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
First Trust/Aberdeen Emerging Opportunity Fund
(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
(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
(Name and address of agent for service)
registrant's telephone number, including area code: (630) 765-8000
Date of fiscal year end: December 31
Date of reporting period: December 31, 2009
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
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("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. Section 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
(GRAPHIC)
(FIRST TRUST LOGO)
ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 2009
FIRST TRUST/ ABERDEEN EMERGING OPPORTUNITY FUND
(ABERDEEN ASSET MANAGEMENT LOGO)
TABLE OF CONTENTS
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
ANNUAL REPORT
DECEMBER 31, 2009
Shareholder Letter ........................................................ 1
At A Glance ............................................................... 2
Portfolio Commentary ...................................................... 3
Portfolio of Investments .................................................. 7
Schedule of Forward Foreign Currency Contracts ............................ 14
Statement of Assets and Liabilities ....................................... 15
Statement of Operations ................................................... 16
Statements of Changes in Net Assets ....................................... 17
Statement of Cash Flows ................................................... 18
Financial Highlights ...................................................... 19
Notes to Financial Statements ............................................. 20
Report of Independent Registered Public Accounting Firm ................... 27
Additional Information .................................................... 28
Board of Trustees and Officers ............................................ 30
Privacy Policy ............................................................ 34
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or 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 investing in the Fund. See "Risk Considerations" in the Notes to
Financial Statements for a discussion of 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 regulatory filings.
SHAREHOLDER LETTER
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
ANNUAL REPORT
DECEMBER 31, 2009
Dear Shareholders:
The year 2009 was more positive for the U.S. and global markets, which eased the
minds of economists and investors alike. Many economists believe that the
recession that began in December 2007 ended in March 2009. In fact, the Dow
Jones Industrial Average's total return from March 9 (the statistical end of the
bear market) to December 31, 2009, was 61.59%. Of course, no one can guarantee
that this trend will continue, but the economy has continued to rise and most
investors have found it easier to open their financial statements since March.
First Trust Advisors L.P. ("First Trust") has always believed that in order to
be successful in reaching your financial goals, you should be invested for the
long term. A long-term investor understands that the market, from a historical
perspective, has always experienced ups and downs. But history has shown that
the patient investor is typically rewarded over the long term. We have always
believed that staying invested in quality products and having a long-term
perspective can help investors reach their financial goals.
The report you hold contains detailed information about your investment in First
Trust/Aberdeen Emerging Opportunity Fund (the "Fund"). It contains a portfolio
commentary from the Fund's portfolio management team that provides a market
recap for the period, a performance analysis and a market and Fund outlook.
Additionally, the report provides the Fund's financial statements for the period
covered by the report. I encourage you to read this document and discuss it with
your financial advisor.
Since its inception, First Trust has been through many types of markets. We
remain committed to bringing you quality investment solutions regardless of the
inevitable volatility the market experiences. We offer a variety of products
that can fit many financial plans to help those investors seeking long-term
investment success. As well, we are committed to making available up-to-date
information about your investments so you and your financial advisor have
current information on your portfolio.
We continue to value our relationship with you, and we thank you for the
opportunity to assist you in achieving your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
President of First Trust/Aberdeen Emerging Opportunity Fund
Page 1
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
"AT A GLANCE"
AS OF DECEMBER 31, 2009 (UNAUDITED)
FUND STATISTICS
Symbol on New York Stock Exchange FEO
Common Share Price $ 18.04
Common Share Net Asset Value ("NAV") $ 19.76
Premium (Discount) to NAV (8.70)%
Net Assets Applicable to Common Shares $106,716,519
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) 7.09%
Common Share Price & NAV
(weekly closing price)
[Performance Graph]
Common Share Price NAV
12/31/08 10.25 12.87
1/2/09 11.18 13.06
1/9/09 11.36 13.24
1/16/09 11.09 13.00
1/23/09 10.98 12.85
1/30/09 11.17 13.07
2/6/09 11.69 13.37
2/13/09 11.05 13.10
2/20/09 10.02 12.55
2/27/09 9.97 12.45
3/6/09 9.51 12.29
3/13/09 10.48 12.76
3/20/09 10.23 12.75
3/27/09 10.71 13.12
4/3/09 11.15 13.59
4/9/09 11.40 13.96
4/17/09 11.59 14.31
4/24/09 11.50 14.42
5/1/09 11.90 14.72
5/8/09 12.69 15.67
5/15/09 12.26 15.47
5/22/09 13.12 16.05
5/29/09 13.77 16.40
6/5/09 14.06 16.80
6/12/09 14.26 16.97
6/19/09 14.12 16.21
6/26/09 14.32 16.38
7/2/09 14.44 16.47
7/10/09 14.12 16.38
7/17/09 14.72 17.00
7/24/09 15.40 17.50
7/31/09 15.64 17.78
8/7/09 16.09 18.21
8/14/09 15.95 18.06
8/21/09 16.09 18.25
8/28/09 15.90 18.25
9/4/09 15.92 18.30
9/11/09 16.58 18.81
9/18/09 17.00 19.29
9/25/09 16.86 19.01
10/2/09 17.23 19.11
10/9/09 18.36 19.62
10/16/09 18.27 19.85
10/23/09 18.42 19.82
10/30/09 17.47 19.23
11/6/09 17.66 19.47
11/13/09 17.86 19.82
11/20/09 18.09 19.84
11/27/09 18.18 19.76
12/4/09 18.40 19.99
12/11/09 18.12 19.93
12/18/09 18.22 19.78
12/24/09 18.03 19.64
12/31/09 18.04 19.76
Performance
Average Annual
1 Year Total Return
Ended Inception (8/28/2006)
12/31/2009 to 12/31/2009
---------- ---------------------
Fund Performance (3)
NAV 69.25% 11.06%
Market Value 94.01% 6.60%
Index Performance
Blended Benchmark (4) 42.59% 11.05%
Barclays Capital Global Emerging Markets Index 35.61% 7.34%
FTSE All World Emerging Market Index 82.56% 11.52%
% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
--------------- -----------
Republic of Argentina, 7.00%, 03/28/11 2.8%
Brazil NTN - B Note, 6.00%, 08/15/10 2.6
Samsung Electronics Company Ltd.,
Preference Shares 2.0
Petronas Capital Ltd., 5.25%, 08/12/19 2.0
Republic of Venezuela, 5.75%, 02/26/16 1.8
Vale S.A., Preference Shares ADR 1.8
Petroleo Brasileiro S.A., ADR 1.7
Republic of Iraq, 5.80%, 01/15/28 1.6
Banco Bradesco S.A., ADR 1.5
PT Astra International Tbk 1.5
----
Total 19.3%
====
% OF TOTAL
CREDIT QUALITY (6) BONDS & NOTES
------------------ -------------
AAA 1.8
AA- 2.4
A 4.6
A- 2.3
BBB+ 1.5
BBB 15.9
BBB- 10.8
BB+ 7.8
BB 11.6
BB- 15.3
B+ 11.0
B 3.4
B- 7.2
NR 4.4
-----
Total 100.0%
=====
% OF TOTAL
TOP 10 COUNTRIES (5) INVESTMENTS
-------------------- -----------
Brazil 12.3%
Mexico 9.1
Indonesia 6.5
China 5.8
Russia 5.5
India 4.1
Philippines 4.0
Malaysia 3.7
South Africa 3.7
Argentina 3.5
----
Total 58.2%
====
% OF TOTAL
INDUSTRY CLASSIFICATION INVESTMENTS
----------------------- -----------
Government Bonds and Notes 33.8%
Oil, Gas & Consumable Fuels 13.1
Commercial Banks 11.7
Semiconductors & Semiconductor Equipment 3.2
Diversified Financial Services 3.1
Real Estate Management & Development 3.1
Food Retailing & Staples 2.7
Wireless Telecommunication Services 2.5
Automobiles 2.5
Metals & Mining 2.5
Multiline 2.3
Specialty Retail 1.9
Pharmaceuticals 1.9
Construction Materials 1.9
Beverages 1.8
Tobacco 1.7
Household Products 1.2
Food Products 1.1
Household Durables 1.1
Special Purpose Bank 1.0
Other 5.9
-----
Total 100.0%
=====
(1) Most recent distribution paid or declared through 12/31/2009. 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 12/31/2009. 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 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. Past performance is not
indicative of future results.
(4) Blended benchmark consists of the following: JPMorgan Emerging Markets Bond
Index - Global Diversified (32.5%); JPMorgan 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 investment sub-advisor.
(6) The credit quality information represented reflects the ratings assigned by
one or more nationally recognized statistical rating organizations
(NRSROs). For situations in which a security is rated by one or more NRSROs
and ratings are not equivalent, the ratings are averaged.
Page 2
PORTFOLIO COMMENTARY
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 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.
EQUITY MANAGEMENT TEAM
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. After qualifying as a chartered
accountant in 1992, she worked in corporate finance, specializing in raising
development capital finance for private businesses. 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.
MARK GORDON-JAMES
INVESTMENT MANAGER, GEM EQUITY TEAM
After graduating with a degree in Geography and Economics from the London School
of Economics in 2000, Mr. Gordon-James worked with the emerging markets team of
Merrill Lynch Investment Managers. Mr. Gordon-James joined the Aberdeen Group in
April 2004.
FIONA MORRISON
INVESTMENT MANAGER, GEM EQUITY TEAM
Ms. Morrison is an investment manager on the emerging markets ex Asia team. Ms.
Morrison joined Aberdeen in 2001 as an analyst.
ANDY BROWN
INVESTMENT MANAGER, GEM EQUITY TEAM
Mr. Brown is an assistant investment manager on the emerging markets ex Asia
team. Prior to joining Aberdeen in March 2005, Mr. Brown worked in the oil field
consumables industry in the United Arab Emirates.
FIXED-INCOME MANAGEMENT TEAM
BRETT DIMENT
HEAD OF EMERGING MARKET DEBT
Mr. Diment joined Deutsche Asset Management Group Limited ("Deutsche") in 1991
as a member of the fixed-income group and became head of the Emerging Market
Debt team at Deutsche in 1999. Mr. Diment joined Aberdeen following the Deutsche
acquisition in 2005 and is now responsible for the day-to-day management of the
Emerging Market Debt team and portfolios.
Page 3
PORTFOLIO COMMENTARY -- (CONTINUED)
KEVIN DALY
PORTFOLIO MANAGER, EMERGING MARKET DEBT
Mr. Daly joined the Emerging Market Debt team at Aberdeen in April 2007 as a
portfolio manager, having spent the previous 10 years at Standard & Poor's in
London and Singapore as a credit market analyst covering global emerging market
debt, and was head of marketing for Global Sovereign Ratings. At Standard &
Poor's, Mr. Daly was a regular participant on the Global Sovereign Committee,
served as a member of the Sovereign Ratings Review Board, and was one of the
initial members of the Emerging Market Council, formed in 2006 to advise senior
management on business and market developments in emerging markets.
EDWIN GUTIERREZ
PORTFOLIO MANAGER, EMERGING MARKET DEBT
Mr. Gutierrez has served as an economist specializing in Latin America at LGT
Asset Management, and more recently as a portfolio manager specializing in
emerging market fixed-income at Invesco Asset Management. He joined Deutsche in
2000 and Aberdeen in 2005.
MAX WOLMAN
PORTFOLIO MANAGER, EMERGING MARKET DEBT
Mr. Wolman joined Aberdeen in January 2001 and is portfolio manager on the
Emerging Market Debt mandates. Mr. Wolman originally specialized in currency and
domestic debt analysis; however, he is now responsible for wider emerging debt
analysis, including external and corporate issuers. He is a member of the
Emerging Market Debt investment committee at Aberdeen and is also responsible
for the daily implementation of the investment process.
