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 811-21905
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First Trust/Aberdeen Emerging Opportunity 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, 2013
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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
ANNUAL
REPORT
FOR THE YEAR ENDED
DECEMBER 31, 2013
FIRST TRUST/
ABERDEEN
EMERGING
OPPORTUNITY
Fund
(FEO)
ABERDEEN
ASSET MANAGEMENT
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TABLE OF CONTENTS
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FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
ANNUAL REPORT
DECEMBER 31, 2013
Shareholder Letter........................................................... 1
At a Glance.................................................................. 2
Portfolio Commentary......................................................... 4
Portfolio of Investments..................................................... 8
Schedule of Forward Foreign Currency Contracts............................... 17
Statement of Assets and Liabilities.......................................... 18
Statement of Operations...................................................... 19
Statements of Changes in Net Assets.......................................... 20
Statement of Cash Flows...................................................... 21
Financial Highlights......................................................... 22
Notes to Financial Statements................................................ 23
Report of Independent Registered Public Accounting Firm...................... 29
Additional Information....................................................... 30
Board of Trustees and Officers............................................... 34
Privacy Policy............................................................... 36
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 Aberdeen Asset Management Inc. ("Aberdeen" 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/Aberdeen Emerging Opportunity 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 current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
Aberdeen 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 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/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
DECEMBER 31, 2013
Dear Shareholders:
I am pleased to present you with the annual report for your investment in First
Trust/Aberdeen Emerging Opportunity Fund (the "Fund").
As a shareholder, twice a year you receive a detailed report about your
investment, including portfolio commentary from the Fund's management team, a
performance analysis and a market and Fund outlook. Additionally, First Trust
Advisors L.P. ("First Trust") compiles the Fund's financial statements for you
to review. These reports are intended to keep you up-to-date on your investment,
and I encourage you to read this document and discuss it with your financial
advisor.
As you are probably aware, the twelve months covered by this report saw both
challenging economic and political issues in the U.S. However, the period was
still positive for the markets. In fact, the S&P 500 Index, as measured on a
total return basis, rose 32.39% during the twelve months ended December 31,
2013. Of course, past performance can never be an indicator of future
performance, but First Trust believes that staying invested in quality products
through up and down markets and having a long-term horizon can help investors as
they work toward their financial goals.
First Trust continues to offer a variety of products that we believe could fit
the financial plans for many investors seeking long-term investment success.
Your financial advisor can tell you about the other investments First Trust
offers that might fit your financial goals. We encourage you to discuss those
goals with your financial advisor regularly so that he or she can help keep you
on track and help you choose investments that match your goals.
First Trust will continue to make available up-to-date information about your
investments so you and your financial advisor are current on any First Trust
investments you own. We value our relationship with you, and thank you for the
opportunity to assist you in achieving 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/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
"AT A GLANCE"
AS OF DECEMBER 31, 2013 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FEO
Common Share Price $18.05
Common Share Net Asset Value ("NAV") $20.61
Premium (Discount) to NAV (12.42)%
Net Assets Applicable to Common Shares $109,813,046
Current Quarterly Distribution per Common Share (1) $0.350
Current Annualized Distribution per Common Share $1.400
Current Distribution Rate on Closing Common Share Price (2) 7.76%
Current Distribution Rate on NAV (2) 6.79%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
12/12 $22.05 $23.66
23.10 23.87
23.37 23.88
23.36 23.97
1/13 23.54 23.93
23.20 23.95
23.44 23.88
23.00 23.86
2/13 22.44 23.78
22.77 23.69
22.82 23.90
22.94 23.77
21.94 23.02
3/13 22.51 23.28
22.53 23.26
22.85 23.53
22.72 23.33
4/13 22.94 23.49
22.69 23.85
22.63 23.93
22.48 23.81
21.95 23.44
5/13 21.05 22.74
20.68 22.31
20.20 22.05
18.25 20.64
6/13 18.91 21.12
18.67 20.81
18.99 21.15
19.29 21.41
7/13 19.25 21.36
18.82 21.20
18.53 21.25
18.24 21.00
17.79 20.57
8/13 17.64 20.23
17.98 20.56
18.58 21.11
19.24 21.47
9/13 19.15 21.13
19.27 21.25
19.29 21.50
19.75 21.84
10/13 19.53 21.76
19.42 21.56
18.85 21.17
19.26 21.18
18.93 21.16
11/13 18.66 21.14
18.37 20.97
18.18 20.85
18.00 20.51
18.12 20.56
12/13 18.05 20.61
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PERFORMANCE
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Average Annual Total Return
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1 Year Ended 5 Years Ended Inception (08/28/2006)
12/31/2013 12/31/2013 to 12/31/2013
FUND PERFORMANCE (3)
NAV -6.49% 18.38% 9.53%
Market Value -12.13% 20.65% 6.89%
INDEX PERFORMANCE
Blended Benchmark(4) -4.53% 12.19% 8.37%
Barclays Capital Global Emerging Markets Index -2.66% 12.84% 7.81%
FTSE All World Emerging Market Index -3.50% 15.06% 6.53%
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% OF TOTAL
TOP 10 COUNTRIES(5) INVESTMENTS
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Brazil 13.0%
Mexico 7.4
India 6.3
Hong Kong 5.3
Turkey 5.2
Russia 4.9
South Korea 3.7
South Africa 3.6
Ireland 3.4
Hungary 3.2
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Total 56.0%
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% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
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Brazil Notas do Tesouro Nacional, Series F, 10.00%,
01/01/17 4.9%
Mexican Bonos, 8.50%, 11/18/38 2.6
Samsung Electronics Co., Ltd., Preference Shares 2.4
Russian Railway via RZD Capital PLC, 8.30%, 4/2/19 2.3
Hungary Government Bond, 6.75%, 11/24/17 2.3
Turkey Government Bond, 9.00%, 1/27/16 2.0
Taiwan Semiconductor Manufacturing Co., Ltd. 1.7
China Mobile Ltd. 1.7
Nigeria Government Bond, 15.10%, 4/27/17 1.7
South Africa Government Bond, 10.50%, 12/21/26 1.5
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Total 23.1%
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% OF TOTAL
CREDIT QUALITY(6) INVESTMENTS
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AAA 2.0%
AA- 1.1
A 5.7
A- 14.3
BBB+ 11.4
BBB 11.0
BBB- 12.3
BB+ 4.0
BB 7.3
BB- 16.4
B+ 3.8
B 4.6
B- 2.7
NR 3.4
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Total 100.0%
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(1) Most recent distribution paid or declared through 12/31/2013. 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 12/31/2013. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for NAV
returns and changes in Common Share price for market value returns. Total
returns do not reflect sales load and are not annualized for periods less
than one year. Past performance is not indicative of future results.
(4) Blended benchmark consists of the following: J.P. Morgan Emerging Market
Bond Index - Global Diversified (32.5%); J.P. Morgan Government Bond Index
- Emerging Markets (32.5%); MSCI Global Emerging Markets Index (35.0%)
(5) Fixed-income portfolio securities are included in a country based upon
their underlying credit exposure as determined by Aberdeen Asset
Management Inc., the sub-advisor.
(6) The credit quality and ratings information presented above reflects the
ratings assigned by one or more nationally recognized statistical rating
organizations (NRSROs), including Standard & Poor's Ratings Group, a
division of the McGraw-Hill Companies, Inc., Moody's Investors Service,
Inc., Fitch Ratings or a comparably rated NRSRO. For situations in which a
security is rated by more than one NRSRO and the ratings are not
equivalent, the highest ratings are used. The credit ratings shown relate
to the creditworthiness of the issuers of the underlying securities in the
Fund, and not to the Fund or its Shares. Credit ratings are subject to
change.
Page 2
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
"AT A GLANCE" (CONTINUED)
AS OF DECEMBER 31, 2013 (UNAUDITED)
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% OF TOTAL
INDUSTRY CLASSIFICATION INVESTMENTS
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Sovereigns 35.7%
Commercial Banks 9.3
Oil, Gas & Consumable Fuels 5.3
Semiconductors & Semiconductor Equipment 4.2
Real Estate Management & Development 3.6
Railroad 2.6
Food & Staples Retailing 2.5
Beverages 2.3
Wireless Telecommunication Services 2.1
Metals & Mining 2.1
Construction Materials 1.9
Automobiles 1.9
Banking 1.9
Pharmaceuticals 1.8
Exploration & Production 1.7
Tobacco 1.3
Thrifts & Mortgage Finance 1.3
Insurance 1.2
IT Services 1.2
Energy Equipment & Services 1.1
Supranationals 1.1
Industrial Other 1.1
Government Development Banks 1.0
Government Agencies 1.0
Transportation Infrastructure 0.9
Real Estate 0.9
Food & Beverage 0.9
Financial Services 0.8
Wireless Telecom Services 0.8
Specialty Retail 0.8
Diversified Financial Services 0.6
Household Products 0.6
Chemicals 0.6
Consumer Services 0.6
Multiline Retail 0.5
Hotels, Restaurants & Leisure 0.5
Consumer Finance 0.3
Utilities 0.3
Wireline Telecom Services 0.3
Pipeline 0.3
Manufactured Goods 0.3
Media Non-Cable 0.2
Oil & Gas Services 0.2
Home Improvement 0.2
Integrated Oils 0.2
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Total 100.0%
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Page 3
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PORTFOLIO COMMENTARY
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FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
ANNUAL REPORT
DECEMBER 31, 2013
SUB-ADVISOR
Aberdeen Asset Management Inc. ("Aberdeen" or the "Sub-Advisor"), a Securities
and Exchange Commission registered investment advisor, is a wholly-owned
subsidiary of Aberdeen Asset Management PLC ("Aberdeen Group"). Aberdeen Group
is a publicly-traded international investment management group listed on the
London Stock Exchange, managing assets for both institutional and retail clients
from offices around the world.
PORTFOLIO MANAGEMENT TEAM
Investment decisions for the First Trust/Aberdeen Emerging Opportunity Fund (the
"Fund") are made by Aberdeen using a team approach and not by any one
individual. By making team decisions, Aberdeen seeks to ensure that the
investment process results in consistent returns across all portfolios with
similar objectives. Aberdeen does not employ separate research analysts.
Instead, Aberdeen's investment managers combine analysis with portfolio
management. Each member of the team has sector and portfolio responsibilities
such as day-to-day monitoring of liquidity. The overall result of this matrix
approach is a high degree of cross-coverage, leading to a deeper understanding
of the securities in which Aberdeen invests. Below are the members of the team
with significant responsibility for the day-to-day management of the Fund's
portfolio.
EQUITY MANAGEMENT TEAM
DEVAN KALOO
Head of Emerging Market Equity for the Aberdeen Group
JOANNE IRVINE
Head of Global Emerging Market ("GEM") Equity Team ex Asia
MARK GORDON-JAMES
Investment Manager, GEM Equity Team
FIONA MANNING
Investment Manager, GEM Equity Team
ANDY BROWN
Investment Manager, GEM Equity Team
PETER TAYLOR
Senior Investment Manager/Head of Corporate Governance
FIXED-INCOME MANAGEMENT TEAM
BRETT DIMENT
Head of Emerging Market Debt
KEVIN DALY
Portfolio Manager, Emerging Market Debt
EDWIN GUTIERREZ
Portfolio Manager, Emerging Market Debt
MAX WOLMAN
Portfolio Manager, Emerging Market Debt
ESTHER CHAN
Portfolio Manager, Emerging Market Debt
COMMENTARY
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
The investment objective of the Fund is to provide a high level of total return.
The Fund pursues its investment objective by investing at least 80% of its
managed assets in a diversified portfolio of equity and fixed-income securities
of issuers in emerging market countries. There can be no assurance that the
Fund's investment objective will be achieved, and the Fund may not be
appropriate for all investors.
FUND RECAP
The Fund had a net asset value ("NAV") total return(1) of -6.49% and a market
value total return of -12.13% for the year ended December 31, 2013, compared to
the Fund's blended benchmark(2) total return of -4.53% over the same period. In
addition to the benchmark, the Fund currently uses other indexes for comparative
purposes. The total returns for the year ended December 31, 2013, for these
indices were as follows: the Barclays Capital Global Emerging Markets Index was
-2.66% and the FTSE All World Emerging Market Index was -3.50%.
The Fund uses leverage because its managers believe that, over time, leverage
provides opportunities for additional income and total return for common
shareholders. However, the use of leverage can also expose common shareholders
to additional volatility. For example, as the prices of securities held by the
Fund decline, the negative impact of the evaluation changes on Common Share NAV
and Common shareholder total return is magnified by the use of leverage.
Conversely, leverage may enhance Common Share returns during periods when the
prices of securities held by the Fund generally are rising. Unlike the Fund, the
Barclays Capital Global Emerging Markets Index, FTSE All World Emerging Market
Index and the components of the blended benchmark are not leveraged. Leverage
had a negative impact on the performance of the Fund over this reporting period.
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1 Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, and changes in NAV per share for NAV
returns and changes in Common Share price for market value returns. Total
returns do not reflect sales load and are not annualized for periods less
than one year. Past performance is not indicative of future results.
2 Blended benchmark consists of the following: J.P. Morgan Emerging Markets
Bond Index - Global Diversified (32.5%); J.P. Morgan Government Bond Index
- Emerging Markets (32.5%); MSCI Global Emerging Markets Index (35.0%).
Page 4
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
ANNUAL REPORT
DECEMBER 31, 2013
MARKET RECAP - EQUITY
Emerging market equities had a difficult time in 2013, underperforming their
developed counterparts by a significant margin. Notably, concerns over the U.S.
Federal Reserve's (the "Fed") planned exit from quantitative easing kept
investors on edge for much of 2013, prompting capital flight, sharp falls in
currencies and monetary tightening. The economic slowdown across the developing
world, particularly in the larger economies, at the time when expectations of
growth in the developed world were improving, also hurt sentiment. Several
countries saw widespread protests as growth failed to keep pace with popular
aspirations that were raised during earlier phases of rapid expansion.
MARKET RECAP - FIXED INCOME
Emerging market debt performance was mixed during 2013 with both hard and local
currency debt posting losses. Over the year, the J.P. Morgan Emerging Markets
Bond Index - Global Diversified declined by -5.28% and its spread increased 29
basis points ("bps") to +285 over U.S. Treasuries. The J.P. Morgan Global Bond
Index - Emerging Markets Diversified decreased -6.32% over the year.
In hard currency debt, the Middle East was the only region to post positive
returns, while Latin America and Asia suffered the greatest losses. Uruguay was
the worst-performing country over the period, closely followed by Turkey and
Indonesia, not helped by having some of the highest duration within the Barclays
Capital Global Emerging Markets Index. Belize was the strongest performing
credit as it bounced back from restructuring, while Argentina and Ecuador also
posted strong gains. In local currency debt, all regions posted negative
returns, led by Latin America. In terms of countries, Brazil was the
worst-performing country, followed by Turkey and South Africa. Hungary posted
the greatest gains, followed by Nigeria and Poland.
