenses to average net
assets................................... 1.83% 1.72% (c)
Ratio of net expenses to average net assets
excluding interest expense............... 1.59% 1.56% (c)
Ratio of net investment income (loss) to
average net assets....................... 4.13% 0.82% (c)
Portfolio turnover rate..................... 41% 5%
INDEBTEDNESS:
Total loan outstanding (in 000's)........... $ 85,791 $ 89,113
Asset coverage per $1,000 of
indebtedness (d)......................... $ 4,607 $ 4,688
-----------------------------
(a) The Fund was seeded on August 20, 2015 and commenced operations on
September 24, 2015.
(b) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions if any, at prices obtained by the
Dividend Reinvestment Plan, and changes in net asset value per Common
Share for net asset value returns and changes in Common Share Price for
market value return. Total returns do not reflect sales load and are not
annualized for periods of less than one year. Past performance is not
indicative of future results.
(c) Annualized.
(d) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the loan outstanding) and dividing by the loan
balance in 000s.
Page 14 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
DECEMBER 31, 2016
1. ORGANIZATION
First Trust Dynamic Europe Equity Income Fund (the "Fund") is a non-diversified,
closed-end management investment company organized as a Massachusetts business
trust on May 11, 2015, and is registered with the Securities and Exchange
Commission (the "SEC") under the Investment Company Act of 1940, as amended (the
"1940 Act"). The Fund trades under the ticker symbol FDEU on the New York Stock
Exchange ("NYSE").
The Fund's investment objective is to provide a high level of current income,
with a secondary focus on capital appreciation. The Fund pursues its objective
by investing at least 80% of its Managed Assets under normal market conditions,
in a portfolio of equity securities of European companies of any market
capitalization. "Managed Assets" means the total asset value of the Fund minus
the sum of the Fund's liabilities other than the principal amount of borrowings,
if any. There can be no assurance that the Fund will achieve its investment
objective.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund is considered an investment company and follows accounting and
reporting guidance under Financial Accounting Standards Board ("FASB")
Accounting Standards Codification ("ASC") Topic 946, "Financial
Services-Investment Companies." The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements. The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America ("U.S.
GAAP") requires management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results
could differ from those estimates.
A. PORTFOLIO VALUATION
The net asset value ("NAV") of the Common Shares of the Fund is determined daily
as of the close of regular trading on the NYSE, normally 4:00 p.m. Eastern time,
on each day the NYSE is open for trading. If the NYSE closes early on a
valuation day, the NAV is determined as of that time. Domestic debt securities
and foreign securities are priced using data reflecting the earlier closing of
the principal markets for those securities. The Fund's NAV per Common Share is
calculated by dividing the value of all assets of the Fund (including accrued
interest and dividends), less all liabilities (including accrued expenses,
dividends declared but unpaid and any borrowings of the Fund), by the total
number of Common Shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Pricing Committee of the Fund's
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"),
in accordance with valuation procedures adopted by the Fund's Board of Trustees,
and in accordance with provisions of the 1940 Act. Investments valued by the
Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to
the Portfolio of Investments. The Fund's investments are valued as follows:
Common stocks, real estate investment trusts ("REITs") and other equity
securities listed on any national or foreign exchange (excluding The
Nasdaq Stock Market LLC ("Nasdaq") and the London Stock Exchange
Alternative Investment Market ("AIM")) are valued at the last sale price
on the exchange on which they are principally traded or, for Nasdaq and
AIM securities, the official closing price. Securities traded on more than
one securities exchange are valued at the last sale price or official
closing price, as applicable, at the close of the securities exchange
representing the principal market for such securities.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Over-the-counter options contracts are fair valued at the closing price in
the market of the underlying contracts where such contracts are
principally traded.
Forward foreign currency contracts are valued at the current day's
interpolated foreign exchange rate, as calculated using the current day's
spot rate, and the thirty, sixty, ninety, and one-hundred eighty day
forward rates provided by a third-party pricing service or by certain
independent dealers in such contracts.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Fund's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a 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
Page 15
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
DECEMBER 31, 2016
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 statement;
9) the existence of merger proposals or tender offers that might affect
the value of the security;
If the security in question is a foreign security, 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) the trading prices of financial products that are tied to baskets of
foreign securities;
5) factors relating to the event that precipitated the pricing problem;
6) whether the event is likely to recur; and
7) whether the effects of the event are isolated or whether they affect
entire markets, countries or regions.
Because foreign markets may be open on different days than the days during which
investors may transact in the shares of the Fund, the value of the Fund's
securities may change on the days when investors are not able to transact in the
shares of the Fund. The value of securities denominated in foreign currencies is
converted into U.S. dollars using exchange rates determined daily as of the
close of regular trading on the NYSE.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of December 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. Amortization of premiums and accretion of discounts
are recorded by using the effective interest method.
The Fund holds shares of REITs. Distributions from such investments may be
comprised of return of capital, capital gains and income. The actual character
of amounts received during the year is not known until after the REIT's fiscal
year end. The Fund records the character of distributions received from REITs
during the year based on estimates available. The characterization of
distributions received by the Fund may be subsequently revised based on
information received from the REITs after their tax reporting periods conclude.
Page 16
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
DECEMBER 31, 2016
C. FORWARD FOREIGN CURRENCY CONTRACTS
The Fund is subject to foreign currency risk in the normal course of pursuing
its investment objective. Forward foreign currency contracts are agreements
between two parties ("Counterparties") to exchange one currency for another at a
future date and at a specified price. The Fund uses forward foreign currency
contracts to facilitate transactions in foreign securities and to manage the
Fund's foreign currency exposure. These contracts are valued daily, and the
Fund's net equity therein, representing unrealized gain or loss on the contracts
as measured by the difference between the forward foreign exchange rates at the
dates of entry into the contracts and the forward rates at the reporting date,
is included in "Unrealized appreciation (depreciation) on forward foreign
currency contracts" on the Statement of Assets and Liabilities. The change in
unrealized appreciation (depreciation) is included in "Net change in unrealized
appreciation (depreciation) on forward foreign currency contracts" on the
Statement of Operations. When the forward contract is closed, the Fund records a
realized gain or loss equal to the difference between the proceeds from (or the
cost of) the closing transaction and the Fund's basis in the contract. This
realized gain or loss is included in "Net realized gain (loss) on forward
foreign currency contracts" on the Statement of Operations. Risks arise from the
possible inability of counterparties to meet the terms of their contracts and
from movement in currency and securities values and interest rates. Due to the
risks, the Fund could incur losses in excess of the net unrealized value shown
on the Forward Foreign Currency Contracts table in the Portfolio of Investments.
In the event of default by the Counterparty, the Fund will provide notice to the
Counterparty of the Fund's intent to convert the currency held by the Fund into
the currency that the counterparty agreed to exchange with the Fund. If a
Counterparty becomes bankrupt or otherwise fails to perform its obligations due
to financial difficulties, the Fund may experience significant delays in
obtaining any recovery in a bankruptcy or other reorganizing process. The Fund
may obtain only limited recovery or may obtain no recovery in such
circumstances.
D. OFFSETTING ON THE STATEMENT OF ASSETS AND LIABILITIES
Offsetting Assets and Liabilities requires entities to disclose both gross and
net information about instruments and transactions eligible for offset on the
Statement of Assets and Liabilities, and disclose instruments and transactions
subject to master netting or similar agreements. These disclosure requirements
are intended to help investors and other financial statement users better assess
the effect or potential effect of offsetting arrangements on a fund's financial
position. The transactions subject to offsetting disclosures are derivative
instruments, repurchase agreements and reverse repurchase agreements, and
securities borrowing and securities lending transactions.
For financial reporting purposes, the Fund does not offset financial assets and
financial liabilities that are subject to master netting arrangements ("MNAs")
or similar agreements on the Statement of Assets and Liabilities. MNAs provide
the right, in the event of default (including bankruptcy and insolvency) for the
non-defaulting counterparty to liquidate the collateral and calculate the net
exposure to the defaulting party or request additional collateral.
At December 31, 2016, derivative assets and liabilities (by type) on a gross
basis are as follows:
Gross Amounts
not Offset in the
Statement of
Net Amounts of Assets and Liabilities
Gross Amounts Assets Presented -----------------------
Gross Amounts of Offset in the in the Statement Collateral
Recognized Statement of Assets of Assets and Financial Amounts
Assets and Liabilities Liabilities Instruments Received Net Amount
---------------------------------------------------------------------------------------------------------------------
Forward Foreign
Currency Contracts* $ 2,289,114 $ -- $ 2,289,114 $ -- $ -- $ 2,289,114
* The respective counterparties for each contract are disclosed in the
Forward Foreign Currency Contracts table in the Portfolio of Investments.
E. FOREIGN CURRENCY
The books and records of the Fund are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investments and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses on assets and liabilities, other than investments in securities, which
result from changes in foreign currency exchange rates have been included in
"Net change in unrealized appreciation (depreciation) on foreign currency
translation" on the Statement of Operations. Unrealized gains and losses on
investments in securities which result from changes in foreign exchange rates
are included with fluctuations arising from changes in market price and are
shown in "Net change in unrealized appreciation (depreciation) on investments"
on the Statement of Operations. Net realized foreign currency gains and losses
include the effect of changes in exchange rates between trade date and
settlement date on investment security transactions, foreign currency
transactions and interest and dividends received and are shown in "Net realized
gain (loss) on foreign currency transactions" on the Statement of Operations.