ESTHER CHAN
PORTFOLIO MANAGER, EMERGING MARKET DEBT
Ms. Chan joined Aberdeen in Singapore in 2005 where she started as a corporate
credit analyst and trader working across investment-grade and high-yield assets
in the region. She has 6 years of experience in the asset class, and now serves
as a portfolio manager in Aberdeen London with specialization in analysis,
management and trading of external Asian debt, and Emerging Market corporates.
Prior to joining Aberdeen, Ms. Chan worked as a corporate finance analyst at
John Moore, assisting in various deals focused on the debt restructuring in
Indonesian firms facing creditor holdout situations, post-Asian crisis.
COMMENTARY
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
The investment objective of First Trust/Aberdeen Emerging Opportunity Fund (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.
MARKET RECAP -- EQUITY
Stock market performance during 2009 reflected a sharp reversal in sentiment.
Emerging markets ended sharply higher at year-end 2009, far outpacing the MSCI
AC World Index's gain. Early in 2009, foreign investors fled the asset class as
the credit crisis deepened. Foreign investors initially fled from emerging
equities as the panic sown by the failure of several major financial
institutions in developed markets pushed financial markets close to collapse.
Economic activity contracted sharply as lending froze. Demand fell, exports
tumbled and many emerging economies slipped into recession by early 2009. But
sentiment turned around in mid-March, after governments injected unprecedented
amounts of liquidity to stabilize the financial system. As fears that the world
would suffer one of the deepest slumps since the Great Depression subsided,
global markets bottomed in March 2009. The near uninterrupted rally that
occurred was also helped by the economic recovery of many emerging market
countries. On the economic front, unprecedented government intervention appears
to have stabilized the global economy and several countries are now expanding
again, led by emerging countries, prompting authorities to consider unwinding
stimulus measures. Among the so-called BRIC economies, Brazil's GDP contracted
less than the world's major economies in 2009; Russia's economy grew for two
consecutive quarters after being hit hard by falling oil prices; China reported
growth rates of around 9%: while India is forecast to expand by almost 8% for
the 12 months ending March 31, 2010.
Page 4
PORTFOLIO COMMENTARY - (CONTINUED)
MARKET RECAP - FIXED-INCOME
Emerging market debt had a remarkably good year in 2009 as investors began the
year very bearish on the asset class and ended the year very bullish. The
JPMorgan Emerging Markets Bond Index-Global Diversified spread tightened from
748 over United States Treasuries at the start of 2009 to 287 at the end of the
year, which equates to a spread compression of 461 basis points. Investors only
started adding risk in March after the announcement from U.S. Treasury Secretary
Geithner on the Public/Private Investment Program and the U.S. Federal Reserve
then introduced quantitative easing ("QE:" an extreme form of monetary policy
used to stimulate an economy where the interest rates are either at, or close
to, zero). The most significant development for emerging markets was the new
International Monetary Fund ("IMF") lending framework and the G20's (a group of
finance ministers and central bank governors from 20 economies: 19 countries,
plus the European Union) proposal to triple its resources to USD750 billion,
which occurred around the same time as QE.
The remainder of the year consisted of investors continuing to add exposure to
the asset class as their concerns regarding defaults decreased due to the
extraordinary measures adopted by the various central banks around the world. Of
particular note were several country-specific stories which helped to galvanize
demand for the asset class such as Argentina's expected reopening of the debt
exchange for their defaulted debt, the Russian central bank's establishment of
the Vnesheconombank (a Russian state bank for development and foreign economic
affairs) to offer loans to companies in Russia, the IMF's credit line with
Ukraine, and political stability in Indonesia during and after their elections.
FUND RECAP
The Fund had a net asset value ("NAV") total return(1) of 69.25% and a market
value total return(1) of 94.01% for the year ended December 31, 2009, compared
to the Fund's blended benchmark(2) total return of 42.59% over the same period.
In addition to this blended benchmark, the Fund currently uses other indexes for
comparative purposes. The total returns for the year ended December 31, 2009,
for these indexes were as follows: the Barclays Capital Global Emerging Markets
Index was 35.61% and the FTSE All World Emerging Market Index was 82.56%.
PERFORMANCE ANALYSIS - EQUITY
As global emerging markets recovered from their March 2009 lows, the Fund
initially lagged the blended benchmark as more volatile stocks led the rally.
However, the overweight to interest rate-sensitive sectors, such as consumer
discretionary and financials, allowed the Fund to catch up as the rally
broadened out. Several of the Fund's consumer holdings performed well, including
Indonesian conglomerate Astra International and Brazilian retailer Lojas Renner.
Many of the Fund's financial holdings also performed well, such as Standard
Chartered, Akbank, Aksigorta, Grupo Financiero Banorte, Banco Bradesco and ICICI
Bank.
Conversely, the overweight to defensive sectors, such as consumer staples,
proved negative. Although these sectors had held up well amid the turmoil of
2008, they did not enjoy the full extent of the rebound in 2009, although this
was mitigated partially by the Fund's underweight to telecoms and utilities.
The equity portion of the Fund rose by 81.06% in U.S. dollar terms over the
period covered by this report, compared with a rise in the benchmark, the MSCI
Global Emerging Markets Index, of 79.06 %.
PERFORMANCE ANALYSIS - FIXED-INCOME
Our conviction that the credits which had very poor returns in 2008 would have a
strong rebound in 2009, such as the corporate bonds and higher-yielding
countries, proved correct. The emerging market debt component of the Fund
returned 54.18%, compared to the debt component(3) of the blended benchmark
which returned 25.20%. This outperformance came from both local currency
holdings and external bond holdings (debt denominated in G3 currencies; here,
mostly debt denominated in U.S. dollars). Of particular note were the high
returns from the external bonds of Ukraine, Argentina, the Dominican Republic
and Russia. Brazil and Uruguay were the strong outperformers in local bonds
compared to the benchmark.
----------
(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 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. Past performance is not
indicative of future results.
(2) The Fund's blended benchmark consists of the following: 32.5% JPMorgan
Emerging Markets Bond Index-Global Diversified; 32.5% JPMorgan Government
Bond Index-Emerging Markets; and 35% MSCI (Morgan Stanley Capital
International) Global Emerging Markets Index.
(3) The benchmark for the fixed-income portion of the Fund consists of the
following: 50% JPMorgan Emerging Markets Bond Index--Global Diversified
(JPM EMBI Global) and 50% JPMorgan Government Bond Index--Emerging Markets
(JPM GBI-EM).
Page 5
PORTFOLIO COMMENTARY - (CONTINUED)
MARKET AND FUND OUTLOOK - EQUITY
In our opinion, emerging markets may rally further amid positive liquidity in
the short term, but uncertainty and volatility are likely to persist. For now,
policymakers appear to have decided that the withdrawal of extraordinary fiscal
stimulus would be unwise, but this stimulus cannot continue indefinitely. The
risk of asset bubbles could become more pronounced, if U.S. interest rates stay
low, restricting any recovery of the U.S. dollar and prolonging the carry-trade.
(A strategy in which an investor sells a certain currency with a relatively low
interest rate and uses the funds to purchase a different currency yielding a
higher interest rate.) How emerging market countries will fare may depend on
their ability to improve domestic demand in the face of developed economies'
tepid recovery.
Nevertheless, we feel the inherent potential for emerging markets remains
undimmed. We believe our stock-picking approach is especially relevant, given
that earnings visibility has been obscured by the one-off effects of
cost-cutting and inventory restocking. In our opinion, the Fund's holdings are
generally well managed and financially sound.
MARKET AND FUND OUTLOOK - FIXED-INCOME
Heading into 2010 we remain positive on emerging market debt following a
generally robust performance in 2009, but would acknowledge that the coming year
will be more challenging as the focus shifts from the favorable growth backdrop
to the uncertainty over exit strategies. At the outset of 2010, we would expect
the strong growth outlook in emerging markets, supported by improving U.S. data,
will generally be positive for risk appetite. In this context, we believe
high-yield sovereigns and some of the smaller sovereign issuers should continue
to perform well, along with selective quasi-sovereigns and corporates. In
addition, we believe local currency debt will also offer some appeal as risk
appetite remains healthy, in our opinion, but performance over the short-term
may be mixed amid a firming U.S. dollar.