Risk appetite took a breather at the beginning of 2013 following a surprise
Italian parliamentary election result in February and the news of a Cyprus
bailout at the end of March. Poor employment figures in the U.S., however,
caused Treasury yields to fall sharply in April, providing support for emerging
market spread products.
Increased rhetoric from the Fed in May and June regarding the "tapering" of its
quantitative easing program toward the end of 2013 caused emerging market debt
to perform poorly. The announcements were motivated by increasingly positive
signs of economic recovery in the U.S. Consequently, U.S. Treasury yields rose,
causing emerging market debt to suffer. Market concerns over a reversal in fund
flows into the asset class, as well as a higher cost of financing for emerging
market countries, led to a significant re-pricing across all segments of the
asset class.
July generally provided some respite from negative sentiment, although a
downbeat tone came back to emerging markets in August as investors refocused
their attention on the state of the U.S. economy and its effect on the Fed's
monetary policy stance. Events in Syria also had a marked impact on sentiment,
after a chemical weapons attack on civilians was blamed on pro-Assad forces and
the prospect of a U.S. military strike on Damascus emerged.
Emerging markets were treated to an unexpected, positive surprise in the middle
of September when the U.S. Federal Open Market Committee ("FOMC") decided not to
begin tapering its asset purchases given that it is still unconvinced by the
scale of the economic recovery in the United States. The post "no tapering"
announcement resulted in a strong two-day rally as investors deemed that an
equilibrium level had been reached and that value had now returned to emerging
market assets.
Nevertheless, improved U.S. economic data in November led to a growing sense
that there would not be a significant delay in the Fed beginning to taper its
quantitative easing program. In its December meeting, the Fed announced that it
would start tapering its asset purchasing program by US$10 billion, which was
viewed positively by the market given that policy remains accommodative.
PERFORMANCE ANALYSIS - EQUITY
The equity portion of the Fund underperformed the benchmark against a
challenging backdrop. Currency weakness in markets where the portfolio has
long-standing overweight positions had a significant impact on the Fund's
performance. The Brazilian real, Indian rupee, Indonesian rupiah, Turkish lira
and South African rand were among the emerging market currencies that
depreciated the most against the U.S. dollar as capital flows rotated to
developed markets. Despite the macroeconomic volatility of these nations, we
continue to be drawn to the companies there, many of which have sustainable
business models, strong balance sheets and are focused on shareholder returns.
In contrast China, Korea and Taiwan, where the portfolio has a light exposure,
held up better amid the volatility; China and Taiwan further benefited from
their pegged or managed currencies. The Fund's underweight exposure to these
north Asian countries is due to the lack of companies with sufficient quality to
meet the Fund's investment criteria and we do not foresee a major shift in our
exposure to these markets. Meanwhile, the Fund's overweight to financials and
consumer-related sectors, which are interest-rate sensitive, also hurt relative
performance as some countries tightened monetary policy to support their
currencies.
Page 5
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
ANNUAL REPORT
DECEMBER 31, 2013
At the stock level, the companies that underperformed over the year included
several bank holdings such as Brazilian bank Banco Bradesco S.A., and Turkish
lenders Akbank TAS and Turkiye Garanti Bankasi AS. Despite reporting earnings in
line with our expectations, their share prices were hit by tapering fears rather
than by fundamental issues; we are comfortable with the Fund's financial
holdings, many of which we believe remain well capitalised and offer good value.
Consumer companies such as Truworths International Ltd., Massmart Holdings Ltd.
and PT Astra International Tbk also underperformed. Tough operating conditions
weighed on their results, even though their earnings met our conservative
forecasts. Although the Fund's consumer-related holdings currently face cyclical
challenges, their long-term prospects remain upbeat and many are well placed to
benefit from a recovery, in our opinion.
On a brighter note, stock selection was positive in Korea, India and Mexico;
most of our holdings delivered healthy results. The top-performing stock last
year was Korean semiconductor firm Samsung Electronics Co. Ltd., which continued
to post record results that were driven by its mobile division. In India,
software company Infosys Technologies Ltd. gained from prospects of a recovery
in the U.S., where it has a large customer base, and on signs that the operating
environment was stabilising. The return of one of its founders Narayana Murthy,
a pioneer in the domestic IT services industry, also reassured investors. While
the tasks ahead for Murthy are considerable, he is very clear on what needs to
be done, a sentiment we hold based on our recent meeting with management. As
well, we believe the respect he commands should go a long way in reducing
execution risks for the company. Mexican bank Grupo Financiero Banorte, S.A.B.
de C.V.'s price recovered following its successful capital-raising exercise to
strengthen the balance sheet after an acquisition spree.
Other holdings that contributed positively to relative returns included Polish
lender Bank Pekao S.A. and pan-Asian insurer AIA Group Ltd. Better hopes of
recovery in Europe supported Bank Pekao while AIA's new business grew strongly.
Hungarian pharmaceutical company Richter Gedeon Nyrt was buoyed by results which
showed signs of a rebound. Brazilian fuel and chemicals company Ultrapar
Participacoes S.A. rallied on the back of good performance across all its
businesses, in particular its petroleum distribution arm, Ipiranga, where
volumes remain solid and retail margins healthy. South African brewer SABMiller
PLC benefited from robust volume growth in Africa and Latin America. The Fund's
non-benchmark exposure to Tenaris S.A., a global specialist pipe maker with
significant operations in Latin America, also proved beneficial on the back of
an expected recovery in drilling activity in North America as well as Mexico's
energy reforms.
PERFORMANCE ANALYSIS - FIXED INCOME
Over the course of 2013, the emerging market debt portion of the Fund
outperformed its blended benchmark in hard currency by 418 bps, but trailed in
local bonds by 214 bps.
Within hard currency space, the Fund's overweight position in Russia was the key
positive contributor to performance, helped by the Fund's allocation to
quasi-sovereign and corporate credits. Underweight positions in Venezuela and
Turkey also added value to the Fund. On the other side, an overweight position
in Mexico detracted from performance as the portfolio had exposure to the
Mexican homebuilder sector which suffered from working capital issues during the
first quarter of 2013. Underweight positions in Argentina and Lebanon and an
overweight position in Brazil also detracted from the Fund.
Within the local currency holdings, an underweight position in Peru benefitted
the Fund as did an off-benchmark holding in Serbian treasury bills. An
off-benchmark position in Indonesia was the main detractor from performance as
the portfolio had underweights in Poland and Romania.
MARKET OUTLOOK - EQUITY
Emerging market equities have steadied somewhat in recent months, but the year
ahead may yet prove trying. For one, the process of unwinding the Fed's monetary
stimulus is tricky; any misstep could lead to renewed market stress in the short
term. Then there are domestic issues to contend with as well. Growth has
decelerated across the developing world and is not expected to return to their
previous robust levels soon. In the face of capital outflows, many countries
have raised interest rates, putting further pressure on economic activity.
Although a recent pickup in exports to advanced economies and resilient local
demand may help negate the impact, economic imbalances persist in some
developing economies. Further reforms, such as improving infrastructure and
liberalising labour and capital markets, are necessary to sustain future growth.
But extensive reforms require political will, which appears to be in short
supply. With Brazil, Hungary, India, Indonesia, South Africa and Turkey all
facing crucial elections in 2014, politicians may be reluctant to implement
unpopular but much-needed reforms.
That said, much of the concerns have already been priced in, with the asset
class trading at a substantial discount to both its historical average and to
developed markets. In our opinion, a repeat of the crisis experienced in the
late 1990s is unlikely, given that many emerging markets have improved their
balance sheets, built up reserves and have more flexible exchange rate regimes
than before. We believe economies are still in decent shape despite the
slowdown, and will likely be supported by any general global upturn. Companies,
too, are more profitable and have lower debt compared to their advanced market
peers. An adjustment process is going on at the country and corporate level
which is ultimately very positive for these markets. So while uncertainties lie
ahead, opportunities can be had for prudent stock pickers over the long run, in
our opinion.
Page 6
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
ANNUAL REPORT
DECEMBER 31, 2013
MARKET OUTLOOK - FIXED INCOME
Looking ahead into 2014, the risk-return opportunities in the market do not look
as asymmetrically skewed as they did at the beginning of 2013. In general,
valuations in emerging market debt are looking more attractive than a year ago
when yields were near their all-time lows. Hard currency and local currency
sovereign yields have unsurprisingly risen sharply, while emerging market
currencies took most of the pain in 2013, but with the technical position
improving we believe the risk-return trade-off is looking more attractive. We
also believe that volatility will be lower during 2014 than it was in 2013 as
strong U.S. economic data should no longer be a surprise to the market than it
was a year ago, with a strong possibility that once final 2013 GDP growth is
released, there will be further upward revisions to economists' 2014 forecasts.
Page 7
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a)
DECEMBER 31, 2013
SHARES DESCRIPTION VALUE
-------------- ----------------------------------------------------------------------------------------- ------------
COMMON STOCKS - 48.2%
BRAZIL - 7.0%
125,316 Banco Bradesco S.A., ADR ................................................................ $ 1,570,210
22,000 Lojas Renner S.A......................................................................... 568,825
27,454 Multiplan Empreendimentos Imobiliarios S.A., Preference Shares .......................... 580,674
93,000 Petroleo Brasileiro S.A., ADR ........................................................... 1,281,540
66,500 Souza Cruz S.A........................................................................... 679,587
58,267 Ultrapar Participacoes S.A............................................................... 1,381,811
84,104 Vale S.A., ADR .......................................................................... 1,282,586
21,842 Vale S.A., Preference Shares, ADR ....................................................... 306,006
------------
7,651,239
------------
CHILE - 0.7%
32,728 Banco Santander Chile S.A., ADR ......................................................... 771,399
------------
CHINA - 1.1%
1,070,000 PetroChina Co., Ltd., Class H ........................................................... 1,172,900
------------
HONG KONG - 5.5%
280,000 AIA Group Ltd............................................................................ 1,404,643
188,500 China Mobile Ltd......................................................................... 1,954,456
202,000 Hang Lung Group Ltd...................................................................... 1,019,862
640,000 Swire Pacific Ltd., B Shares ............................................................ 1,444,363
89,600 Swire Properties Ltd..................................................................... 226,476
------------
6,049,800
------------
HUNGARY - 1.0%
55,000 Richter Gedeon Nyrt ..................................................................... 1,119,706
------------
INDIA - 6.6%
20,000 GlaxoSmithKline Pharmaceuticals Ltd...................................................... 969,461
13,000 Grasim Industries Ltd.................................................................... 570,525
23,000 Hero MotoCorp Ltd........................................................................ 771,674
78,000 Hindustan Unilever Ltd................................................................... 719,597
110,500 Housing Development Finance Corp., Ltd................................................... 1,419,591
20,000 ICICI Bank Ltd........................................................................... 355,266
23,668 Infosys Ltd.............................................................................. 1,333,738
162,173 ITC Ltd.................................................................................. 843,835
7,428 UltraTech Cement Ltd..................................................................... 211,846
------------
7,195,533
------------
INDONESIA - 1.3%
2,524,000 PT Astra International Tbk .............................................................. 1,410,288
------------
ITALY - 1.1%
28,600 Tenaris S.A., ADR ....................................................................... 1,249,534
------------
KAZAKHSTAN - 0.0%
376 BTA Bank JSC (b) ........................................................................ 1
------------
MALAYSIA - 1.1%
230,606 CIMB Group Holdings Berhad .............................................................. 536,473
120,000 Public Bank Berhad ...................................................................... 715,860
------------
1,252,333
------------
MEXICO - 3.8%
15,700 Fomento Economico Mexicano, S.A.B. de C.V., ADR ......................................... 1,536,559
40,000 Grupo Aeroportuario del Centro Norte, S.A.B. de C.V., ADR ............................... 1,068,000
Page 8 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
DECEMBER 31, 2013
SHARES DESCRIPTION VALUE
-------------- ----------------------------------------------------------------------------------------- ------------
COMMON STOCKS (CONTINUED)
MEXICO (CONTINUED)
228,200 Grupo Financiero Banorte, S.A.B. de C.V., O Shares ...................................... $ 1,596,779
------------
4,201,338
------------
PHILIPPINES - 1.3%
1,400,000 Ayala Land, Inc.......................................................................... 780,713
342,672 Bank of the Philippine Islands .......................................................... 656,275
------------
1,436,988
------------
POLAND - 1.1%
20,000 Bank Pekao S.A........................................................................... 1,188,329
------------
RUSSIA - 2.1%
25,500 LUKOIL, ADR ............................................................................. 1,609,560
10,600 Magnit OJSC ............................................................................. 701,720
------------
2,311,280
------------
SOUTH AFRICA - 2.3%
43,610 Massmart Holdings Ltd.................................................................... 540,448
20,978 SABMiller PLC ........................................................................... 1,065,399
119,729 Truworths International Ltd.............................................................. 876,110
------------
2,481,957
------------
SOUTH KOREA - 3.3%
3,292 E-Mart Co., Ltd.......................................................................... 831,305
2,870 Samsung Electronics Co., Ltd., Preference Shares ........................................ 2,754,830
------------
3,586,135
------------
TAIWAN - 2.3%
150,005 Taiwan Mobile Co., Ltd................................................................... 484,691