The portion of foreign currency gains and losses related to fluctuation in
exchange rates between the initial purchase settlement date and subsequent sale
trade date is included in "Net realized gain (loss) on investments" on the
Statement of Operations.
Page 17
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
DECEMBER 31, 2016
F. OPTION CONTRACTS
The Fund is subject to equity price risk in the normal course of pursuing its
investment objective and may write (sell) options to hedge against changes in
the value of equities. Also, the Fund seeks to generate additional income, in
the form of premiums received, from writing (selling) the options. The Fund may
write (sell) covered call options ("options") on a portion of the equity
securities held in the Fund's portfolio and on securities indices as determined
to be appropriate by the Advisor, and consistent with the Fund's investment
objective in an amount up to 40% of the value of its Managed Assets. The Fund
will write (sell) a call option on an individual security only if the Fund owns
the security underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or, if additional
cash consideration is required, cash or other assets determined to be liquid by
the Advisor, the Sub-Advisor or the Sub-Sub-Advisor (in accordance with
procedures approved by the Board of Trustees) in such amount that are segregated
by the Fund's custodian) upon conversion or exchange of other securities held by
the Fund. Options on securities indices are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security and are similar to options on
single securities, except that the exercise of securities index options requires
cash settlement payments and does not involve the actual purchase or sale of
securities. The Fund will not write (sell) "naked" or uncovered call options. If
certain equity securities held in the Fund's portfolio are not covered by a
related call option on the individual equity security, securities index options
may be written on all or a portion of such uncovered securities. Options are
marked-to-market daily and their value will be affected by changes in the value
and dividend rates of the underlying equity securities, changes in interest
rates, changes in the actual or perceived volatility of the securities markets
and the underlying equity securities and the remaining time to the options'
expiration. The value of options may also be adversely affected if the market
for the options becomes less liquid or trading volume diminishes.
Options the Fund writes (sells) will either be exercised, expire or be cancelled
pursuant to a closing transaction. If the price of the underlying equity
security exceeds the option's exercise price, it is likely that the option
holder will exercise the option. If an option written (sold) by the Fund is
exercised, the Fund would be obligated to deliver the underlying equity security
to the option holder upon payment of the strike price. In this case, the option
premium received by the Fund will be added to the amount realized on the sale of
the underlying security for purposes of determining gain or loss and is included
in "Net realized gain (loss) on investments" on the Statement of Operations. If
the price of the underlying equity security is less than the option's strike
price, the option will likely expire without being exercised. The option premium
received by the Fund will, in this case, be treated as short-term capital gain
on the expiration date of the option. The Fund may also elect to close out its
position in an option prior to its expiration by purchasing an option of the
same series as the option written (sold) by the Fund.
The options that the Fund writes (sells) give the option holder the right, but
not the obligation, to purchase a security from the Fund at the strike price on
or prior to the option's expiration date. The ability to successfully implement
the writing (selling) of covered call options depends on the ability of the
Advisor to predict pertinent market movements, which cannot be assured. Thus,
the use of options may require the Fund to sell portfolio securities at
inopportune times or for prices other than current market value, which may limit
the amount of appreciation the Fund can realize on an investment, or may cause
the Fund to hold a security that it might otherwise sell. As the writer (seller)
of a covered option, the Fund foregoes, during the option's life, the
opportunity to profit from increases in the market value of the security
covering the option above the sum of the premium and the strike price of the
option, but has retained the risk of loss should the price of the underlying
security decline. The writer (seller) of an option has no control over the time
when it may be required to fulfill its obligation as a writer (seller) of the
option. Once an option writer (seller) has received an exercise notice, it
cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver the underlying security to the
option holder at the exercise price.
Over-the-counter options have the risk of the potential inability of
counterparties to meet the terms of their contracts. The Fund's maximum equity
price risk for purchased options is limited to the premium initially paid. In
addition, certain risks may arise upon entering into option contracts including
the risk that an illiquid secondary market will limit the Fund's ability to
close out an option contract prior to the expiration date and that a change in
the value of the option contract may not correlate exactly with changes in the
value of the securities hedged.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
The Fund distributes to holders of its Common Shares monthly distributions of
all or a portion of its net income after the payment of interest in connection
with leverage used by the Fund. In addition to regular monthly distributions,
for two years following the Fund's initial public offering, the Fund intends to
pay quarterly distributions in cash to Common Shareholders if certain conditions
are met. Distributions of net realized capital gains earned by the Fund, if any,
are distributed at least annually. Distributions are automatically reinvested
into additional Common Shares pursuant to the Fund's Dividend Reinvestment Plan
unless cash distributions are elected by the shareholder.
Distributions from net investment income and realized capital gains are
determined in accordance with federal income tax regulations, which may differ
from U.S. GAAP. Certain capital accounts in the financial statements are
periodically adjusted for permanent differences in order to reflect their tax
character. These permanent differences are primarily due to the varying
treatment of income and gain/loss on portfolio securities held by the Fund and
have no impact on net assets or NAV per Common Share. Temporary differences,
which arise from recognizing certain items of income, expense and gain/loss in
different periods for financial statement and tax purposes, will reverse at some
point in the future. Permanent differences incurred during the year ended
Page 18
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
DECEMBER 31, 2016
December 31, 2016, primarily a result of differing book and tax treatment on
realization of foreign currency gains (losses), have been reclassified at year
end to reflect an increase to accumulated net investment income (loss) of
$5,051,924 and a decrease to accumulated net realized gain (loss) of $5,051,924.
There was no change to paid-in-capital. Net assets were not affected by these
reclassifications.
The tax character of distributions paid during the fiscal year ended December
31, 2016 and the fiscal period ended December 31, 2015 was as follows:
Distributions paid from: 2016 2015
Ordinary income............................... $ 19,529,780 $ 2,085,061
Return of Capital............................. 5,490,950 --
As of December 31, 2016, the distributable earnings and net assets on a tax
basis were as follows:
Undistributed ordinary income................. $ --
Undistributed capital gains................... --
--------------
Total undistributed earnings.................. --
Accumulated capital and other losses.......... (4,121,524)
Net unrealized appreciation (depreciation).... (9,474,102)
--------------
Total accumulated earnings (losses)........... (13,595,626)
Other......................................... --
Paid-in capital............................... 323,050,509
--------------
Net assets.................................... $ 309,454,883
==============
H. INCOME TAXES
The Fund intends to qualify as a regulated investment company by complying with
the requirements under Subchapter M of the Internal Revenue Code of 1986, as
amended, which includes distributing substantially all of its net investment
income and net realized gains to shareholders. Accordingly, no provision has
been made for federal and state income taxes. However, due to the timing and
amount of distributions, the Fund may be subject to an excise tax of 4% of the
amount by which approximately 98% of the Fund's taxable income exceeds the
distributions from such taxable income for the calendar year.
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At December 31, 2016, the
Fund had non-expiring capital loss carryforwards for federal income tax purposes
of $4,121,524.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. The taxable years ended 2015 and
2016 remain open to federal and state audit. As of December 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.
I. EXPENSES
The Fund will pay all expenses directly related to its operations.
J. ORGANIZATION AND OFFERING COSTS
Organization costs consisted of costs incurred to establish the Fund and enable
it to legally conduct business. These costs included filing fees, listing fees,
legal services pertaining to the organization of the business and audit fees
relating to the initial registration and auditing the initial statement of
assets and liabilities, among other fees. Offering costs consisted of legal fees
pertaining to the Fund's shares offered for sale, registration fees,
underwriting fees, and printing of the initial prospectus, among other fees.
First Trust paid all organization expenses. The Fund's Common Share offering
costs of $660,000 were recorded as a reduction of the proceeds from sales from
the sale of Common Shares during the period ended December 31, 2015. During the
year ended December 31, 2016, it was determined that the actual offering costs
were less than the estimated offering costs by $72,016. Therefore,
paid-in-capital was increased by that amount in the current year, as reflected
on the Statements of Changes in Net Assets.
K. NEW AND AMENDED FINANCIAL REPORTING RULES AND FORMS
On October 13, 2016, the SEC adopted new rules and forms, and amended existing
rules and forms. The new and amended rules and forms are intended to modernize
the reporting of information provided by funds and to improve the quality and
type of information that funds provide to the SEC and investors. The new and
amended rules and forms will be effective for the First Trust funds, including
the Fund, from 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 19
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
DECEMBER 31, 2016
L. NEW ACCOUNTING PRONOUNCEMENT
In December 2016, FASB released Accounting Standards Update ("ASU") 2016-19 that
makes technical changes to various sections of the ASC, including Topic 820,
Fair Value Measurement. The changes to Topic 820 are intended to clarify the
difference between a valuation approach and a valuation technique. The changes
to ASC 820-10-50-2 require a reporting entity to disclose, for Level 2 and Level
3 fair value measurements, a change in either or both a valuation approach and a
valuation technique and the reason(s) for the change. The changes to Topic 820
are effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2016. At this time, management is evaluating the
implications of the ASU and has not yet determined its impact on the financial
statements and disclosures.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
services, First Trust is entitled to a monthly fee calculated at an annual rate
of 1.10% of the Fund's Managed Assets. First Trust also provides fund reporting
services to the Fund for a flat annual fee in the amount of $9,250.
