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, 2008
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
[MAP]
[FIRST TRUST LOGO]
ANNUAL REPORT
FOR THE YEAR ENDED
DECEMBER 31, 2008
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
[ABERDEEN LOGO]
TABLE OF CONTENTS
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
ANNUAL REPORT
DECEMBER 31, 2008
Shareholder Letter ......................................................... 1
At A Glance ................................................................ 2
Portfolio Commentary ....................................................... 3
Portfolio of Investments ................................................... 8
Schedule of Forward Foreign Currency Contracts ............................. 15
Statement of Assets and Liabilities ........................................ 16
Statement of Operations .................................................... 17
Statements of Changes in Net Assets ........................................ 18
Statement of Cash Flows .................................................... 19
Financial Highlights ....................................................... 20
Notes to Financial Statements .............................................. 21
Report of Independent Registered Public Accounting Firm .................... 28
Additional Information ..................................................... 29
Board of Trustees and Officers ............................................. 31
Privacy Policy ............................................................. 35
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or 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, 2008
Dear Shareholders:
The year ended December 31, 2008 brought all sorts of challenges to investors.
Throughout 2008, the financial sector was plagued with failures in banking,
insurance and by brokerage firms. By year's end, after a meltdown in the credit
markets, historically high levels of volatility in the stock market, and the
resulting turmoil to the overall economy, the Dow Jones Industrial Average's
("Dow") total return was -31.92% (as of 12/31/08). In fact, 2008 was the Dow's
third worst calendar year since its inception in 1896. For the year, the
negative total return performance of the Dow was surpassed only by 1931 and
1907, two years in which the U.S. was also enduring a major banking crisis. Of
the thirty stocks in the Dow, only two were up in 2008.
Yet regardless of the market, 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. While no one has the ability to predict when the markets will
recover, we believe 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 the
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.
First Trust has been through many types of markets and remains committed to
bringing you quality investment solutions regardless of the inevitable ups and
downs experienced in the market. We offer a variety of products that may fit
many financial plans to help those investors seeking long-term investment
success. As well, we are committed to making available up-to-date reports 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" (UNAUDITED)
AS OF DECEMBER 31, 2008
FUND STATISTICS
Symbol on New York Stock Exchange FEO
Common Share Price $ 10.25
Common Share Net Asset Value ("NAV") $ 12.87
Premium (Discount) to NAV (20.36)%
Net Assets Applicable to Common Shares $ 75,364,844
Current Quarterly Distribution per Common Share (1) $ 0.390
Current Annualized Distribution per Common Share $ 1.560
Current Distribution Rate on Closing Common Share Price (2) 15.22%
Current Distribution Rate on NAV (2) 12.12%
PERFORMANCE
Average Annual
Total Return
1 Year Ended Inception (8/28/2006)
12/31/2008 to 12/31/2008
Fund Performance
NAV (3) -33.94% -7.22%
Market Value (4) -41.48% -17.45%
Index Performance
Blended Benchmark (5) -26.69% -0.20%
Barclays Capital Global Emerging Markets Index -16.16% -2.85%
FTSE All World Emerging Market Index -52.89% -21.12%
% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
Republic of Panama, 8.88%, 09/30/27 3.3%
Brazil NTN - B Note, 6.00%, 08/15/10 3.0
Republic of Peru International Bond, 7.50%, 10/14/14 2.6
Republic of El Salvador, 7.65%, 06/15/35 1.8
Indonesian Government, 6.75%, 03/10/14 1.8
Republic of Colombia, 12.00%, 10/22/15 1.8
Republic of South Africa, 7.38%, 04/25/12 1.7
Taiwan Mobile Company, Ltd. 1.6
RSHB Capital S.A., 7.75%, 05/29/18 1.6
Samsung Electronics Company Ltd., Preference Shares 1.5
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Total 20.7%
=======
% OF TOTAL
CREDIT QUALITY (7) BONDS & Notes
AAA 1.6%
A- 3.7
BBB+ 10.8
BBB 2.5
BBB- 6.0
BB+ 18.0
BB 11.4
BB- 22.5
B+ 10.0
B 6.1
B- 1.5
NR 5.9
--------
Total 100.0%
========
COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
(LINE GRAPH)
Common Share Price NAV
12/31/07 19.50 21.69
1/4/08 19.10 21.44
1/11/08 18.80 21.69
1/18/08 18.13 21.08
1/25/08 17.79 20.91
2/1/08 18.503 21.36
2/8/08 18.10 20.99
2/15/08 18.35 21.25
2/22/08 18.53 21.45
2/29/08 18.40 21.47
3/7/08 17.92 21.11
3/14/08 18.05 21.02
3/20/08 17.21 20.45
3/28/08 17.52 20.64
4/4/08 18.11 21.09
4/11/08 17.82 21.10
4/18/08 18.26 21.47
4/25/08 18.32 21.50
5/2/08 18.69 21.82
5/9/08 18.69 21.53
5/16/08 18.75 21.99
5/23/08 18.76 21.67
5/30/08 19.01 21.89
6/6/08 18.86 21.52
6/13/08 18.80 21.21
6/20/08 18.15 20.59
6/27/08 17.52 20.42
7/3/08 17.00 20.00
7/11/08 16.95 19.97
7/18/08 17.07 20.19
7/25/08 16.98 20.31
8/1/08 17.30 20.51
8/8/08 17.46 20.38
8/15/08 17.52 20.17
8/22/08 17.51 20.10
8/29/08 17.95 20.05
9/5/08 17.19 19.50
9/12/08 16.38 19.17
9/19/08 14.03 18.25
9/26/08 14.15 17.88
10/3/08 13.14 16.54
10/10/08 9.78 13.97
10/17/08 10.75 13.72
10/24/08 9.43 11.91
10/31/08 10.78 12.69
11/7/08 10.82 13.15
11/14/08 9.69 12.36
11/21/08 8.31 11.72
11/28/08 9.81 12.40
12/5/08 9.60 12.23
12/12/08 10.04 12.73
12/19/08 9.97 12.79
12/26/08 9.98 12.61
12/31/08 10.25 12.87
% OF TOTAL
TOP 10 COUNTRIES (6) INVESTMENTS
Brazil 12.7%
Mexico 8.4
Indonesia 8.2
Russia 8.0
South Africa 4.2
China 4.2
Panama 3.9
Philippines 3.7
Uruguay 3.6
Turkey 3.2%
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Total 60.1%
=======
% OF TOTAL
INDUSTRY CLASSIFICATION INVESTMENTS
Government Bonds and Notes 43.5%
Commercial Banks 10.5
Diversified Financial Services 5.8
Oil, Gas & Consumable Fuels 5.1
Semiconductors & Semiconductor Equipment 2.8
Wireless Telecommunication Services 2.7
Beverages 2.5
Food & Staples Retailing 2.4
Tobacco 2.1
Metals & Mining 2.0
Real Estate Management & Development 1.8
Construction Materials 1.7
Automobiles 1.6
Diversified Telecommunication Services 1.6
Household Products 1.6
Specialty Retail 1.6
Other 10.7%
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Total 100.0%
=======
(1) Most recent distribution paid or declared through 12/31/2008. 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
market price or NAV, as applicable, as of 12/31/2008.
(3) Total return based on NAV is the combination of reinvested dividend
distributions and reinvested capital gain distributions, if any, at prices
obtained by the Dividend Reinvestment Plan and changes in NAV per share
and does not reflect sales load. Past performance is not indicative of
future results.
(4) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share price per share. Past performance is not indicative of future
results.
(5) 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%)
(6) 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.
(7) 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 Asset Management PLC 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 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. Included below is
additional information about the members of the team with significant
responsibility for the day-to-day management of the Fund's portfolio.
EQUITY MANAGEMENT TEAM
DEVAN KALOO
Head of Emerging Market Equity for the Aberdeen Group
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 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, he 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. Mr. Kaloo took his current position in July 2005. Mr. Kaloo
graduated with an MA (Hons) in Management and International Relations from St.
Andrews University in Scotland and holds a postgraduate degree in Investment
Analysis from Stirling University, also in Scotland.
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. She
has a BA with honors in History and French from Durham University, England. 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
desk. He graduated from the University of St. Andrews with a BSc in Geography in
June 2003. Prior to joining Aberdeen in March 2005, Mr. Brown worked in the oil
field consumables industry in the United Arab Emirates.
Page 3
PORTFOLIO COMMENTARY - (CONTINUED)
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.
KEVIN DALY
Portfolio Manager, Emerging Market Debt
Mr. Daly joined the emerging markets 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. 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 Manager, 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, where he is Head of Global Emerging Markets, is responsible
for the London GEM team and also oversees GEM input from the Asia team based in
Singapore.
NIMA TAYEBI
Portfolio Manager, Emerging Market Debt
Mr. Tayebi has 10 years of experience as executive director responsible for
emerging markets trading at Millennium Global Investments, vice president at
Salomon Brothers, focusing on emerging currency and debt trading and head of
fixed-income research at Renaissance Capital. He joined Deutsche as an emerging
currency portfolio manager in 2001 and Aberdeen in 2005, where his current
duties are Portfolio Manager for Emerging Market debt and member of the currency
team.