561,954 Taiwan Semiconductor Manufacturing Co., Ltd.............................................. 1,989,234
------------
2,473,925
------------
THAILAND - 2.2%
123,000 PTT Exploration and Production Public Co., Ltd........................................... 623,235
67,200 Siam Cement Public (The) Co., Ltd........................................................ 830,286
230,600 Siam Commercial Bank Public Co., Ltd..................................................... 1,007,033
------------
2,460,554
------------
TURKEY - 2.2%
134,635 Akbank TAS .............................................................................. 419,754
40,444 Bim Birlesik Magazalar AS ............................................................... 816,784
181,150 Haci Omer Sabanci Holding A.S............................................................ 728,309
141,000 Turkiye Garanti Bankasi AS .............................................................. 456,659
------------
2,421,506
------------
UNITED KINGDOM - 1.7%
19,000 BHP Billiton PLC ........................................................................ 586,645
56,608 Standard Chartered PLC .................................................................. 1,274,871
------------
1,861,516
------------
UNITED STATES - 0.5%
7,500 Yum! Brands, Inc......................................................................... 567,075
------------
TOTAL COMMON STOCKS ..................................................................... 52,863,336
(Cost $37,797,122) ------------
See Notes to Financial Statements Page 9
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
DECEMBER 31, 2013
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
-------------- ------------------------------------------------------------- ---------- -------------- ------------
FOREIGN SOVEREIGN BONDS AND NOTES - 39.9%
ARMENIA - 1.0%
850,000 Republic of Armenia (USD) (c)................................ 6.00% 09/30/20 $ 847,875
200,000 Republic of Armenia (USD).................................... 6.00% 09/30/20 199,500
------------
1,047,375
------------
BAHRAIN - 0.2%
220,000 Bahrain Government International Bond (USD) (c).............. 6.13% 08/01/23 228,030
------------
BRAZIL - 6.0%
650,000 Banco Nacional de Desenvolvimento Economico e Social
(USD) (c)................................................. 5.75% 09/26/23 640,217
13,939,000 Brazil Notas do Tesouro Nacional, Series F (BRL)............. 10.00% 01/01/17 5,599,936
370,000 Brazilian Government International Bond (BRL)................ 8.50% 01/05/24 138,010
180,000 Brazilian Government International Bond (USD)................ 7.13% 01/20/37 207,000
------------
6,585,163
------------
COLOMBIA - 0.1%
130,000,000 Columbia Government International Bond (COP)................. 7.75% 04/14/21 74,834
------------
COSTA RICA - 0.3%
300,000 Costa Rica Government International Bond (USD)............... 4.25% 01/26/23 276,000
------------
CROATIA - 1.3%
600,000 Croatia Government International Bond (USD).................. 6.63% 07/14/20 645,750
780,000 Croatia Government International Bond (USD).................. 6.00% 01/26/24 778,050
------------
1,423,800
------------
DOMINICAN REPUBLIC - 0.3%
200,000 Dominican Republic International Bond (USD).................. 7.50% 05/06/21 218,000
118,000 Dominican Republic International Bond (USD).................. 8.63% 04/20/27 128,325
------------
346,325
------------
GABON - 0.6%
650,000 Gabonese Republic (USD) (c).................................. 6.38% 12/12/24 654,875
------------
GEORGIA - 0.3%
350,000 Georgian Oil and Gas Corp. JSC (USD) (c)..................... 6.88% 05/16/17 362,250
------------
HONDURAS - 0.7%
840,000 Honduras Government International Bond (USD) (c)............. 7.50% 03/15/24 774,900
------------
HUNGARY - 2.3%
513,000,000 Hungary Government Bond (HUF)................................ 6.75% 11/24/17 2,575,953
------------
INDONESIA - 1.2%
4,000,000,000 Indonesia Treasury Bond (IDR)................................ 10.00% 07/15/17 352,730
6,900,000,000 Indonesia Treasury Bond (IDR)................................ 6.13% 05/15/28 441,119
5,500,000,000 Indonesia Treasury Bond (IDR)................................ 10.50% 08/15/30 511,002
------------
1,304,851
------------
IRAQ - 0.2%
280,000 Republic of Iraq (USD)....................................... 5.80% 01/15/28 240,100
------------
IVORY COAST - 0.5%
600,000 Ivory Coast Government International Bond (USD).............. 5.75% 12/31/32 540,000
------------
Page 10 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
DECEMBER 31, 2013
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
-------------- ------------------------------------------------------------- ---------- -------------- ------------
FOREIGN SOVEREIGN BONDS AND NOTES (CONTINUED)
MEXICO - 3.4%
35,100,000 Mexican Bonos (MXN).......................................... 8.50% 11/18/38 $ 2,982,832
4,000,000 Mexican Bonos (MXN).......................................... 7.75% 11/13/42 313,476
400,000 Mexico Government International Bond (USD)................... 6.05% 01/11/40 437,000
------------
3,733,308
------------
MONGOLIA - 0.4%
490,000 Development Bank of Mongolia LLC (USD)....................... 5.75% 03/21/17 463,050
------------
NIGERIA - 2.2%
295,000,000 Nigeria Government Bond (NGN)................................ 15.10% 04/27/17 1,946,318
450,000 Nigeria Government International Bond (USD) (c).............. 5.13% 07/12/18 462,937
------------
2,409,255
------------
PERU - 1.3%
2,620,000 Peru Government Bond (PEN)................................... 7.84% 08/12/20 1,068,910
890,000 Peruvian Government International Bond (PEN)................. 6.95% 08/12/31 318,709
------------
1,387,619
------------
ROMANIA - 0.3%
330,000 Romanian Government International Bond (USD)................. 6.75% 02/07/22 375,788
------------
RUSSIA - 3.5%
46,500,000 Russian Federal Bond - OFZ (RUB)............................. 7.40% 06/14/17 1,443,450
9,850,000 Russian Federal Bond - OFZ (RUB)............................. 7.00% 01/25/23 289,591
50,000,000 Russian Foreign Bond - Eurobond (RUB)........................ 7.85% 03/10/18 1,570,642
450,000 Vnesheconombank Via VEB Finance PLC (USD).................... 6.90% 07/09/20 497,813
------------
3,801,496
------------
RWANDA - 0.6%
500,000 Rwanda International Government Bond (USD)................... 6.63% 05/02/23 477,500
200,000 Rwanda International Government Bond (USD) (c)............... 6.63% 05/02/23 191,000
------------
668,500
------------
SERBIA - 2.8%
600,000 Republic of Serbia (USD)..................................... 5.25% 11/21/17 604,500
600,000 Republic of Serbia (USD)..................................... 7.25% 09/28/21 633,750
200,000 Republic of Serbia (USD) (c)................................. 7.25% 09/28/21 211,250
137,000,000 Serbia Treasury Bills (RSD).................................. (d) 01/23/14 1,645,053
------------
3,094,553
------------
SOUTH AFRICA - 2.4%
500,000 Eskom Holdings SOC Ltd. (USD) (c)............................ 6.75% 08/06/23 513,750
15,270,000 South Africa Government Bond (ZAR)........................... 10.50% 12/21/26 1,717,885
400,000 South Africa Government International Bond (USD)............. 5.88% 09/16/25 417,200
------------
2,648,835
------------
SOUTH KOREA - 0.6%
41,000,000 Export-Import Bank of Korea (INR) (c)........................ 6.00% 02/27/14 660,322
------------
TANZANIA - 0.6%
680,000 Tanzania Government International Bond (USD) (e)............. 6.39% 03/09/20 714,000
------------
See Notes to Financial Statements Page 11
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
DECEMBER 31, 2013
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
-------------- ------------------------------------------------------------- ---------- -------------- ------------
FOREIGN SOVEREIGN BONDS AND NOTES (CONTINUED)
TURKEY - 2.9%
4,850,000 Turkey Government Bond (TRY)................................. 9.00% 01/27/16 $ 2,221,657
1,600,000 Turkey Government Bond (TRY)................................. 6.30% 02/14/18 656,975
250,000 Turkey Government International Bond (USD)................... 6.25% 09/26/22 260,250
------------
3,138,882
------------
UKRAINE - 0.6%
700,000 Ukraine Government International Bond (USD).................. 9.25% 07/24/17 701,456
------------
UNITED ARAB EMIRATES - 1.2%
1,090,000 Emirate of Dubai Government International Bonds (USD)........ 7.75% 10/05/20 1,299,825
------------
URUGUAY - 1.1%
23,352,145 Uruguay Government International Bond, Inflation Adjusted
Bond (UYU) (f)............................................ 5.00% 09/14/18 1,177,708
------------
VENEZUELA - 0.8%
1,042,500 Venezuela Government International Bond (USD)................ 5.75% 02/26/16 888,210
------------
VIETNAM - 0.2%
200,000 Vietnam Government International Bond (USD).................. 6.88% 01/15/16 214,500
------------
TOTAL FOREIGN SOVEREIGN BONDS AND NOTES 43,811,763
(Cost $46,331,240) ------------
FOREIGN CORPORATE BONDS AND NOTES (g) - 15.6%
BRAZIL - 1.3%
550,000 Caixa Economica Federal (USD) (c)............................ 4.50% 10/03/18 547,800
350,000 JBS Investments GmBH (USD) (c)............................... 7.75% 10/28/20 355,250
350,000 OAS Financial Ltd. (USD) (c)................................. 8.88% (h) 310,625
200,000 OAS Investments GmbH (USD) (c)............................... 8.25% 10/19/19 196,000
------------
1,409,675
------------
CANADA - 0.6%
650,000 Uranium One Investments, Inc. (USD) (c)...................... 6.25% 12/13/18 641,063
------------
CHINA - 0.5%
200,000 COSL Finance BVI Ltd. (USD) (c).............................. 3.25% 09/06/22 179,710
350,000 Longfor Properties Co., Ltd. (USD)........................... 6.88% 10/18/19 367,500
------------
547,210
------------
COLOMBIA - 0.2%
250,000 Pacific Rubiales Energy Corp. (USD) (c)...................... 5.38% 01/26/19 252,500
------------
DOMINICAN REPUBLIC - 0.4%
350,000 AES Andres Dominicana, Ltd. / Itabo Dominicana, Ltd.
(USD)..................................................... 9.50% 11/12/20 374,500
------------
EL SALVADOR - 0.4%
450,000 Telemovil Finance Co., Ltd. (USD)............................ 8.00% 10/01/17 481,500
------------
GUATEMALA - 0.6%
250,000 Cementos Progreso Trust (USD) (c)............................ 7.13% 11/06/23 254,063
400,000 Industrial Subordinated Trust (USD).......................... 8.25% 07/27/21 430,000
------------
684,063
------------
Page 12 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
DECEMBER 31, 2013
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
-------------- ------------------------------------------------------------- ---------- -------------- ------------
FOREIGN CORPORATE BONDS AND NOTES (g) (CONTINUED)
INDIA - 0.3%
400,000 Bharti Airtel International Netherlands B.V. (USD) (c)....... 5.13% 03/11/23 $ 371,360
------------
INDONESIA - 0.7%
150,000 Adaro Indonesia PT (USD)..................................... 7.63% 10/22/19 158,812
440,000 Pertamina Persero PT (USD) (c)............................... 4.30% 05/20/23 381,106
200,000 Pertamina Persero PT (USD)................................... 6.00% 05/03/42 165,750
------------
705,668
------------
KAZAKHSTAN - 0.7%
300,000 Kazakhstan Temir Zholy Finance B.V. (USD) (c)................ 6.95% 07/10/42 299,250
400,000 Zhaikmunai LLP (USD) (c)..................................... 7.13% 11/13/19 420,480
------------
719,730
------------
MEXICO - 1.5%
350,000 BBVA Bancomer S.A. (USD) (c)................................. 6.75% 09/30/22 372,085
350,000 CEMEX Espana Luxembourg (USD)................................ 9.88% 04/30/19 401,625
650,000 Offshore Drilling Holding S.A. (USD) (c)..................... 8.38% 09/20/20 695,500
160,000 Petroleos Mexicanos (USD).................................... 6.50% 06/02/41 168,000
------------
1,637,210
------------
MOZAMBIQUE - 0.6%
700,000 EMATUM Via Mozambique EMATUM Finance 2020 BV
(USD)..................................................... 6.31% 09/11/20 668,500
------------
MULTINATIONAL - 1.1%
76,200,000 European Bank For Reconstruction & Development (INR)......... 5.25% 02/07/14 1,227,971
------------
NIGERIA - 0.3%
310,000 GTB Finance B.V. (USD)....................................... 7.50% 05/19/16 328,662
------------
RUSSIA - 3.9%
150,000 Alfa Bank OJSC Via Alfa Bond Issuance PLC (USD).............. 7.88% 09/25/17 167,250
200,000 Alfa Bank OJSC Via Alfa Bond Issuance PLC (USD).............. 7.75% 04/28/21 214,750
400,000 EuroChem Mineral & Chemical Co. OJSC via EuroChem
GI Ltd. (USD) (c)......................................... 5.13% 12/12/17 402,500
230,000 Evraz Group S.A. (USD) (c)................................... 6.50% 04/22/20 214,762
300,000 Gazprom Neft OAO Via GPN Capital SA (USD) (c)................ 6.00% 11/27/23 306,000
86,400,000 Russian Railways via RZD Capital PLC (RUB)................... 8.30% 04/02/19 2,607,157
420,000 VimpelCom Holdings B.V. (USD) (c)............................ 5.95% 02/13/23 397,950
------------
4,310,369
------------
SOUTH AFRICA - 0.2%
220,000 Myriad International Holdings B.V. (USD) (c)................. 6.00% 07/18/20 236,500
------------
TURKEY - 0.6%
200,000 Arcelik AS (USD) (c)......................................... 5.00% 04/03/23 173,600
200,000 Turkiye Sise Ve Cam Fabrikalari AS (USD) (c)................. 4.25% 05/09/20 176,980
300,000 Yasar Holdings S.A. via Willow No. 2 (USD)................... 9.63% 10/07/15 296,250
------------
646,830
------------
See Notes to Financial Statements Page 13
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
DECEMBER 31, 2013
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
-------------- ------------------------------------------------------------- ---------- -------------- ------------
FOREIGN CORPORATE BONDS AND NOTES (g) (CONTINUED)
UKRAINE - 0.9%
350,000 Metinvest B.V. (USD)......................................... 8.75% 02/14/18 $ 330,750
370,000 MHP S.A. (USD) (c)........................................... 8.25% 04/02/20 330,299
360,000 Mriya Agro Holding PLC (USD) (c)............................. 9.45% 04/19/18 311,400
------------
972,449
------------
UNITED ARAB EMIRATES - 0.6%
600,000 Jafz Sukuk Ltd. (USD)........................................ 7.00% 06/19/19 687,000
------------
UNITED KINGDOM - 0.2%
250,000 Tullow Oil PLC (USD) (c)..................................... 6.00% 11/01/20 253,750
------------
TOTAL FOREIGN CORPORATE BONDS AND NOTES ................................................. 17,156,510
(Cost $17,458,618) ------------
TOTAL INVESTMENTS - 103.7% .............................................................. 113,831,609
(Cost $101,586,980) (i)
OUTSTANDING LOANS - (5.3%) .............................................................. (5,800,000)
NET OTHER ASSETS AND LIABILITIES - 1.6% ................................................. 1,781,437
------------
NET ASSETS - 100.0% ..................................................................... $109,813,046
============
(a) All of the securities within the Portfolio of Investments, except for the
BTA Bank JSC common stock, are available to serve as collateral for the
outstanding loans.
(b) Non-income producing security.
(c) This security, sold within the terms of a private placement memorandum, is
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and may be resold in transactions exempt from registration,
normally to qualified institutional buyers. Pursuant to procedures adopted
by the Fund's Board of Trustees, this security has been determined to be
liquid by the Fund's sub-advisor. At December 31, 2013, securities noted
as such amounted to $13,627,939 or 12.41% of net assets.
(d) Zero coupon bond.
(e) Floating rate security. The interest rate shown reflects the rate in
effect at December 31, 2013.
(f) Security whose principal value is adjusted in accordance with changes to
the country's Consumer Price Index. Interest is calculated on the basis of
the current adjusted principal value.
(g) Portfolio securities are included in a country based upon their underlying
credit exposure as determined by Aberdeen Asset Management Inc., the
Fund's investment sub-advisor.
(h) Perpetual maturity.
(i) Aggregate cost for federal income tax purposes is $101,819,688. As of
December 31, 2013, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$17,899,816 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$5,887,895.