Page 6
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS (a)(b)
DECEMBER 31, 2009
PRINCIPAL
VALUE
(LOCAL STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
------------- ------------------------------------------------------------- ------ -------- ------------
BONDS AND NOTES (c) -- 59.2%
ARGENTINA -- 3.6%
1,390,769 Republic of Argentina (ARS) (d) ............................. 4.68% 02/04/18 $ 596,352
3,170,000 Republic of Argentina (USD) ................................. 7.00% 03/28/11 3,095,124
177,646 Republic of Argentina (USD) ................................. 8.28% 12/31/33 133,235
------------
3,824,711
------------
BRAZIL -- 4.2%
2,640,000 Brazil NTN - B Note (BRL) ................................... 6.00% 08/15/10 2,888,653
144,000 Dasa Finance Corp. (USD) .................................... 8.75% 05/29/18 150,120
580,000 Odebrecht Finance Ltd. (USD) ................................ 7.00% 04/21/20 589,425
540,000 Petrobras International Finance Co. (USD) ................... 7.88% 03/15/19 625,779
230,000 Telemar Norte Leste S.A. (USD) .............................. 9.50% 04/23/19 276,000
------------
4,529,977
------------
CHINA -- 1.0%
470,000 Agile Property Holdings Ltd. (USD) .......................... 10.00% 11/14/16 479,400
580,000 Parkson Retail Group Ltd. (USD) ............................. 7.88% 11/14/11 594,028
------------
1,073,428
------------
COLOMBIA -- 2.3%
460,000 Republic of Colombia (USD) .................................. 7.38% 03/18/19 523,250
260,000 Republic of Colombia (USD) .................................. 7.38% 09/18/37 284,700
1,735,000 Republic of Colombia (USD) .................................. 6.13% 01/18/41 1,613,550
------------
2,421,500
------------
CROATIA -- 1.4%
1,400,000 Croatia Government International Bond (USD) ................. 6.75% 11/05/19 1,510,639
------------
DOMINICAN REPUBLIC -- 1.0%
505,000 Cerveceria Nacional Dominica (USD) (d) ...................... 16.00% 03/27/12 470,357
528,000 Dominican Republic (USD) .................................... 8.63% 04/20/27 554,400
------------
1,024,757
------------
EL SALVADOR -- 1.0%
1,070,000 Republic of El Salvador (USD) ............................... 7.65% 06/15/35 1,059,300
------------
GABON -- 0.5%
540,000 Gabonese Republic (USD) ..................................... 8.20% 12/12/17 569,700
------------
GHANA -- 0.6%
90,000 Republic of Ghana (USD) ..................................... 8.50% 10/04/17 92,925
490,000 Republic of Ghana (USD) ..................................... 8.50% 10/04/27 505,925
------------
598,850
------------
HUNGARY -- 1.5%
227,370,000 Hungary Government Bond (HUF) ............................... 6.00% 10/24/12 1,172,089
87,000,000 Hungary Government Bond (HUF) ............................... 5.50% 02/12/16 410,601
------------
1,582,690
------------
See Notes to Financial Statements
Page 7
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS (a)(b) -- (CONTINUED)
DECEMBER 31, 2009
PRINCIPAL
VALUE
(LOCAL STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
------------- ------------------------------------------------------------- ------ -------- ------------
BONDS AND NOTES (c) -- (CONTINUED)
INDONESIA -- 5.2%
140,000 Indo Integrated Energy II B.V. (USD) ........................ 9.75% 11/05/16 $ 141,750
330,000 Indonesian Government Bond (USD) ............................ 6.75% 03/10/14 360,699
5,730,000,000 Indonesian Government Bond (IDR) ............................ 10.75% 05/15/16 656,924
1,850,000,000 Indonesian Recapitalization Bond (IDR) ...................... 13.40% 02/15/11 209,461
4,350,000,000 Indonesian Recapitalization Bond (IDR) ...................... 13.45% 08/15/11 502,466
850,000 Majapahit Holding B.V. (USD) ................................ 7.75% 10/17/16 902,536
150,000 Majapahit Holding B.V. (USD) ................................ 7.25% 06/28/17 154,131
200,000 Matahari International Financial Co. B.V. (USD) ............. 10.75% 08/07/12 207,275
620,000 MGTI Finance Company, Ltd. (USD) ............................ 8.38% 09/15/10 625,719
690,000 PT Adaro Indonesia (USD) .................................... 7.63% 10/22/19 685,687
900,000 Republic of Indonesia (USD) ................................. 10.38% 05/04/14 1,117,335
------------
5,563,983
------------
IRAQ -- 1.7%
2,350,000 Republic of Iraq (USD) ...................................... 5.80% 01/15/28 1,821,250
------------
KAZAKHSTAN -- 2.5%
1,050,000 Halyk Savings Bank of Kazakhstan (USD) ...................... 9.25% 10/16/13 1,097,250
730,000 KazakhGold Group Ltd. (USD) ................................. 9.38% 11/06/13 730,475
620,000 KazMunaiGaz Finance Sub B.V. (USD) .......................... 8.38% 07/02/13 674,250
150,000 KazMunaiGaz Finance Sub B.V. (USD) .......................... 11.75% 01/23/15 181,500
------------
2,683,475
------------
LITHUANIA -- 1.3%
1,310,000 Republic of Lithuania (USD) ................................. 6.75% 01/15/15 1,341,977
------------
MALAYSIA -- 2.1%
2,180,000 Petronas Capital Ltd. (USD) ................................. 5.25% 08/12/19 2,194,438
------------
MEXICO -- 5.4%
682,000 Axtel S.A.B. de C.V. (USD) .................................. 9.00% 09/22/19 702,460
525,000 Corp. Geo S.A. de C.V. (USD) ................................ 8.88% 09/25/14 544,688
666,000 Desarrolladora Homex S.A. (USD) ............................. 7.50% 09/28/15 636,030
5,100,000 Mexican Bonos Desarr Fixed Rate Bond (MXN) .................. 7.25% 12/15/16 384,207
12,340,000 Mexican Bonos Desarr Fixed Rate Bond (MXN) .................. 10.00% 11/20/36 1,075,812
8,400,000 Mexico Cetes (MXN) .......................................... (e) 03/04/10 636,967
140,000 Pemex Project Funding Master Trust (USD) .................... 5.75% 03/01/18 142,258
1,800,000 Pemex Project Funding Master Trust (USD) .................... 6.63% 06/15/38 1,683,959
------------
5,806,381
------------
NIGERIA -- 1.8%
790,000 GTB Finance B.V. (USD) ...................................... 8.50% 01/29/12 778,150
174,000,000 KfW International Finance (NGN) ............................. 8.50% 01/18/11 1,125,763
------------
1,903,913
------------
PAKISTAN -- 0.2%
290,000 Islamic Republic of Pakistan (USD) .......................... 7.88% 03/31/36 214,442
------------
See Notes to Financial Statements
Page 8
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS (a)(b) -- (CONTINUED)
DECEMBER 31, 2009
PRINCIPAL
VALUE
(LOCAL STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
------------- ------------------------------------------------------------- ------ -------- ------------
BONDS AND NOTES (c) -- (CONTINUED)
PERU -- 1.4%
490,000 CFG Investment S.A.C. (USD) ................................. 9.25% 12/19/13 $ 488,775
2,440,000 Peru Bono Soberano (PEN) .................................... 8.20% 08/12/26 1,011,852
------------
1,500,627
------------
PHILIPPINES -- 3.1%
620,000 Republic of Philippines (USD) ............................... 10.63% 03/16/25 879,879
1,470,000 Republic of Philippines (USD) ............................... 7.75% 01/14/31 1,664,775
740,000 SM Investments Corp. (USD) .................................. 6.00% 09/22/14 738,784
------------
3,283,438
------------
QATAR -- 1.4%
1,500,000 State of Qatar (USD) ........................................ 5.25% 01/20/20 1,518,750
------------
RUSSIA -- 4.6%
1,180,000 Gaz Capital S.A. (USD) ...................................... 9.25% 04/23/19 1,321,600
17,000,000 GPB Eurobond Finance PLC (RUB) .............................. 7.25% 02/22/10 553,308
630,000 LUKOIL International Finance B.V. (USD) ..................... 7.25% 11/05/19 636,300
22,502,740 Red Arrow International Leasing PLC (RUB) ................... 8.38% 06/30/12 747,901
150,400 Russia Government International Bond (USD) .................. 7.50% 03/31/30 171,268
670,000 TNK-BP Finance S.A. (USD) ................................... 7.50% 07/18/16 695,962
750,000 VTB Capital S.A. (USD) ...................................... 6.88% 05/29/18 757,500
------------
4,883,839
------------
SINGAPORE -- 0.7%
700,000 Ciliandra Perkasa Finance Co. Pte Ltd. (USD) ................ 10.75% 12/08/11 719,391
------------
SOUTH AFRICA -- 1.5%
860,000 Republic of South Africa (USD) .............................. 7.38% 04/25/12 944,581
4,160,000 Republic of South Africa (ZAR) .............................. 13.50% 09/15/15 692,313
------------
1,636,894
------------
TURKEY -- 1.3%
1,030,000 Turkey Government Bond (TRY) ................................ (e) 03/03/10 681,281
320,000 Turkey Government Bond (TRY) ................................ 16.00% 03/07/12 241,265
460,000 Turkey Government Bond, Inflation Adjusted Bond (TRY) (f) ... 10.00% 02/15/12 428,457
------------
1,351,003
------------
UKRAINE -- 2.0%
970,000 EX-IM Bank of Ukraine (USD) ................................. 7.65% 09/07/11 824,500
400,000 Naftogaz of Ukraine (USD) ................................... 9.50% 09/30/14 339,996
500,000 UBS AG Jersey Branch, Credit Linked Note (USD) (j) .......... 9.13% 06/21/10 216,000
830,000 Ukraine Government Bond (USD) ............................... 6.88% 03/04/11 763,600
------------
2,144,096
------------
URUGUAY -- 2.5%
570,000 Republic of Uruguay (USD) ................................... 7.88% 01/15/33 632,700
1,010,000 Republic Orient Uruguay (USD) ............................... 7.63% 03/21/36 1,098,375
See Notes to Financial Statements
Page 9
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS (a)(b) -- (CONTINUED)
DECEMBER 31, 2009
PRINCIPAL
VALUE
(LOCAL STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
------------- ------------------------------------------------------------- ------ -------- ------------
BONDS AND NOTES (C) -- (CONTINUED)
URUGUAY -- (CONTINUED)
15,690,000 Republic Orient Uruguay, Inflation Adjusted Bond (UYU) (f) .. 5.00% 09/14/18 $ 971,005
------------
2,702,080
------------
VENEZUELA -- 3.4%
490,000 Bolivarian Republic of Venezuela (USD) ...................... 7.75% 10/13/19 323,400
2,360,000 Petroleos de Venezuela S.A. (USD) ........................... 5.25% 04/12/17 1,303,900
3,110,000 Republic of Venezuela (USD) ................................. 5.75% 02/26/16 2,037,050
------------
3,664,350
------------
TOTAL BONDS AND NOTES
(Cost $60,454,293) .......................................... 63,129,879
------------
SHARES DESCRIPTION VALUE
------------- ------------------------------------------------------------- ------------
COMMON STOCKS -- 44.6%
BRAZIL -- 8.5%
78,450 Banco Bradesco S.A., ADR .................................... 1,715,701
43,000 Lojas Renner S.A ............................................ 970,649
22,560 Multiplan Empreendimentos Imobiliarios S.A .................. 420,489
44,000 Petroleo Brasileiro S.A., ADR ............................... 1,865,160
25,300 Souza Cruz S.A .............................................. 839,361
28,000 Ultrapar Participacoes S.A., Preference Shares .............. 1,288,386
80,000 Vale S.A., Preference Shares, ADR ........................... 1,985,600
------------
9,085,346
------------
CHILE -- 0.9%
15,600 Banco Santander Chile S.A., ADR. ............................ 1,010,568
------------
CHINA -- 5.0%
130,000 China Mobile Ltd. (g) ....................................... 1,209,585
350,000 Dah Sing Banking Group Ltd. (g) ............................. 519,699
200,000 Hang Lung Group Ltd. (g) .................................... 989,103
920,000 PetroChina Company Ltd., H Shares (g) ....................... 1,093,741
700,000 Swire Pacific Ltd., B Shares (g) ............................ 1,531,007
------------
5,343,135
------------
CZECH REPUBLIC -- 0.6%
3,000 Komercni Banka AS (g) ....................................... 642,834
------------
HUNGARY -- 1.3%
6,300 Richter Gedeon Nyrt (g) (h) ................................. 1,434,178
------------
INDIA -- 4.3%
32,000 Bharti Airtel Ltd. (g) ...................................... 226,105
20,000 GlaxoSmithKline Pharmaceuticals Ltd. (g) .................... 688,730
13,000 Grasim Industries Ltd. (g) .................................. 690,831
See Notes to Financial Statements
Page 10
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS (a)(b) -- (CONTINUED)
DECEMBER 31, 2009
SHARES DESCRIPTION VALUE
------------- ------------------------------------------------------------- ------------
COMMON STOCKS -- (CONTINUED)
INDIA -- (CONTINUED)
29,000 Hero Honda Motors Ltd. (g) .................................. $ 1,066,643
59,000 Hindustan Unilever Ltd. (g) ................................. 334,387
11,500 Housing Development Finance Corp., Ltd. (g) ................. 657,973
20,000 ICICI Bank Ltd. (g) ......................................... 374,796
10,000 Infosys Technologies Ltd. (g) ............................... 556,551
------------
4,596,016
------------
INDONESIA -- 1.6%
460,000 PT Astra International Tbk (g) .............................. 1,691,142
------------
ITALY -- 0.9%
23,600 Tenaris S.A., ADR ........................................... 1,006,540
------------
MALAYSIA -- 1.8%
80,300 British American Tobacco Malaysia Berhad (g) ................ 1,002,318
289,000 Public Bank Berhad (g) ...................................... 949,992
------------
1,952,310
------------
MEXICO -- 4.0%
31,900 Fomento Economico Mexicano, S.A.B. de C.V., ADR ............. 1,527,372
40,000 Grupo Aeroportuario del Centro Norte, S.A.B. de C.V., ADR ... 532,400
352,000 Grupo Financiero Banorte, S.A.B. de C.V., O Shares .......... 1,269,482
209,000 Kimberly-Clark de Mexico, S.A.B. de C.V., A Shares .......... 935,723
------------
4,264,977
------------
PHILIPPINES -- 1.1%
1,164,000 Bank of the Philippine Islands (g) .......................... 1,202,212
------------
RUSSIA -- 1.1%
20,500 LUKOIL, ADR ................................................. 1,156,200
------------
SOUTH AFRICA -- 2.3%
130,000 Massmart Holdings Ltd. (g) .................................. 1,574,024
142,729 Truworths International Ltd. (g) ............................ 838,841
------------
2,412,865
------------
SOUTH KOREA -- 3.0%
47,008 Busan Bank (g) .............................................. 560,873
4,900 Samsung Electronics Co., Ltd., Preference Shares (g) ........ 2,208,642
850 Shinsegae Co., Ltd. (g) ..................................... 392,605
------------
3,162,120
------------
TAIWAN -- 2.7%
800,450 Taiwan Mobile Company, Ltd. (g) ............................. 1,560,491
643,953 Taiwan Semiconductor Manufacturing Company, Ltd. (g) ........ 1,297,885
------------
2,858,376
------------
THAILAND -- 2.3%
250,000 PTT Exploration and Production Public Co., Ltd .............. 1,102,280
190,000 Siam Cement Public (The) Co., Ltd. (g) ...................... 1,359,849
------------
2,462,129
------------
See Notes to Financial Statements
Page 11
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS (a)(b) -- (CONTINUED)
DECEMBER 31, 2009
SHARES DESCRIPTION VALUE
------------- ------------------------------------------------------------- ------------
COMMON STOCKS -- (CONTINUED)
TURKEY -- 2.1%
55,226 Akbank TAS (g) .............................................. $ 351,400
253,000 Aksigorta AS (g) ............................................ 883,397
21,188 Bim Birlesik Magazalar AS (g) ............................... 985,312
------------
2,220,109
------------
UNITED KINGDOM -- 1.1%
45,696 Standard Chartered PLC (g) .................................. 1,153,634
------------
TOTAL COMMON STOCKS
(Cost $36,151,550)........................................... 47,654,691
------------
TOTAL INVESTMENTS -- 103.8%
(Cost $96,605,843) (i) ...................................... 110,784,570
OUTSTANDING LOAN -- (5.4)% .................................. (5,800,000)
NET OTHER ASSETS AND LIABILITIES -- 1.6% .................... 1,731,949
------------
NET ASSETS -- 100.0% ........................................ $106,716,519
============
----------
(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) All of these securities are available to serve as collateral for the
outstanding loan.