MAX WOLMAN
Portfolio Manager, Emerging Market Debt
Mr. Wolman joined Aberdeen in January 2001 and is portfolio manager on the
Global 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 Markets Debt investment committee at Aberdeen and is also
responsible for the daily implementation of the investment process.
COMMENTARY
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
The investment objective of First Trust/Aberdeen Emerging Opportunity Fund
("FEO" or 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
Emerging markets fell in the year under review, after what was a very strong
five-year bull market. The benchmark for the equity portion of the Fund, the
MSCI Emerging Markets Index, declined 53% in U.S. dollar terms, with Russia -74%
and India -65% among the biggest losers. By region, EMEA (Europe, Middle East
and Africa) was the worst performer, down 56%, followed by emerging Asia and
Latin America, which fell more than 50% each. In comparison, the MSCI World
Index declined 40% for the same period, while developed markets, such as the
U.S. and Europe, lost 37% and 46% each, respectively.
Page 4
PORTFOLIO COMMENTARY - (CONTINUED)
Performance during 2008 was marked by two distinct phases. Initially, investors
were hopeful that emerging economies would be able to de-couple from the
financial troubles plaguing their Western counterparts. Indeed, the
outperformance of emerging stock markets in the first half of the year bolstered
by healthy Gross Domestic Product growth and record-high commodity prices that
benefited resource-rich economies such as Brazil and Russia, supported that
belief despite the persistent threat of higher inflation.
But the situation reversed dramatically in the second half of 2008. Further
write-downs at major financial institutions rekindled worries over a prolonged
crisis. The collapse of Lehman Brothers and Washington Mutual in the U.S. in
September represented a tipping point. October was one of the worst months on
record for emerging markets as risk aversion intensified and capital flight
accelerated. These events demonstrated that the asset class could not disengage
itself from the global credit crisis. Emerging markets were indeed still very
dependent on Western demand for both their exports and their financial assets.
Inflationary worries were rapidly replaced with recessionary fears as Western
economies contracted and commodity prices retreated.
MARKET RECAP - FIXED-INCOME
The market had a turbulent year in 2008 with most of the damage coming in
October, as emerging market debt had its worst single month since the 1998
Russia crisis. The unprecedented volatility in global financial markets was
initially triggered by the collapse of Lehman Brothers in September, which
caused bid-offer spreads to widen out to unforeseen levels. Ongoing deleveraging
and outflows from retail investors, exacerbated by the illiquid conditions,
prompted further spread widening on emerging market debt. Coordinated rate cuts
by the U.S., Europe and the United Kingdom, International Monetary Fund ("IMF")
bailout packages for Hungary and Ukraine, and a fast-track financing facility
for top-tier emerging countries provided some much-needed support for risk
assets at the end of October. Trading conditions did improve by the end of
October, although they are far from normal, with most of the activity confined
to the credit default swap market.
FUND RECAP
The Fund had net asset value ("NAV") total return1 of -33.94% and a market value
total return2 of -41.48% for the year ended December 31, 2008, compared to the
Fund's blended benchmark3 total return of -26.69% 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, 2008,
for these indexes were as follows: the Barclays Global Emerging Markets Index
was -16.16%; and the FTSE All World Emerging Market Index was -52.89%.
PERFORMANCE ANALYSIS - EQUITY
Amid the turmoil in 2008, the equity portion of the Fund outperformed its
benchmark by 14.2%, even though it fell 39% in absolute terms. Underweight
positions in Russia and China added 2.5% to the Fund's performance. The bulk of
the remainder came from stock selection with one percentage point or more coming
each from selections in South Africa, Taiwan, India, Malaysia, Indonesia and
Brazil. Generally, the Fund's portfolio of sensibly managed companies with
strong balance sheets held up relatively well as funding became increasingly
tight.
Russia was one of the worst performers in the Fund's portfolio during the year
as tighter credit conditions led to a massive withdrawal of foreign funds from
its domestic stock markets, which shut down on a number of occasions as a result
of extreme volatility. Having risen exponentially in previous years, China also
gave up much of these gains during 2008. Our view of the market has changed
little: China remains one of the most exciting long-term growth stories in Asia,
but its positive macro environment has not always been reflected at companies,
which have tended to lack discipline in the area of capital investment.
PERFORMANCE ANALYSIS - FIXED-INCOME
For the year ended December 31, 2008, the fixed-income component of the Fund
returned -23.55%, compared to the benchmark4 for the fixed-income portion of the
Fund returning -8.33%. During the year ended December 31, 2008, the JPM Global
Diversified spread widened from 274 basis points to close the year at 749 basis
points over U.S. treasuries and peaking at a multi-year high of 901 basis points
in October. Brazil, Mexico, Colombia and the Philippines USD sovereign bonds
outperformed over the one-year period, while Argentina, Venezuela, Indonesia and
Ukraine USD sovereign bonds were the main detractors from the Fund's
performance. The performance from local currency debt was mixed, with Mexico and
Egypt outperforming while Brazil, Peru and Turkey underperformed.
-----------
(1) Total return based on NAV is the combination of reinvested dividend
distributions and reinvested capital gains distributions, if any, at
prices obtained by the Dividend Reinvestment Plan, and changes in NAV per
share and does not reflect sales load.
(2) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan, and changes in
Common Share price.
(3) 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.
(4) 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)
The news in Brazil was generally positive, as the country joined Mexico and
Chile in the investment-grade category (Peru was added to the list shortly
after). The economy continued to boom on back of strong domestic demand and
robust commodity prices, which pushed inflation above the official 4.5% target,
prompting the Central Bank to embark on a series of rate hikes. However, with
the slowdown in the global economy coming in the latter part of 2008 Brazil has
reduced its growth forecasts and it is anticipated the Central Bank will begin
cutting base rates in 2009.
Argentina was one of the main detractors from the Fund's performance during the
period covered by this report, reflecting general market aversion toward
high-beta credits, and concerns over the policy framework of the new Kirchner
administration. When Cristina Kirchner took office in December 2007, following
the Presidency of her husband Nestor Kirchner, there were hopes that the new
government would address some of the bottlenecks in the economy, such as the
under-reporting of inflation, frozen tariff prices, the Paris Club (a monthly
meeting in Paris attended by creditors of 19 countries) debt restructuring and
the re-opening of the 2005 commercial debt exchange. Kirchner held to her vow to
cut spending, and booming agriculture prices were also supportive for an
improving fiscal position, but there was little movement on the other issues.
One policy that backfired was the decision to raise taxes on commodity exports,
which prompted a three-month strike by the farmers and created significant
political noise. The dispute concluded when the Senate overturned the tax
increases, which prompted a relief rally on Argentine debt. Nonetheless,
Argentine spreads remain extremely high and access to market financing is
limited, although it can turn to local pension funds and Venezuela to fulfill
most of its financing gap in 2009. On a positive note, the growth outlook is
still healthy and the fiscal position remains in surplus, which is a departure
from the past when growth was anemic and fiscal deficits were the norm. Renewed
talk of a re-opening of the 2005 debt exchange is also supportive for Argentine
debt, as it would help alleviate the high financing cost.
Russia and Turkey remained the Fund's two top positions in the European, Middle
East and African regions. Russian debt performed well during the first half of
2008 but then weakened due to the fallout from the Georgian invasion and
remained weak as investors became concerned about decreasing oil prices and a
weaker Rouble. After months of uncertainty, Turkey's AKP government received
some good news at the end of July, as the Constitutional Court voted 6-5 in
favor of the lawsuit against the ruling party for alleged anti-secular
activities, but fell short of the 7-4 majority required to ban the party. The
verdict sparked a big rally on Turkish assets, with the lira moving to a
six-month high of 1.16 against USD in July 2008 but subsequently sold off to
1.53 at the end of the year due to increased risk aversion. Turkish lira rates
fell sharply across the board in December as it became apparent growth was
deteriorating more than anticipated and the Central Bank cut rates far more
aggressively than the market had assumed. The yield on the benchmark March 2012
government bond declined around 350 basis points to 16.50% in December, while
spreads on external debt also narrowed.
The Fund's Asian positions have had a mixed performance, with the Philippines
outperforming Indonesia. Indonesia has been an overweight position in the hard
currency portion of the Fund's portfolio during the year, and had a
disappointing performance in the first half of 2008 due to concerns about new
issuance, and the fiscal and inflation outlooks. More responsive action by
policy makers, with the removal of some fuel subsidies and interest rate hikes,
prompted a rebound in external and local currency debt before the October
selloff.
MARKET AND FUND OUTLOOK - EQUITY
2009 is likely to be characterized by continued uncertainty and market
volatility. Emerging markets will likely feel the effects of the ongoing credit
crisis on three fronts.
For most markets, the fundamental problem is one of very tight credit. In
emerging regions, ongoing risk aversion and capital flight may well last into
the first half of 2009. Some markets, particularly Russia and Hungary, appear
highly vulnerable as they are more leveraged and reliant on foreign capital than
their peers. Foreign banks and investors will likely continue to hold back
lending for some time. Bailouts by the IMF and their respective governments to
ease the tight credit situation will take some time to win back investors'
confidence.