ADR American Depositary Receipt
Currency Abbreviations:
BRL Brazilian Real
COP Columbian Peso
GBP British Pound Sterling
HKD Hong Kong Dollar
HUF Hungarian Forint
IDR Indonesian Rupiah
INR Indian Rupee
KRW South Korean Won
KZT Kazakhstan Tenge
MXN Mexican Peso
MYR Malaysian Ringgit
NGN Nigerian Naira
PEN Peruvian New Sol
PHP Philippines Peso
PLN Polish Zloty
RSD Serbian Dinar
RUB Russian Ruble
THB Thailand Baht
TRY Turkish Lira
TWD Taiwan New Dollar
USD United States Dollar
UYU Uruguayan Peso
ZAR South African Rand
Page 14 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2013
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of December 31,
2013 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
INVESTMENTS 12/31/2013 PRICES INPUTS INPUTS
--------------------------------------------------- ------------ ------------ -------------- ------------
Common Stocks*..................................... $ 52,863,336 $ 52,863,336 $ -- $ --
Foreign Sovereign Bonds and Notes*................. 43,811,763 -- 43,811,763 --
Foreign Corporate Bonds and Notes*................. 17,156,510 -- 17,156,510 --
------------ ------------ -------------- ------------
Total Investments.................................. 113,831,609 52,863,336 60,968,273 --
Forward Foreign Currency Contracts**............... 112,184 -- 112,184 --
------------ ------------ -------------- ------------
Total.............................................. $113,943,793 $ 52,863,336 $ 61,080,457 $ --
============ ============ ============== ============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
12/31/2013 PRICES INPUTS INPUTS
------------ ------------ -------------- ------------
Forward Foreign Currency Contracts**............... $ (54,252) $ -- $ (54,252) $ --
============ ============ ============== ============
* See the Portfolio of Investments for country breakout.
** See the Schedule of Forward Foreign Currency Contacts 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, 2013, the Fund transferred common stocks valued at $31,537,424 from Level 2
to Level 1 of the fair value hierarchy. The common stocks that transferred from
Level 2 to Level 1 did so as a result of foreign equities that are now being
valued based on quoted prices that were previously fair valued using a factor
provided by a pricing service due to the change in value between the foreign
markets' close and the New York Stock Exchange close on December 31, 2012
exceeding a certain threshold.
See Notes to Financial Statements Page 15
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2013
CURRENCY EXPOSURE % OF TOTAL
DIVERSIFICATION INVESTMENTS #
USD 45.1%
INR 8.0
HKD 6.3
BRL 5.6
MXN 4.3
ZAR 4.2
TRY 3.5
RUB 3.2
KRW 3.1
HUF 2.3
TWD 2.2
THB 2.2
NGN 1.7
RSD 1.4
IDR 1.3
PHP 1.3
GBP 1.1
MYR 1.1
PLN 1.0
UYU 1.0
COP 0.1
KZT 0.0 # #
PEN (0.0)+
------------------------------------
Total 100.0%
======
# The weightings include the impact of currency forwards.
## Amount is less than 0.1%.
+ Amount is less than (0.1)%.
Page 16 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
DECEMBER 31, 2013
FORWARD FOREIGN CURRENCY CONTRACTS
------------------------------------------------------------
PURCHASE SALE
VALUE AS OF VALUE AS OF UNREALIZED
SETTLEMENT AMOUNT AMOUNT DECEMBER 31, DECEMBER 31, APPRECIATION
DATE COUNTERPARTY PURCHASED (a) SOLD (a) 2013 2013 (DEPRECIATION)
------------ ------------ --------------------- ------------------- ---------------- ---------------- -------------
02/26/14 JPM USD 2,592,593 BRL 6,153,000 $ 2,592,593 $ 2,571,385 $ 21,208
01/16/14 CIT USD 1,114,928 HUF 245,327,000 1,114,928 1,134,280 (19,352)
02/26/14 DNDF USD 1,267,350 IDR 15,525,045,000 1,267,350 1,262,799 4,551
02/26/14 JPM USD 1,417,240 PEN 4,020,000 1,417,240 1,424,497 (7,257)
02/26/14 CIT USD 2,277,512 RUB 76,549,000 2,277,512 2,305,155 (27,643)
01/16/14 CIT USD 1,348,231 TRY 2,721,000 1,348,231 1,261,806 86,425
-------------
Net unrealized appreciation (depreciation)............................................................... $ 57,932
=============
(a) Please see Portfolio of Investments for currency descriptions.
Please see Note 2D - Offsetting on the Statement of Assets and Liabilities for a
table that presents the forward foreign currency contracts asset and liability
amounts on a gross basis.
Counterparty Abbreviations:
CIT Citibank, NA
DNDF Deutsche NDF Currencies
JPM JPMorgan Chase
See Notes to Financial Statements Page 17
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2013
ASSETS:
Investments, at value
(Cost $101,586,980)......................................................................... $113,831,609
Cash........................................................................................... 601,612
Foreign currency (Cost $11,043)................................................................ 10,881
Unrealized appreciation on forward foreign currency contracts.................................. 112,184
Receivables:
Interest.................................................................................... 1,267,752
Investment securities sold.................................................................. 529,732
Miscellaneous............................................................................... 40,381
Dividends................................................................................... 31,819
Prepaid expenses............................................................................... 1,935
------------
Total Assets............................................................................ 116,427,905
------------
LIABILITIES:
Outstanding loan............................................................................... 5,800,000
Unrealized depreciation on forward foreign currency contracts.................................. 54,252
Payables:
Investment securities purchased............................................................. 211,222
Custodian fees.............................................................................. 184,838
Deferred Thailand capital gains tax......................................................... 156,330
Investment advisory fees.................................................................... 99,154
Audit and tax fees.......................................................................... 58,200
Administrative fees......................................................................... 19,402
Interest and fees on loan................................................................... 12,043
Printing fees............................................................................... 11,074
Transfer agent fees......................................................................... 5,319
Legal fees.................................................................................. 1,219
Deferred Indonesian capital gains tax....................................................... 831
Financial reporting fees.................................................................... 771
Other liabilities.............................................................................. 204
------------
Total Liabilities........................................................................... 6,614,859
------------
NET ASSETS..................................................................................... $109,813,046
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $ 97,383,198
Par value...................................................................................... 53,278
Accumulated net investment income (loss)....................................................... (204,964)
Accumulated net realized gain (loss) on investments, forward foreign currency
contracts and foreign currency transactions.................................................. 462,761
Net unrealized appreciation (depreciation) on investments, forward foreign
currency contracts and foreign currency translation.......................................... 12,118,773
------------
NET ASSETS..................................................................................... $109,813,046
============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)........................... $ 20.61
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 5,327,785
============
Page 18 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2013
INVESTMENT INCOME:
Interest (net of foreign withholding tax of $10,567)........................................... $ 4,827,284
Dividends (net of foreign withholding tax of $148,972)......................................... 1,422,707
Other.......................................................................................... 57,702
------------
Total investment income..................................................................... 6,307,693
------------
EXPENSES:
Investment advisory fees....................................................................... 1,241,760
Custodian fees................................................................................. 285,084
Administrative fees............................................................................ 154,933
Interest and fees on loan...................................................................... 84,984
Audit and tax fees............................................................................. 64,721
Printing fees.................................................................................. 41,274
Transfer agent fees............................................................................ 36,250
Excise tax expense............................................................................. 27,178
Trustees' fees and expenses.................................................................... 19,437
Legal fees..................................................................................... 16,848
Financial reporting fees....................................................................... 9,250
Other.......................................................................................... 95,308
------------
Total expenses.............................................................................. 2,077,027
------------
NET INVESTMENT INCOME (LOSS)................................................................... 4,230,666
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments................................................................................. 2,846,715
Forward foreign currency contracts.......................................................... 482,135
Foreign currency transactions............................................................... (886,273)
------------
Net realized gain (loss)....................................................................... 2,442,577
------------
Net change in unrealized appreciation (depreciation) on:
Investments................................................................................. (15,574,092)
Forward foreign currency contracts.......................................................... (37,130)
Foreign currency translation................................................................ (42,294)
Net change in deferred Thailand capital gains tax.............................................. 116,180
Net change in deferred Indonesian capital gains tax............................................ 42,606
------------
Net change in unrealized appreciation (depreciation)........................................... (15,494,730)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ (13,052,153)
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS............................... $ (8,821,487)
============
See Notes to Financial Statements Page 19
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
12/31/2013 12/31/2012
------------- -------------
OPERATIONS:
Net investment income (loss)....................................................... $ 4,230,666 $ 4,774,944
Net realized gain (loss)........................................................... 2,442,577 1,919,847
Net change in unrealized appreciation (depreciation)............................... (15,494,730) 18,683,992
------------- -------------
Net increase (decrease) in net assets resulting from operations.................... (8,821,487) 25,378,783
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................................................. (4,041,125) (4,677,795)
Net realized gain.................................................................. (3,417,774) (2,781,104)
------------- -------------
Total distributions to shareholders................................................ (7,458,899) (7,458,899)
------------- -------------
Total increase (decrease) in net assets............................................ (16,280,386) 17,919,884
NET ASSETS:
Beginning of period................................................................ 126,093,432 108,173,548
------------- -------------
End of period...................................................................... $ 109,813,046 $ 126,093,432
============= =============
Accumulated net investment income (loss) at end of period.......................... $ (204,964) $ (168,124)
============= =============
COMMON SHARES:
Common Shares at end of period..................................................... 5,327,785 5,327,785
============= =============
Page 20 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations................. $ (8,821,487)
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by operating activities:
Purchases of investments.................................................. (60,656,054)
Sales, maturities and paydowns of investments............................. 62,008,152
Net amortization/accretion of premiums/discounts on investments........... (249,317)
Net realized gain/loss on investments..................................... (2,846,715)
Net realized gain/loss on foreign currency transactions (a)............... 843,649
Net change in unrealized appreciation/depreciation on forward foreign
currency contracts..................................................... 37,130
Net change in unrealized appreciation/depreciation on investments......... 15,574,092
CHANGES IN ASSETS AND LIABILITIES:
Increase in interest receivable........................................... (30,200)
Decrease in dividends receivable.......................................... 19,332
Increase in miscellaneous receivable...................................... (40,381)
Decrease in prepaid expenses.............................................. 1,712
Increase in interest and fees on loan payable............................. 1,092
Decrease in investment advisory fees payable.............................. (11,872)
Decrease in audit and tax fees payable.................................... (43)
Decrease in legal fees payable............................................ (1,503)
Decrease in printing fees payable......................................... (2,186)
Increase in administrative fees payable................................... 9,688
Increase in custodian fees payable........................................ 133,244
Increase in transfer agent fees payable................................... 1,730
Decrease in Trustees' fees and expenses payable........................... (8)
Decrease in deferred Thailand capital gains tax........................... (116,180)
Decrease in Indonesian capital gains tax.................................. (20,130)
Decrease in deferred Indonesian capital gains tax......................... (42,606)
Decrease in other liabilities............................................. (9,225)
-------------
CASH PROVIDED BY OPERATING ACTIVITIES........................................... $ 5,781,914
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders from net realized gain............... (3,417,774)
Distributions to Common Shareholders from net investment income........... (4,041,125)
-------------
CASH USED IN FINANCING ACTIVITIES............................................... (7,458,899)
-------------
Decrease in cash (b)............................................................ (1,676,985)
Cash and foreign currency at beginning of period................................ 2,289,478
-------------
CASH AND FOREIGN CURRENCY AT END OF PERIOD...................................... $ 612,493
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees............................... $ 83,892
-------------
(a) This amount is a component of net realized gain (loss) on foreign currency
transactions as shown on the Statement of Operations.
(b) Includes net change in unrealized appreciation (depreciation) on foreign
currency of $(10,728).
See Notes to Financial Statements Page 21
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
12/31/2013 12/31/2012 12/31/2011 12/31/2010 12/31/2009
------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period $ 23.67 $ 20.30 $ 22.77 $ 19.76 $ 12.87
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.79 0.90 0.98 0.97 1.01
Net realized and unrealized gain (loss) (2.45) 3.87 (2.05) 3.41 7.16
---------- ---------- ---------- ---------- ----------
Total from investment operations (1.66) 4.77 (1.07) 4.38 8.17
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.76) (0.88) (0.74) (0.83) (0.81)
Net realized gain (0.64) (0.52) (0.66) (0.57) --
Return of capital -- -- -- -- (0.63)
---------- ---------- ---------- ---------- ----------
Total distributions to Common Shareholders (1.40) (1.40) (1.40) (1.40) (1.44)
---------- ---------- ---------- ---------- ----------
Capital share repurchases -- -- -- 0.03 0.16
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 20.61 $ 23.67 $ 20.30 $ 22.77 $ 19.76
========== ========== ========== ========== ==========
Market value, end of period $ 18.05 $ 22.05 $ 17.82 $ 21.32 $ 18.04
========== ========== ========== ========== ==========
TOTAL RETURN BASED ON NET ASSET VALUE (a) (6.49)% 24.36% (4.18)% 23.29% 69.25%
========== ========== ========== ========== ==========
TOTAL RETURN BASED ON MARKET VALUE (a) (12.13)% 32.02% (10.17)% 26.45% 94.01%
========== ========== ========== ========== ==========
-----------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 109,813 $ 126,093 $ 108,174 $ 121,338 $ 106,717
Ratio of total expenses to average net assets 1.75% 1.78% 1.68% 1.76% 2.11%
Ratio of total expenses to average net assets
excluding interest expense 1.68% 1.70% 1.61% 1.62% 1.80%
Ratio of net investment income (loss) to
average net assets 3.57% 4.04% 4.47% 4.55% 6.11%
Portfolio turnover rate 50% 49% 51% 87% 66%
INDEBTEDNESS:
Total loan outstanding (in 000's) $ 5,800 $ 5,800 $ 5,800 $ 5,800 $ 5,800
Asset coverage per $1,000 of
indebtedness (b) $ 19,933 $ 22,740 $ 19,651 $ 21,920 $ 19,399
-----------------------
(a) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by the
Dividend Reinvestment Plan, and changes in net asset value per share for
net asset value returns and changes in Common Share price for market value
returns. Total returns do not reflect sales load and are not annualized for
periods less than one year. Past performance is not indicative of future
results.
(b) Calculated by subtracting the Fund's total liabilities (not including the
loan outstanding) from the Fund's total assets, and dividing by the
outstanding loan balance in 000's.
Page 22 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2013
1. ORGANIZATION
First Trust/Aberdeen Emerging Opportunity Fund (the "Fund") is a diversified,
closed-end management investment company organized as a Massachusetts business
trust on May 16, 2006 and is registered with the Securities and Exchange
Commission ("SEC") under the Investment Company Act of 1940, as amended (the
"1940 Act"). The Fund trades under the ticker symbol FEO on the New York Stock
Exchange ("NYSE").
The Fund's investment objective is to seek a high level of total return. The
Fund pursues its objective by investing at least 80% of its Managed Assets in a
diversified portfolio of equity and fixed-income securities of issuers in
emerging market countries. "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.