Henderson Global Investors (North America) Inc. ("Henderson" or the
"Sub-Advisor") serves as the Fund's sub-advisor and manages the Fund's portfolio
subject to First Trust's supervision. The Sub-Advisor receives a monthly
portfolio management fee calculated at an annual rate of 0.50% of the Fund's
Managed Assets that is paid by First Trust out of its investment advisory fee.
Brown Brothers Harriman & Co. ("BBH") serves as the Fund's administrator, fund
accountant and custodian in accordance with certain fee arrangements. As
administrator and fund accountant, BBH is responsible for providing certain
administrative and accounting services to the Fund, including maintaining the
Fund's books of account, records of the Fund's securities transactions, and
certain other books and records. As custodian, BBH is responsible for custody of
the Fund's assets.
Computershare, Inc. serves as the Fund's transfer agent in accordance with
certain fee arrangements. As transfer agent, Computershare is responsible for
maintaining shareholder records for the Fund.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated equally among each fund in the First Trust Fund
Complex. Each Independent Trustee is also paid an annual per fund fee that
varies based on whether the fund is a closed-end or other actively managed fund,
or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
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.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investments, excluding short-term
investments, for the year ended December 31, 2016, were $168,279,199 and
$159,151,653, respectively.
5. DERIVATIVE TRANSACTIONS
The following table presents the types of derivatives held by the Fund at
December 31, 2016, the primary underlying risk exposure and location of these
instruments as presented on the Statement of Assets and Liabilities. In
compliance with the 1940 Act, the Fund covers its derivative commitments by
earmarking liquid assets, entering into offsetting transactions or owning
positions covering its obligations.
ASSET DERIVATIVES LIABILITY DERIVATIVES
---------------------------------------------- ----------------------------------------------
DERIVATIVE RISK STATEMENT OF ASSETS AND STATEMENT OF ASSETS AND
INSTRUMENT EXPOSURE LIABILITIES LOCATION VALUE LIABILITIES LOCATION VALUE
-------------------- ------------- ---------------------------------- ---------- ---------------------------------- ----------
Forward foreign Currency Unrealized appreciation on Unrealized depreciation on
currency contracts Risk forward foreign currency contracts $2,289,114 forward foreign currency contracts $ --
Written Options Equity Risk Options written, at value $ -- Options written, at value $5,190,780
Page 20
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
DECEMBER 31, 2016
The following table presents the amount of net realized gain (loss) and change
in net unrealized appreciation (depreciation) recognized for the year ended
December 31, 2016, on derivative instruments, as well as the primary underlying
risk exposure associated with each instrument.
STATEMENT OF OPERATIONS LOCATION
--------------------------------------------------------------------------------
CURRENCY RISK EXPOSURE
Net realized gain (loss) on forward foreign currency contracts $ 5,609,791
Net change in unrealized appreciation (depreciation) on forward
foreign currency contracts 1,349,397
EQUITY RISK EXPOSURE
Net realized gain (loss) on written option transactions 9,011,794
Net change in unrealized appreciation (depreciation) on written
options held (4,310,962)
During the year ended December 31, 2016, notional values of forward foreign
currency contracts opened and closed were $280,395,324 and $285,346,462,
respectively.
Written options activity for the Fund was as follows:
NUMBER OF
WRITTEN OPTIONS CONTRACTS PREMIUMS
---------------------------------------------------------------------------
Options outstanding at December 31, 2015 3,434 $ 3,707,791
Options Written 16,988 13,465,663
Options Expired (10,456) (9,011,794)
Options Exercised -- --
Options Closed (6,512) (5,728,812)
---------- -----------
Options outstanding at December 31, 2016 3,454 $ 2,432,848
========== ===========
The Fund does not have the right to offset financial assets and financial
liabilities related to option contracts on the Statement of Assets and
Liabilities.
6. BORROWINGS
The Fund has entered into a credit agreement with The Bank of Nova Scotia, which
provides for a revolving credit facility to be used as leverage for the Fund.
The revolving credit facility provides for a secured line of credit for the Fund
where Fund assets are pledged against advances made to the Fund. Under the
requirements of the 1940 Act, the Fund, immediately after any such borrowings,
must have an "asset coverage" of at least 300% (33-1/3% of the Fund's total
assets after borrowings). The total commitment under the facility is up to
$117,000,000. The borrowing rate under the revolving credit facility is equal to
the Euro rate of the 6-month LIBOR plus 80 basis points. Prior to September 27,
2016, the rate under the revolving credit facility was equal to the Euro rate of
the 6-month LIBOR plus 77.5 basis points. As of December 31, 2016, the Fund had
three loans outstanding under the revolving credit facility totaling $85,790,973
(81,500,000 EUR). For the year ended December 31, 2016, the average amount
outstanding was $92,050,677 (83,191,257 EUR). The high and low annual interest
rates during the year ended December 31, 2016 were 0.800% and 0.775%,
respectively, and the weighted average interest rate was 0.784%. The interest
rate at December 31, 2016 was 0.800%. The Fund does not pay a commitment fee
unless the loan balance drops below 75% of total commitment, which results in a
fee of 0.25% and is included in "Interest and fees on loan" on the Statement of
Operations.
7. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
8. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Fund through
the date the financial statements were issued, and has determined that there was
the following subsequent event:
On January 19, 2017, the Fund declared a distribution of $0.121 per Common Share
to Common Shareholders of record on February 3, 2017, payable February 15, 2017.
Page 21
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST DYNAMIC EUROPE EQUITY
INCOME FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust Dynamic Europe Equity Income Fund (the "Fund"), including the portfolio of
investments, as of December 31, 2016, and the related statements of operations
and cash flows for the year then ended, and the statements changes in net assets
and the financial highlights for the period 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 December 31, 2016 by correspondence with the Fund's
custodian and brokers; when 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 Dynamic Europe Equity Income Fund, as of December 31, 2016, the results of
its operations and its cash flows for the year then ended and the changes in net
assets and the financial highlights for each period presented, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 22, 2017
Page 22
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
DECEMBER 31, 2016 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by
Computershare Trust Company, N.A. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) NAV per Common Share on that date or
(ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the NYSE or
elsewhere, for the participants' accounts. It is possible that the
market price for the Common Shares may increase before the Plan
Agent has completed its purchases. Therefore, the average purchase
price per share paid by the Plan Agent may exceed the market price
at the time of valuation, resulting in the purchase of fewer shares
than if the dividend or distribution had been paid in Common Shares
issued by the Fund. The Plan Agent will use all dividends and
distributions received in cash to purchase Common Shares in the open
market within 30 days of the valuation date except where temporary
curtailment or suspension of purchases is necessary to comply with
federal securities laws. Interest will not be paid on any uninvested
cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing Computershare, Inc., P.O.
Box 30170, College Station, TX 77842-3170.
--------------------------------------------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio investments during the most recent 12-month period ended June 30 will
be available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
Page 23
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
DECEMBER 31, 2016 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Form N-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 100% of its ordinary
income distributions (including short-term capital gains, if applicable) for the
year ended December 31, 2016. None of the ordinary income (including short-term
capital gain, if applicable) distributions made by the Fund during the year
ended December 31, 2016, qualify for corporate dividends received deduction
available to corporate shareholders.
The Fund meets the requirements of Section 853 of the Code, and elects to pass
through to its shareholders credit for foreign taxes paid. The total amount of
income received by the Fund from sources within foreign countries and
possessions of the United States is $20,384,292 (representing a total of $1.18
per share). The total amount of taxes paid to such countries is $2,027,776
(representing a total of $0.12 per share).
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.
DERIVATIVES RISK: The use of options and other derivatives can lead to losses
because of adverse movements in the price or value of the underlying asset,
index or rate, which may be magnified by certain features of the derivatives.
These risks are heightened when the Fund's portfolio managers use derivatives to
enhance the Fund's return or as a substitute for a position or security, rather
than solely to hedge (or offset) the risk of a position or security held by the
Fund.
EMERGING MARKETS RISK: Investments in securities of issuers located in emerging
market countries are considered speculative. In addition to the general risks of
investing in non-U.S. securities, heightened risks of investing in emerging
markets securities include: smaller market capitalization of securities markets,
which may suffer periods of relative illiquidity; significant price volatility;
restrictions on foreign investment; and possible restrictions on repatriation of
investment income and capital. Furthermore, foreign investors may be required to
register the proceeds of sales, and future economic or political crises could
lead to price controls, forced mergers, expropriation or confiscatory taxation,
seizure, nationalization or creation of government monopolies. The currencies of
emerging market countries may experience significant declines against the U.S.
dollar, and devaluation may occur subsequent to investments in these currencies
by the Fund. Inflation and rapid fluctuations in inflation rates have had, and
may continue to have, negative effects on the economies and securities markets
of certain emerging market countries.