Second, the credit crisis has had negative ramifications on the real economy.
There is no doubt that growth will slow. Much of the developed world has already
fallen into recession and emerging economies will inevitably follow suit. We
believe export-driven economies, such as China and Mexico, will feel the impact
of falling Western demand. Mexican exporters may face more hardship ahead, given
their strong links to the U.S. economy and the anticipated further decline in
U.S. consumption. As for China, weakness in export markets is likely to
accelerate factory closures and exacerbate rising unemployment which, in turn,
could potentially become a serious political problem. Already, factory closures
in southern China have led to violent protests.
Falling commodity prices is the final factor that will have a significant impact
on the asset class. In our opinion, the most vulnerable markets will likely be
Russia, Brazil and South Africa, where resource companies comprise a large
portion of local indices. Resource companies, having previously enjoyed the
commodities bull-run, will now feel the brunt of falling oil and agricultural
prices as a result of weaker global demand.
We believe that despite the apparently glum outlook, developing economies have
much to be upbeat about. For one, inflation has eased, which leaves plenty of
room for authorities to loosen monetary policy. Countries like India, which are
heavily reliant on oil imports, stand to benefit from the falling price of crude
oil. Indian policymakers have signalled their intentions to provide both
monetary and fiscal stimulus packages in a bid to cushion the slowdown. And as
long as relations with Pakistan do not get derailed by the recent terrorist
attacks, India's economy may even outperform its peers in 2009.
Page 6
PORTFOLIO COMMENTARY - (CONTINUED)
Many emerging economies are also in much better shape than they were a decade
ago. In Brazil, public sector debt is down and government's finances are much
improved. Although growth will slow, it is still expected to outperform
developed economies. China, sitting on a huge surplus and massive foreign
reserves, should have a lot of policy tools available to mitigate slower growth.
In Russia's favor, too, is the government's hitherto sensible macroeconomic
policy and huge reserves, even if they are shrinking fast.
Finally, we are hopeful that, if the right measures are put in place to avert a
prolonged slowdown, rising domestic consumption within a growing middle class in
developing markets will be able to provide some buffer against the decline in
U.S. and European demand. The dismal performances of global stock markets in
2008, which shattered the de-coupling theory and reinforced emerging economies'
close links with the developed world, should not distract from the potential of
these markets to recover from the current headwinds, as they did from earlier
crises. There will be pockets of instability. The political quagmire in Malaysia
and Thailand will likely spill over into the early part of 2009. Argentina's
recent nationalization of its pensioners' assets may have spooked foreign
investors to some extent. But these are isolated cases and are unlikely to
affect the asset class as a whole in our opinion.
We feel confident that the Fund's holdings, with stocks of companies that we
believe are well-managed and financially sound, will be able to weather the
global downturn and should continue to strengthen their market positions as
competitors struggle. Valuations have fallen significantly and reached
attractive levels, but could fall further in what will probably be another
volatile year. But this would present opportunities to add to the Fund's
holdings or buy quality companies that had appeared too expensive previously.
MARKET AND FUND OUTLOOK - FIXED-INCOME
At current levels, spreads on emerging market hard currency debt appear
attractive on a fundamental basis, but valuations will be driven by the
volatility in global markets over the short-term. As liquidity returns and
bid-offer spreads narrow, we would expect less liquid holdings in the Fund's
portfolio to outperform. The IMF support package for Ukraine, and talk of
further bailout packages for other sovereigns, should also be supportive for the
asset class. A further round of deleveraging would be a negative for risk
assets, although recent indications suggest the worst of the selling pressure
has abated for now. As conditions normalize, we would expect to see renewed
spread compression on emerging market debt as default risk remains low.
Page 7
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS (A)
DECEMBER 31, 2008
PRINCIPAL
VALUE
(LOCAL STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
-------------- -------------------------------------------- ------ -------- -------------
BONDS AND NOTES (B) - 71.0%
ARGENTINA - 1.1%
2,230,000 Republic of Argentina (USD) ................ 7.00% 04/17/17 $ 776,340
169,615 Republic of Argentina (USD) ................ 8.28% 12/31/33 55,125
-------------
831,465
-------------
BRAZIL - 7.4%
650,000 Banco Nacional de Desenvolvimento
Economico e Social (USD) .................. 6.37% 06/16/18 620,750
3,420,000 Brazil NTN - B Note (BRL) .................. 6.00% 08/15/10 2,574,142
580,000 Dasa Finance Corp. (USD) ................... 8.75% 05/29/18 439,350
470,000 Independencia International Ltd. (USD) ..... 9.88% 05/15/15 260,262
430,000 Independencia International Ltd. (USD) ..... 9.88% 01/31/17 229,512
1,000,000 Isa Capital do Brasil S.A. (USD) ........... 7.88% 01/30/12 947,500
630,000 Odebrecht Finance Ltd. (USD) ............... 7.50% 10/18/17 507,150
-------------
5,578,666
-------------
CHINA - 0.2%
210,000 Parkson Retail Group Ltd. (USD) ............ 7.88% 11/14/11 147,000
-------------
COLOMBIA - 2.4%
300,000 EEB International Ltd. (USD) ............... 8.75% 10/31/14 279,750
3,140,000,000 Republic of Colombia (COP) ................. 12.00% 10/22/15 1,542,378
-------------
1,822,128
-------------
DOMINICAN REPUBLIC - 2.9%
820,000 Cerveceria Nacional Dominica (USD) (c) ..... 16.00% 03/27/12 410,000
1,792,482 Dominican Republic (USD) ................... 9.04% 01/23/18 1,120,301
1,310,000 Dominican Republic (USD) ................... 8.63% 04/20/27 674,650
-------------
2,204,951
-------------
EGYPT - 0.8%
3,450,000 Egypt Treasury Bill (EGP) .................. * 05/05/09 599,701
-------------
EL SALVADOR - 2.5%
450,000 Republic of El Salvador (USD) .............. 8.25% 04/10/32 294,750
2,440,000 Republic of El Salvador (USD) .............. 7.65% 06/15/35 1,561,600
-------------
1,856,350
-------------
GABON - 1.4%
1,480,000 Gabonese Republic (USD) .................... 8.20% 12/12/17 1,021,200
-------------
GEORGIA - 1.3%
1,510,000 Republic of Georgia (USD) .................. 7.50% 04/15/13 958,850
-------------
GHANA - 0.9%
480,000 Republic of Ghana (USD) .................... 8.50% 10/04/17 241,137
920,000 Republic of Ghana (USD) .................... 8.50% 10/04/27 462,179
-------------
703,316
-------------
See Notes to Financial Statements
Page 8
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS (A) - (CONTINUED)
DECEMBER 31,2008
PRINCIPAL
VALUE
(LOCAL STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
-------------- ---------------------------------------------- ------ -------- -------------
BONDS AND NOTES (B) - (CONTINUED)
INDONESIA - 7.9%
380,000 Empire Capital Resources Pte. Ltd. (USD) ..... 9.38% 12/15/11 $ 235,092
7,400,000,000 Indonesian Government (IDR) .................. 11.00% 12/15/12 660,311
650,000,000 Indonesian Government (IDR) .................. 12.50% 03/15/13 60,522
4,900,000,000 Indonesian Government (IDR) .................. 9.00% 09/15/13 397,295
1,740,000 Indonesian Government (IDR) .................. 6.75% 03/10/14 1,556,498
1,850,000,000 Indonesian Recapitalization Bond (IDR) ....... 13.40% 02/15/11 173,774
9,350,000,000 Indonesian Recapitalization Bond (IDR) ....... 13.45% 08/15/11 884,039
2,500,000,000 Indonesian Recapitalization Bond (IDR) ....... 13.18% 07/15/12 237,074
700,000 Majapahit Holding B.V. (USD) ................. 7.75% 10/17/16 385,671
670,000 Majapahit Holding B.V. (USD) ................. 7.25% 06/28/17 352,723
350,000 MGTI Finance Company, Ltd. (USD) ............. 8.38% 09/15/10 331,959
210,000 Republic of Indonesia (USD) .................. 6.88% 03/09/17 173,981
200,000 Republic of Indonesia (USD) .................. 6.88% 01/17/18 163,193
370,000 Republic of Indonesia (USD) .................. 8.50% 10/12/35 311,197
-------------
5,923,329
-------------
KAZAKHSTAN - 1.9%
1,000,000 Halyk Savings Bank of Kazakhstan (USD) ....... 8.13% 10/07/09 920,000
620,000 KazMunaiGaz Finance Sub B.V. (USD) ........... 8.38% 07/02/13 486,700
-------------
1,406,700
-------------
MEXICO - 4.1%
140,000 Desarrolladora Homex S.A. (USD) .............. 7.50% 09/28/15 101,500
8,200,000 Mexican Bonos Desarr Fixed Rate Bond (MXN) ... 7.25% 12/15/16 568,615
12,340,000 Mexican Bonos Desarr Fixed Rate Bond (MXN) ... 10.00% 11/20/36 1,053,424
600,000 Mexician Republic (USD) ...................... 8.30% 08/15/31 738,000
800,000 Pemex Project Funding Master Trust (USD) ..... 6.63% 06/15/38 670,000
-------------
3,131,539
-------------
NIGERIA - 1.7%
790,000 GTB Finance B.V. (USD) ....................... 8.50% 01/29/12 470,050
174,000,000 KfW International Finance (NGN) .............. 8.50% 01/18/11 836,408
-------------
1,306,458
-------------
PANAMA - 4.5%
520,000 Republic of Panama (USD) ..................... 9.38% 07/23/12 564,044
2,640,000 Republic of Panama (USD) ..................... 8.88% 09/30/27 2,858,064
-------------
3,422,108
-------------
PERU - 3.0%
1,690,000 Republic of Peru International Bond (EUR) .... 7.50% 10/14/14 2,234,070
-------------
PHILIPPINES - 3.0%
100,000 Republic of Philippines (USD) ................ 8.00% 01/15/16 103,500