On December 10, 2012, the Fund's Board of Trustees approved a change to certain
of the Fund's investment strategies. The Fund's investment strategies are
non-fundamental policies of the Fund and require 60 days' prior written notice
to shareholders before they can be changed by the Board without receiving
shareholder approval. As such, on or about April 30, 2013, the following Fund
investment strategy became effective:
o The Fund may invest up to 5% of its Managed Assets in
non-deliverable forward foreign exchange contracts for purposes of
hedging.
2. SIGNIFICANT ACCOUNTING POLICIES
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 Fund's Common Shares 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 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 in accordance with valuation procedures
adopted by the Fund's Board of Trustees, and in accordance with provisions of
the 1940 Act. All securities and other assets of the Fund initially expressed in
foreign currencies will be converted to U.S. dollars using exchange rates in
effect at the time of valuation. All market quotations used in valuing the
Fund's securities will be obtained from a third party pricing service. The
Fund's securities will be valued as follows:
Bonds, notes and other debt securities not traded in an organized market
are valued on the basis of valuations provided by dealers who make markets
in such securities or by an independent pricing service approved by the
Fund's Board of Trustees, which may use the following valuation inputs
when available:
1) benchmark yields;
2 ) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7 ) reference data including market research publications.
Debt securities having a remaining maturity of sixty days or less when
purchased are valued at cost adjusted for amortization of premiums and
accretions of discounts.
Common stocks and other securities listed on any national or foreign
exchange (excluding the NASDAQ Stock Market LLC ("NASDAQ") and the London
Stock Exchange Alternative Investment Market ("AIM")) are valued at the
last sale price on the exchange on which they are principally traded or,
for NASDAQ and AIM securities, the official closing price. Securities
traded on more than one securities exchange are valued at the last sale
price or official closing price, as applicable, at the close of the
securities exchange representing the principal market for such securities.
Securities traded in an over-the-counter market are valued at the mean of
the bid and asked prices, if available, and otherwise at the closing bid
price.
Page 23
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2013
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 an independent pricing service.
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 at fair value. These securities generally include, but are not limited
to, restricted securities (securities which may not be publicly sold without
registration under the Securities Act of 1933, as amended) for which a pricing
service is unable to provide a market price; securities whose trading has been
formally suspended; a security whose market price is not available from a
pre-established pricing source; a security with respect to which an event has
occurred that is likely to materially affect the value of the security after the
market has closed but before the calculation of the Fund's NAV or make it
difficult or impossible to obtain a reliable market quotation; and a security
whose price, as provided by the pricing service, does not reflect the security's
"fair value." As a general principle, the current "fair value" of a security
would appear to be the amount which the Fund might reasonably expect to receive
for the security upon its current sale. The use of fair value prices by the Fund
generally results in prices used by the Fund that may differ from current market
quotations or official closing prices on the applicable exchange. A variety of
factors may be considered in determining the fair value of such securities,
including, but not limited to the following:
1) the fundamental business data relating to the issuer or economic
data relating to the country of issue;
2) an evaluation of the forces which influence the market in which
these securities are purchased and sold;
3) the type, size and cost of security;
4) the financial statements of the issuer, or the financial condition
of the country of issue;
5) the credit quality and cash flow of the issuer, or country of issue,
based on the sub-advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities (or
equity securities) of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing
the security;
10) the business prospects of the issuer, including any ability to
obtain money or resources from a parent or affiliate and an
assessment of the issuer's management (for corporate debt only);
11) the economic, political and social prospects/developments of the
country of issue and the assessment of the country's governmental
leaders/officials (for sovereign debt only);
12) the prospects for the issuer's industry, and multiples (of earnings
and/or cash flows) being paid for similar businesses in that
industry (for corporate debt only); and
13) other relevant factors.
Fair valuation of an equity security will be based on the consideration of all
available information, including, but not limited to the following:
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or the
appropriate stock exchange;
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might affect
the value of the security.
If the equity securities in question are foreign securities, the following
additional information may be considered:
1) the value of similar foreign securities traded on other foreign
markets;
2) ADR trading of similar securities;
3) closed-end fund trading of similar securities;
4) foreign currency exchange activity;
5) the trading prices of financial products that are tied to baskets of
foreign securities;
6) factors relating to the event that precipitated the pricing problem;
7) whether the event is likely to recur; and 8) whether the effects of
the event are isolated or whether they affect entire markets,
countries or regions.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
Page 24
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2013
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 methodology 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, 2013, 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.
Securities purchased on a when-issued, delayed-delivery or forward purchase
commitment basis may have extended settlement periods. The value of the security
so purchased is subject to market fluctuations during this period. The Fund
maintains liquid assets with a current value at least equal to the amount of its
when-issued, delayed-delivery or forward purchase commitments until payment is
made. At December 31, 2013, the Fund had no when-issued, delayed-delivery or
forward purchase commitments.
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 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 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 Schedule
of Forward Foreign Currency Contracts.
During the year ended December 31, 2013, the amount of notional values of
forward foreign currency contracts opened and closed were $91,502,134 and
$90,309,223, respectively.
D. OFFSETTING ON THE STATEMENT OF ASSETS AND LIABILITIES:
In December 2011, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update No. 2011-11 "Disclosures about Offsetting Assets and
Liabilities" ("ASU 2011-11"). This disclosure requirement is 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. ASU
2011-11 requires entities to disclose both gross and net information about both
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. In addition, in January 2013, FASB issued Accounting
Standards Update No. 2013-1 "Clarifying the Scope of Offsetting Assets and
Liabilities" ("ASU 2013-1"), specifying exactly which transactions are subject
to offsetting disclosures. The scope of the disclosure requirements is limited
to derivative instruments, repurchase agreements and reverse repurchase
agreements, and securities borrowing and securities lending transactions. ASU
2011-11 and ASU 2013-1 are effective for financial statements with fiscal years
beginning on or after January 1, 2013, and interim periods within those fiscal
years.
The Fund adopted the disclosure requirement on netting for the current reporting
period. For financial reporting purposes, the Fund does not offset financial
assets and financial liabilities that are subject to master netting arrangements
or similar agreements on the Statement of Assets and Liabilities.
Page 25
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2013
At December 31, 2013, 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 Currency Contracts* $ 112,184 $ -- $ 112,184 $ (54,252) $ -- $ 57,932
Gross Amounts
not Offset in the
Statement of
Net Amounts of Assets and Liabilities
Gross Amounts Liabilities Presented --------------------------
Gross amounts of Offsetting the in the Statement Collateral
Recognized Statement of Assets of Assets and Financial Amounts
Liabilities and Liabilities Liabilities Instruments Pledged Net Amount
------------------------------------------------------------------------------------------------------------------------------------
Forward Currency Contracts* $ (54,252) $ -- $ (54,252) $ 54,252 $ -- $ --
* The respective counterparties for each contract are disclosed in the
Schedule of Forward Foreign Currency Contracts.
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. The portion of foreign
currency gains and losses related to fluctuation in exchange rates between the
initial purchase settle date and subsequent sale trade date for equity
securities is included in "Net realized gain (loss) on investments" on the
Statement of Operations. The portion of foreign currency gains and losses
related to fluctuations in exchange rates between the initial purchase trade
date and subsequent sale trade date for fixed-income securities, is included in
"Net realized gain (loss) on foreign currency transactions" on the Statement of
Operations.
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Level dividend distributions are declared and paid quarterly to Common
Shareholders after the payment of interest and/or dividends in connection with
leverage. The level dividend rate may be modified by the Board of Trustees from
time to time. If, for any quarterly distribution, net investment company taxable
income, if any (which term includes net short-term capital gain), is less than
the amount of the distribution, the difference will generally be a tax-free
return of capital distributed from the Fund's assets. Distributions of any net
long-term capital gains earned by the Fund are distributed at least annually.
Distributions will automatically be reinvested into additional Common Shares
pursuant to the Fund's Dividend Reinvestment Plan unless cash distributions are
elected by the shareholder.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from U.S. GAAP. Certain capital
accounts in the financial statements are periodically adjusted for permanent
differences in order to reflect their tax character. These permanent differences
are primarily due to the varying treatment of income and gain/loss on portfolio
securities held by the Fund and have no impact on net assets or NAV per share.
Temporary differences, which arise from recognizing certain items of income,
expense and gain/loss in different periods for financial statement and tax
purposes, will reverse at some point in the future. Permanent differences
incurred during the year ended December 31, 2013, primarily a result of
differing book and tax treatment on realization of foreign currency gains
(losses), have been reclassified at year end to reflect a decrease to
accumulated net investment income (loss) of $226,381, an increase to accumulated
net realized gain (loss) of $253,559 and a decrease to paid-in capital of
$27,178. Net assets were not affected by these reclassifications.
Page 26
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2013
The tax character of distributions paid during the fiscal years ended December
31, 2013, and 2012 was as follows:
Distributions paid from: 2013 2012
Ordinary income................................. $ 4,520,626 $ 4,885,579
Long-term capital gains......................... 2,938,273 2,573,320
As of December 31, 2013, the distributable earnings and net assets on a tax
basis were as follows:
Undistributed ordinary income................... $ 80,285
Undistributed capital gains..................... 499,627
-------------
Total undistributed earnings.................... 579,912
Accumulated capital and other losses............ --
Net unrealized appreciation (depreciation)...... 11,982,588
-------------
Total accumulated earnings (losses)............. 12,562,500
Other........................................... (185,930)
Paid-in capital................................. 97,436,476
-------------
Net assets...................................... $ 109,813,046
=============
G. INCOME AND OTHER TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
Certain countries assess a capital gains tax on securities sold in their local
markets. This tax is accrued as the securities in these foreign markets
appreciate in value and is paid at the time of sale to the extent a capital gain
is realized. Taxes accrued on securities in an unrealized appreciation position
are included in "Net change in unrealized appreciation (depreciation)" on the
Statement of Operations. The capital gains tax paid on securities sold is
included in "Other" expenses on the Statement of Operations.
At December 31, 2013, the Fund had no capital loss carryforward for federal
income tax purposes.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ended 2010, 2011,
2012 and 2013 remain open to federal and state audit. As of December 31, 2013,
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.
H. EXPENSES:
The Fund will pay all expenses directly related to its operations.
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 1.00% 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.
Aberdeen Asset Management Inc. ("Aberdeen" 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.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
Administrator, Fund Accountant and Transfer Agent in accordance with certain fee
arrangements. As administrator and fund accountant, BNYM IS is responsible for
providing certain administrative and accounting services to the Fund, including
maintaining the Fund's books of account, records of the Fund's securities
transactions, and certain other books and records. As transfer agent, BNYM IS is
responsible for maintaining shareholder records for the Fund. The Bank of New
York Mellon ("BNYM") serves as the Fund's Custodian in accordance with certain
fee arrangements. As custodian, BNYM is responsible for custody of the Fund's
assets.
Page 27
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2013
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 of $125,000 and an annual per fund fee of $4,000 for each closed-end
fund or other actively managed fund and $1,000 for each index fund in the First
Trust Fund Complex. The fixed annual retainer is allocated pro rata among each
fund in the First Trust Fund Complex based on net assets.
Additionally, the Lead Independent Trustee is paid $15,000 annually, the
Chairman of the Audit Committee is paid $10,000 annually, and each of the
Chairmen of the Nominating and Governance Committee and the Valuation Committee
is paid $5,000 annually to serve in such capacities, with such compensation
allocated pro rata among each fund in the First Trust Fund Complex based on net
assets. Trustees are reimbursed for travel and out-of-pocket expenses in
connection with all meetings. The Lead Independent Trustee and each Committee
Chairman served two-year terms until December 31, 2013, before rotating to serve
as Chairman of another Committee or as Lead Independent Trustee. After December
31, 2013, the Lead Independent Trustee and Committee Chairmen will rotate every
three years. The officers and "Interested" Trustee receive no compensation from
the funds for serving 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, 2013, were $60,867,276 and
$62,532,992, respectively.
5. 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
$20,000,000. As of December 31, 2013, the Fund had one loan outstanding under
the revolving credit facility totaling $5,800,000. For the year ended December
31, 2013, the average amount outstanding was $5,800,000. The high and low annual
interest rates during the year ended December 31, 2013 were 1.16% and 1.07%,
respectively, and the weighted average interest rate was 1.10%. The interest
rate at December 31, 2013 was 1.11%. The Fund pays a commitment fee of 0.15% (or
0.30% if the loan balance drops below 40% of total commitment) per year, which
is included in "Interest and fees on loan" on the Statement of Operations.
6. 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.
7. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined that there
were no subsequent events requiring recognition or disclosure in the financial
statements that have not already been disclosed.
Page 28
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST/ABERDEEN EMERGING
OPPORTUNITY FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust/Aberdeen Emerging Opportunity Fund (the "Fund"), including the portfolio
of investments, as of December 31, 2013, and the related statements of
operations and cash flows for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits 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, 2013 by correspondence with the Fund's
custodian and brokers; where replies were not received, 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/Aberdeen Emerging Opportunity Fund, as of December 31, 2013, and the
results of its operations and its cash flows for the year then ended, the
changes in its net assets for each of the two years in the period then ended,
and the financial highlights for each of the five years in the period then
ended, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 21, 2014
Page 29
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2013 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) NAV per Common Share on that date or
(ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the NYSE or
elsewhere, for the participants' accounts. It is possible that the
market price for the Common Shares may increase before the Plan
Agent has completed its purchases. Therefore, the average purchase
price per share paid by the Plan Agent may exceed the market price
at the time of valuation, resulting in the purchase of fewer shares
than if the dividend or distribution had been paid in Common Shares
issued by the Fund. The Plan Agent will use all dividends and
distributions received in cash to purchase Common Shares in the open
market within 30 days of the valuation date except where temporary
curtailment or suspension of purchases is necessary to comply with
federal securities laws. Interest will not be paid on any uninvested
cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio investments during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
Page 30
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2013 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com;
(3) on the SEC's website at http://www.sec.gov; and (4) for review and copying
at the SEC's Public Reference Room ("PRR") in Washington, DC. Information
regarding the operation of the PRR may be obtained by calling (800) SEC-0330.
TAX INFORMATION
The Fund hereby designates as qualified dividend income 29.17% of its ordinary
income distributions (including short-term capital gains, if applicable) for the
year ended December 31, 2013. None of the ordinary income (including short-term
capital gain, if applicable) distributions made by the Fund during the year
ended December 31, 2013, 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 $5,395,374 (representing a total of $1.01
per share). The total amount of taxes paid to such countries is $120,426
(representing a total of $0.02 per share).
For the year ended December 31, 2013, the amount of long-term capital gain
distributions designated by the Fund was $2,938,273 which is taxable at the
applicable capital gain tax rates for federal income tax purposes.