(c) Bonds and notes are included in a country based upon their underlying
credit exposure as determined by Aberdeen Asset Management Inc., the
investment sub-advisor.
(d) Variable rate security. The interest rate shown reflects the rate in effect
at December 31, 2009.
(e) Zero coupon bond.
(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) Security is fair valued in accordance with procedures adopted by the Fund's
Board of Trustees.
(h) Non-income producing security.
(i) Aggregate cost for federal income tax purposes is $97,297,335. As of
December 31, 2009, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$17,388,648 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$3,901,413.
(j) Credit linked to the KSC State Export-Import Bank of Ukraine.
ADR American Depositary Receipt
Currency
ARS Argentine Peso
BRL Brazilian Real
COP Colombian Peso
HUF Hungarian Forint
IDR Indonesian Rupiah
MXN Mexican Peso
NGN Nigerian Naira
PEN Peruvian New Sol
RUB Russian Ruble
TRY Turkish Lira
USD United States Dollar
UYU Uruguayan Peso
ZAR South African Rand
See Notes to Financial Statements
Page 12
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS -- (CONTINUED)
DECEMBER 31, 2009
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of December 31,
2009 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
12/31/2009 PRICES INPUTS INPUTS
------------ ----------- ------------ ------------
Bonds and Notes * ...................... $ 63,129,879 $ -- $63,129,879 $--
------------ ----------- ----------- ---
Common Stocks
Brazil .............................. 9,085,346 9,085,346 -- --
Chile ............................... 1,010,568 1,010,568 -- --
China ............................... 5,343,135 -- 5,343,135 --
Czech Republic ...................... 642,834 -- 642,834 --
Hungary ............................. 1,434,178 -- 1,434,178 --
India ............................... 4,596,016 -- 4,596,016 --
Indonesia ........................... 1,691,142 -- 1,691,142 --
Italy ............................... 1,006,540 1,006,540 -- --
Malaysia ............................ 1,952,310 -- 1,952,310 --
Mexico .............................. 4,264,977 4,264,977 -- --
Philippines ......................... 1,202,212 -- 1,202,212 --
Russia .............................. 1,156,200 1,156,200 --
South Africa ........................ 2,412,865 -- 2,412,865 --
South Korea ......................... 3,162,120 -- 3,162,120 --
Taiwan .............................. 2,858,376 -- 2,858,376 --
Thailand ............................ 2,462,129 1,102,280 1,359,849 --
Turkey .............................. 2,220,109 -- 2,220,109 --
United Kingdom ...................... 1,153,634 -- 1,153,634 --
------------ ----------- ----------- ---
Total Common Stock ............... 47,654,691 17,625,911 30,028,780 --
------------ ----------- ----------- ---
Total Investments ...................... 110,784,570 17,625,911 93,158,659 --
------------ ----------- ----------- ---
Other Financial Instruments:
Forward Foreign Currency Contracts ** .. 27,160 27,160 -- --
------------ ----------- ----------- ---
$110,811,730 $17,653,071 $93,158,659 $--
============ =========== =========== ===
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
12/31/2009 PRICES INPUTS INPUTS
------------ ----------- ------------ ------------
Forward Foreign Currency Contracts ** .. $(29,629) $(29,629) $-- $--
========= ======== ======== ========
* See the Portfolio of Investments for country breakout.
** See the Schedule of Forward Foreign Currency Contracts for contract and
currency detail.
See Notes to Financial Statements
Page 13
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
DECEMBER 31, 2009
FORWARD FOREIGN CURRENCY CONTRACTS TO BUY
CONTRACTS TO RECEIVE
--------------------------------------------- NET NET
LOCAL UNREALIZED UNREALIZED
CURRENCY IN APPRECIATION DEPRECIATION
SETTLEMENT LOCAL VALUE IN EXCHANGE OF CONTRACTS OF CONTRACTS
DATE CURRENCY (a) U.S. $ FOR U.S. $ U.S. $ U.S. $
---------- ----------------- ---------- ---------- ------------ ------------
03/05/10 COP 958,850,000 (b) $468,326 $ 475,149 $-- $(6,823)
01/22/10 HUF 63,871,000 (c) 339,060 339,000 60 --
--- -------
$60 $(6,823)
--- -------
FORWARD FOREIGN CURRENCY CONTRACTS TO SELL
CONTRACTS TO DELIVER
--------------------------------------------- NET NET
LOCAL UNREALIZED UNREALIZED
CURRENCY IN APPRECIATION DEPRECIATION
SETTLEMENT LOCAL VALUE IN EXCHANGE OF CONTRACTS OF CONTRACTS
DATE CURRENCY (a) U.S. $ FOR U.S. $ U.S. $ U.S. $
---------- ----------------- ---------- ---------- ------------ ------------
03/05/10 BRL 3,834,000 (d) $2,175,393 $2,189,106 $13,713 $ --
03/05/10 COP 958,850,000 (d) 468,326 481,713 13,387 --
01/22/10 HUF 116,964,000 (b) 620,905 605,372 -- (15,533)
01/22/10 ZAR 5,196,000 (e) 701,766 694,493 -- (7,273)
------- --------
$27,100 $(22,806)
------- --------
Unrealized Appreciation (Depreciation) ................... $27,160 $(29,629)
======= ========
Net Unrealized Appreciation (Depreciation) ............... $ (2,469)
========
(a) Please see page 12 for currency descriptions.
(b) Counterparty - Citibank
(c) Counterparty - Credit Suisse
(d) Counterparty - JPMorgan Chase
(e) Counterparty - UBS
See Notes to Financial Statements
Page 14
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2009
ASSETS:
Investments, at value
(Cost $96,605,843) ............................................ $110,784,570
Cash .......................................................... 842,935
Foreign currency (Cost $17,533) ............................... 17,607
Unrealized appreciation on forward foreign currency
contracts .................................................. 27,160
Prepaid expenses .............................................. 4,980
Receivables:
Interest ................................................... 1,146,902
Dividends .................................................. 44,603
------------
Total Assets ............................................ 112,868,757
------------
LIABILITIES:
Outstanding loan .............................................. 5,800,000
Unrealized depreciation on forward foreign currency
contracts .................................................. 29,629
Payables:
Investment advisory fees ................................... 96,120
Common Shares repurchased .................................. 71,497
Audit and tax fees ......................................... 52,000
Custodian fees ............................................. 28,008
Printing fees .............................................. 20,107
Interest and fees on loan .................................. 17,407
Legal fees ................................................. 15,814
Administrative fees ........................................ 9,132
Transfer agent fees ........................................ 4,882
Other liabilities ............................................. 7,642
------------
Total Liabilities ....................................... 6,152,238
------------
NET ASSETS .................................................... $106,716,519
============
NET ASSETS CONSISTS OF:
Paid-in capital ............................................... $ 99,045,506
Par value ..................................................... 54,002
Accumulated net investment income (loss) ...................... (915,972)
Accumulated net realized gain (loss) on investments, forward
foreign currency contracts and foreign currency
transactions ............................................... (5,648,080)
Net unrealized appreciation (depreciation) on investments,
forward foreign currency contracts and foreign currency
translation ................................................ 14,181,063
------------
NET ASSETS .................................................... $106,716,519
============
NET ASSET VALUE, per Common Share (par value $0.01 per Common
Share) ..................................................... $ 19.76
============
Number of Common Shares outstanding (unlimited number of Common
Shares has been authorized) ................................ 5,400,233
============
See Notes to Financial Statements
Page 15
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2009
INVESTMENT INCOME:
Interest (net of foreign withholding tax of $20,099) .......... $ 6,352,998
Dividends (net of foreign withholding tax of $133,760) ........ 1,321,620
-----------
Total investment income ................................. 7,674,618
-----------
EXPENSES:
Investment advisory fees ...................................... 1,024,411
Interest and fees on loan ..................................... 290,136
Custodian fees ................................................ 162,631
Administrative fees ........................................... 103,947
Legal fees .................................................... 83,458
Printing fees ................................................. 82,474
Audit and tax fees ............................................ 55,609
Trustees" fees and expenses ................................... 39,297
Transfer agent fees ........................................... 33,549
Other ......................................................... 93,668
-----------
Total expenses .......................................... 1,969,180
-----------
NET INVESTMENT INCOME (LOSS) .................................. 5,705,438
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments ................................................ (2,318,490)
Forward foreign currency contracts ......................... (1,324,380)
Foreign currency transactions .............................. (312,761)
-----------
Net realized gain (loss) ...................................... (3,955,631)
-----------
Net change in unrealized appreciation (depreciation) on:
Investments (a) ............................................ 44,615,020
Forward foreign currency contracts ......................... 184,163
Foreign currency translation ............................... 36,041
-----------
Net change in unrealized appreciation (depreciation) .......... 44,835,224
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ....................... 40,879,593
-----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS ................................................. $46,585,031
===========
----------
(a) Change in unrealized appreciation (depreciation) on investments is net of
decrease in deferred foreign capital gains tax of $78,842.