330,000 Republic of Philippines (USD) ................ 9.38% 01/18/17 362,529
620,000 Republic of Philippines (USD) ................ 10.63% 03/16/25 723,069
970,000 Republic of Philippines (USD) ................ 9.50% 02/02/30 1,091,250
-------------
2,280,348
-------------
See Notes to Financial Statements
Page 9
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS (A) - (CONTINUED)
DECEMBER 31, 2008
PRINCIPAL
VALUE
(LOCAL STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
-------------- ------------------------------------------------- ------ -------- -------------
BONDS AND NOTES (B) - (CONTINUED)
RUSSIA - 8.6%
390,000 Evraz Group S.A. (USD) .......................... 8.88% 04/24/13 $ 203,775
780,000 Evraz Group S.A. (USD) .......................... 8.25% 11/10/15 386,100
17,000,000 GPB Eurobond Finance PLC (RUB) .................. 7.25% 02/22/10 409,638
1,000,000 Mobile Telesystems Finance (USD) ................ 8.38% 10/14/10 895,000
33,441,242 Red Arrow International Leasing PLC (RUB) ....... 8.38% 06/30/12 440,809
350,000 RS Finance (RSB) (USD) .......................... 7.50% 10/07/10 138,831
2,070,000 RSHB Capital S.A. (USD) ......................... 7.75% 05/29/18 1,375,308
650,000 TNK-BP Finance S.A. (USD) ....................... 7.50% 07/18/16 341,250
560,000 Transcapitalinvest, Ltd. (USD) .................. 8.70% 08/07/18 364,000
1,000,000 UBS Luxembourg (USD) ............................ 8.00% 02/11/10 918,300
1,560,000 VTB Capital S.A. (USD) .......................... 6.88% 05/29/18 1,018,696
-------------
6,491,707
-------------
SERBIA - 0.7%
840,000 Republic of Serbia (USD) (d) .................... 3.75% 11/01/24 546,000
-------------
SOUTH AFRICA - 2.6%
1,460,000 Republic of South Africa (USD) .................. 7.38% 04/25/12 1,460,219
540,000 Republic of South Africa (USD) .................. 6.50% 06/02/14 499,003
-------------
1,959,222
-------------
TURKEY - 1.7%
450,000 Turkey Government Bond (TRY) .................... 16.00% 03/07/12 286,297
1,380,000 Turkey Government Bond,
Inflation Adjusted Bond (TRY) (e) .............. 10.00% 02/15/12 968,795
-------------
1,255,092
-------------
UKRAINE - 2.5%
800,000 Alfa Bank Ukraine (USD) ......................... 9.75% 12/22/09 540,000
1,070,000 EX-IM Bank of Ukraine (USD) ..................... 7.65% 09/07/11 449,654
500,000 UBS AG Jersey Branch, Credit Linked Note (USD)... 9.13% 06/21/10 106,050
230,000 Ukraine Government (USD) ........................ 6.58% 11/21/16 83,950
1,800,000 Ukraine Government (USD) ........................ 6.75% 11/14/17 685,863
-------------
1,865,517
-------------
URUGUAY - 4.2%
380,000 Republic of Uruguay (USD) ....................... 8.00% 11/18/22 359,100
570,000 Republic of Uruguay (USD) ....................... 7.88% 01/15/33 490,599
1,280,000 Republic Orient Uruguay (USD) ................... 7.63% 03/21/36 1,088,000
37,710,000 Republic Orient Uruguay,
Inflation Adjusted Bond (UYU) (e) .............. 5.00% 09/14/18 1,050,934
8,560,000 Republic Orient Uruguay,
Inflation Adjusted Bond (UYU) (e) .............. 4.25% 04/05/27 182,426
-------------
3,171,059
-------------
VENEZUELA - 3.7%
240,000 Bolivarian Republic of Venezuela (USD) .......... 9.00% 05/07/23 97,200
2,360,000 Petroleos de Venezuela S.A. (USD) ............... 5.25% 04/12/17 855,500
191,000 Republic of Venezuela (USD) ..................... 10.75% 09/19/13 127,617
See Notes to Financial Statements
Page 10
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS (A) -(CONTINUED)
DECEMBER 31, 2008
PRINCIPAL
VALUE
(LOCAL STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
-------------- -------------------------------------------- ------ -------- -------------
BONDS AND NOTES (B) - (CONTINUED)
VENEZUELA (CONTINUED)
1,045,000 Republic of Venezuela (USD) ................ 8.50% 10/08/14 $ 548,625
2,680,000 Republic of Venezuela (USD) ................ 5.75% 02/26/16 1,152,400
-------------
2,781,342
-------------
TOTAL BONDS AND NOTES ...................... 53,498,118
-------------
(Cost $72,604,026)
SHARES DESCRIPTION VALUE
-------------- ------------------------------------------------------------ -------------
COMMON STOCKS - 44.6%
ARGENTINA - 0.9%
34,000 Tenaris S.A., ADR........................................... 713,320
-------------
BRAZIL - 7.3%
78,450 Banco Bradesco S.A., ADR ................................... 774,302
104,000 Companhia Vale do Rio Doce, ADR, Preference Shares ......... 1,107,600
90,000 Lojas Renner S.A............................................ 604,760
50,000 Petroleo Brasileiro S.A., ADR............................... 1,020,500
38,000 Souza Cruz S.A ............................................. 718,611
28,000 Telecomunicacoes de Sao Paulo S.A. ......................... 444,254
38,000 Ultrapar Participacoes S.A., Preference Shares ............. 828,113
-------------
5,498,140
-------------
CHILE - 1.2%
26,000 Banco Santander Chile S.A., ADR ............................ 910,780
-------------
CHINA - 4.7%
90,000 China Mobile Ltd. (f) ...................................... 913,151
350,000 Dah Sing Banking Group Ltd. (f) ............................ 254,003
200,000 Hang Lung Group Ltd. (f) ................................... 610,970
920,000 PetroChina Company Ltd., H Shares (f) ...................... 817,565
700,000 Swire Pacific Ltd., B Shares (f) ........................... 933,534
-------------
3,529,223
-------------
CZECH REPUBLIC - 0.7%
3,000 Komercni Banka AS (f)....................................... 488,738
-------------
HUNGARY - 1.0%
5,300 Richter Gedeon, Sponsored GDR .............................. 786,950
-------------
INDIA - 3.5%
90,000 Gail India Ltd. (f) ........................................ 383,245
20,000 GlaxoSmithKline Pharmaceuticals Ltd. (f) ................... 473,678
13,000 Grasim Industries Ltd. (f) ................................. 328,000
40,000 Hero Honda Motors Ltd. (f) ................................. 662,402
11,500 Housing Development Finance Corp. Ltd. (f) ................. 351,922
20,000 ICICI Bank Ltd. (f) ........................................ 185,405
74,000 Satyam Computer Services Ltd. (f) .......................... 261,628
-------------
2,646,280
-------------
See Notes to Financial Statements
Page 11
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS (A) -(CONTINUED)
DECEMBER 31, 2008
SHARES DESCRIPTION VALUE
-------------- ------------------------------------------------------------------------ -------------
COMMON STOCKS - (CONTINUED)
INDONESIA - 1.6%
773,500 PT Astra International Tbk (f) ......................................... $ 760,199
619,500 PT Unilever Indonesia Tbk (f) .......................................... 448,736
-------------
1,208,935
-------------
MALAYSIA - 2.6%
85,000 British American Tobacco Malaysia Berhad (f) ........................... 1,094,310
332,000 Public Bank Berhad (f) ................................................. 841,754
-------------
1,936,064
-------------
MEXICO - 5.5%
39,900 Fomento Economico Mexicano, S.A.B. de C.V., Sponsored ADR .............. 1,202,187
40,000 Grupo Aeroportuario del Centro Norte, S.A.B. de C.V., ADR .............. 444,000
361,000 Grupo Continental, S.A.B ............................................... 596,953
510,939 Grupo Financiero Banorte, S.A.B. de C.V., O Shares ..................... 922,372
274,000 Kimberly-Clark de Mexico, S.A.B. de C.V., A Shares ..................... 910,135
390,000 SARE Holding S.A.B de C.V., B Shares (g) ............................... 83,078
-------------
4,158,725
-------------
PHILIPPINES - 1.3%
1,164,000 Bank of the Philippine Islands (f) ..................................... 972,418
-------------
QATAR - 0.5%
16,000 Qatar Insurance Company (f) ............................................ 398,905
-------------
RUSSIA - 0.6%
14,500 LUKOIL, ADR ............................................................ 479,950
-------------
SOUTH AFRICA - 2.3%
130,000 Massmart Holdings Ltd. (f) ............................................. 1,192,013
142,729 Truworths International Ltd. (f) ....................................... 528,069
-------------
1,720,082
-------------
SOUTH KOREA - 2.5%
55,000 Pusan Bank (f) ......................................................... 260,868
6,300 Samsung Electronics Company Ltd., Preference Shares (f) ................ 1,309,127
850 Shinsegae Company Ltd. (f) ............................................. 330,235
-------------
1,900,230
-------------
TAIWAN - 3.4%
946,450 Taiwan Mobile Company, Ltd. (f) ........................................ 1,408,346
827,750 Taiwan Semiconductor Manufacturing Company, Ltd. (f) ................... 1,129,448
-------------
2,537,794
-------------
THAILAND - 2.2%
250,000 PTT Exploration and Production Public Company Ltd. . ................... 769,120
275,000 Siam Cement Public (The) Company Ltd. (f) .............................. 871,085
-------------
1,640,205
-------------
See Notes to Financial Statements
Page 12
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS (A) -(CONTINUED)
DECEMBER 31, 2008
SHARES DESCRIPTION VALUE
-------------- --------------------------------------------------------------- -------------
COMMON STOCKS - (CONTINUED)
TURKEY - 2.0%
344,000 Aksigorta AS (f)............................................... $ 647,456
27,610 Bim Birlesik Magazalar AS (f).................................. 580,705
156,000 Cimsa Cimento Sanayi ve Ticaret AS (f)......................... 310,885
-------------
1,539,046
-------------
UNITED KINGDOM - 0.8%
46,538 Standard Chartered PLC (f)..................................... 595,503
-------------
TOTAL COMMON STOCKS............................................ 33,661,288
-------------
(Cost $44,991,673)
TOTAL INVESTMENTS - 115.6%..................................... 87,159,406
(Cost $117,595,699) (h)