EUROPEAN MARKETS RISK: Investing in Europe involves risks not typically
associated with investments in the United States. While many countries in Europe
are considered to have developed markets, investing in the developed countries
of Europe imposes different risks than those associated with investing in other
developed markets. Many countries in Europe are members of the European Union
("EU"), which faces major issues involving its membership, structure, procedures
and policies. Efforts of the member states to continue to unify their economic
and monetary policies may increase the potential for similarities in the
movements of European markets and may reduce any diversification benefit a Fund
may seek by investing in multiple countries within Europe. European countries
that are members of, or candidates to join, the Economic and Monetary Union
("EMU") (which is comprised of EU members that have adopted the Euro currency)
are subject to restrictions on inflation rates, interest rates, deficits and
debt levels, as well as fiscal and monetary controls. By adopting the Euro as
its currency, a member state relinquishes control over its own monetary
policies. As a result, European countries are significantly affected by fiscal
and monetary controls implemented by the EMU, and it is possible that the timing
and substance of these controls may not address the needs of all EMU member
countries. In addition, the fiscal policies of a single member state can impact
and pose economic risks to the EU as a whole. Investing in Euro-denominated
securities also creates exposure to a currency that may not fully reflect the
strengths and weaknesses of the disparate economies that comprise Europe. There
is continued concern over national-level support for the Euro, which could lead
to certain countries leaving the EMU, the implementation of currency controls,
or potentially the dissolution of the Euro. The dissolution of the Euro would
have significant negative effects on European economies and would cause funds
with holdings denominated in Euros to face substantial challenges, including
difficulties relating to settlement of trades and valuation of holdings,
diminished liquidity, and the redenomination of holdings into other currencies.
Page 24
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
DECEMBER 31, 2016 (UNAUDITED)
EUROPEAN UNION RISK: Continuing uncertainty as to the status of the Euro and the
European Monetary Union and the potential for certain countries to withdraw from
the institution has created significant volatility in currency and financial
markets generally. Any partial or complete dissolution of the European Union
("EU") could have significant adverse effects on currency and financial markets,
and on the values of a Fund's portfolio investments. The United Kingdom's
referendum on June 23, 2016 to leave the European Union (known as "Brexit")
sparked depreciation in the value of the British pound, short-term declines in
the stock markets and heightened risk of continued economic volatility
worldwide. Although the long-term effects of Brexit are difficult to gauge and
cannot be fully known, they could have wide ranging implications for the United
Kingdom's economy, including: possible inflation or recession, continued
depreciation of the pound, or disruption to Britain's trading arrangements with
the rest of Europe. The United Kingdom is one of the EU's largest economies; its
departure also may negatively impact the EU and Europe as a whole, such as by
causing volatility within the union, trigging prolonged economic downturns in
certain European countries or sparking additional member states to contemplate
departing the EU (thereby perpetuating political instability in the region).
FOREIGN CURRENCY RISK: The Fund will engage in practices and strategies that
will result in exposure to fluctuations in foreign exchange rates, thus
subjecting the Fund to foreign currency risk. The Fund's exposure to foreign
currencies or in securities or instruments that trade, or receive revenues, in
foreign currencies are subject to the risk that those currencies will decline in
value relative to the U.S. dollar or, in the case of hedging positions, that the
U.S. dollar will decline in value relative to the currency being hedged.
Currency rates in foreign countries may fluctuate significantly over short
periods of time for a number of reasons, including the forces of supply and
demand in the non-U.S. exchange markets, actual or perceived changes in interest
rates, rates of inflation, balance of payments and governmental surpluses or
deficits, intervention (or the failure to intervene) by U.S. or foreign
governments, central banks or supranational entities such as the International
Monetary Fund, or by the imposition of currency controls or other political
developments in the United States or abroad. These fluctuations may have a
significant adverse impact on the value of the Fund's portfolio and/or the level
of Fund distributions made to Common Shareholders. As noted above, the Fund will
seek to hedge exposure to reduce the risk of loss due to fluctuations in
currency exchange rates relative to the U.S. dollar. There is no assurance,
however, that these strategies will be available or will be successful and the
Fund will incur costs associated with such strategies.
FOREIGN (NON-U.S.) SECURITIES RISK: Investing in securities of non-U.S. issuers
may involve certain risks not typically associated with investing in securities
of U.S. issuers. These risks include: (i) there may be less publicly available
information about non-U.S. issuers or markets due to less rigorous disclosure or
accounting standards or regulatory practices; (ii) non-U.S. markets may be
smaller, less liquid and more volatile than the U.S. market; (iii) potential
adverse effects of fluctuations in currency exchange rates or controls on the
value of the Fund's investments; (iv) the economies of non U.S. countries may
grow at slower rates than expected or may experience a downturn or recession;
(v) the impact of economic, political, social or diplomatic events; (vi) certain
non-U.S. countries may impose restrictions on the ability of non U.S. issuers to
make payments of principal and interest to investors located in the United
States due to blockage of non-U.S. currency exchanges or otherwise; and (vii)
withholding and other non-U.S. taxes may decrease the Fund's return.
GEOGRAPHIC CONCENTRATION RISK: The Fund may invest from time to time a
substantial amount of its assets in issuers located in a single country or
region. Investments in a single region, although representing a number of
different countries within the region, may be affected by common economic forces
and other factors. Because the Fund will concentrate its investments in this
manner, it assumes the risk that economic, political and social conditions in
those countries will have a significant impact on its investment performance.
This vulnerability to factors affecting European investments is significantly
greater than it would be for a more geographically diversified fund, and may
result in greater losses and volatility. This risk increases to the extent the
Fund focuses on issuers in a limited number of countries in Europe. Western
Europe has, in certain instances, been susceptible to serious financial
hardship, high debt levels and high levels of unemployment. The European Union
itself has experienced difficulties in connection with the debt loads of some of
its member states. In addition, the Fund's investment performance may also be
more volatile if it concentrates its investments in certain countries,
especially emerging market countries.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund dividends
and distributions.
LEVERAGE RISK: The use of leverage results in additional risks and can magnify
the effect of any losses. The funds borrowed pursuant to a leverage borrowing
program constitute a substantial lien and burden by reason of their prior claim
against the income of the Fund and against the net assets of the Fund in
liquidation. The rights of lenders to receive payments of interest on and
repayments of principal on any borrowings made by the Fund under a leverage
borrowing program are senior to the rights of holders of Common Shares with
respect to payment of dividends or upon liquidation. If the Fund is not in
compliance with certain credit facility provisions, the Fund may not be
permitted to declare dividends or other distributions, including dividends and
distributions with respect to Common Shares or purchase Common Shares.
Page 25
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
DECEMBER 31, 2016 (UNAUDITED)
MARKET DISRUPTION AND GEOPOLITICAL RISK: Some countries in which the Fund
invests have experienced security concerns, war or threats of war and
aggression, terrorism, economic uncertainty, natural and environmental disasters
and/or systemic market dislocations that have led, and in the future may lead,
to increased short term market volatility and may have adverse long term effects
on the European and world economies and markets generally, each of which may
negatively impact the Fund's investments. For example, there have been various
events throughout Europe, including Russia's annexation of Crimea and the
resulting sanctions against Russia, ongoing tension between Russia and Ukraine
and the political uncertainty and market turmoil in Greece, that have recently
had and may continue to have an adverse impact on European and global markets.
It is possible, for instance, that the events occurring in Russia could result
in, among other things, Russia withholding its natural gas supply from other
European countries, which has the potential to harm the economies and markets of
such countries. The events occurring in one country or region (including
non-European countries and regions) may spread through, or otherwise effect,
other countries and regions across Europe and therefore adversely impact the
Fund's investments in such countries and regions.
NON-DIVERSIFICATION RISK: The Fund is classified as "non-diversified" under the
Investment Company Act of 1940, as amended (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 Internal Revenue Code of 1986, as amended. 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 invested in certain issuers.
REAL ESTATE INVESTMENT TRUST (REIT) RISK: Investing in REITs involves certain
unique risks in addition to investing in the real estate industry in general.
REITs are subject to interest rate risk and the risk of default by lessees or
borrowers. REITs whose underlying assets are concentrated in properties used by
a particular industry are also subject to risks associated with such industry.
REITs may have limited financial resources, their securities may trade less
frequently and in a limited volume, and their securities may be subject to more
abrupt or erratic price movements than larger company securities.
REDENOMINATION RISK: Continuing uncertainty as to the status of the euro and the
EMU has created significant volatility in currency and financial markets
generally. Any partial or complete dissolution of the EMU could have significant
adverse effects on currency and financial markets, and on the values of the
Fund's portfolio investments. If one or more EMU countries were to stop using
the euro as its primary currency, the Fund's investments in such countries may
be redenominated into a different or newly adopted currency. As a result, the
value of those investments could decline significantly and unpredictably. In
addition, securities or other investments that are redenominated may be subject
to foreign currency risk, liquidity risk and valuation risk to a greater extent
than similar investments currently denominated in euros. To the extent a
currency used for redenomination purposes is not specified in respect of certain
EMU-related investments, or should the euro cease to be used entirely, the
currency in which such investments are denominated may be unclear, making such
investments particularly difficult to value or sell. The Fund may incur
additional expenses to the extent it is required to seek judicial or other
clarification of the denomination or value of such securities.