See Notes to Financial Statements
Page 16
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
12/31/2009 12/31/2008
------------ ------------
OPERATIONS:
Net investment income (loss) ......................................... $ 5,705,438 $ 6,367,854
Net realized gain (loss) ............................................. (3,955,631) (3,040,576)
Net change in unrealized appreciation (depreciation) ................. 44,835,224 (46,393,364)
------------ ------------
Net increase (decrease) in net assets resulting from operations ...... 46,585,031 (43,066,086)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ................................................ (4,606,552) (6,396,916)
Net realized gain .................................................... -- (573,086)
Return of capital .................................................... (3,534,075) (2,227,912)
------------ ------------
Total distributions to shareholders .................................. (8,140,627) (9,197,914)
------------ ------------
CAPITAL TRANSACTIONS:
Repurchase of Common Shares .......................................... (7,092,729) (483,289)
------------ ------------
Total increase (decrease) in net assets .............................. 31,351,675 (52,747,289)
NET ASSETS:
Beginning of period .................................................. 75,364,844 128,112,133
------------ ------------
End of period ........................................................ $106,716,519 $ 75,364,844
============ ============
Accumulated net investment income (loss) at end of period ............ $ (915,972) $ (505,147)
============ ============
CAPITAL SHARE TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period ................................. 5,855,188 5,905,236
Common Shares repurchased* ........................................... (454,955) (50,048)
------------ ------------
Common Shares at end of period ....................................... 5,400,233 5,855,188
============ ============
* On November 17, 2008, the Fund commenced a share repurchase program for
purposes of enhancing shareholder value and reducing the discount at which
the Fund's shares trade from their net asset value. The program originally
expired on May 17, 2009, but on June 2, 2009, the Fund announced that the
Board of Trustees of the Fund (the "Board") authorized the continuation of
the Fund's share repurchase program. The program expired again on December
2, 2009, but on December 15, 2009, the Fund again announced that the Board
authorized the continuation of the Fund's share repurchase program. For the
years ended December 31, 2009, and 2008, the Fund repurchased 454,955 and
50,048, respectively, of its shares at a weighted-average discount of
11.47% and 22.65%, respectively, from net asset value per share. The Fund
expects to continue to repurchase its outstanding shares as it believes
such activity will further the accomplishment of the foregoing objectives,
subject to the earlier of (i) the repurchase of an additional 203,625
common shares (for an aggregate of 708,628), or (ii) March 15, 2010.
See Notes to Financial Statements
Page 17
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations .............. $ 46,585,031
Adjustments to reconcile net increase (decrease) in net assets
resulting from operations to net cash provided by operating activities:
Purchases of investments .................................................. (65,279,871)
Sales and maturities of investments ....................................... 85,391,461
Net amortization/accretion of premium/discount on investments ............. (1,276,079)
Net realized gain/loss on investments ..................................... 2,318,490
Net change in unrealized appreciation/depreciation on investments ......... (44,615,020)
Increase in net unrealized appreciation/depreciation on forward
foreign currency contracts ............................................. (184,163)
CHANGES IN ASSETS AND LIABILITIES:
Decrease in dividends receivable .......................................... 4,245
Decrease in interest receivable ........................................... 337,801
Increase in interest and fees on loan payable ............................. 4,687
Increase in investment advisory fees payable .............................. 21,036
Increase in legal fees payable ............................................ 13,498
Increase in printing fees payable ......................................... 4,245
Increase in transfer agent fees payable ................................... 2,298
Increase in administrative fees payable ................................... 799
Decrease in custodian fees payable ........................................ (5,790)
Decrease in Trustees" fees and expenses payable ........................... (75)
Decrease in prepaid expenses .............................................. 85,723
Increase in other liabilities ............................................. 6,042
------------
CASH PROVIDED BY OPERATING ACTIVITIES ........................................ $ 23,414,358
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of Common Shares ............................................... (7,050,637)
Distributions to Common Shareholders from net investment income ........... (4,606,552)
Return of capital distributions ........................................... (3,534,075)
Repayments of loan ........................................................ (7,700,000)
------------
CASH USED IN FINANCING ACTIVITIES ............................................ (22,891,264)
------------
Increase in cash and foreign currency (a) .................................... 523,094
Cash and foreign currency at beginning of period ............................. 337,448
------------
CASH AND FOREIGN CURRENCY AT END OF PERIOD ................................... $ 860,542
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees ............................ $ 285,449
============
----------
(a) Includes net change in unrealized appreciation/depreciation on foreign
currency of $749.
See Notes to Financial Statements
Page 18
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
12/31/2009 12/31/2008 12/31/2007 12/31/2006 (a)
---------- ---------- ---------- --------------
Net asset value, beginning of period ............. $ 12.87 $ 21.69 $ 20.58 $ 19.10(b)
-------- ------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ..................... 1.01 1.09(c) 0.92 0.29
Net realized and unrealized gain (loss) .......... 7.16 (8.37) 2.00 1.58
-------- ------- -------- --------
Total from investment operations ................. 8.17 (7.28) 2.92 1.87
-------- ------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income ............................ (0.81) (1.08) (0.79) (0.31)
Net realized gain ................................ -- (0.10) (1.02) --
Return of capital ................................ (0.63) (0.38) -- (0.04)
-------- ------- -------- --------
Total distributions .............................. (1.44) (1.56) (1.81) (0.35)
-------- ------- -------- --------
Common Shares offering costs charged to
paid-in capital ............................... -- -- -- (0.04)
-------- ------- -------- --------
Capital share repurchases ........................ 0.16 0.02 -- --
-------- ------- -------- --------
Net asset value, end of period ................... $ 19.76 $ 12.87 $ 21.69 $ 20.58
======== ======= ======== ========
Market value, end of period ...................... $ 18.04 $ 10.25 $ 19.50 $ 19.03
======== ======= ======== ========
TOTAL RETURN BASED ON NET ASSET VALUE (D) ........ 69.25% (33.94)% 15.74% 9.74%
======== ======= ======== ========
TOTAL RETURN BASED ON MARKET VALUE (D) ........... 94.01% (41.48)% 12.53% (3.10)%
======== ======= ======== ========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ............. $106,717 $75,365 $128,112 $121,519
Ratio of total expenses to average net assets .... 2.11% 2.00% 2.04% 2.16%(e)
Ratio of total expenses to average net assets
excluding interest expense and fees on loan ... 1.80% 1.60% 1.58% 2.05%(e)
Ratio of net investment income to average net
assets ........................................ 6.11% 5.73% 4.31% 4.27%(e)
Portfolio turnover rate .......................... 66% 64% 95% 40%
INDEBTEDNESS:
Outstanding loan (in 000's) ...................... $ 5,800 $13,500 $ 8,000 $ 7,000
Asset coverage per $1,000 of indebtedness (f) .... $ 19,399 $ 6,583 $ 17,014 $ 18,360
(a) Initial seed date of July 14, 2006. The Fund commenced operations on August
28, 2006.
(b) Net of sales load of $0.90 per Common Share on initial offering.
(c) Based on average shares outstanding.
(d) 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.
(e) Annualized.
(f) Calculated by subtracting the Fund's total assets less the Fund's total
liabilities (not including the loan outstanding), and dividing by the
outstanding loan balance in 000's.
See Notes to Financial Statements
Page 19
NOTES TO FINANCIAL STATEMENTS
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
DECEMBER 31, 2009
1. FUND DESCRIPTION
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 average daily gross asset
value of the Fund (which includes the principal amount of any borrowings, minus
accrued liabilities). There can be no assurance that the Fund's investment
objective will be achieved.
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 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. 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 dividends and interest),
less all liabilities (including accrued expenses, dividends declared but unpaid
and any borrowings of the Fund), by the total number of Common Shares
outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value according
to procedures adopted by the Fund's Board of Trustees. A majority of the Fund's
assets are valued using market information supplied by third parties. In
addition, structured products, including currency linked notes and credit linked
notes, as well as interest rate swaps and credit default swaps, are valued using
a pricing service or quotes provided by the selling dealer or financial
institution. In the event that market quotations are not readily available, the
pricing service does not provide a valuation for a particular asset, or the
valuations are deemed unreliable, the Fund's Board of Trustees has designated
First Trust Advisors L.P. ("First Trust") to use a fair value method to value
the Fund's securities and other investments. Additionally, if events occur after
the close of the principal markets for particular securities (e.g., domestic
debt and foreign securities), but before the Fund values its assets, that could
materially affect NAV, First Trust may use a fair value method to value the
Fund's securities and other investments. The use of fair value pricing by the
Fund is governed by valuation procedures adopted by the Fund's Board of
Trustees, and in accordance with the provisions of the 1940 Act.
Portfolio securities listed on any exchange other than the NASDAQ National
Market ("NASDAQ") and the London Stock Exchange Alternative Investment Market
("AIM") are valued at the last sale price on the business day as of which such
value is being determined. Securities listed on the NASDAQ or the AIM are valued
at the official closing price on the business day as of which such value is
being determined. If there has been no sale on such day, or no official closing
price in the case of securities traded on the NASDAQ or the AIM, the securities
are valued at the mean of the most recent bid and ask prices on such day.
Portfolio securities traded on more than one securities exchange are valued at
the last sale price or official closing price, as applicable, on the business
day as of which such value is being determined at the close of the exchange
representing the principal market for such securities. Portfolio securities
traded in the over-the-counter market, but excluding securities trading on the
NASDAQ and the AIM, are valued at the closing bid prices. Fixed income
securities with a remaining maturity of 60 days or more will be valued by the
Fund using a pricing service. Short-term investments that mature in less than 60
days when purchased are valued at amortized cost.
Foreign securities traded outside the United States are generally valued as of
the time their trading is complete, which is usually different from the close of
the NYSE. Occasionally, events affecting the value of such securities may occur
between such times and the close of the NYSE that will not always be reflected
in the computation of the value of such securities. If events materially
affecting the value of such securities occur during such period, these
securities will be valued at their fair value according to procedures adopted by
the Fund's Board of Trustees. 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.
Page 20
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
DECEMBER 31, 2009
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:
- Level 1 - Level 1 inputs are quoted prices in active markets for
identical securities. An active market is a market in which
transactions for the security occur with sufficient
frequency and volume to provide pricing information on an
ongoing basis.
- Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
- Quoted prices for similar securities in active markets.
- Quoted prices for identical or similar securities in
markets that are non-active. A non-active market is a
market where there are few transactions for the
security, 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.
- Inputs other than quoted prices that are observable for
the security (for example, interest rates and yield
curves observable at commonly quoted intervals,
volatilities, prepayment speeds, loss severities,
credit risks, and default rates).
- Inputs that are derived principally from or
corroborated by observable market data by correlation
or other means.
- Level 3 - Level 3 inputs are unobservable inputs. Unobservable inputs
reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing
the security.
The inputs or methodology used for valuing securities are not necessarily an
indication of the risk associated with investing in those securities. A summary
of the inputs used to value the Fund's investments as of December 31, 2009 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
on the accrual basis, including amortization of premiums and accretion of
discounts.
Securities purchased or sold on a when-issued or delayed-delivery basis may be
settled a month or more after the trade date; interest income on such securities
is not accrued until settlement date. The Fund maintains liquid assets with a
current value at least equal to the amount of its when-issued or
delayed-delivery purchase commitments. At December 31, 2009, the Fund had no
when-issued or delayed-delivery purchase commitments.
C. CREDIT LINKED NOTES:
The Fund invests in credit linked notes. Credit linked notes are securities that
are collateralized by one or more designated securities that are referred to as
"reference securities". Through the purchase of a credit linked note, the buyer
assumes the risk of the default or, in some cases, other declines in credit
quality of the reference securities. The buyer also takes on exposure to the
issuer of the credit linked note in the full amount of the purchase price of the
note. The issuer of a credit linked note normally will have hedged its risk on
the reference securities without acquiring any additional credit exposure. The
Fund has the right to receive periodic interest payments from the issuer of the
credit linked note at an agreed-upon interest rate, and, if there has been no
default or, if applicable, other declines in credit quality, a return of
principal at the maturity date.
Credit linked notes are subject to credit risk of the reference securities
underlying the credit linked notes. If one of the underlying reference
securities defaults, or suffers certain other declines in credit quality, the
Fund may, instead of receiving repayment of principal in whole or in part,
receive the security that has defaulted.