LOAN OUTSTANDING - (17.9)%..................................... (13,500,000)
NET OTHER ASSETS AND LIABILITIES - 2.3%........................ 1,705,438
-------------
NET ASSETS - 100.0%............................................ $ 75,364,844
=============
----------------
* Zero coupon bond.
(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) 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.
(c) Variable rate security. The interest rate shown reflects the rate in
effect at December 31, 2008.
(d) Step-up security. A security where the coupon increases or steps up at a
predetermined date. Interest rate shown reflects the rate in effect at
December 31, 2008.
(e) 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.
(f) Security is fair valued in accordance with procedures adopted by the
Fund's Board of Trustees.
(g) Non-income producing security.
(h) Aggregate cost for federal income tax purposes is $117,907,651. As of
December 31, 2008, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$1,881,197 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$32,629,442.
ADR American Depositary Receipt
GDR Global Depositary Receipt
RSB Russian Standard Bank
Currency
BRL Brazilian Real
COP Colombian Peso
EGP Egyptian Pound
EUR Euro Dollar
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
See Notes to Financial Statements
Page 13
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
DECEMBER 31, 2008
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of December 31,
2008 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
VALUATION INPUTS INVESTMENTS IN SECURITIES OTHER FINANCIAL INSTRUMENTS (A)
-------------------------------------------------------- ------------------------- -------------------------------
Level 1 - Quoted Prices ................................ $ 13,316,985 $ (186,632)
Level 2 - Other Significant Observable Inputs .......... 73,842,421 --
Level 3 - Significant Unobservable Inputs .............. -- --
------------------------- -------------------------------
TOTAL .................................................. $ 87,159,406 $ (186,632)
========================= ===============================
(a) Other financial instruments are forward foreign currency contracts not
reflected in the Portfolio of Investments, which are valued at the
unrealized appreciation (depreciation) on the contracts (see Schedule of
Forward Foreign Currency Contracts).
See Notes to Financial Statements
Page 14
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
DECEMBER 31, 2008
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. $
-------------- ---------------------- ------------ ------------ -------------- ------------
02/10/09 BRL 2,621,000 $ 1,105,239 $ 1,092,845 $ 12,394 $ --
02/10/09 COP 1,805,600,000 797,422 825,229 -- (27,807)
01/23/09 MXN 45,602,000 3,265,388 3,581,949 -- (316,561)
02/10/09 PEN 3,100,000 987,418 997,908 -- (10,490)
02/10/09 RUB 20,979,000 644,769 722,757 -- (77,988)
-------------- ------------
$ 12,394 $ (432,846)
-------------- ------------
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. $
-------------- ---------------------- ------------ ------------ -------------- ------------
02/10/09 BRL 4,567,000 $ 1,925,839 $ 2,000,742 $ 74,903 $ --
02/10/09 COP 2,840,061,000 1,254,280 1,180,899 -- (73,381)
01/23/09 EUR 1,417,000 1,967,602 1,774,710 -- (192,892)
02/10/09 IDR 10,616,168,000 953,262 732,613 -- (220,649)
01/23/09 MXN 45,602,000 3,265,388 3,717,892 452,504 --
02/10/09 PEN 3,100,000 981,157 977,918 -- (3,239)
02/10/09 RUB 39,578,000 1,216,391 1,348,484 132,093 --
01/23/09 TRY 1,042,000 668,857 733,338 64,481 --
-------------- ------------
$ 723,981 $ (490,161)
-------------- ------------
Unrealized Appreciation (Depreciation)............................... $ 736,375 $ (923,007)
============== ============
Net Unrealized Appreciation (Depreciation)........................... $ (186,632)
============
(a) Please see page 13 for currency descriptions.
See Notes to Financial Statements
Page 15
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2008
ASSETS:
Investments, at value
(Cost $117,595,699) .................................................................... $ 87,159,406
Cash ............................................................................................ 314,626
Foreign currency (Cost $23,497) ................................................................. 22,822
Unrealized appreciation on forward foreign currency contracts ................................... 736,375
Prepaid expenses ................................................................................ 90,703
Receivables:
Interest ............................................................................... 1,484,703
Investment securities sold ............................................................. 164,145
Dividends .............................................................................. 48,848
------------
Total Assets ....................................................................... 90,021,628
------------
LIABILITIES:
Unrealized depreciation on forward foreign currency contracts ................................... 923,007
Payables:
Outstanding loan........................................................................ 13,500,000
Investment advisory fees ............................................................... 75,084
Audit and tax fees ..................................................................... 52,000
Custodian fees ......................................................................... 33,798
Common Shares repurchased .............................................................. 29,405
Printing fees .......................................................................... 15,862
Interest and fees on loan .............................................................. 12,720
Administrative fees .................................................................... 8,333
Transfer agent fees .................................................................... 2,584
Legal fees ............................................................................. 2,316
Trustees' fees and expenses ............................................................ 75
Accrued expenses and other liabilities .......................................................... 1,600
------------
Total Liabilities .................................................................. 14,656,784
------------
NET ASSETS ...................................................................................... $ 75,364,844
============
NET ASSETS consist of:
Paid-in capital ................................................................................. $109,667,760
Par value ....................................................................................... 58,552
Accumulated net investment income (loss)......................................................... (505,147)
Accumulated net realized gain (loss) on investments sold, forward foreign currency contracts and
foreign currency transactions .............................................................. (3,202,160)
Net unrealized appreciation (depreciation) on investments, forward foreign currency contracts and
foreign currency translation ............................................................... (30,654,161)
------------
NET ASSETS $ 75,364,844
============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share) ............................ $ 12.87
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized) ..... 5,855,188
============
See Notes to Financial Statements
Page 16
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2008
INVESTMENT INCOME:
Interest (net of foreign withholding tax of $ 31,603) ............. $ 6,748,413
Dividends (net of foreign withholding tax of $ 131,162) ........... 1,839,698
-------------
Total investment income .................................... 8,588,111
-------------
EXPENSES:
Investment advisory fees .......................................... 1,231,274
Interest and fees on loan ......................................... 442,000
Custodian fees .................................................... 202,011
Administrative fees ............................................... 122,649
Audit and tax fees ................................................ 42,575
Trustees' fees and expenses ....................................... 38,462
Transfer agent fees ............................................... 31,540
Legal fees ........................................................ 7,109
Other ............................................................. 102,637
-------------
Total expenses ............................................. 2,220,257
-------------
NET INVESTMENT INCOME ............................................. 6,367,854
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments ................................................... (3,714,008)
Forward foreign currency contracts ............................ 691,079
Foreign currency transactions ................................. (17,647)
-------------
Net realized gain (loss) .......................................... (3,040,576)
-------------
Net change in unrealized appreciation (depreciation) on:
Investments (a) ............................................... (46,410,449)
Forward foreign currency contracts ............................ 66,399
Foreign currency translation .................................. (49,314)
-------------
Net change in unrealized appreciation (depreciation) .............. (46,393,364)
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ........................... (49,433,940)
-------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ... $ (43,066,086)
=============
----------
(a) Change in unrealized appreciation (depreciation) on securities is net of
decrease in deferred foreign capital gains tax of $52,950.