UNITED KINGDOM RISK: Investments in British issuers may subject the Fund to
regulatory, political, currency, security, and economic risk specific to the
United Kingdom. The United Kingdom has one of the largest economies in Europe,
and the United States and other European countries are substantial trading
partners of the United Kingdom. As a result, the British economy may be impacted
by changes to the economic health of the United States and other European
countries. On June 23, 2016, the United Kingdom voted via referendum to leave
the European Union ("EU"), which immediately led to significant market
volatility around the world, as well as political, economic, and legal
uncertainty. It is expected that the United Kingdom's exit from the EU will take
place within two years after the United Kingdom formally notifies the European
Council of its intention to withdraw. However, there is still considerable
uncertainty relating to the potential consequences and precise timeframe for the
exit, how the negotiations for the withdrawal and new trade agreements will be
conducted, and whether the United Kingdom's exit will increase the likelihood of
other countries also departing the EU. During this period of uncertainty, the
negative impact on not only the United Kingdom and European economies, but the
broader global economy, could be significant, potentially resulting in increased
volatility and illiquidity and lower economic growth for companies that rely
significantly on Europe for their business activities and revenues.
Page 26
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
DECEMBER 31, 2016 (UNAUDITED)
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 FUND SERVICE (1) DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Three-Year Term Physician, Officer, Wheaton Orthopedics; 138 None
c/o First Trust Advisors L.P. Limited Partner, Gundersen Real Estate
120 East Liberty Drive, o Since Fund Limited Partnership (June 1992 to
Suite 400 Inception December 2016); Member, Sportsmed LLC
Wheaton, IL 60187 (April 2007 to November 2015)
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Three-Year Term President, ADM Services, Inc. (Futures 138 Director of ADM
c/o First Trust Advisors L.P. Commission Merchant) Investor Services,
120 East Liberty Drive, o Since Fund Inc., ADM
Suite 400 Inception Investor Services
Wheaton, IL 60187 International and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Three-Year Term President, Hibs Enterprises (Financial 138 Director of Trust
c/o First Trust Advisors L.P. and Management Consulting) Company of
120 East Liberty Drive, o Since Fund Illinois
Suite 400 Inception
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Three-Year Term Managing Director and Chief Operating 138 Director of
c/o First Trust Advisors L.P. Officer (January 2015 to Present); Covenant
120 East Liberty Drive, o Since Fund Pelita Harapan Educational Foundation Transport, Inc.
Suite 400 Inception (Educational Products and Services); (May 2003 to
Wheaton, IL 60187 President and Chief Executive Officer May 2014)
D.O.B.: 03/54 (June 2012 to September 2014); Servant
Interactive LLC (Educational Products
and Services); President and Chief
Executive Officer (June 2012 to
September 2014); Dew Learning LLC
(Educational Products and Services);
President (June 2002 to June 2012),
Covenant College
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(2), Trustee o Three-Year Term Chief Executive Officer, First Trust 138 None
and Chairman of the Board Advisors L.P. and First Trust Portfolios
120 East Liberty Drive, o Since Fund L.P.; Chairman of the Board of Directors,
Suite 400 Inception BondWave LLC (Software Development
Wheaton, IL 60187 Company) and Stonebridge Advisors LLC
D.O.B.: 09/55 (Investment Advisor)
-----------------------------
(1) Currently, Richard E. Erickson and Thomas R. Kadlec, as Class II Trustees,
are serving as trustees until the Fund's 2018 annual meeting of
shareholders. James A. Bowen and Niel B. Nielson, as Class III Trustees,
are serving as trustees until the Fund's 2019 annual meeting of
shareholders. Robert F. Keith, as a Class I Trustee, is serving as a
trustee until the Fund's 2017 annual meeting of shareholders.
(2) Mr. Bowen is deemed an "interested person" of the Fund due to his position
as Chief Executive Officer of First Trust Advisors L.P., investment
advisor of the Fund.
Page 27
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
DECEMBER 31, 2016 (UNAUDITED)
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(3)
------------------------------------------------------------------------------------------------------------------------------------
James M. Dykas President and Chief o Indefinite Term Managing Director and Chief Financial
120 E. Liberty Drive, Executive Officer Officer (January 2016 to Present), Controller
Suite 400 o Since January 2016 (January 2011 to January 2016), Senior Vice
Wheaton, IL 60187 President (April 2007 to January 2016), First
D.O.B.: 01/66 Trust Advisors L.P. and First Trust
Portfolios L.P.; Chief Financial Officer
(January 2016 to Present), BondWave LLC
(Software Development Company) and
Stonebridge Advisors LLC (Investment
Advisor)
Donald P. Swade Treasurer, Chief Financial o Indefinite Term Senior Vice President (July 2016 to Present),
120 E. Liberty Drive, Officer and Chief Vice President (April 2012 to Present), First
Suite 400 Accounting Officer o Since January 2016 Trust Advisors L.P. and First Trust
Wheaton, IL 60187 Portfolios L.P.; Vice President (September
D.O.B.: 08/72 2006 to April 2012); Guggenheim Funds
Investment Advisors, LLC and Claymore
Securities, Inc.
W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P. and
120 E. Liberty Drive, Legal Officer First Trust Portfolios L.P.; Secretary and General
Suite 400 o Since Fund Counsel, BondWave LLC; Secretary,
Wheaton, IL 60187 Inception Stonebridge Advisors LLC
D.O.B.: 05/60
Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present), Senior
120 E. Liberty Drive, Vice President (September 2005 to July 2012),
Suite 400 o Since Fund First Trust Advisors L.P. and First Trust
Wheaton, IL 60187 Inception Portfolios L.P.
D.O.B.: 02/70
Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel, First Trust
120 E. Liberty Drive, and Assistant Secretary Advisors L.P. and First Trust Portfolios L.P.
Suite 400 o Since Fund
Wheaton, IL 60187 Inception
D.O.B.: 12/66
-----------------------------
(3) Officers of the Fund have an indefinite term. The term "officer" means the
president, vice president, secretary, treasurer, controller or any other
officer who performs a policy making function.
Page 28
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PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST DYNAMIC EUROPE EQUITY INCOME FUND (FDEU)
DECEMBER 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 L.P.) or 1-800-222-6822 (First Trust
Advisors L.P.).
March 2016
Page 29
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FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Henderson Global Investors (North America) Inc.
737 North Michigan Avenue, Suite 1700
Chicago, Illinois 60611
ADMINISTRATOR,
FUND ACCOUNTANT &
CUSTODIAN
Brown Brothers Harriman & Co.
50 Post Office Square
Boston, MA 02110
TRANSFER AGENT
Computershare, Inc.
P.O. Box 30170
College Station, TX 77842-3170
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
(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.
(e) Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the registrant's board of
trustees has determined that Thomas R. Kadlec and Robert F. Keith are qualified
to serve as audit committee financial experts serving on its audit committee and
that each of them is "independent," as defined by Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees (Registrant) -- The aggregate fees billed for each of the
last two fiscal years for professional services rendered by the principal
accountant for the audit of the registrant's annual financial statements or
services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements were $62,500 for 2015 and
$39,500 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 $91.91 for 2016.
Audit-Related Fees (Investment Adviser) -- The aggregate fees billed in
each of the last two fiscal years of the registrant 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 $0 for 2016.
(c) Tax Fees (Registrant) -- The aggregate fees billed in each of the last
two fiscal years for professional services rendered by the principal accountant
for tax compliance, tax advice, and tax planning to the registrant were $0 for
2015 and $5,200 for 2016.
Tax Fees (Investment Adviser) -- The aggregate fees billed in each of the
last two fiscal years of the registrant for professional services rendered by
the principal accountant for tax compliance, tax advice, and tax planning to the
registrant's adviser were $0 for 2015 and $0 for 2016.
(d) All Other Fees (Registrant) -- The aggregate fees billed in each of
the last two fiscal years for products and services provided by the principal
accountant to the registrant, other than the services reported in paragraphs (a)
through (c) of this Item were $0 for 2015 and $0 for 2016.
All Other Fees (Investment Adviser) -- The aggregate fees billed in each
of the last two fiscal years for products and services provided by the principal
accountant to the registrant's investment adviser, other than services reported
in paragraphs (a) through (c) of this Item were $0 for 2015 and $0 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 of this
Item that were approved by the audit committee pursuant to the pre-approval
exceptions included in paragraph (c)(7)(i)(c) or paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X are as follows:
(b) 0%
(c) 0%
(d) 0%
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most recent
fiscal year that were attributed to work performed by persons other than the
principal accountant's full-time, permanent employees was less than fifty
percent.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's investment
adviser (not including any sub-adviser whose role is primarily portfolio
management and is subcontracted with or overseen by another investment adviser),
and any entity controlling, controlled by, or under common control with the
adviser that provides ongoing services to the Registrant for 2015 were $0 and $0
for the Registrant and the Registrant's investment adviser, respectively, and
for 2016 were $5,200 and $13,000 for the Registrant and the Registrant's
investment adviser, respectively.
(h) The Registrant's audit committee of its Board of Trustees 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 trustees of the Registrant. The members of the audit
committee are: Thomas R. Kadlec, Niel B. Nielson, Richard E. Erickson and
Robert F. Keith.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Proxy Voting Policies are attached herewith.
HENDERSON INVESTMENT MANAGEMENT LIMITED
PROXY POLICIES AND PROCEDURES
AS OF JUNE 14, 2012
It is the intent of Henderson Investment Management Limited ("HIML") to vote
proxies in the best interests of the firm's clients. HIML believes that in order
to achieve long-term success, companies need not only to conceive and execute
appropriate business strategies, but also to maintain high standards of
corporate governance and corporate responsibility. We therefore expect companies
to operate according to recognised national and international standards in these
areas.