Credit linked notes typically are privately negotiated transactions between two
or more parties. The Fund bears the risk that the issuer of the credit linked
note will default or become bankrupt. The Fund bears the risk of loss of the
principal amount it invested, and the periodic interest payments expected to be
received for the duration of its investment in the credit linked note.
The market for credit linked notes may suddenly become illiquid. The other
parties to the transaction may be the only investors with sufficient
understanding of the derivative to be interested in bidding for it. Changes in
liquidity may result in significant, rapid and unpredictable changes in the
prices for credit linked notes. In certain cases, a market price for a credit
linked note may not be available.
Page 21
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
DECEMBER 31, 2009
D. FORWARD FOREIGN CURRENCY CONTRACTS:
The Fund is subject to foreign currency risk in the normal course of pursuing
its objectives. Forward foreign currency contracts are agreements to exchange
one currency for another at a future date and at a specified price. The Fund may
use 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 on the Statement of Assets and
Liabilities and the Schedule of Forward Foreign Currency Contracts. Realized and
unrealized gains and losses are included 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 up to the entire contract
amount, which would exceed the net unrealized value shown on the Schedule of
Forward Foreign Currency Contracts.
During the year ended December 31, 2009, the open and close values of forward
foreign currency contracts were $6,308,343 and $(1,324,380), respectively.
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 investment securities 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 fluctuations in exchange rates between the
initial purchase trade date and subsequent sale trade date 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 accounting principles generally
accepted in the United States of America. These differences are primarily due to
differing treatments of income and gains on various investment securities held
by the Fund, timing differences and differing characterization of distributions
made by the Fund. Permanent differences incurred during the year ended December
31, 2009, resulting in book and tax accounting differences, have been
reclassified at year end to reflect a decrease to accumulated net investment
income (loss) of $1,509,711 and an increase in accumulated net realized gain
(loss) of $1,509,711. Net assets were not affected by these reclassifications.
The tax character of distributions paid during the years ended December 31, 2009
and December 31, 2008 was as follows:
2009 2008
----------- ----------
Distributions paid from:
Ordinary Income ............................. $ 4,606,552 $6,476,214
Long-Term Capital Gains ..................... -- 493,788
Return of Capital ........................... 3,534,075 2,227,912
As of December 31, 2009, the components of distributable earnings on a tax basis
were as follows:
Undistributed Ordinary Income ............... $ --
Net Unrealized Appreciation (Depreciation) .. 13,492,040
Accumulated Capital and Other Losses ........ (5,875,029)
Page 22
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
DECEMBER 31, 2009
G. INCOME TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), 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.
The Fund intends to utilize provisions of the federal income tax laws, which
allows it to carry a realized capital loss forward for eight years following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At December 31, 2009, the
Fund had a capital loss carryforward for federal income tax purposes of
$5,609,855, with $495,817 and $5,114,038 expiring on December 31, 2016 and 2017,
respectively.
Certain capital losses realized after October 31 may be deferred and treated as
occurring on the first day of the following fiscal year. For the fiscal year
ended December 31, 2009, the Fund intends to elect to defer net realized foreign
currency losses of $265,174 incurred between November 1, 2009 through December
31, 2009.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ending 2009, 2008,
2007 and 2006 remain open to federal and state audit. As of December 31, 2009,
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 pays all expenses directly related to its operations.
I. NEW ACCOUNTING PRONOUNCEMENT
In January 2010, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") No. 2010-06 "Improving Disclosures about
Fair Value Measurements". ASU No. 2010-06 amends FASB Accounting Standards
Codification Topic 820, Fair Value Measurements and Disclosures, to require
additional disclosures regarding fair value measurements. Certain disclosures
required by ASU No. 2010-06 are effective for interim and annual reporting
periods beginning after December 15, 2009, and other required disclosures are
effective for fiscal years beginning after December 15, 2010, and for interim
periods within those fiscal years. Management is currently evaluating the impact
ASU No. 2010-06 will have on its financial statement disclosures.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, The Charger Corporation. First Trust
serves as investment advisor to the Fund pursuant to an Investment Management
Agreement. 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.
Aberdeen Asset Management Inc. (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 Managed Assets that is paid by First
Trust out of its investment advisory fee.
PNC Global Investment Servicing (U.S.) Inc., an indirect, majority-owned
subsidiary of The PNC Financial Services Group, Inc., serves as the Fund's
Administrator, Fund Accountant and Transfer Agent in accordance with certain fee
arrangements. PFPC Trust Company, also an indirect, majority-owned subsidiary of
The PNC Financial Services Group, Inc., serves as the Fund's Custodian in
accordance with certain fee arrangements.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid an annual retainer
of $10,000 per trust for the first 14 trusts of the First Trust Fund Complex and
an annual retainer of $7,500 per trust for each subsequent trust in the First
Trust Fund Complex. The annual retainer is allocated equally among each of the
trusts. No additional meeting fees are paid in connection with board or
committee meetings.
Additionally, the Lead Independent Trustee is paid $10,000 annually, the
Chairman of the Audit Committee is paid $5,000 annually, and each of the
Chairmen of the Nominating and Governance Committee and the Valuation Committee
are paid $2,500 annually to serve in such capacities, with such compensation
paid by the trusts in the First Trust Fund Complex and divided among those
trusts. Trustees are also reimbursed by the trusts in the First Trust Fund
Complex for travel and out-of-pocket expenses in connection with all meetings.
The
Page 23
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
DECEMBER 31, 2009
Lead Independent Trustee and each Committee chairman served two-year terms which
ended December 31, 2009, before rotating to serve as a chairman of another
Committee or as Lead Independent Trustee. The officers and "Interested" Trustee
receive no compensation from the Fund for serving in such capacities.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, other than U.S.
government obligations and short-term obligations, for the year ended December
31, 2009, were $65,279,871 and $85,227,316, respectively.
5. BORROWING
The Fund has entered into a revolving loan agreement with The Bank of Nova
Scotia, which provides for a credit facility to be used as leverage for the
Fund. The 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
$28,000,000. As of December 31, 2009, the Fund had one loan outstanding under
the loan agreement of $5,800,000. For the year ended December 31, 2009, the
average amount outstanding was $8,940,548. The high and low annual interest
rates during the year ended December 31, 2009, were 2.26% and 1.53%,
respectively, and the weighted-average interest rate was 1.68%. The interest
rate at December 31, 2009 was 1.53%. The Fund also pays a commitment fee of
0.35% per year, which is included in "Interest and fees on loan" on the
Statement of Operations. Prior to November 16, 2009, the revolving loan
agreement had a commitment fee of 0.25% per year and an administration fee of
$100,000. The revolving loan agreement has been extended until November 15,
2010.
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. RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some of the risks
that should be considered for the Fund. For additional information about the
risks associated with investing in the Fund, please see the Fund's prospectus
and statement of additional information, as well as other Fund regulatory
filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund, 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.
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
emerg-
Page 24
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
DECEMBER 31, 2009
ing 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; (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 Fund to reinvest 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 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. 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.
CREDIT LINKED NOTES RISK: The Fund may invest up to 35% of its Managed Assets in
credit linked notes. Credit linked notes are subject to credit risk of the
reference securities underlying the credit linked notes. If one of the
underlying reference securities defaults or suffers certain other declines in
credit quality, the Fund may, instead of receiving repayment of principal in
whole or in part, receive the security that has defaulted. The Fund also bears
the risk that the issuer of the credit linked note will default or become
bankrupt. The Fund bears the risk of loss of the principal amount it invested
and the periodic interest payments expected to be received for the duration of
its investment in the credit linked note.
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 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,
Page 25
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
DECEMBER 31, 2009
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.
8. SUBSEQUENT EVENT
Management has evaluated the impact of all subsequent events on the Fund through
February 25, 2010, the date the financial statements were issued, and has
determined that there was a subsequent event as follows:
On February 2, 2010, The PNC Financial Services Group, Inc. ("PNC") entered into
a Stock Purchase Agreement (the "Stock Purchase Agreement") with The Bank of New
York Mellon Corporation ("BNY Mellon"). Upon the terms and subject to the
conditions set forth in the Stock Purchase Agreement, which has been approved by
the board of directors of each company, PNC will sell to BNY Mellon (the "Stock
Sale") 100% of the issued and outstanding shares of PNC Global Investment
Servicing Inc., an indirect, wholly-owned subsidiary of PNC.
The Stock Sale includes PNC Global Investment Servicing (U.S.) Inc. and PFPC
Trust Company and PNC has indicated that it is expected to close in the third
quarter of 2010.
Page 26
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 and schedule of forward foreign currency contracts, as of
December 31, 2009, 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 the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the 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 investments owned as of December 31, 2009 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, 2009, 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 the periods presented, in conformity with accounting principles
generally accepted in the United States of America.
(DELOITTE & TOUCHE LLP)
Chicago, Illinois
February 25, 2010
Page 27
ADDITIONAL INFORMATION
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
DECEMBER 31, 2009 (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 PNC
Global Investment Servicing (U.S.) 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 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 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 (800) 331-1710, 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 PNC Global Investment
Servicing (U.S.) 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 securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's website located at http://www.sec.gov.
Page 28
ADDITIONAL INFORMATION - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
DECEMBER 31, 2009 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("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.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Annual Meeting of Shareholders of the Common Shares of First Trust/Aberdeen
Emerging Opportunity Fund was held on May 11, 2009. At the Annual Meeting,
Trustees Richard E. Erickson and Thomas R. Kadlec were elected by the holders of
Common Shares of the Fund as Class II Trustees for three-year terms expiring at
the Fund's annual meeting of shareholders in 2012. The number of votes cast in
favor of Dr. Erickson was 4,717,830, the number of votes against was 727,391 and
the number of abstentions was 386,409. The number of votes cast in favor of Mr.
Kadlec was 4,715,084, the number of votes against was 730,137 and the number of
abstentions was 386,409. James A. Bowen, Robert F. Keith and Niel B. Nielson are
the current and continuing Trustees.
At the Annual Meeting, shareholders also voted not to approve a shareholder
proposal submitted by Opportunity Income Plus L.P. (the "Proposal") requesting
the Board of Trustees of the Fund to authorize a self-tender offer for all
outstanding shares of the Fund at net asset value. The Proposal additionally
requested that if more than 50% of the Fund's outstanding shares were tendered,
the tender offer should be cancelled and the Fund should be liquidated or merged
into an open-end mutual fund. The number of votes cast in favor of the Proposal
was 859,640, the number of votes against the Proposal was 2,460,792, the number
of abstentions was 84,397 and the number of broker non-votes was 2,040,392.
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 June 16, 2009, 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 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.
TAX INFORMATION
The Fund hereby designates as qualified dividend income distributions 18.12% of
its ordinary income distributions (including short-term capital gains, if
applicable) for the year ended December 31, 2009. None of the ordinary income
(including short-term capital gain, if applicable) distributions made by the
Fund during the year ended December 31, 2009, 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 $5,332,071 (representing a total of $0.99
per share). The total amount of taxes paid to such countries is $153,859
(representing a total of $0.03 per share).
Page 29
BOARD OF TRUSTEES AND OFFICERS
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
DECEMBER 31, 2009 (UNAUDITED)
Information pertaining to the Trustees and Officers of the Fund is set forth
below.