See Notes to Financial Statements
Page 17
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
12/31/2008 12/31/2007
------------- -------------
OPERATIONS:
Net investment income (loss) ...................................... $ 6,367,854 $ 5,457,475
Net realized gain (loss) .......................................... (3,040,576) 5,521,591
Net change in unrealized appreciation (depreciation) .............. (46,393,364) 6,302,219
------------- -------------
Net increase (decrease) in net assets resulting from operations ... (43,066,086) 17,281,285
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ............................................. (6,396,916) (4,640,236)
Net realized gain ................................................. (573,086) (6,048,241)
Return of capital ................................................. (2,227,912) --
------------- -------------
Total distributions to shareholders ............................... (9,197,914) (10,688,477)
------------- -------------
CAPITAL TRANSACTIONS:
Repurchase of Common Shares ....................................... (483,289) --
------------- -------------
Total increase (decrease) in net assets ........................... (52,747,289) 6,592,808
NET ASSETS:
Beginning of period ............................................... 128,112,133 121,519,325
------------- -------------
End of period ..................................................... $ 75,364,844 $ 128,112,133
============= =============
Accumulated net investment income (loss) at end of period ......... $ (505,147) $ (533,901)
============= =============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period .............................. 5,905,236 5,905,236
Common Shares repurchased* ........................................ (50,048) --
------------- -------------
Common Shares at end of period .................................... 5,855,188 5,905,236
============= =============
* 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. For the year ended
December 31, 2008, the Fund repurchased 50,048 of its shares at an average
discount of 22.65% from net asset value per share. The Fund expects to
continue to repurchase its outstanding shares at such time and in such
amounts as it believes such activity will further the accomplishment of
the foregoing objectives, subject to the earlier of (i) the repurchase of
up to 708,628 of the Fund's outstanding common shares, or (ii) May 17,
2009.
See Notes to Financial Statements
Page 18
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net decrease in net assets resulting from operations ........................ $ (43,066,086)
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by operating activities:
Purchases of investments ............................................. (80,664,789)
Sales and maturities of investments .................................. 76,357,432
Net amortization/accretion of premium/discount on investments ........ (322,519)
Net realized gain/loss on investments ................................ 3,714,008
Net change in unrealized appreciation/depreciation on investments .... 46,410,449
CHANGES IN ASSETS AND LIABILITIES:
Decrease in net unrealized appreciation/depreciation on forward
foreign currency contracts ....................................... (66,399)
Decrease in dividends receivable ..................................... 3,487
Decrease in interest receivable ...................................... 150,063
Increase in prepaid expenses ......................................... (90,015)
Increase in receivable for investment securities sold ................ (33,770)
Decrease in interest and fees on loan payable ........................ (3,674)
Decrease in investment advisory fees payable ......................... (41,310)
Decrease in audit and tax fees payable ............................... (11,515)
Decrease in legal fees payable ....................................... (47,394)
Decrease in printing fees payable .................................... (53,078)
Decrease in transfer agent fees payable .............................. (1,733)
Decrease in administrative fees payable .............................. (3,306)
Decrease in custodian fees payable ................................... (15,002)
Decrease in Trustees' fees and expenses payable ...................... (694)
Decrease in accrued expenses and other liabilities ................... (14,040)
--------------
CASH PROVIDED BY OPERATING ACTIVITIES $ 2,200,115
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of Common Shares .......................................... (453,884)
Distributions to Common Shareholders ................................. (9,197,914)
Issuances of loan .................................................... 9,000,000
Repayments of loan ................................................... (3,500,000)
--------------
CASH USED IN FINANCING ACTIVITIES ........................................... (4,151,798)
------------
Decrease in cash and foreign currency (a) ................................... (1,951,683)
Cash and foreign currency at beginning of period ............................ 2,289,131
------------
CASH AND FOREIGN CURRENCY AT END OF PERIOD .................................. $ 337,448
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees ........................... $ 445,674
============
----------
(a) Includes net change in unrealized appreciation (depreciation) on foreign
currency of $185.
See Notes to Financial Statements
Page 19
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR PERIOD
ENDED ENDED ENDED
12/31/2008 12/31/2007 12/31/2006 (a)
---------- ---------- --------------
Net asset value, beginning of period ....................................... $ 21.69 $ 20.58 $ 19.10 (b)
-------- --------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ............................................... 1.09 (c) 0.92 0.29
Net realized and unrealized gain (loss) .................................... (8.37) 2.00 1.58
-------- --------- ----------
Total from investment operations ........................................... (7.28) 2.92 1.87
-------- --------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income ...................................................... (1.08) (0.79) (0.31)
Net realized gain .......................................................... (0.10) (1.02) --
Return of capital .......................................................... (0.38) -- (0.04)
-------- --------- ----------
Total distributions ........................................................ (1.56) (1.81) (0.35)
-------- --------- ----------
Common Shares offering costs charged to paid-in capital .................... -- -- (0.04)
-------- --------- ----------
Capital share repurchases .................................................. 0.02 -- --
-------- --------- ----------
Net asset value, end of period ............................................. $ 12.87 $ 21.69 $ 20.58
======== ========= ==========
Market value, end of period ................................................ $ 10.25 $ 19.50 $ 19.03
======== ========= ==========
TOTAL RETURN BASED ON NET ASSET VALUE (d) (e) .............................. (33.94)% 15.74% 9.74%
======== ========= ==========
TOTAL RETURN BASED ON MARKET VALUE (e) (f) ................................. (41.48)% 12.53% (3.10)%
======== ========= ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ....................................... $ 75,365 $ 128,112 $ 121,519
Ratio of total expenses to average net assets .............................. 2.00% 2.04% 2.16% (g)
Ratio of total expenses to average net assets excluding interest expense ... 1.60% 1.58% 2.05% (g)
Ratio of net investment income to average net assets ....................... 5.73% 4.31% 4.27% (g)
Portfolio turnover rate .................................................... 64% 95% 40%
INDEBTEDNESS:
Loan outstanding (in 000's) ................................................ $ 13,500 $ 8,000 $ 7,000
Asset coverage per $1,000 of indebtedness (h) .............................. $ 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 based on net asset value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan, and changes in net
asset value per share and does not reflect sales load.
(e) Total return is not annualized for periods less than one year.
(f) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan, and changes in
Common Share price.
(g) Annualized.
(h) 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 20
NOTES TO FINANCIAL STATEMENTS
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
DECEMBER 31, 2008
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 (including assets attributable to the Fund's Preferred Shares,
if any, and the principal amount of any borrowings) minus the sum of the Fund's
accrued and unpaid dividends on any outstanding Preferred Shares and accrued
liabilities (other than the principal amount of any borrowings incurred or
commercial paper or notes issued by the Fund). 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. 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 are valued at amortized cost.
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.
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 21
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
DECEMBER 31, 2008
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 157, Fair Value Measurements
("FAS 157"), effective for fiscal years beginning after November 15, 2007. This
standard clarifies the definition of fair value for financial reporting,
establishes a framework for measuring fair value and requires additional
disclosures about the use of fair value measurements. FAS 157 became effective
for the Fund as of January 1, 2008, the beginning of its current fiscal year.
The three levels of the fair value hierarchy under FAS 157 are described below:
- Level 1 - quoted prices in active markets for identical securities
- Level 2 - other significant observable inputs (including quoted
prices for similar securities, interest rates, prepayment speeds,
credit risk, etc.)
- Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
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, 2008 is
included in 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, 2008, 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.
D. FORWARD FOREIGN CURRENCY CONTRACTS:
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.
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 may exceed the net unrealized value shown on the
Schedule of Forward Foreign Currency Contracts.
Page 22
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
DECEMBER 31, 2008
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, 2008, resulting in book and tax accounting differences, have been
reclassified at year end to reflect an increase to accumulated net investment
income (loss) of $57,816, and a decrease in accumulated net realized gain (loss)
of $57,816. Net assets were not affected by these reclassifications.
The tax character of distributions paid during the years ended December 31, 2008
and December 31, 2007 was as follows:
2008 2007
----------- -----------
Distributions paid from:
Ordinary Income ........... $ 6,476,214 $ 8,313,201
Long-Term Capital Gains ... 493,788 2,375,276
Return of Capital ......... 2,227,912 --
As of December 31, 2008, the components of distributable earnings on a tax basis
were as follows:
Undistributed Ordinary Income ................ $ --
Net Unrealized Appreciation (Depreciation) ... (30,949,378)
Accumulated Capital and Other Losses ......... (3,412,090)
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, 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.
At December 31, 2008, the Fund had available realized capital losses of $495,817
to offset future net capital gains through the fiscal year ending 2016.