This policy sets out HIML's approach to corporate governance, corporate
responsibility and proxy voting.
1. Responsibilities
The Corporate Governance Manager at Henderson Global Investors, acting on
behalf of HIML, is responsible for the implementation of the Proxy Voting
Policies.
2. Service Providers
HIML has contracted ISS Europe Ltd. to provide policy development,
research, advisory and voting disclosure services.
Proxy voting services are provided by BNP Paribas Securities Services plc,
which provides a range of administrative services to Henderson. BNP
Paribas Securities Services plc is provided with voting services by ISS.
3. Voting Guidelines
HIML has adopted the Henderson Global Investors Responsible Investment
policy. This policy sets out Henderson's approach to monitoring and taking
action on financial performance, corporate governance and corporate
responsibility. The International Corporate Governance Policy is detailed
below.
3.1. International Corporate Governance Policy
International corporate governance systems vary a great deal according to
factors such as the legal system, the extent of shareholder rights and the
level of dispersed ownership. In formulating our approach to corporate
governance we are conscious that a 'one size fits all' policy is not
appropriate. We therefore seek to vary our voting and engagement
activities according to the market, and pay close attention to local
market codes of best practice.
Notwithstanding these differences, we consider that certain core
principles of corporate governance apply across all markets, and we seek
to apply these in our voting policy. The paragraphs below elaborate on
these core principles.
3.2. Corporate Objective
The overriding objective of the company should be to optimize over time
the returns to its shareholders. Where other considerations affect this
objective, they should be clearly stated and disclosed. To achieve this
objective, the company should endeavour to ensure the long-term viability
of its business, and to manage effectively its relationships with
stakeholders.
3.3. Disclosure and Transparency
Companies should disclose accurate, adequate and timely information, in
particular meeting market guidelines where they exist, so as to allow
investors to make informed decisions about the acquisition, ownership
obligations and rights, and sale of shares. Clear and comprehensive
information on directors, corporate governance arrangements and the
company's management of corporate responsibility issues should be
provided.
Shareholders should be given sufficient and timely information about all
proposals to allow them to make an informed judgment and exercise their
voting rights. Each proposal should be presented separately to
shareholders - multiple proposals should not be combined in the same
resolution. In the absence of sufficient information provided by a company
on a proposed resolution we will vote against.
3.4. Boards of Directors
Henderson recognises the plurality of corporate governance models across
different markets and does not advocate any one form of board structure.
However, for any corporate board there are certain key functions which
apply.
o Reviewing and guiding corporate strategy, major plans of action,
risk policy, annual budgets and business plans; setting performance
objectives; monitoring implementation and corporate performance; and
overseeing major capital expenditures, acquisitions and
divestitures.
o Monitoring the effectiveness of the company's governance practices
and making changes as needed.
o Selecting, compensating, monitoring and, where necessary, replacing
key executives and overseeing succession planning.
o Aligning key executive and board remuneration with the longer term
interests of the company and its shareholders.
o Ensuring a formal and transparent board nomination and election
process.
o Monitoring and managing potential conflicts of interest of
management, board members and shareholders, including misuse of
corporate assets and abuse in related party transactions.
o Ensuring the integrity of the corporation's accounting and financial
reporting systems, including the independent audit, and that
appropriate systems of control are in place, in particular, systems
for risk management, financial and operational control, and
compliance with the law and relevant standards.
o Overseeing the process of disclosure and communications.
The board of directors, or supervisory board, as an entity, and each of
its members, as an individual, is a fiduciary for all shareholders, and
should be accountable to the shareholder body as a whole. Each member
should stand for election on a regular basis.
Boards should include a sufficient number of independent non-executive
members with appropriate skills, experience and knowledge.
Responsibilities should include monitoring and contributing effectively to
the strategy and performance of management, staffing key committees of the
board, and influencing the conduct of the board as a whole.
Audit, remuneration and nomination/succession committees should be
established. These should be composed wholly or predominantly of
independent non-executives. Companies should disclose the terms of
reference of these committees and give an account to shareholders in the
annual report of how their responsibilities have been discharged. The
chairmen and members of these committees should be appointed by the board
as a whole according to a transparent procedure. When determining how to
vote on the election of a non-executive director, we will give close
consideration to their independence and to the proportion of independent
directors on the Board as a whole.
3.5. Shareholder Rights
All shareholders should be treated equitably. Companies' ordinary shares
should provide one vote for each share, and companies should act to ensure
the owners' rights to vote.
Major strategic modifications to the core business(es) of a company should
not be made without prior shareholder approval. Equally, major corporate
changes which in substance or effect materially dilute the equity or erode
the economic interests or share ownership rights of existing shareholders
should not be made without prior shareholder approval of the proposed
change. Such changes include modifications to articles or bylaws, the
implementation of shareholder rights plans or so called "poison pills",
and the equity component of compensation schemes.
We will not support proposals that have the potential to reduce
shareholder rights such as significant open-ended authorities to issue
shares without pre-emption rights or anti-takeover proposals unless
companies provide a compelling rationale for why they are in shareholder
interests.
3.6. Audit and Internal Control
Company boards should maintain robust structures and processes to ensure
sound internal controls and to oversee all aspects of relationships with
external auditors. The Audit Committee should ensure that the company
gives a balanced and clear presentation of its financial position and
prospects, and clearly explains its accounting principles and policies.
Audit Committee members should have appropriate levels of financial
expertise, in accordance with prevailing legislation or best practice. The
Audit Committee should ensure that the independence of the external
auditors is not compromised by conflicts of interest (arising, for
example, from the award of non-audit consultancy assignments).
Where we have serious concerns over auditor independence we will vote
against the re-election of the auditor.
3.7. Remuneration
Remuneration of executive directors and key executives should be aligned
with the interests of shareholders. Performance criteria attached to
share-based remuneration should be demanding and should not reward
performance that is not clearly superior to that of a group of comparable
companies that is appropriately selected in sector, geographical and index
terms. Requirements on directors and senior executives to acquire and
retain shareholdings in the company that are meaningful in the context of
their cash remuneration are also appropriate.
The design of senior executives' contracts should not commit companies to
'payment for failure'. Boards should pay attention to minimising this risk
when drawing up contracts and to resist pressure to concede excessively
generous severance conditions.
Companies should disclose in each annual report or proxy statement the
board's policies on remuneration - and, preferably, the remuneration of
individual board members and top executives, as well as the composition of
that remuneration - so that investors can judge whether corporate pay
policies and practices are appropriately designed.
Broad-based employee share ownership plans or other profit-sharing
programmes are effective market mechanisms that promote employee
participation.
When reviewing whether to support proposed new share schemes we place
particular importance on the following factors:
o the overall potential cost of the scheme, including the level
of dilution the issue price of share options relative to the
market price
o the use of performance conditions aligning the interests of
participants with shareholders the holding period i.e., the
length of time from the award date to the earliest date of
exercise the level of disclosure.
4. Voting Procedures
The procedure for casting proxy votes is as follows:
1. Custodians notify ISS of forthcoming company meetings and send proxy
materials.
2. ISS notifies Henderson of meetings via its ProxyExchange website.
3. ISS provides voting recommendations based on HIML's Proxy Voting
Policies.
4. The Corporate Governance Manager (or his designee) consults with
fund managers and analysts as appropriate.
5. The Corporate Governance Manager (or his designee) decides in
conjunction with the relevant fund managers and analysts whether to
accept or override the voting recommendations provided by ISS.
6. Voting instructions are sent to custodians via the ProxyExchange
website and executed by the custodians.
7. If at any time during implementation of the above procedures a
conflict of interest is identified the matter will be referred to
the HIML Proxy Committee via the Head of Compliance. In such
circumstances the Proxy Committee reviews the issue and directs ISS
how to vote the proxies through the ProxyExchange website and voting
instructions are executed by the custodians.
5. Share Blocking
In a number of markets in which the funds invest, shares must be suspended
from trading ('blocked') for a specified period before the Annual General
Meeting if voting rights are to be exercised. Such restrictions may place
constraints on portfolio managers that mean exercising proxy votes is not
in clients' interest. In other markets casting proxy votes may involve
costs that are disproportionate to any benefit gained. In markets where
share blocking applies or additional costs are incurred that outweigh the
potential benefits of voting, HIML will vote only in exceptional
circumstances.
6. Conflicts of Interest
For each director, officer and employee of HIML ("HIML person"), the
interests of HIML's clients must come first, ahead of the interest of HIML
and any person within the HIML organization, which includes HIML's
affiliates.
Accordingly, each HIML person must not put "personal benefit", whether
tangible or intangible, before the interests of clients of HIML or
otherwise take advantage of the relationship to HIML's clients. "Personal
benefit" includes any intended benefit for oneself or any other
individual, company, group or organization of any kind whatsoever except a
benefit for a client of HIML, as appropriate. It is imperative that each
of HIML's directors, officers and employees avoid any situation that might
compromise, or call into question, the exercise of fully independent
judgment in the interests of HIML's clients.