NUMBER OF
PORTFOLIOS IN
THE FIRST TRUST
NAME, ADDRESS, FUND COMPLEX OTHER TRUSTEESHIPS
DATE OF BIRTH AND TERM OF OFFICE AND PRINCIPAL OCCUPATIONS DURING OVERSEEN BY OR DIRECTORSHIPS
POSITION WITH THE FUND LENGTH OF SERVICE(1) PAST 5 YEARS TRUSTEE HELD BY TRUSTEE
---------------------- ----------------------- ----------------------------- --------------- ----------------------
INDEPENDENT TRUSTEES
Richard E. Erickson, Trustee - Three Year Term Physician; President, Wheaton 61 None
c/o First Trust Advisors L.P. Orthopedics; Co-owner and
120 E. Liberty Drive, - Since Fund Inception Co-Director (January 1996 to
Suite 400 May 2007), Sports Med Center
Wheaton, IL 60187 for Fitness; Limited Partner,
D.OB.: 04/51 Gundersen Real Estate
Partnership; Sportsmed LLC
Thomas R. Kadlec, Trustee - Three Year Term Senior Vice President and 61 Director of ADM
c/o First Trust Advisors L.P. Chief Financial Officer (May Investor Service,
120 E. Liberty Drive, - Since Fund Inception 2007 to Present), Vice Inc. and ADM Investor
Suite 400 President and Chief Financial Services International
Wheaton, IL 60187 Officer (1990 to May 2007),
D.O.B.: 11/57 ADM Investor Services, Inc.
(Futures Commission Merchant)
Robert F. Keith, Trustee - Three Year Term President (2003 to Present), 61 None
c/o First Trust Advisors L.P. Hibs Enterprises (Financial
120 E. Liberty Drive, - Since Fund Inception and Management Consulting);
Suite 400
Wheaton, IL 60187
D.O.B.: 11/56
----------
(1) Currently, Robert F. Keith is serving as a trustee until the Fund's 2011
annual meeting of shareholders. Richard E. Erickson and Thomas R. Kadlec
are each serving as trustees until the Fund's 2012 annual meeting of
shareholders. James A. Bowen and Niel B. Nielson are each serving as
trustees until the Fund's 2010 annual meeting of shareholders. Officers of
the Fund have an indefinite term.
Page 30
BOARD OF TRUSTEES AND OFFICERS - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
DECEMBER 31, 2009 (UNAUDITED)
NUMBER OF
PORTFOLIOS IN
THE FIRST TRUST
NAME, ADDRESS, FUND COMPLEX OTHER TRUSTEESHIPS
DATE OF BIRTH AND TERM OF OFFICE AND PRINCIPAL OCCUPATIONS DURING OVERSEEN BY OR DIRECTORSHIPS
POSITION WITH THE FUND LENGTH OF SERVICE(1) PAST 5 YEARS TRUSTEE HELD BY TRUSTEE
---------------------- ----------------------- ----------------------------- --------------- ----------------------
INDEPENDENT TRUSTEES (CONTINUED)
Niel B. Nielson, Trustee - Three Year Term President (June 2002 to 61 Director of Covenant
c/o First Trust Advisors L.P. Present), Covenant College Transport Inc.
120 E. Liberty Drive, - Since Fund Inception
Suite 400
Wheaton, IL 60187
D.O.B.: 03/54
INTERESTED TRUSTEE
James A. Bowen(2), Trustee, - Three Year Trustee President, First Trust 61 Trustee of Wheaton
President, Chairman of the Term and Indefinite Advisors L.P. and First College
Board and CEO Officer Term Trust Portfolios L.P.;
120 E. Liberty Drive, Chairman of the Board of
Suite 400 - Since Fund Inception Directors, BondWave LLC
Wheaton, IL 60187 (Software Development
D.O.B.: 09/55 Company/Investment Advisor)
and Stonebridge Advisors
LLC (Investment Advisor)
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 WHO ARE NOT TRUSTEES(3)
Mark R. Bradley Treasurer, Controller, Chief - Indefinite Term Chief Financial Officer, First Trust
120 E. Liberty Drive, Financial Officer and Chief Advisors L.P. and First Trust Portfolios
Suite 400 Accounting Officer - Since Fund Inception L.P.; Chief Financial Officer, BondWave
Wheaton, IL 60187 LLC (Software Development
D.O.B.: 11/57 Company/Investment Advisor) and
Stonebridge Advisors LLC (Investment
Advisor)
----------
(1) Currently, Robert F. Keith is serving as a trustee until the Fund's 2011
annual meeting of shareholders. Richard E. Erickson and Thomas R. Kadlec
are each serving as trustees until the Fund's 2012 annual meeting of
shareholders. James A. Bowen and Niel B. Nielson are each serving as
trustees until the Fund's 2010 annual meeting of shareholders. Officers of
the Fund have an indefinite term.
(2) Mr. Bowen is deemed an "interested person" of the Fund due to his position
as President of First Trust Advisors L.P., investment advisor of the Fund.
(3) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 31
BOARD OF TRUSTEES AND OFFICERS - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
DECEMBER 31, 2009 (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 WHO ARE NOT TRUSTEES(3)(CONTINUED)
Erin E. Chapman Assistant Secretary - Indefinite Term Assistant General Counsel (October 2007
120 E. Liberty Drive, to Present), Associate Counsel (March
Suite 400 - Since June 2009 2006 to October 2007), First Trust
Wheaton, IL 60187 Advisors L.P. and First Trust Portfolios
D.O.B.: 08/76 L. P.; Associate Attorney (November 2003
to March 2006), Doyle & Bolotin, Ltd.
James M. Dykas Assistant Treasurer - Indefinite Term Senior Vice President (April 2007 to
120 E. Liberty Drive, Present), Vice President (January 2005
Suite 400 - Since Fund Inception to April 2007), First Trust Advisors
Wheaton, IL 60187 L.P. and First Trust Portfolios L.P.
D.O.B.: 01/66
Christopher R. Fallow Assistant Vice President - Indefinite Term Assistant Vice President (August 2006 to
120 E. Liberty Drive, Present), Associate (January 2005 to
Suite 400 - Since Fund Inception August 2006), First Trust Advisors L.P.
Wheaton, IL 60187 and First Trust Portfolios L.P.;
D.O.B.: 04/79 Municipal Bond Trader (July 2001 to
January 2005), BondWave LLC (Software
Development Company/Investment Advisor)
W. Scott Jardine Secretary and Chief - Indefinite Term General Counsel, First Trust Advisors
120 E. Liberty Drive, Compliance Officer L.P., First Trust Portfolios L.P., and
Suite 400 - Since Fund Inception BondWave LLC (Software Development
Wheaton, IL 60187 Company/Investment Advisor); Secretary
D.O.B.: 05/60 of Stonebridge Advisors LLC (Investment
Advisor)
----------
(3) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 32
BOARD OF TRUSTEES AND OFFICERS - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
DECEMBER 31, 2009 (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 WHO ARE NOT TRUSTEES(3)(CONTINUED)
Daniel J. Lindquist Vice President - Indefinite Term Senior Vice President (September 2005
120 E. Liberty Drive, to Present), Vice President (April 2004
Suite 400 - Since Fund Inception to September 2005), First Trust
Wheaton, IL 60187 Advisors L.P. and First Trust
D.O.B.: 02/70 Portfolios L.P.
Coleen D. Lynch Assistant Vice President - Indefinite Term Assistant Vice President (January 2008
120 E. Liberty Drive, to Present), First Trust Advisors L.P.
Suite 400 - Since July 2008 and First Trust Portfolios L.P.; Vice
Wheaton, IL 60187 President (May 1998 to January 2008),
D.O.B.: 07/58 Van Kampen Asset Management and Morgan
Stanley Investment Management
Kristi A. Maher Assistant Secretary and - Indefinite Term Deputy General Counsel (May 2007 to
120 E. Liberty Drive, Deputy Chief Compliance Present), Assistant General Counsel
Suite 400 Officer - Assistant Secretary (March 2004 to May 2007), First Trust
Wheaton, IL 60187 since Fund Inception Advisors L.P. and First Trust
D.O.B.: 12/66 Portfolios L.P
- Deputy Chief Compliance
Officer since November
2009
----------
(3) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 33
PRIVACY POLICY
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
DECEMBER 31, 2009 (UNAUDITED)
PRIVACY POLICY
The open-end and closed-end funds advised by First Trust Advisors L.P. (each a
"Fund") value our relationship with you and consider your privacy an important
priority in maintaining that relationship. We are committed to protecting the
security and confidentiality of your personal information.
I. SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
A. Information we receive from you and your broker-dealer, investment
advisor or financial representative through interviews, applications, agreements
or other forms;
B. Information about your transactions with us, our affiliates or others;
C. Information we receive from your inquiries by mail, e-mail or telephone;
and
D. 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.
II. 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.
III. 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:
A. 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.
B. 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.
IV. CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, the Fund restricts access to
your nonpublic personal information to those individuals 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.
V. 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 34
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This Page Left Blank Intentionally.
(FIRST TRUST LOGO)
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
PNC Global Investment Servicing (U.S.) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
PFPC Trust Company
8800 Tinicum Boulevard
Philadelphia, PA 19153
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
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) During the period covered by this report, 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 was amended
to name W. Scott Jardine as the Compliance Coordinator for the
implementation and administration of the aforementioned code. The
amended code of ethics is provided as an exhibit pursuant to Item
12(a)(1).
(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 $44,000 for 2008 and
$46,800 for 2009.
(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 2008 and $0 for 2009.
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 2008 and $0 for 2009.
(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
$8,589.90 for 2008 and $8,089.86 for 2009. 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 2008 and $0 for 2009.
(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 2008 and $0 for 2009.
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 2008 and $0 for
2009.
(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 2008 were $8,589.90 and $12,143 for the Registrant and the
Registrant's investment adviser, respectively, and for 2009 were
$8,089.86 and $36,000 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 SEPTEMBER 09, 2008
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's 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.
- Support existing management on votes on the financial statements of a
company and the election of the Board of Directors;
- 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
- 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-by-case 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
relevant Aberdeen Adviser's designated proxy administrator ("PA"). Proxies may
also be delivered electronically by custodians using proxy services such as
ProxyEdge. 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 Global
Voting Team based in Scotland ("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
designated PA and the Corporate Governance Group ("CGG") of each Aberdeen
Adviser in voting portfolio securities and the extent to which the Aberdeen
Advisers rely on third party service providers.
The US Fund Administration group ("PA-US"), and the PA-UK, are responsible for
ensuring that votes for Aberdeen Advisers' clients are cast and cast in
accordance with these Policies and Procedures. The PA-US is primarily
responsible for administering proxy votes for the Funds which are advised or
sub-advised by the Aberdeen Advisers, the US closed-end Funds for which Aberdeen
Singapore is the Manager, and the Canadian investment funds.
Responsibility for considering the substantive issues relating to any vote and
for deciding how shares will be voted resides with the relevant Analyst whether
located in Aberdeen US, Aberdeen UK, Aberdeen AU or Aberdeen Singapore.
In the event that a material conflict of interest is identified by any Analyst,
whether in Aberdeen US, Aberdeen UK, Aberdeen AU, Aberdeen Singapore, or AAMISL,
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 Aberdeen US, Aberdeen UK,
Aberdeen AU, AAMISL and Aberdeen Singapore's 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
appropriate proxy administrator, either the PA-US or 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 Aberdeen Advisers have engaged ProxyEdge, a third party service provider, to
cast votes electronically for certain clients and to maintain records of such
votes electronically. Custodians for certain clients provide the PA-US with
access to ProxyEdge. PA-UK helps facilitate and coordinate proxy voting for
certain U.S. clients of the Aberdeen Advisers. Aberdeen UK has engaged
Institutional Shareholder Services ("ISS"), a third party service provider, to
provide (1) 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. For clients
on the ISS system, votes are automatically entered in accordance with ISS
recommendations unless the PA-UK expressly changes the vote prior to the voting
deadline with appropriate analyst documentation. 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.