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, 2008, the Fund intends to elect to defer net realized capital
losses of $2,615,927 and foreign currency losses of $300,346 incurred from
November 1, 2008 through December 31, 2008.
In June 2006, FASB issued Interpretation No. 48 ("FIN 48"), "Accounting for
Uncertainty in Income Taxes". FIN 48 establishes the 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, and is effective for the Fund's current
fiscal year. As of December 31, 2008, management has evaluated the application
of FIN 48 to the Fund and has determined that no provision for income tax is
required in the Fund's financial statements.
Page 23
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
DECEMBER 31, 2008
H. EXPENSES:
The Fund pays all expenses directly related to its operations.
I. ACCOUNTING PRONOUNCEMENT:
In March 2008, FASB released Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("FAS
161"). FAS 161 requires qualitative disclosures about objectives and strategies
for using derivatives, quantitative disclosures about fair value amounts of and
gains and losses on derivative instruments, and disclosures about credit
risk-related contingent features in derivative agreements. The application of
FAS 161 is required for fiscal years beginning after November 15, 2008 and
interim periods within those fiscal years. Management is currently evaluating
the impact the adoption of FAS 161 will have on the Fund's financial statement
disclosures, if any.
3. INVESTMENT ADVISORY FEE AND OTHER AFFILIATED TRANSACTIONS
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., formerly known as PFPC Inc., an
indirect, majority-owned subsidiary of The PNC Financial Services Group, Inc.,
serves as the Fund's Administrator, Fund Accountant, Transfer Agent and Board
Administrator 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 and the
Chairman of the Audit Committee is paid $5,000 annually, 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.
Effective January 1, 2008, each of the chairmen of the Nominating and Governance
Committee and the Valuation Committee is 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. Also effective January 1, 2008, the Lead
Independent Trustee and each Committee chairman will serve two-year terms. The
officers and "Interested" Trustee receive no compensation 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, 2008, were $80,664,789 and $76,357,432, respectively.
5. REVOLVING LOAN AGREEMENT
The Fund has entered into a revolving loan agreement with certain lenders, 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. For
the year ended December 31, 2008, the average amount outstanding was
$11,871,585. The high and low annual interest rates during the year ended
December 31, 2008, were 5.68% and 2.26%, respectively, and the weighted average
interest rate was 3.49%. The interest rate at December 31, 2008 was 2.26%. The
Fund also pays a commitment fee of 0.25% per year, which is included in
"Interest and fees on loan" on the Statement of Operations. Prior to November
17, 2008, the Fund had in place a revolving loan agreement with a commitment fee
of 0.125%. The revolving loan agreement has been extended until November 16,
2009.
Page 24
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
DECEMBER 31, 2008
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.
In 2008, securities markets have been significantly negatively affected by the
financial crisis that initially resulted from the downturn in the subprime
mortgage market in the United States. The potential impact of the financial
crisis on securities markets may prove to be significant and long-lasting and
may have a substantial impact on the value of the Fund.
NON-INVESTMENT GRADE SECURITIES RISK: The Fund may invest up to 80% of its
Managed Assets in non-investment grade securities. Non-investment grade
securities are rated below "Baa3" by Moody's Investors Service, Inc., below
"BBB-" by Standard & Poor's, or comparably rated by another nationally
recognized statistical rating organization or, if unrated, determined by the
Sub-Advisor to be of comparable credit quality. Non-investment grade debt
instruments are commonly referred to as "high-yield" or "junk" bonds and are
considered speculative with respect to the issuer's capacity to pay interest and
repay principal and are susceptible to default or decline in market value due to
adverse economic and business developments. The market values for high-yield
securities tend to be very volatile, and these securities are less liquid than
investment grade debt securities.
EMERGING MARKETS RISK: Under normal market conditions, the Fund will invest at
least 80% of its Managed Assets in equity or fixed-income securities of issuers
located in countries considered to be emerging markets. Investments in such
securities are considered speculative. In addition to the general risks of
investing in non-U.S. securities, heightened risks of investing in emerging
markets securities include: smaller market capitalization of securities markets,
which may suffer periods of relative illiquidity; significant price volatility;
restrictions on foreign investment; and possible restrictions on repatriation of
investment income and capital. Furthermore, foreign investors may be required to
register the proceeds of sales, and future economic or political crises could
lead to price controls, forced mergers, expropriation or confiscatory taxation,
seizure, nationalization or creation of government monopolies. The currencies of
emerging market countries may experience significant declines against the U.S.
dollar, and devaluation may occur subsequent to investments in these currencies
by the Fund. Inflation and rapid fluctuations in inflation rates have had, and
may continue to have, negative effects on the economies and securities markets
of certain emerging market countries.
FIXED-INCOME SECURITIES RISK: Debt securities, including high yield securities,
are subject to certain risks, including: (i) issuer risk, which is the risk that
the value of fixed-income securities may decline for a number of reasons which
directly relate to the issuer, such as management performance, financial
leverage and reduced demand for the issuer's goods and services; (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.
Page 25
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
DECEMBER 31, 2008
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, or obtained through the issuance of Preferred Shares, 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 and the holders of Preferred 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 Preferred Shares or purchase
Common Shares or Preferred 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, 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.
Page 26
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
DECEMBER 31, 2008
A substantial portion of the Fund's Managed Assets are expected to be invested
in debt instruments of issuers located in countries considered to be emerging
markets, and investments in such securities are considered speculative.
Heightened risks of investing in emerging markets government debt include:
smaller market capitalization of securities markets, which may suffer periods of
relative illiquidity; significant price volatility; restrictions on foreign
investment; and possible repatriation of investment income and capital.
Furthermore, foreign investors may be required to register the proceeds of sales
and future economic or political crises could lead to price controls, forced
mergers, expropriation or confiscatory taxation, seizure, nationalization or
creation of government monopolies. The currencies of emerging market countries
may experience significant declines against the U.S. dollar, and devaluation may
occur subsequent to investments in these currencies by the Fund. Inflation and
rapid fluctuations in inflation rates have had, and may continue to have,
negative effects on the economies and securities markets of certain emerging
market countries.
Page 27
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, 2008, the related statements of operations and cash flows for the
year ended and 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 securities owned as of December 31, 2008, 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, 2008, the results of
its operations and its cash flows for the year ended, 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 24, 2009
Page 28
ADDITIONAL INFORMATION
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
DECEMBER 31, 2008 (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 29
ADDITIONAL INFORMATION - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
DECEMBER 31, 2008 (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 Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, Energy Income and
Growth Fund, First Trust Enhanced Equity Income Fund, First Trust/Aberdeen
Global Opportunity Income Fund, First Trust/FIDAC Mortgage Income Fund, First
Trust Strategic High Income Fund, First Trust Strategic High Income Fund II,
First Trust/Aberdeen Emerging Opportunity Fund, First Trust Specialty Finance
and Financial Opportunities Fund (formerly known as First Trust/Gallatin
Specialty Finance and Financial Opportunities Fund) and First Trust Active
Dividend Income Fund and Shareholders of the Preferred Shares of First Trust
Tax-Advantaged Preferred Income Fund, was held on April 14, 2008. At the Annual
Meeting, Trustee Robert F. Keith was elected for a three-year term. The number
of votes cast in favor of Mr. Keith was 4,296,839, the number of votes against
was 113,648 and the number of abstentions was 1,494,749. James A. Bowen, Richard
E. Erickson, Thomas R. Kadlec and Niel B. Nielson are the current and continuing
Trustees.
NYSE CERTIFICATION INFORMATION
In accordance with Section 303A-12 of the New York Stock Exchange ("NYSE")
Listed Company Manual, the Fund's President has certified to the NYSE that, as
of May 14, 2008, 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 17.94% of
its ordinary income distributions (including short-term capital gains) for the
year ended December 31, 2008. None of the ordinary income (including short-term
capital gain) distributions made by the Fund during the year ended December 31,
2008, qualify for corporate dividends received deduction available to corporate
shareholders.
For the year ended December 31, 2008, the amount of long-term capital gain
distributions designated by the Fund was $493,788, which is taxable at a 15%
rate for federal income tax purposes.
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 $7,355,867 (representing a total of $1.26
per share). The total amount of taxes paid to such countries is $162,765
(representing a total of $0.03 per share).
Page 30
BOARD OF TRUSTEES AND OFFICERS
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
DECEMBER 31, 2008 (UNAUDITED)
Information pertaining to the Trustees and Officers of the Fund is set forth
below.