Occasions may arise where a person or organization involved in the proxy
voting process may have a conflict of interest. A conflict of interest may
exist if HIML has a business relationship with (or is actively soliciting
business from) either the company soliciting the proxy or a third party
that has a material interest in the outcome of a proxy vote or that is
actively lobbying for a particular outcome of a proxy vote. Any individual
with knowledge of an actual or potential conflict of interest relating to
a particular referral item shall disclose that conflict to the Head of
Compliance.
The following are examples of situations where a conflict may exist:
o Business Relationships - where HIML manages money for a company or
an employee group, manages pension assets or is actively soliciting
any such business, or leases office space from a company;
o Personal Relationships - where a HIML person has a personal
relationship with other proponents of proxy proposals, participants
in proxy contests, corporate directors, or candidates for
directorships;
o Familial Relationships - where a HIML person has a known familial
relationship relating to a company (e.g. a spouse or other relative
who serves as a director of a public company or is employed by the
company); and
o Fund Relationships - HIML may have a conflict because of a
relationship to fund shares held in client accounts (e.g., an entity
who receives fees from a fund is solicited by the fund to increase
those fees).
o Fund of Fund's Relationship - HIML may have a conflict where it
manages a fund of funds that invests in other affiliated Henderson
funds, and the underlying affiliated fund is soliciting votes for a
proxy.
It is the responsibility of each director, officer and employee of HIML to
report any real or potential conflict of interest to the Head of
Compliance who shall present any such information to the Proxy Committee.
However, once a particular conflict has been reported to the Head of
Compliance, this requirement shall be deemed satisfied with respect to all
individuals with knowledge of such conflict. In addition, all HIML persons
shall certify annually as to their compliance with this policy.
7. Proxy Committee
The Proxy Committee shall have three members, the Head of Equities, the
Corporate Governance Manager and the Head of Compliance (or their
respective designees). Proxy Committee meetings may be called by any
member of the Proxy Committee and shall be called whenever an actual or
potential conflict of interest is identified.
Two members of the Proxy Committee shall constitute a quorum and the Proxy
Committee shall act by a majority vote. The Proxy Committee shall keep
minutes of its meetings that shall be kept with the other corporate
records of HIML.
The Proxy Committee will review each item referred to it to determine if
an actual or potential conflict of interest indeed exists. If the Proxy
Committee determines that no actual or potential conflict exists, then the
proxy will be voted as it otherwise would have been under these
procedures. If the Proxy Committee determines that an actual or potential
conflict exists, then it will review the issue and instruct ISS to: (1)
vote based on ISS' recommendation, (2) vote in the same proportion as the
other shareholders, (3) abstain from voting entirely, (4) vote in
accordance with the recommendation of the investment professional
responsible for the account, or (5) vote in another manner as the Proxy
Committee deems fit. With respect to a conflict that arises due to (a) a
business transaction involving Henderson Group PLC and the company
soliciting the proxy, or (b) a Fund of funds relationship described above
only options (1)-(3) above shall be available.
For each matter where the Proxy Committee determines an actual or
potential conflict exists, the Proxy Committee will produce a Conflicts
Report that (1) describes the conflict of interest; (2) discusses the
procedures used to address such conflict of interest; and (3) discloses
any contacts from parties outside HIML (other than routine communications
from proxy solicitors) with respect to the referral item not otherwise
reported in a portfolio manager's recommendation. To the extent the Proxy
Committee instructs ISS to vote in accordance with the recommendation of
the investment professional responsible for the account, the Conflicts
Report will also include written confirmation that any recommendation from
an investment professional provided under circumstances where a conflict
of interest exists was made solely on the investment merits and without
regard to any other consideration.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(a)(1) IDENTIFICATION OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS.
Information provided as of December 31, 2016
Henderson Global Investors (North America) Inc., a registered investment adviser
("HGINA" or the "Sub-Advisor"), is the Fund's sub-adviser and provides U.S.
regulatory and compliance oversight to the Fund and HIML (as defined below).
HGINA is a Delaware corporation and provides investment management services to
SEC-registered mutual funds, other pooled investment vehicles and institutional
accounts. The principal offices of HGINA are located at 737 North Michigan
Avenue, Suite 1700, Chicago, Illinois.
HGINA is an indirect, wholly-owned subsidiary of Henderson Group plc ("Henderson
Group"), which is the parent company of an asset management group. Henderson
Group, founded in 1934, is a global asset management firm providing a full
spectrum of investment products and services to institutions and individuals
around the world. The Advisor, the Sub-Advisor and the Fund have engaged
Henderson Investment Management Limited ("HIML" or the "Sub-Sub-Advisor"), a
registered investment adviser and an indirect, wholly-owned subsidiary of
Henderson Group, pursuant to an investment sub-advisory agreement among the
Fund, the Advisor, HGINA and HIML. Investment professionals of HIML render
portfolio management, research or trading services to certain clients of HGINA,
including the Fund. HIML will be responsible for the day-to-day investment
decisions of the Fund other than the Option Overlay Strategy.
The members of the portfolio management team responsible for the day-to-day
management of the Fund's investment portfolio other than the Option Overlay
Strategy are Alex Crooke and Ben Lofthouse. The members of the portfolio
management team responsible for implementing the Option Overlay Strategy are
John Gambla and Rob A. Guttschow.
1. ALEX CROOKE
HEAD OF GLOBAL EQUITY INCOME AT HENDERSON INVESTMENT MANAGEMENT
LIMITED ("HENDERSON")
Alex Crooke is a portfolio manager with more than 25 years of investment
management experience. Mr. Crooke is currently head of the Henderson Global
Equity Income team, which encompasses the firm's key equity income products.
Prior to joining Henderson, Alex was an Investment Analyst at Equitable Life
Assurance Society responsible for US Equity Research. In 1994, Mr. Crooke joined
Henderson as a Fund Manager and was responsible for UK and European Investments.
He was named Director of UK Investment Trusts in 2001. Mr. Crooke has managed
several funds during his 20 plus years at Henderson Global Investors, including
currently managing the Henderson Global Equity Income Fund, the Henderson
Dividend & Income Builder Fund, Henderson High Income Investment Trust and the
Bankers Investment Trust.
2. BEN LOFTHOUSE, CFA
PORTFOLIO MANAGER FOR THE GLOBAL EQUITY INCOME TEAM AT HENDERSON
Ben Lofthouse, CFA, is the portfolio manager of the Henderson Global Equity
Income Fund and the Henderson Dividend & Income Builder Fund, and has been a
member of the Henderson Global Equity Income team since 2004. In addition, Mr.
Lofthouse has co-managed the Global Equity Income OEIC since May 2012, and has
managed the Henderson International Income Trust plc since its launch in April
2011. Mr. Lofthouse joined Henderson in 2004 as an Investment Analyst and
Assistant Fund Manager having previously trained as a Chartered Accountant with
PricewaterhouseCoopers in its Banking and Capital Markets division. Mr. Crooke
also worked in the PricewaterhouseCoopers Business Recovery Services team.
3. JOHN GAMBLA, CFA
SENIOR PORTFOLIO MANAGER FOR THE ALTERNATIVES AND ACTIVE EQUITY INVESTMENT TEAM
AT FIRST TRUST ADVISORS L.P. ("FIRST TRUST")
Mr. Gambla has over 20 years of investment experience, most recently as co-Chief
Investment Officer at the Nuveen HydePark Group LLC, a wholly-owned subsidiary
of Nuveen Investments. He graduated Phi Beta Kappa with a Bachelor of Science in
genetics and developmental biology (Cum Laude) and a Bachelor of Arts in finance
(departmental distinction) from the University of Illinois at Urbana/Champaign,
and earned an MBA from the University of Chicago's Graduate School of Business.
He is a CFA Charter holder and holds FRM and PRM designations.
4. ROB A. GUTTSCHOW, CFA
SENIOR PORTFOLIO MANAGER FOR THE ALTERNATIVES AND ACTIVE EQUITY INVESTMENT TEAM
AT FIRST TRUST
Mr. Guttschow has 20 years of investment experience, most recently as co-Chief
Investment Officer at the Nuveen HydePark Group LLC, a wholly-owned subsidiary
of Nuveen Investments. Mr. Guttschow earned a Bachelor of Science degree in
engineering and an MBA from the University of Illinois at Urbana/Champaign. He
is a CFA Charter holder and a member of the CFA Society of Chicago.