NYSE CERTIFICATION INFORMATION
In accordance with Section 303A-12 of the New York Stock Exchange ("NYSE")
Listed Company Manual, the Fund's President has certified to the NYSE that, as
of May 14, 2013, he was not aware of any violation by the Fund of NYSE corporate
governance listing standards. In addition, the Fund's reports to the SEC on
Forms N-CSR, N-CSRS and N-Q contain certifications by the Fund's principal
executive officer and principal financial officer that relate to the Fund's
public disclosure in such reports and are required by Rule 30a-2 under the 1940
Act.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, First Trust Energy
Income and Growth Fund, First Trust Enhanced Equity Income Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income Fund,
First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging
Opportunity Fund, First Trust Specialty Finance and Financial Opportunities
Fund, First Trust Dividend and Income Fund (formerly known as First Trust Active
Dividend Income Fund), First Trust High Income Long/Short Fund and First Trust
Energy Infrastructure Fund was held on April 17, 2013 (the "Annual Meeting"). At
the Annual Meeting, Trustees James A. Bowen and Niel B. Nielsen were elected by
the Common Shareholders of the First Trust/Aberdeen Emerging Opportunity Fund as
Class III Trustees for three-year terms expiring at the Fund's annual meeting of
shareholders in 2016. The number of votes cast in favor of Mr. Bowen was
4,970,317, the number of votes against was 48,935 and the number of abstentions
was 308,533. The number of votes cast in favor of Mr. Nielsen was 4,967,265, the
number of votes against was 51,987 and the number of abstentions was 308,533.
Richard E. Erickson, Thomas R. Kadlec and Robert F. Keith are the other current
and continuing Trustees.
RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some, but not all,
of the risks that should be considered for the Fund. For additional information
about the risks associated with investing in the Fund, please see the Fund's
prospectus and statement of additional information, as well as other Fund
regulatory filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund, which include a global bond and equity
portfolio of investment grade and below-investment grade government and
corporate debt securities. The value of these securities, like other market
investments, may move up or down, sometimes rapidly and unpredictably. Common
Shares at any point in time may be worth less than the original investment, even
after taking into account the reinvestment of Fund dividends and distributions.
Security prices can fluctuate for several reasons including the general
condition of the bond market, or when political or economic events affecting the
issuers occur. When the Advisor or Sub-Advisor determines that it is temporarily
unable to follow the Fund's investment strategy or that it is impractical to do
so (such as when a market disruption event has occurred and trading in the
securities is extremely limited or absent), the Fund may take temporary
defensive positions.
Page 31
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2013 (UNAUDITED)
NON-INVESTMENT GRADE SECURITIES RISK: The Fund may invest up to 80% of its
Managed Assets in non-investment grade securities. Non-investment grade
securities are rated below "Baa3" by Moody's Investors Service, Inc., below
"BBB-" by Standard & Poor's, or comparably rated by another nationally
recognized statistical rating organization or, if unrated, determined by the
Sub-Advisor to be of comparable credit quality. Non-investment grade debt
instruments are commonly referred to as "high-yield" or "junk" bonds and are
considered speculative with respect to the issuer's capacity to pay interest and
repay principal and are susceptible to default or decline in market value due to
adverse economic and business developments. The market values for high-yield
securities tend to be very volatile, and these securities are less liquid than
investment grade debt securities.
EMERGING MARKETS RISK: Under normal market conditions, the Fund will invest at
least 80% of its Managed Assets in equity or fixed-income securities of issuers
located in countries considered to be emerging markets. Investments in such
securities 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.
FIXED-INCOME SECURITIES RISK: Debt securities, including high-yield securities,
are subject to certain risks, including: (i) issuer risk, which is the risk that
the value of fixed-income securities may decline for a number of reasons which
directly relate to the issuer, such as management performance, financial
leverage and reduced demand for the issuer's goods and services or; (ii)
reinvestment risk, which is the risk that income from the Fund's portfolio will
decline if the Fund invests the proceeds from matured, traded or called bonds at
market interest rates that are below the Fund portfolio's current earnings rate;
(iii) prepayment risk, which is the risk that during periods of declining
interest rates, the issuer of a security may exercise its option to prepay
principal earlier than scheduled, forcing the reinvestment in lower yielding
securities; and (iv) credit risk, which is the risk that a security in the
Fund's portfolio will decline in price or the issuer fails to make interest
payments when due because the issuer of the security experiences a decline in
its financial status.
INTEREST RATE RISK: The Fund's portfolio is also subject to interest rate risk.
Interest rate risk is the risk that fixed-income securities will decline in
value because of changes in market interest rates. Investments in debt
securities with long-term maturities may experience significant price declines
if long-term interest rates increase.
NON-U.S. ISSUER RISK: Investments in the securities and instruments of non-U.S.
issuers involve certain considerations and risks not ordinarily associated with
investments in securities and instruments of U.S. issuers. Non-U.S. companies
are not generally subject to uniform accounting, auditing and financial
standards and requirements comparable to those applicable to U.S. companies.
Non-U.S. securities exchanges, brokers and listed companies may be subject to
less government supervision and regulation than exists in the United States.
Dividend and interest income may be subject to withholding and other non-U.S.
taxes, which may adversely affect the net return on such investments. There may
be difficulty in obtaining or enforcing a court judgment abroad.
CURRENCY RISK: The value of securities denominated or quoted in foreign
currencies may be adversely affected by fluctuations in the relative currency
exchange rates and by exchange control regulations. The Fund's investment
performance may be negatively affected by a devaluation of a currency in which
the Fund's investments are denominated or quoted. Further, the Fund's investment
performance may be significantly affected, either positively or negatively, by
currency exchange rates because the U.S. dollar value of securities denominated
or quoted in another currency will increase or decrease in response to changes
in the value of such currency in relation to the U.S. dollar. While certain of
the Fund's non-U.S. dollar-denominated securities may be hedged into U.S.
dollars, hedging may not alleviate all currency risks.
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.
GOVERNMENT SECURITIES RISK: The ability of a government issuer, especially in an
emerging market country, to make timely and complete payments on its debt
obligations will be strongly influenced by the government issuer's balance of
payments, including export performance, its access to international credits and
investments, fluctuations of interest rates and the extent of its foreign
reserves. A country whose exports are concentrated in a few commodities or whose
economy depends on certain strategic imports could be vulnerable to fluctuations
in international prices of these commodities or imports. To the extent that a
country receives payment for its exports in
Page 32
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2013 (UNAUDITED)
currencies other than U.S. dollars, its ability to make debt payments
denominated in U.S. dollars could be adversely affected. If a government issuer
cannot generate sufficient earnings from foreign trade to service its external
debt, it may need to depend on continuing loans and aid from foreign
governments, commercial banks, and multinational organizations. There are no
bankruptcy proceedings similar to those in the United States by which defaulted
government debt may be collected. Additional factors that may influence a
government issuer's ability or willingness to service debt include, but are not
limited to, a country's cash flow situation, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of its debt
service burden to the economy as a whole, and the issuer's policy towards the
International Monetary Fund, the International Bank for Reconstruction and
Development and other international agencies to which a government debtor may be
subject.
NON-U.S. GOVERNMENT SECURITIES RISK: Economies and social and political climates
in individual countries may differ unfavorably from the United States. Non-U.S.
economies may have less favorable rates of growth of gross domestic product,
rates of inflation, currency valuation, capital reinvestment, resource
self-sufficiency and balance of payments positions. Many countries have
experienced extremely high rates of inflation for many years. Unanticipated
economic, political and social developments may also affect the values of the
Fund's investments and limit the availability of additional investments in such
countries. Furthermore, such developments may significantly disrupt the
financial markets or interfere with the Fund's ability to enforce its rights
against non-U.S. government issuers.
Investments in debt instruments of issuers located in emerging market countries
are considered speculative. Heightened risks of investing in emerging markets
government debt include: smaller market capitalization of securities markets,
which may suffer periods of relative illiquidity; significant price volatility;
restrictions on foreign investment; and possible 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.
Page 33
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2013 (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(2) DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Three-Year Term Physician; President, Wheaton Orthopedics; 105 None
c/o First Trust Advisors L.P. Limited Partner, Gundersen Real Estate
120 East Liberty Drive, o Since Fund Limited Partnership; Member, Sportsmed
Suite 400 Inception LLC
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Three-Year Term President (March 2010 to Present), Senior 105 Director of ADM
c/o First Trust Advisors L.P. Vice President and Chief Financial Officer Investor Services,
120 East Liberty Drive, o Since Fund (May 2007 to March 2010), ADM Investor Inc. and ADM
Suite 400 Inception Services, Inc. (Futures Commission Merchant) Investor Services
Wheaton, IL 60187 International
D.O.B.: 11/57
Robert F. Keith, Trustee o Three-Year Term President (2003 to Present), Hibs Enterprises 105 Director of
c/o First Trust Advisors L.P. (Financial and Management Consulting) Trust Company
120 East Liberty Drive, o Since Fund of Illinois
Suite 400 Inception
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Three-Year Term President and Chief Executive Officer (June 105 Director of
c/o First Trust Advisors L.P. 2012 to Present), Dew Learning LLC Covenant
120 East Liberty Drive, o Since Fund (Educational Products and Services); President Transport Inc.
Suite 400 Inception (June 2002 to June 2012), Covenant College
Wheaton, IL 60187
D.O.B.: 03/54
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1), Trustee and o Three-Year Term Chief Executive Officer (December 2010 105 None
Chairman of the Board to Present), President (until December
120 East Liberty Drive, o Since Fund 2010), First Trust Advisors L.P. and First
Suite 400 Inception Trust Portfolios L.P.; Chairman of the
Wheaton, IL 60187 Board of Directors, BondWave LLC
D.O.B.: 09/55 (Software Development Company/
Investment Advisor) and Stonebridge
Advisors LLC (Investment Advisor)
-------------------
(1) 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.
(2) Currently, Robert F. Keith, as a Class I Trustee, is serving as a Trustee
until the Fund's 2014 annual meeting of shareholders. Richard E. Erickson
and Thomas R. Kadlec, as Class II Trustees, are serving as Trustees until
the Fund's 2015 annual meeting of shareholders. James A. Bowen and Niel B.
Nielson, as Class III Trustees, are serving as Trustees until the Fund's
2016 annual meeting of shareholders.
Page 34
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2013 (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)
------------------------------------------------------------------------------------------------------------------------------------
Mark R. Bradley President and Chief o Indefinite Term Chief Operating Officer (December 2010 to Present)
120 E. Liberty Drive, Executive Officer o Since January 2012 and Chief Financial Officer, First Trust Advisors
Suite 400 L.P. and First Trust Portfolios L.P.; Chief Financial
Wheaton, IL 60187 Officer, BondWave LLC (Software Development
D.O.B.: 11/57 Company/Investment Advisor) and Stonebridge
Advisors LLC (Investment Advisor)
James M. Dykas Treasurer, Chief Financial o Indefinite Term Controller (January 2011 to Present), Senior Vice
120 E. Liberty Drive, Officer and Chief President (April 2007 to Present), First Trust
Suite 400 Accounting Officer o Since January 2012 Advisors L.P. and First Trust Portfolios L.P.
Wheaton, IL 60187
D.O.B.: 01/66
W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P., First
120 E. Liberty Drive, Legal Officer Trust Portfolios L.P. and Secretary and General
Suite 400 o Since Fund Inception Counsel, BondWave LLC (Software Development
Wheaton, IL 60187 Company/Investment Advisor); Secretary of
D.O.B.: 05/60 Stonebridge Advisors LLC (Investment Advisor)
Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present), Senior
120 E. Liberty Drive, Vice President (September 2005 to July 2012), First
Suite 400 o Since Fund Inception Trust Advisors L.P. and First Trust Portfolios L.P.
Wheaton, IL 60187
D.O.B.: 02/70
Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel (May 2007 to Present),
120 E. Liberty Drive, and Assistant Secretary o Chief Compliance Officer First Trust Advisors L.P. and First Trust
Suite 400 since January 2011 Portfolios L.P.
Wheaton, IL 60187 o Assistant Secretary
D.O.B.: 12/66 since Fund Inception
-------------------
(3) Officers of the Fund have an indefinite term. The term "officer" means the
president, vice president, secretary, treasurer, controller or any other
officer who performs a policy making function.
Page 35
--------------------------------------------------------------------------------
PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2013
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 with affiliates of the Fund.
PRIVACY ONLINE
We allow third-party companies, including AddThis (a social media sharing
service), to collect certain anonymous information when you visit our website.
These companies may use non-personally identifiable information during your
visits to this and other websites in order to provide advertisements about goods
and services likely to be of greater interest to you. These companies typically
use a cookie, third party web beacon or pixel tags, to collect this information.
To learn more about this behavioral advertising practice, you can visit
www.networkadvertising.org.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, First Trust restricts access to
your nonpublic personal information to those First Trust employees who need to
know that information to provide products or services to you. We maintain
physical, electronic and procedural safeguards to protect your nonpublic
personal information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time, however, if we do change
it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).
Page 36
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Aberdeen Asset Management Inc.
1735 Market Street, 32nd Floor
Philadelphia, PA 19103
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
The Bank of New York Mellon
101 Barclay Street, 20th Floor
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
(a) The registrant, as of the end of the period covered by this report,
has adopted a code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by
the registrant or a third party.
(c) There have been no amendments, during the period covered by this
report, to a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial
officer, principal accounting officer or controller, or persons
performing similar functions, regardless of whether these
individuals are employed by the registrant or a third party, and
that relates to any element of the code of ethics description.
(d) The registrant has not granted any waivers, including an implicit
waiver, from a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial
officer, principal accounting officer or controller, or persons
performing similar functions, regardless of whether these
individuals are employed by the registrant or a third party, that
relates to one or more of the items set forth in paragraph (b) of
this item's instructions.
(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 $53,000 for 2012 and
$53,000 for 2013.
(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 2012 and $0 for 2013.
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 2012 and $0 for 2013.
(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 $9,290
for 2012 and $8,290 for 2013. These fees were for tax preparation.
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 2012 and $0 for 2013.
(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 2012 and $0 for 2013.
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 2012 and $0 for 2013.
(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 2012 were $9,290
and $4,120 for the Registrant and the Registrant's investment adviser,
respectively and for 2013 were $8,290 and $38,000 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.
ABERDEEN U.S. REGISTERED ADVISERS
PROXY VOTING POLICIES AND PROCEDURES
AS OF FEBRUARY 8, 2010
The following are proxy voting policies and procedures ("Policies and
Procedures") adopted by affiliated investment advisers registered with the U.S.
Securities and Exchange Commission ("SEC") under the Investment Advisers Act of
1940, as amended ("Advisers Act"), that are subsidiaries of Aberdeen Asset
Management PLC ("AAM"); including, specifically, Aberdeen Asset Management Inc.,
a Delaware Corporation, ("Aberdeen US"), Aberdeen Asset Management Asia Limited,
a Singapore Corporation ("Aberdeen Singapore"), Aberdeen Asset Management
Limited, an Australian Corporation ("Aberdeen AU"), and Aberdeen Asset
Management Investment Services Limited, a UK Corporation ("AAMISL"),
(collectively referred to herein as "Aberdeen Advisers" and each an "Aberdeen
Adviser") (collectively with AAM, "Aberdeen"). These Policies and Procedures
address proxy voting considerations under U.S. law and regulation and under
Canadian securities laws. These Policies and Procedures do not address the laws
or requirements of other jurisdictions.