The Aberdeen US Chief Compliance Officer is responsible for implementing and
updating these Policies and Procedures;
The PA-UK and PA-US are 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 31, 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 MARCH 9, 2010
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. After qualifying as a chartered
accountant in 1992, she worked in corporate finance, specializing in raising
development capital finance for private businesses. 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.
MARK GORDON-JAMES
INVESTMENT MANAGER, GEM EQUITY TEAM
After graduating with a degree in Geography and Economics from the London School
of Economics in 2000, Mr. Gordon-James worked with the emerging markets team of
Merrill Lynch Investment Managers. Mr. Gordon-James joined the Aberdeen Group in
April 2004.
BRETT DIMENT
HEAD OF EMERGING MARKET DEBT
Mr. Diment joined Deutsche Asset Management Group Limited ("Deutsche") in 1991
as a member of the fixed-income group and became head of the Emerging Market
Debt team at Deutsche in 1999. Mr. Diment joined Aberdeen following the Deutsche
acquisition in 2005 and is now responsible for the day-to-day management of the
Emerging Market Debt team and portfolios.
MAX WOLMAN
PORTFOLIO MANAGER, EMERGING MARKET DEBT
Mr. Wolman joined Aberdeen in January 2001 and is portfolio manager on the
Emerging Market Debt mandates. Mr. Wolman originally specialized in currency and
domestic debt analysis; however, he is now responsible for wider emerging debt
analysis, including external and corporate issuers. He is a member of the
Emerging Market 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, 2009
(assets in millions).
Total Assets
# of Accounts for which
Total Managed for Advisory
# of which Advisory Fee is Based
Name of Portfolio Manager Accounts Total Fee is Based on on
or Team Member Type of Accounts Managed Assets Performance Performance
------------------------- --------------------------------- -------- ---------- --------------- ------------
1. Devan Kaloo Registered Investment Companies: 9 $ 2,020.42 0 $ 0
Other Pooled Investment Vehicles: 11 $ 8,776.49 0 $ 0
Other Accounts: 55 $12,585.18 6 $1,539.65
2. Joanne Irvine Registered Investment Companies: 9 $ 2,020.42 0 $ 0
Other Pooled Investment Vehicles: 11 $ 8,776.49 0 $ 0
Other Accounts: 55 $12,585.18 6 $1,539.65
3. Mark Gordon-James Registered Investment Companies: 9 $ 2,020.42 0 $ 0
Other Pooled Investment Vehicles: 11 $ 8,776.49 0 $ 0
Other Accounts: 55 $12,585.18 6 $1.539.65
4. Brett Diment Registered Investment Companies: 11 $ 557.20 0 $ 0
Other Pooled Investment Vehicles: 86 $16,910.16 0 $ 0
Other Accounts: 443 $44,857.01 16 $1,589.57
5. Max Wolman Registered Investment Companies: 10 $ 515.51 0 $ 0
Other Pooled Investment Vehicles: 78 $12,735.88 0 $ 0
Other Accounts: 358 $41,603.06 16 $1.589.57
POTENTIAL CONFLICTS OF INTERESTS
The Sub-Adviser believes that there are no material conflicts of interest in
connection with any Portfolio Manager's management of the registrant's
investments and investments of other accounts. The Sub-Adviser has adopted the
CFA Institute Code of Ethics and Standards of Professional Conduct and adherence
by all employees is mandatory. All employees are expected to avoid any
employment, associations or business activities, including personal investments,
that interfere with their duties to Aberdeen, divide their loyalty or create or
appear to create a conflict of interest. Employees must promptly report any
situation or transaction involving an actual or potential conflict of interest
to the Compliance Officer.
With regards to allocation, the Sub-Adviser has adopted Best Execution, Soft
Dollar, Order Aggregation, and Trade Allocation Policies & Procedures designed
among other things to ensure fair treatment of all accounts.
Aberdeen aggregates orders so as to realize the benefits of larger block orders.
When executing aggregated orders, it seeks to allocate opportunities to all
clients in a consistent manner. Most portfolios are managed to a model based on
common attributes to a benchmark with low dispersion between accounts and
benchmarks. This is accomplished through the calculation of a 'median account'
with this median account becoming the model portfolio. Certain situations such
as new portfolio fundings, unique guideline restrictions and the fungability of
certain security types may cause us to adjust our weightings. However over time,
we expect to minimize the dispersion of account holdings around the model
portfolio.
NEW ISSUE ALLOCATION
Aberdeen seeks to allocate new issue opportunities to all clients in a
consistent manner.
New issue opportunities are allocated according to the following factors:
1. All portfolios are ranked based on their account composition versus their
benchmark. The portfolio management team will set a minimum acceptable position
size (in terms of percent of market value) for the security.
2. Next, we define the target percentage for our LAB portfolios, depending on
the characteristics of the security or the percentage of the account based on
that securities' contribution to duration and the current composition of each
account.
3. For portfolios with a benchmark other than LAB, we may adjust the target
allocation to reflect the characteristics of the non-LAB benchmark.
4. We then determine our desired total par value and give our indication of
interest.
5. If our order is completely filled, we will allocate according to the steps
outlined above. If we are allotted a significant percentage of our order
(typically 70% or more), we will allocate pro-rata based on the initial
allocation developed from the steps outlined above. If we are not allotted a
significant percentage of our order, we will remove the non-LAB benchmark
adjustments and allocate pro-rata based on market value of participating
accounts. If this continues to result in accounts receiving less than the
minimum target position size, the least deserving accounts (defined as those
accounts that are closest to the model account) will be eliminated from the
allocation.
BATCH TRANSACTION AND ALLOCATION POLICY - EQUITY
Where practicable, all client portfolio orders for the same security should be
combined or "batched" and executed as block transactions in order to facilitate
best execution as well as for the purpose of negotiating more favorable
brokerage commissions. Where a block trade is executed for a number of client
accounts, the average execution price on all of the purchases and sales that are
aggregated to this purpose should be used for all accounts.
If an entire block is not fully executed on the same day, an allocation method
should be administered that is fair and reasonable to all clients. If it is not
practicable to allocate the executed portion of the block on a pro rata basis,
allocation may be done on a random account basis (alphabetically, numerically,
or otherwise), but any procedure administered should not operate to consistently
favor or disfavor the same client accounts. If any method is to be used other
than a pro rata method, the manner in which the shares are to be allocated
should be documented, disclosed and signed off by the Chief Compliance Officer.
(A)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
INFORMATION PROVIDED AS OF MARCH 9, 2010
Aberdeen recognizes the importance of compensation in attracting and retaining
talent and has structured remuneration to include an attractive base salary, a
discretionary bonus that is directly linked to one's contribution to the overall
success of Aberdeen and a long term incentive plan for key staff members
comprised of a mixture of cash, options, and shares. Overall compensation
packages are designed to be competitive relative to investment management
industry standards. In addition to an attractive compensation package, Aberdeen
also offers a first class benefits package.
The compensation policy has been designed to deliver additional rewards through
appropriate incentive schemes, both annual and long term. These are directly
linked to performance at both a corporate and an individual level. The policy
seeks to reward performance in a manner which aligns the interests of clients,
shareholders and executives. As the level of the bonus goes up, the amount of
equity given to an investment professional goes up.
Performance is reviewed on a formal basis once a year and these reviews
influence individual staff members' subsequent remuneration. The review process
looks at all of the ways in which an individual has contributed to the
organization, and specifically, in the case of investment managers, to the
investment team. Overall participation in team meetings, quality of research
analysis, and presenting the team externally are also contributory factors.
These reviews are subjective and are not tied to any pre-determined formula
(i.e., directly linked to new assets raised). While the quantum of bonuses can
be very attractive, equity incentives offer the potential to form a
substantially greater part of compensation over the longer term. Therefore, the
equity component of the compensation plan provides the opportunity for direct
ownership, which in our view directly aligns the interests of the investment
team with those of our clients. The equity component typically vests annually
over a 3-year period. Leavers who depart prior to the end of the full vesting
period would typically forfeit their ownership stake.
(A)(4) DISCLOSURE OF SECURITIES OWNERSHIP
INFORMATION PROVIDED AS OF DECEMBER 31, 2009
Name of Portfolio Dollar ($) Range of
Manager or Fund Shares
Team Member Beneficially Owned
----------------- -------------------
Devan Kaloo $0
Joanne Irvine $0
Mark Gordon-James $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.
REGISTRANT PURCHASES OF EQUITY SECURITIES
(C) TOTAL NUMBER OF SHARES (OR (D) MAXIMUM NUMBER (OR APPROXIMATE DOLLAR
(A) TOTAL NUMBER OF (B) AVERAGE PRICE UNITS) PURCHASED AS PART OF VALUE) OF SHARES (OR UNITS) THAT MAY YET BE
SHARES (OR UNITS) PAID PER SHARE (OR PUBLICLY ANNOUNCED PLANS PURCHASED UNDER THE PLANS
PERIOD PURCHASED UNIT) OR PROGRAMS OR PROGRAMS
------------- ------------------- ------------------ ------------------------------ -------------------------------------------
Month #1
(01/01/2009 -
01/31/2009) 18,749 $11.2762 68,797 639,831
Month #2
(02/01/2009 - 9,556 $10.1038 78,353 630,275
02/28/2009)
Month #3
(03/01/2009 - 32,432 $10.1675 110,785 597,843
03/31/2009)
Month #4
(04/01/2009 - 20,211 $11.3302 130,996 577,632
04/30/2009)
Month #5
(05/01/2009 - 12,470 $12.3901 143,466 565,162
05/31/2009)
Month #6
(06/01/2009 - 41,045 14.1021 184,511 650,367
06/30/2009)
Month #7
(07/01/2009 - 51,449 14.7489 235,960 598,918
07/31/2009)
Month #8
(08/01/2009 - 37,024 15.9438 272,984 561,894
08/31/2009)
Month #9
(09/01/2009 - 35,908 16.6902 308,892 525,986
09/30/2009)
Month #10
(10/01/2009 - 71,571 18.1120 380,463 454,415
10/31/2009)
Month #11
(11/01/2009 - 80,700 18.0406 461,163 373,715
11/30/2009)
Month #12
(12/01/2009 - 43,840 18.2375 505,003 203,754
12/31/2009)
Total 454,955 15.6063 505,003 203,754
On November 17, 2008, the Fund commenced a share repurchase program for
purposes of enhancing shareholder value and reducing the discount at which the
Fund's shares trade from their net asset value. The program originally expired
on May 17, 2009, but on June 2, 2009, the Fund announced that the Board of
Trustees of the Fund (the "Board") authorized the continuation of the Fund's
share repurchase program. The program expired again on December 2, 2009, but on
December 15, 2009, the Fund again announced that the Board authorized the
continuation of the Fund's share repurchase program. For the years ended
December 31, 2009, and 2008, the Fund repurchased 454,955 and 50,048,
respectively, of its shares at a weighted-average discount of 11.47% and 22.65%,
respectively, from net asset value per share. The Fund expects to continue to
repurchase its outstanding shares as it believes such activity will further the
accomplishment of the foregoing objectives, subject to the earlier of (i) the
repurchase of an additional 203,625 common shares (for an aggregate of 708,628),
or (ii) March 15, 2010.
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)* /s/ James A. Bowen
----------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date February 19, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ James A. Bowen
----------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date February 19, 2010
By (Signature and Title)* /s/ Mark R. Bradley
-----------------------------------------------------
Mark R. Bradley, Treasurer, Controller, Chief
Financial Officer and Chief Accounting Officer
(principal financial officer)
Date February 19, 2010
* Print the name and title of each signing officer under his or her
signature.