(a)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBER
AND POTENTIAL CONFLICTS OF INTEREST
Information provided as of December 31, 2016
# OF ACCOUNTS TOTAL ASSETS
MANAGED FOR WHICH FOR WHICH
TOTAL ADVISORY FEE IS ADVISORY FEE
NAME OF PORTFOLIO # OF ACCOUNTS TOTAL BASED ON IS BASED ON
MANAGER OR TEAM MEMBER TYPE OF ACCOUNTS MANAGED ASSETS PERFORMANCE PERFORMANCE
----------------
1. Alex Crooke Registered Investment 1 $1,156,000,000
Companies:
Other Pooled 3 $4,118,000,000
Investment Vehicles:
Other Accounts: 1 32,000,000
2. Ben Lofthouse Registered Investment 1 $ 283,000,000
Companies:
Other Pooled 5 $5,158,000,000 1 $ 11,500,000
Investment Vehicles:
Other Accounts: 1 32,000,000
3. John Gambla Registered Investment 6 $ 294.2mm 0 0
Companies:
Other Pooled
Investment Vehicles:
Other Accounts: $ 0.6mm 0 0
4. Rob Guttschow Registered Investment 6 $ 294.2mm 0 0
Companies:
Other Pooled
Investment Vehicles:
Other Accounts: $ 0.6mm 0 0
POTENTIAL CONFLICTS OF INTERESTS
HENDERSON, POTENTIAL CONFLICTS OF INTERESTS
PORTFOLIO MANAGEMENT CONFLICTS OF INTEREST. The Adviser seeks to foster a
reputation for integrity and professionalism. That reputation is a vital
business asset. The confidence and trust placed in us by investors is something
that is highly valued and must be protected. As a result, any activity that
creates any actual or potential conflict of interest or even the appearance of
any conflict of interest must be avoided and is prohibited. A Code of Ethics has
been adopted to ensure that those who have knowledge of portfolio transactions
or other confidential client information will not be able to act thereon to the
disadvantage of Henderson's clients. The Code of Ethics does not purport
comprehensively to cover all types of conduct or transactions which may be
prohibited or regulated by the laws and regulations applicable.
The portfolio managers responsible for managing the Funds may currently or
in the future also manage one or more other accounts. Other than potential
conflicts between investment strategies, the side-by-side management of a Fund
and other accounts may raise potential conflicts of interest due to certain
trading practices used by the portfolio manager (e.g. allocation of aggregated
trades). Henderson has policies and procedures reasonably designed to mitigate
these conflicts. The portfolio managers may advise certain accounts under a
performance fee arrangement. A performance fee arrangement may create an
incentive for a portfolio manager to make investments that are riskier or more
speculative than would be the case in the absence of performance fees.
PORTFOLIO MANAGEMENT COMPENSATION. The following is a summary of the
compensation received by Henderson's investment professionals for all accounts
managed and not just for the Fund. Henderson's investment professionals have
significant short and long-term financial incentives. In general, the
compensation plan is based on:
o Pre-defined, objective, measurable investment performance
o Performance goals that are ambitious, but attainable
o The plan provides an incentive for appropriately aggressive
portfolio management to achieve maximum feasible results within the
portfolio's risk return parameters.
The compensation structure consists of four primary elements. There is a
competitive base salary together with a short-term incentive bonus plan. In
addition, there are two further incentive-based packages for senior
international investment professionals that reward staff on both individual and
team performance, reflecting profitable asset growth. "Profitable asset growth"
refers to the increase in adviser revenues generated less the increase in costs.
It is typically calculated per adviser team on a calendar year basis. Members of
the relevant team receive a share of this growth, which is typically paid over a
three-year period.
Some managers are granted an award in a long-term incentive program that
is based on several factors, including the profitability of Henderson Global
Investors. Additionally, some managers participate in the distribution of
performance-related fees if such funds are structured accordingly. Currently,
none of the Funds charge performance-related fees.
A summary of the compensation package is as follows:
o Basic Salaries: in line with or better than the industry average
o Short Term Incentive Bonus: the STI bonus is usually the majority of
the variable component, based largely on investment performance; for
a typical fund manager, it can vary between 50 percent and 150
percent of the salary
o Growth Equity Bonus Plan: the GEB is based on a team's contribution
to a rise in profits, it is designed to reward profitable asset
growth
o Long Term Incentive Plan: as described above
o Employee Share Plans: from year to year, managers may be able to
invest part of their remuneration in various share schemes which are
then partially matched by Henderson
o Performance-related fees: for some funds, any performance-related
fee earned by the firm is shared with individuals generating that
performance. If a performance-related fee applies, compensation is
based solely on performance and its terms are made public in the
fund's relevant disclosure document (i.e., prospectus or offering
memorandum). Performance-related fees may vary from fund to fund but
are typically measured over a one year period and compare the fund's
returns to either (i) a peer group, (ii) an index or (iii) an
absolute return.
FIRST TRUST, POTENTIAL CONFLICTS OF INTERESTS
First Trust and its affiliate, First Trust Portfolios L.P. ("FTP"), have in
place a joint Code of Ethics and Insider Trading Policies and Procedures that
are designed to (a) prevent First Trust personnel from trading securities based
upon material inside information in the possession of such personnel and (b)
ensure that First Trust personnel avoid actual or potential conflicts of
interest or abuse of their positions of trust and responsibility that could
occur through such activities as front running securities trades for the
Registrant. Personnel are required to have duplicate confirmations and account
statements delivered to First Trust and FTP compliance personnel who then
compare such trades to trading activity to detect any potential conflict
situations.
(a)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
Information provided as of December 31, 2015
ALEX CROOKE AND BEN LOFTHOUSE, HENDERSON
SALARY AND BENEFITS
Base salaries are set to be competitive with the market, and are set typically
within a band of +/- 5% of market median for the individual's role and
responsibilities, although salary levels at or around market upper quartile may
be awarded for key individuals with specialist skills, market knowledge and/or
who perform critical roles, to ensure that their fixed remuneration remains
market leading. Salary levels may be lower than market median for individuals
who are inexperienced or new to their role, but will be moved rapidly towards to
median and beyond where this is merited by individual performance. Base salaries
are set to be competitive with the market, and are periodically reviewed for
market competitiveness.
A range of benefits are provided to employees (including private medical
insurance, disability insurance and life insurance) with a view to offering an
overall remuneration package that is competitive to each local market in which
Henderson operates. Fringe benefits account for a small percentage of total
remuneration. Henderson also operates non-contributory pension schemes for
employees. With the exception of a small number of individuals who participate
in closed legacy defined benefits schemes, pension arrangements are all funded
on a defined contribution basis, with contribution levels being benchmarked to
the local market.
INCENTIVE ARRANGEMENTS FOR INVESTMENT PROFESSIONALS
Investment Management Incentive Plan (IMIP) IMIP is a short term incentive
variable pay (bonus) framework, which is designed to reward the contribution of
portfolio managers to increased profitability and quality asset growth. The
total incentive pool is based on a variable share of net management fees, taking
into account:
o A 'base' element - formed of a set percentage of management fees,
after deduction of direct salary and associated costs
o A 'performance' element (which can be positive or negative) -
determined as a variable share of management fees, depending on the
1 and 3 year track record of underlying funds
o A 'growth' element - determined as a set percentage of management
fees in the first 12 months from net inflows, offset by rebates and
commissions and subject to a clawback for net outflows
o A 'corporate' - determined as a variable share of management fees,
after deduction of direct salary and associated costs, with the
share dependent on the Group (STI) Balanced Scorecard outcome (see
below)
Performance fees
For some funds, performance-related fees earned by the firm are shared with the
individuals generating that performance in a transparent and agreed way.
Individual performance fee allocations are also subject to mandatory deferral
mechanisms and, in some cases, individuals are obliged to defer a proportion of
their performance fee incentives into their own funds.
Alternative Investment Management Fund Directive (AIFMD) Henderson complies with
AIFMD, which has impacted variable pay earned by Henderson fund managers since
January 1, 2015. The key implications are that, in relation to variable
remuneration earned in respect of AIFMD activities:
o The percentage of variable remuneration that must be deferred is
likely to increase (up to 60% of total variable pay for the highest
paid code employees).
o It will become mandatory for at least 50% of both deferred and
non-deferred variable remuneration to be delivered in
units/interests of the relevant funds.
In addition, within the Global Equities team the investment managers are
rewarded by their contribution to our clients' performance. A significant
portion of the end of year bonus pool is distributed to the investment managers
based on the performance attribution over a 1 and 3 year basis. This more
closely aligns the investment managers with the performance the team has
delivered to clients and rewards them for the return of the stocks they put in
the portfolio.
JOHN GAMBLA AND ROB GUTTSCHOW, FIRST TRUST
The compensation structure for John Gambla and Rob Guttschow is based upon a
fixed salary as well as a discretionary bonus determined by the management of
the Advisor. Salaries are determined by management and are based upon an
individual's position and overall value to the firm. Bonuses are also determined
by management and are generally based on a variety of factors, including, but
not limited to, an individual's overall contribution to the success of the firm
and the profitability of the firm.
(a)(4) DISCLOSURE OF SECURITIES OWNERSHIP
Information provided as of December 31, 2016
Name of Portfolio Dollar ($) Range of
------------------ --------------------
Manager or Fund Shares
----------- ------------
Team Member Beneficially Owned
----------- -------------------
Alex Crooke $0
Ben Lofthouse $0
John Gambla $0
Rob A. Guttschow $0
(b) Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
None.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial
officers, or persons performing similar functions, have concluded
that the registrant's disclosure controls and procedures (as defined
in Rule 30a-3(c) under the Investment Company Act of 1940, as
amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of
a date within 90 days of the filing date of the report that includes
the disclosure required by this paragraph, based on their evaluation
of these controls and procedures required by Rule 30a-3(b) under the
1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b)
under the Securities Exchange Act of 1934, as amended (17 CFR
240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act
(17 CFR 270.30a-3(d)) that occurred during the registrant's second
fiscal quarter of the period covered by this report that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes- Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) First Trust Dynamic Europe Equity Income Fund
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By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: February xx, 2017
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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
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: February 22, 2017
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By (Signature and Title)* /s/ Donald P. Swade
----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: February 22, 2017
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* Print the name and title of each signing officer under his or her signature.