Each of the Aberdeen Advisers provides advisory resources to certain U.S.
clients, including substantive advice on voting proxies for certain equity
securities. These Policies and Procedures are adopted to ensure compliance by
the Aberdeen Advisers with Rule 206(4)-6 under the Advisers Act and other
applicable fiduciary obligations under rules and regulations of the SEC and
interpretations of its staff with respect to proxies for voting securities held
by client portfolios.
Clients may consist of investment companies registered under the Investment
Company Act of 1940, as amended ("1940 Act") ("Funds" and each a "Fund"), and
other U.S. residents as well as non-U.S. registered funds or clients. Each
Aberdeen Adviser follows these Policies and Procedures for each of its
respective U.S. clients as required under the Advisers Act and other applicable
law, unless expressly directed by a client in writing to refrain from voting
that client IS proxies or to vote in accordance with the client's proxy voting
policies and procedures. Aberdeen Advisers who advise or subadvise the Funds
follow both these Policies and Procedures and the proxy voting policies and
procedures adopted by the Funds and their respective Boards of Directors or
Trustees. Aberdeen Advisers located outside the U.S. may provide proxy voting
services to their non-U.S. based clients in accordance with the jurisdiction in
which the client is located. Aberdeen US, Aberdeen Singapore and Aberdeen AU
will provide proxy voting services to Canadian investment funds in accordance
with National Instrument 81-106 - Investment Fund Continuous Disclosure.
I. DEFINITIONS
A. "Best interest of clients". Clients' best economic interests over the long
term that is, the common interest that all clients share in seeing the value of
a common investment increase over time. Clients may have differing political or
social interests, but their best economic interest is generally uniform.
B. "Material conflict of interest". Circumstances when an Aberdeen Adviser or
any member of senior management, portfolio manager or portfolio analyst
knowingly does business with a particular proxy issuer or closely affiliated
entity, which may appear to create a material conflict between the interests of
the Aberdeen Adviser and the interests of its clients in how proxies of that
issuer are voted. A material conflict of interest might also exist in unusual
circumstances when Aberdeen has actual knowledge of a material business
arrangement between a particular proxy issuer or closely affiliated entity and
an affiliate of an Aberdeen Adviser.
II. GENERAL VOTING POLICIES
A. Client's Best Interest. These Policies and Procedures are designed and
implemented in a way that is reasonably expected to ensure that proxies are
voted in the best interests of clients. Proxies are voted with the aim of
furthering the best economic interests of clients, promoting high levels of
corporate governance and adequate disclosure of company policies, activities and
returns, including fair and equal treatment of stockholders.
B. Shareholder Activism. Aberdeen Advisers seek to develop relationships with
the management of portfolio companies to encourage transparency and improvements
in the treatment of employees, owners and stakeholders. Thus, Aberdeen Advisers
may engage in dialogue with the management of portfolio companies with respect
to pending proxy voting issues.
C. Case-by-Case Basis. These Policies and Procedures are guidelines. Each vote
is ultimately cast on a case-by-case basis, taking into consideration the
contractual obligations under the advisory agreement or comparable document, and
all other relevant facts and circumstances at the time of the vote. Aberdeen
Advisers may cast proxy votes in favor of management proposals or seek to change
the views of management, considering specific issues as they arise on their
merits. Aberdeen Advisers may also join with other investment managers in
seeking to submit a shareholder proposal to a company or to oppose a proposal
submitted by the company. Such action may be based on fundamental, social,
environmental or human rights grounds.
D. Individualized. These Policies and Procedures are tailored to suit Aberdeen's
advisory business and the types of securities portfolios Aberdeen Advisers
manage. To the extent that clients (e.g., investment companies, corporations,
pension plans) have adopted their own procedures, Aberdeen Advisers may vote the
same securities differently depending upon clients' directions.
E. Material Conflicts of Interest. Material conflicts are resolved in the best
interest of clients. When a material conflict of interest between an Aberdeen
Adviser and its respective client(s) is identified, the Aberdeen Adviser will
choose among the procedures set forth in Section IV.B.2. below to resolve such
conflict.
F. Limitations. The circumstances under which Aberdeen may take a limited role
in voting proxies, include the following:
1. No Responsibility. Aberdeen Advisers will not vote proxies for client
accounts in which the client contract specifies that Aberdeen will not vote.
Under such circumstances, the clients' custodians are instructed to mail proxy
material directly to such clients or the clients' designees.
2. Limited Value. An Aberdeen Adviser may abstain from voting a client proxy if
the Aberdeen Adviser determines that the effect on shareholders' economic
interests or the value of the portfolio holding is indeterminable or
insignificant. Aberdeen Advisers may also abstain from voting the proxies of
portfolio companies held in their passively managed funds. Proxies with respect
to securities that have been sold before the date of the shareholders meeting
and are no longer held by a client generally will not be voted.
3. Unjustifiable Costs. An Aberdeen Adviser may abstain from voting a client
proxy for cost reasons (e.g., non-U.S. securities).
4. Securities Lending Arrangements. If voting securities are part of a
securities lending program, Aberdeen may be unable to vote while the securities
are on loan.
5. Share Blocking. Certain jurisdictions may impose share blocking restrictions
at various times which may prevent Aberdeen from exercising its voting
authority.
6. Special Considerations. Aberdeen's responsibilities for voting proxies are
determined generally by its obligations under each advisory contract or similar
document. If a client requests in writing that an Aberdeen Adviser vote its
proxy in a manner inconsistent with these Policies and Procedures, the Aberdeen
Adviser may follow the client's direction or may request that the client vote
the proxy directly.
G. Sources of Information. The Aberdeen Advisers may conduct research internally
and/or use the resources of an independent research consultant. The Aberdeen
Advisers may consider legislative materials, studies of corporate governance and
other proxy voting issues, and/or analyses of shareholder and management
proposals by a certain sector of companies, e.g., Fortune 500 companies.
H. Subadvisers. To the extent that an Aberdeen Adviser may rely on subadvisers,
whether affiliated or unaffiliated, to manage any client portfolio on a
discretionary basis, the Aberdeen Adviser may delegate responsibility for voting
proxies to the subadviser. However, such subadvisers will be required either to
follow these Policies and Procedures or to demonstrate that their proxy voting
policies and procedures are consistent with these Policies and Procedures or
otherwise implemented in the best interests of the Aberdeen Advisers' clients.
I. Availability of Policies and Procedures. Aberdeen Advisers will provide
clients with a copy of these Policies and Procedures, as revised from time to
time, upon request.
J. Disclosure of Vote. As disclosed in Part II of each Aberdeen Adviser's Form
ADV, a client may obtain information on how its proxies were voted by requesting
such information from its Aberdeen Adviser. Aberdeen Advisers do not generally
disclose client proxy votes to third parties, other than as required for Funds,
unless specifically requested, in writing, by the client.
III. SPECIFIC VOTING POLICIES
A. General Philosophy.
o Support existing management on votes on the financial statements of
a company and the election of the Board of Directors;
o Vote for the acceptance of the accounts unless there are grounds to
suspect that either the accounts as presented or audit procedures
used, do not present an accurate picture of company results; and
o Support routine issues such as the appointment of independent
auditors, allocation of income and the declaration of stock (scrip)
dividend proposals provided there is a cash alternative.
B. Anti-takeover Measures. Aberdeen Advisers vote on anti-takeover measures on a
case-by-case basis taking into consideration such factors as the long-term
financial performance of the target company relative to its industry
competition. Key measures of performance will include the growth rates for
sales, operating income, net income and total shareholder returns. Other factors
which will be considered include margin analysis, cash flow and debt levels.
C. Proxy Contests for Control. Aberdeen Advisers vote on proxy contests for
control on a case-bycase basis taking into consideration such factors as
long-term financial performance of the target company relative to its industry,
management's track record, background to the proxy contest, qualifications of
director nominees, evaluation of what each side is offering shareholders as well
as the likelihood that the proposed objectives and goals can be met, and stock
ownership positions.
D. Contested Elections. Aberdeen Advisers vote on contested elections on a
case-by-case basis taking into consideration such factors as the qualifications
of all director nominees. Aberdeen Advisers also consider the independence of
board and key committee members and the corporate governance practices of the
company.
E. Executive compensation proposals. Aberdeen Advisers consider such proposals
on a case-by-case basis taking into consideration such factors as executive pay
and spending perquisites, particularly in conjunction with sub-par performance
and employee layoffs.
F. Shareholder Proposals. Aberdeen Advisers consider such proposals on a
case-by-case basis. Aberdeen Advisers support those proposals which will improve
the company's corporate governance or business profile at a reasonable cost, but
may oppose proposals which result in significant cost being incurred with little
or no benefit to the company or its shareholders.
IV. PROXY VOTING PROCEDURES
This section applies to each Aberdeen Adviser except to the extent that certain
procedures are identified as applicable only to a specific Aberdeen Adviser.
A. Obtain Proxy. Registered owners of record, e.g., trustees or custodian banks,
that receive proxy materials from the issuer or its information agent, are
instructed to sign physical proxy cards in blank and forward directly to the
Global Voting Team based in Scotland ("PA-UK"). Proxies may also be delivered
electronically by custodians using proxy services such as ProxyEdge and
Institutional Shareholder Services ("ISS"). Each proxy received is matched to
the securities to be voted.
B. Material Conflicts of Interest.
1. Identify the existence of any material conflicts of interest relating to the
securities to be voted or the issue at hand. Portfolio managers and research
analysts ("Analysts") and senior management of each Aberdeen Adviser have an
affirmative duty to disclose any personal conflicts such as officer or director
positions held by them, their spouses or close relatives in the portfolio
company or attempts by the portfolio company to exert influence over such person
with respect to their vote. Conflicts based on business relationships or
dealings of affiliates of any Aberdeen Adviser will only be considered to the
extent that the Aberdeen Adviser has actual knowledge of such business
relationships.
2. When a material conflict of interest between an Aberdeen Adviser's interests
and its clients' interests appears to exist, the Aberdeen Adviser may choose
among the following options to eliminate such conflict: (1) vote in accordance
with these Policies and Procedures if it involves little or no discretion; (2)
vote as recommended by a third party service if the Aberdeen Adviser utilizes
such a service; (3) "echo vote" or "mirror vote" the proxies in the same
proportion as the votes of other proxy holders that are not Aberdeen clients;
(4) if possible, erect information barriers around the person or persons making
voting decisions sufficient to insulate the decision from the conflict; (5) if
practical, notify affected clients of the conflict of interest and seek a waiver
of the conflict; or (6) if agreed upon in writing with the client, forward the
proxies to affected clients allowing them to vote their own proxies.
C. Analysts. The proxy administration process is carried out by the PA-UK. The
PA-UK ensures that each proxy statement is directed to the appropriate Analyst.
If a third party recommendation service has been retained, the PA-UK will
forward the proxy statement to the Analyst with the recommendation highlighted.
The Analyst will determine whether to vote as recommended by the service
provider or to recommend an alternative and shall advise the PA-UK. The Analyst
may consult with the PA-UK as necessary. If the Analyst recommends voting
against the third party recommendation, he or she is responsible for documenting
the reasons for such recommendation and that no conflict of interest influenced
such recommendation. If no third party recommendation service is utilized or if
no recommendation is provided, the Analyst is responsible for documenting the
rationale for his or her vote recommendation.
D. Vote. The following describes the breakdown of responsibilities between the
PA-UK and the Corporate Governance Group ("CGG") in voting portfolio securities
and the extent to which the Aberdeen Advisers rely on third party service
providers.
The PA-UK is responsible for ensuring that votes for Aberdeen Advisers' clients
are cast in a timely fashion and in accordance with these Policies and
Procedures. In addition, the PA-UK is primarily responsible for administering
proxy votes for the US and Canadian Funds which are advised or sub-advised by
the Aberdeen Advisers.
Responsibility for considering the substantive issues relating to any vote and
for deciding how shares will be voted resides with the relevant Analyst.
In the event that a material conflict of interest is identified by an Analyst,
decisions on how to vote will be referred to the Corporate Governance Group
("CGG"). The CGG includes the Chief Investment Officer, the head of the Socially
Responsible Research, and representatives from portfolio management teams. The
CGG meets as needed to consider material conflicts of interest or any other
items raising unique issues. If the CGG determines that there is no material
conflict of interest, the vote recommendation will be forwarded to the PA-UK. If
a material conflict of interest is identified, the CGG will follow the conflict
of interest procedures set forth in Section IV.B.2., above.
The PA-UK helps facilitate and coordinate proxy voting for U.S. clients of the
Aberdeen Advisers. The Aberdeen Advisers have engaged Proxy Edge, a third party
service provider, to cast votes electronically for certain clients and to
maintain records of such votes electronically. Aberdeen has also engaged ISS, a
third party service provider, to provide (I) notification of impending votes;
(2) research into non-routine votes, including shareholder resolutions; (3)
voting recommendations which may be viewed on-line; and (4) web-based voting. In
the absence of any material conflict of interest, the Aberdeen Advisers may
either vote in accordance with the ISS recommendation or decline to follow the
ISS recommendation based on its own view of the agenda item provided that
decisions to vote contrary to the ISS recommendation are documented as set forth
in Section IV.C., above. In the event of a material conflict of interest, the
Aberdeen Advisers will follow the procedures outlined in Section IV.B.2, above.
E. Review. PA-UK are responsible for ensuring that proxy materials are received
in a timely manner and reconciled against holdings on the record date of client
accounts over which the Aberdeen Adviser has voting authority to ensure that all
shares held on the record date, and for which a voting obligation exists, are
voted.
V. DOCUMENTATION, RECORDKEEPING AND REPORTING REQUIREMENTS
A. Documentation.
Each Adviser's Chief Compliance Officer is responsible for implementing
and updating these Policies and Procedures;
The PA-UK is responsible for:
1. Overseeing the proxy voting process;
2. Consulting with portfolio managers/analysts for the relevant portfolio
security; and 3. Maintaining manual proxy voting records, if any, and overseeing
and reviewing voting execution and recordkeeping by third party providers such
as ISS and ProxyEdge.
B. Record Keeping.
1. Each Aberdeen Adviser maintains or procures the maintenance of records of all
proxies it has voted. As permitted by Rule 204-2(c), electronic proxy statements
and the record of each vote cast by each client account will be maintained by
either ISS or Proxy Edge, depending on the client account.
A US Fund's proxy voting record must be filed with the SEC on Form N-PX.
Form N-PX must be completed and signed in the manner required, containing a
fund's proxy voting record for the most recent twelve-month period ended June
30th (beginning August) I, 2004). If an Aberdeen Adviser delegates this
reporting responsibility to a third party service provider such as ISS or Proxy
Edge, it will ensure that the third party service provider files Form N-PX
accordingly. Aberdeen Advisers shall obtain and maintain undertakings from both
ISS and Proxy Edge to provide it with copies of proxy voting records and other
documents relating to its clients' votes promptly upon request. Aberdeen
Advisers, ISS and Proxy Edge may rely on the SEC's EDGAR system to keep records
of certain proxy statements if the proxy statements are maintained by issuers on
that system (e.g., large U.S.-based issuers).
2. As required by Rule 204-2(c), such records will also include: (a) a copy of
the Policies and Procedures; (b) a copy of any document created by the Aberdeen
Adviser that was material to making a decision on how to vote proxies on behalf
of a client or that memorializes the basis for that decision; and (c) each
written client request for proxy voting records and the Aberdeen Adviser's
written response to any (written or oral) client request for such records .
3. Duration. Proxy voting books and records will be maintained in an easily
accessible place for a period of five years, the first two in an appropriate
office of the Aberdeen Adviser.
C. Reporting. The Aberdeen Advisers will initially inform clients of these
Policies and Procedures by summary disclosure in Part II of their respective
Forms ADV. Upon receipt of a client's request for more information, the Aberdeen
Advisers will provide to the client a copy of these Policies and Procedures
and/or, in accordance with the client's stated requirements, how the client's
proxies were voted during the period requested subsequent to the adoption of
these Policies and Procedures. Such periodic reports, other than those required
for Funds, will not be made available to third parties absent the express
written request of the client. However, to the extent that any Aberdeen Adviser
may serve as a subadviser to another adviser to a Client, such Aberdeen Adviser
will be deemed to be authorized to provide proxy voting records on such Client
accounts to such other adviser.
For Canadian investment funds, Aberdeen US, Aberdeen AU and Aberdeen
Singapore will assist in preparing annual proxy voting records for the period
ending June 30 of each year and will post an annual proxy voting record on each
Canadian investment fund's website no later than August 31 of each year. Upon
receipt of a client or securityholder's request, Aberdeen US, Aberdeen AU or
Aberdeen Singapore will make available a copy of these Policies and Procedures
and the Canadian investment fund's proxy voting record, without charge, to any
client or securityholder upon a request made by the client Or securityholder
after August 31.
D. Review of Policies and Procedures. These Policies and Procedures will be
subject to review on a periodic basis as deemed appropriate by the Aberdeen
Advisers. Any questions regarding the Policies and Procedures should be directed
to the Compliance Department of the respective Aberdeen Adviser.
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, 2013
Aberdeen Asset Management Inc. ("Aberdeen" or the "Sub-Advisor"), a Securities
and Exchange Commission registered investment advisor, is a wholly-owned
subsidiary of Aberdeen Asset Management PLC ("Aberdeen Group") and serves as the
investment sub-advisor to the registrant. Aberdeen Group is a publicly-traded
international investment management group listed on the London Stock Exchange,
managing assets for both institutional and retail clients from offices around
the world.
Investment decisions for the registrant are made by Aberdeen using a team
approach and not by any one individual. By making team decisions, Aberdeen seeks
to ensure that the investment process results in consistent returns across all
portfolios with similar objectives. Aberdeen does not employ separate research
analysts. Instead, Aberdeen's investment managers combine the roles of analysis
with portfolio management. Each member of the team has sector and portfolio
responsibilities such as day-to-day monitoring of liquidity. The overall result
of this matrix approach is a high degree of cross-coverage, leading to a deeper
understanding of the securities in which Aberdeen invests.
DEVAN KALOO
Head of Emerging Market Equity for the Aberdeen Group
Mr. Kaloo is responsible for the London based Global Emerging Market ("GEM")
Equity Team, which manages Latin America, Europe, Middle East and Africa
equities, and also has oversight of global emerging market input from the Asia
research team based in Singapore, with which he works closely. Mr. Kaloo began
his career at Martin Currie in Edinburgh, Scotland, shortly after graduation,
working initially on the North American desk before transferring to the global
asset allocation team. Mr. Kaloo moved off the global asset allocation team in
1997, and for the next three years worked on Asian portfolios before joining
Murray Johnstone in Singapore in July 2000. Following the latter's acquisition,
he transferred to the Aberdeen Group where he was responsible for the Asian ex
Japan region as well as regional portfolios within emerging market mandates and
technology stocks.
JOANNE IRVINE
Head of GEM Equity Team ex Asia
Ms. Irvine is on the GEM Equity Team, where she specializes in the emerging
markets of Europe, Africa and the Middle East. In January 1996, Ms. Irvine
joined the Aberdeen Group in a group development role. Since May 1997, Ms.
Irvine has been part of Aberdeen's emerging markets fund management group in
London.
PETER TAYLOR
Senior Investment Manager/Head of Corporate Governance
Mr. Taylor is a Senior Investment Manager and Head of Corporate Governance on
the Global Emerging Markets Equity Team. Peter joined Aberdeen's Asian Equities
Team in Singapore in 2007 and transferred to London in 2011. Previously, he was
with the International Finance Corporation, where he worked on corporate
governance and capital markets development for seven years from their Washington
DC and Hong Kong offices.
BRETT DIMENT
Head of Emerging Market Debt
Mr. Diment is Head of Emerging Market Debt and joined Aberdeen following the
acquisition of Deutsche Asset Management ("Deutsche") in 2005. He is responsible
for the day-to-day management of the Emerging Market Debt Team and portfolios.
Mr. Diment had been at Deutsche since 1991 as a member of the Fixed Income group
and served as Head of the Emerging Debt Team there from 1999 until its
acquisition by Aberdeen.
MAX WOLMAN
Portfolio Manager, Emerging Market Debt
Mr. Wolman is a Portfolio Manager on the Global Emerging Market Debt Team and
has been with Aberdeen since January 2001. Mr. Wolman originally specialized in
currency and domestic debt analysis but is now responsible for a wide range of
emerging debt analysis including external and corporate issuers. Mr. Wolman is a
member of the Emerging Markets Debt Investment Committee at Aberdeen and is also
responsible for the daily implementation of the investment process.
(A)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBER
AND POTENTIAL CONFLICTS OF INTEREST
OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBER
INFORMATION PROVIDED AS OF DECEMBER 31, 2013
(assets in millions).
# of Accounts Total Assets
Managed for which for which
Total Advisory Fee is Advisory Fee
Name of Portfolio Manager or # of Accounts Total Based on is Based on
Team Member Type of Accounts Managed Assets Performance Performance
------------------------------ ---------------- ------------- -------- ------------------ -------------
1. Devan Kaloo Registered Investment Companies: 10 $12,030.04 0 $0
Other Pooled Investment Vehicles: 25 $28,733.24 0 $0
Other Accounts: 53 $18,345.24 5 $1,470.54
2. Joanne Irvine Registered Investment Companies: 10 $12,030.04 0 $0
Other Pooled Investment Vehicles: 25 $28,733.24 0 $0
Other Accounts: 53 $18,345.24 5 $1,470.54
3. Peter Taylor Registered Investment Companies: 10 $12,030.04 0 $0
Other Pooled Investment Vehicles: 25 $28,733.24 0 $0
Other Accounts: 53 $18,345.24 5 $1,470.54
4. Brett Diment Registered Investment Companies: 9 $794.86 0 $0
Other Pooled Investment Vehicles: 83 $15,230.37 0 $0
Other Accounts: 132 $25,586.06 2 $303.11
5. Max Wolman Registered Investment Companies: 9 $794.86 0 $0
Other Pooled Investment Vehicles: 83 $15,230.37 0 $0
Other Accounts: 132 $25,586.06 2 $303.11
POTENTIAL CONFLICTS OF INTERESTS
In accordance with legal requirements in the various jurisdictions in which they
operate, and their own Conflicts of Interest policies, all subsidiaries of
Aberdeen Asset Management PLC, (together Aberdeen), have in place arrangements
to identify and manage Conflicts of Interest that may arise between them and
their clients or between their different clients. Where Aberdeen does not
consider that these arrangements are sufficient to manage a particular conflict,
it will inform the relevant client(s) of the nature of the conflict so that the
client(s) may decide how to proceed.
The portfolio managers' management of "other accounts", including (1) mutual
funds; (2) other pooled investment vehicles; and (3) other accounts that may pay
advisory fees that are based on account performance ("performance-based fees"),
may give rise to potential conflicts of interest in connection with their
management of a Fund's investments, on the one hand, and the investments of the
other accounts, on the other. The other accounts may have the same investment
objective as a Fund. Therefore, a potential conflict of interest may arise as a
result of the identical investment objectives, whereby the portfolio manager
could favor one account over another. However, Aberdeen believes that these
risks are mitigated by the fact that: (i) accounts with like investment
strategies managed by a particular portfolio manager are generally managed in a
similar fashion, subject to exceptions to account for particular investment
restrictions or policies applicable only to certain accounts, differences in
cash flows and account sizes, and similar factors; and (ii) portfolio manager
personal trading is monitored to avoid potential conflicts. In addition,
Aberdeen has adopted trade allocation procedures that require equitable
allocation of trade orders for a particular security among participating
accounts.
In some cases, another account managed by the same portfolio manager may
compensate Aberdeen based on the performance of the portfolio held by that
account. The existence of such performance-based fees may create additional
conflicts of interest for the portfolio manager in the allocation of management
time, resources and investment opportunities.
Another potential conflict could include instances in which securities
considered as investments for a Fund also may be appropriate for other
investment accounts managed by Aberdeen or its affiliates. Whenever decisions
are made to buy or sell securities by the Fund and one or more of the other
accounts simultaneously, Aberdeen may aggregate the purchases and sales of the
securities and will allocate the securities transactions in a manner that it
believes to be equitable under the circumstances. As a result of the
allocations, there may be instances where the Fund will not participate in a
transaction that is allocated among other accounts. While these aggregation and
allocation policies could have a detrimental effect on the price or amount of
the securities available to a Fund from time to time, it is the opinion of
Aberdeen that the benefits from the Aberdeen organization outweigh any
disadvantage that may arise from exposure to simultaneous transactions. Aberdeen
has adopted policies that are designed to eliminate or minimize conflicts of
interest, although there is no guarantee that procedures adopted under such
policies will detect each and every situation in which a conflict arises.
(A)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
INFORMATION PROVIDED AS OF DECEMBER 31, 2013
Aberdeen Asset Management PLC's ("Aberdeen") remuneration policies are designed
to support its business strategy, as a leading international asset manager. The
objective is to attract, retain and reward talented individuals for the delivery
of sustained, superior returns for its clients and shareholders. Aberdeen
operates in a highly competitive international employment market, and aims to
maintain its strong track record of success in developing and retaining talent.
Aberdeen's policy is to recognize corporate and individual achievements each
year through an appropriate annual bonus scheme. The aggregate value of awards
in any year is dependent on the group's overall performance and profitability.
Consideration is also given to the levels of bonuses paid in the market.
Individual awards which are payable to all members of staff are determined by a
rigorous assessment of achievement against defined objectives.
A long-term incentive plan for key staff and senior employees comprises of a
mixture of cash and deferred shares in Aberdeen PLC or select Aberdeen funds
(where applicable). Overall compensation packages are designed to be competitive
relative to the investment management industry.
Base Salary
Aberdeen's policy is to pay a fair salary commensurate with the individual's
role, responsibilities and experience, and having regard to the market rates
being offered for similar roles in the asset management sector and other
comparable companies. Any increase is to reflect inflation and is applied in a
manner consistent with other Aberdeen employees; any other increases must be
justified by reference to promotion or changes in responsibilities.
Annual Bonus
Aberdeen's policy is to recognize corporate and individual achievements each
year through an appropriate annual bonus scheme. The Remuneration Committee of
Aberdeen determines the key performance indicators that will be applied in
considering the overall size of the bonus pool. In line with practice amongst
other asset management companies, individual bonuses are not subject to an
absolute cap. However, the aggregate size of the bonus pool is dependent on the
group's overall performance and profitability. Consideration is also given to
the levels of bonuses paid in the market. Individual awards are determined by a
rigorous assessment of achievement against defined objectives, and are reviewed
and approved by the Remuneration Committee.
Aberdeen has a deferral policy which is intended to assist in the retention of
talent and to create additional alignment of executives' interests with
Aberdeen's sustained performance and, in respect of the deferral into funds,
managed by Aberdeen, to align the interest of asset managers with our clients.
Staff performance is reviewed formally at least once a year. The review process
evaluates the various aspects that the individual has contributed to the
Aberdeen, and specifically, in the case of portfolio managers, to the relevant
investment team. Discretionary bonuses are based on client service, asset growth
and the performance of the respective portfolio manager. Overall participation
in team meetings, generation of original research ideas and contribution to
presenting the team externally are also evaluated.
In the calculation of a portfolio management team's bonus, Aberdeen takes into
consideration investment matters (which include the performance of funds,
adherence to the company investment process, and quality of company meetings) as
well as more subjective issues such as team participation and effectiveness at
client presentations. To the extent performance is factored in, such performance
is not judged against any specific benchmark and is evaluated over the period of
a year - January to December. The pre- or after-tax performance of an individual
account is not considered in the determination of a portfolio manager's
discretionary bonus; rather the review process evaluates the overall performance
of the team for all of the accounts they manage.
Portfolio manager performance on investment matters is judged over all of the
accounts the portfolio manager contributes to and is documented in the appraisal
process. A combination of the team's and individual's performance is considered
and evaluated. However, since the performance of other accounts is a subjective
portion of a portfolio manager's annual bonus consideration, it is deliberated
in a general fashion without a set method or specialized compensation structure.
Although performance is not a substantial portion of a portfolio manager's
compensation, Aberdeen also recognizes that fund performance can often be driven
by factors outside one's control, such as (irrational) markets, and as such pays
attention to the effort by portfolio managers to ensure integrity of our core
process by sticking to disciplines and processes set, regardless of momentum and
'hot' themes. Short-terming is thus discouraged and trading-oriented managers
will thus find it difficult to thrive in the Aberdeen environment. Additionally,
if any of the aforementioned undue risks were to be taken by a portfolio
manager, such trend would be identified via Aberdeen's dynamic compliance
monitoring system.
When determining compensation, Fund performance is calculated using pre-tax
information. Fund performance is compared to standards such as peer performance
and benchmarks when determining compensation, with specific metrics including a
comparison to the Fund's benchmark.
(A)(4) DISCLOSURE OF SECURITIES OWNERSHIP
INFORMATION PROVIDED AS OF DECEMBER 31, 2013
Name of Portfolio Manager Dollar ($) Range of
-------------------------- --------------------
or Fund Shares
--- ------------
Team Member Beneficially Owned
----------- -------------------
Devan Kaloo $0
Joanne Irvine $0
Peter Taylor $0
Brett Diment $0
Max Wolman $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/Aberdeen Emerging Opportunity Fund
---------------------------------------------------
By (Signature and Title)* /a/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: February 21, 2014
----------------------
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)* /a/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: February 21, 2014
----------------------
By (Signature and Title)* /a/ Mark R. Bradley
----------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: February 21, 2014
----------------------
* Print the name and title of each signing officer under his or her signature.