NUMBER OF
PORTFOLIOS IN OTHER
NAME, ADDRESS, THE FIRST TRUST TRUSTEESHIPS OR
DATE OF BIRTH AND TERM OF OFFICE AND PRINCIPAL OCCUPATIONS FUND COMPLEX DIRECTORSHIPS
POSITION WITH THE FUND LENGTH OF SERVICE (1) DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
----------------------------- --------------------- -------------------------- ------------------- -------------------------
INDEPENDENT TRUSTEES
Richard E. Erickson, Trustee - Two Year Term Physician; President, 60 None
c/o First Trust Advisors L.P. - Since Fund Wheaton Orthopedics;
120 E. Liberty Drive, Inception Co-owner and Co-Director
Suite 400 (January 1996 to May
Wheaton, IL 60187 2007), Sports Med Center
D.OB.: 04/51 for Fitness; Limited
Partner, Gundersen Real
Estate Limited
Partnership; Member,
Sportsmed LLC
Thomas R. Kadlec, Trustee - Two Year Term Senior Vice President and 60 Director of ADM Investor
c/o First Trust Advisors L.P. - Since Fund Chief Financial Officer Service, Inc. and
120 E. Liberty Drive, Inception (May 2007 to Present), Director of Archer
Suite 400 Vice President and Chief Financial Services, Inc.
Wheaton, IL 60187 Financial Officer (1990 to
D.O.B.: 11/57 May 2007), ADM Investor
Services, Inc. (Futures
Commission Merchant);
President (May 2005 to
Present), ADM Derivatives,
Inc.; Registered
Representative (2000 to
Present), Segerdahl &
Company, Inc., a FINRA
member (Broker-Dealer)
Robert F. Keith, Trustee - Three Year Term President (2003 to 60 None
c/o First Trust Advisors L.P. - Since June 2006 Present), Hibs Enterprises
120 E. Liberty Drive, (Financial and Management
Suite 400 Consulting); President
Wheaton, IL 60187 (2001 to 2003), Aramark
D.O.B.: 11/56 Management Services LP;
President and Chief
Operating Officer (1998 to
2003), ServiceMaster
Management Services LP
----------
(1) Currently, Robert F. Keith, as a Class I Trustee, is serving as a trustee
until the Fund's 2011 annual meeting of shareholders. Richard E. Erickson
and Thomas R. Kadlec, as Class II Trustees, are each serving as trustees
until the Fund's 2009 annual meeting of shareholders. James A. Bowen and
Niel B. Nielson, as Class III Trustees, are each serving as trustees until
the Fund's 2010 annual meeting. Officers of the Fund have an indefinite
term.
Page 31
BOARD OF TRUSTEES AND OFFICERS - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
DECEMBER 31, 2008 (UNAUDITED)
NUMBER OF
PORTFOLIOS IN OTHER
NAME, ADDRESS, THE FIRST TRUST TRUSTEESHIPS OR
DATE OF BIRTH AND TERM OF OFFICE AND PRINCIPAL OCCUPATIONS FUND COMPLEX DIRECTORSHIPS
POSITION WITH THE FUND LENGTH OF SERVICE (1) DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
----------------------------- --------------------- -------------------------- ------------------- -------------------------
INDEPENDENT TRUSTEES (CONTINUED)
Niel B. Nielson, Trustee - Three Year Term President (June 2002 to 60 Director of Covenant
c/o First Trust Advisors L.P. - Since Fund Present), Covenant College Transport Inc.
120 E. Liberty Drive, Inception
Suite 400
Wheaton, IL 60187
D.O.B.: 03/54
INTERESTED TRUSTEE
James A. Bowen (2), Trustee, - Three Year Trustee President, First Trust 60 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, - Since Fund Chairman of the Board of
Suite 400 Inception Directors, BondWave LLC
Wheaton, IL 60187 (Software Development
D.O.B.: 09/55 Company/Broker-
Dealer/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
120 E. Liberty Drive, Financial Officer and Chief - Since Fund Trust Advisors L.P. and First
Suite 400 Accounting Officer Inception Trust Portfolios L.P.; Chief
Wheaton, IL 60187 Financial Officer, BondWave
D.O.B.: 11/57 LLC (Software Development
Company/Broker-Dealer/Investment
Advisor) and Stonebridge
Advisors LLC (Investment
Advisor)
----------
(1) Currently, Robert F. Keith, as a Class I Trustee, is serving as a trustee
until the Fund's 2011 annual meeting of shareholders. Richard E. Erickson
and Thomas R. Kadlec, as Class II Trustees, are each serving as trustees
until the Fund's 2009 annual meeting of shareholders. James A. Bowen and
Niel B. Nielson, as Class III Trustees, are each serving as trustees until
the Fund's 2010 annual meeting. 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 32
BOARD OF TRUSTEES AND OFFICERS - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
DECEMBER 31, 2008 (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)
James M. Dykas Assistant Treasurer - Indefinite Term Senior Vice President (April
120 E. Liberty Drive, - Since Fund 2007 to Present), Vice
Suite 400 Inception President (January 2005 to
Wheaton, IL 60187 April 2007), First Trust
D.O.B.: 01/66 Advisors L.P. and First Trust
Portfolios L.P.; Executive
Director (December 2002 to
January 2005), Vice President
(December 2000 to December
2002), Van Kampen Asset
Management and Morgan Stanley
Investment Management
Christopher Fallow Assistant Vice President - Indefinite Term Assistant Vice President
120 E. Liberty Drive, - Since Fund (August 2006 to Present),
Suite 400 Inception Associate (January 2005 to
Wheaton, IL 60187 August 2006), First Trust
D.O.B.: 04/79 Advisors L.P. and First Trust
Portfolios L.P.; Municipal
Bond Trader (July 2001 to
January 2005), BondWave LLC
(Software Development
Company/Broker-Dealer/Investment
Advisor)
W. Scott Jardine Secretary and Chief - Indefinite Term General Counsel, First Trust
120 E. Liberty Drive, Compliance Officer - Since Fund Advisors L.P. and First Trust
Suite 400 Inception Portfolios L.P.; Secretary,
Wheaton, IL 60187 BondWave LLC (Software
D.O.B.: 05/60 Development Company/Broker-
Dealer/Investment Advisor) and
Stonebridge Advisors LLC
(Investment Advisor)
Daniel J. Lindquist Vice President - Indefinite Term Senior Vice President
120 E. Liberty Drive, - Since Fund (September 2005 to Present),
Suite 400 Inception Vice President (April 2004 to
Wheaton, IL 60187 September 2005), First Trust
D.O.B.: 02/70 Advisors L.P. and First Trust
Portfolios L.P.; Chief
Operating Officer (January
2004 to April 2004), Mina
Capital Management, LLC; Chief
Operating Officer (April 2000
to January 2004), Samaritan
Asset Management Services,
Inc.
----------
(3) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 33
BOARD OF TRUSTEES AND OFFICERS - (CONTINUED)
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
DECEMBER 31, 2008 (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)
Coleen D. Lynch Assistant Vice President - Indefinite Term Assistant Vice President
120 E. Liberty Drive, - Since July 2008 (January 2008 to Present),
Suite 400 First Trust Advisors L.P. and
Wheaton, IL 60187 First Trust Portfolios L.P.;
D.O.B.: 07/58 Vice President (May 1998 to
January 2008), Van Kampen
Asset Management and Morgan
Stanley Investment Management
Kristi A. Maher Assistant Secretary - Indefinite Term Deputy General Counsel (May
120 E. Liberty Drive, - Since Fund 2007 to Present), Assistant
Suite 400 Inception General Counsel (March 2004 to
Wheaton, IL 60187 May 2007), First Trust
D.O.B.: 12/66 Advisors L.P. and First Trust
Portfolios L.P.; Associate
(December 1995 to March 2004),
Chapman and Cutler LLP
----------
(3) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 34
PRIVACY POLICY
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
DECEMBER 31, 2008 (UNAUDITED)
PRIVACY POLICY
The open-end and closed-end funds advised by First Trust Advisors L.P. (each a
"Fund") consider your privacy an important priority in maintaining our
relationship. We are committed to protecting the security and confidentiality of
your personal information.
SOURCES OF INFORMATION
We may collect nonpublic personal information about you from the following
sources:
- Information we receive from you or your broker-dealer, investment adviser
or financial representative through interviews, applications, agreements
or other forms;
- Information about your transactions with us, our affiliates or others;
- Information we receive from your inquiries by mail, e-mail or telephone;
and
- Information we collect on our website through the use of "cookies." For
example, we may identify the pages on our website that your browser
requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. The permitted uses
include the disclosure of such information to unaffiliated companies for the
following reasons:
- 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 and printers.
- 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. Please note,
however, that the California Financial Information Privacy Act contains an "opt
out" mechanism that California consumers may use to prevent us from sharing
nonpublic personal information with affiliates.
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.
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
contact us at (800) 621-1675.
Page 35
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
Philadelphia, PA 19103
ADMINISTRATOR,
FUND ACCOUNTANT,
TRANSFER AGENT &
BOARD ADMINISTRATOR
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) There have been no amendments, during the period covered by this
report, to a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing
similar functions, regardless of whether these individuals are employed
by the registrant or a third party, and that relates to any element of
the code of ethics definition enumerated in paragraph (b) of this
item's instructions.
(d) The registrant has not, during the period covered by this report,
granted any waivers, including an implicit waiver, from a provision of
the code of ethics that applies to the registrant's principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions, regardless of
whether these individuals are employed by the registrant or a third
party, that relates to one or more of the items set forth in paragraph
(b) of this item's instructions.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the Registrant's board of
trustees has determined that Thomas R. Kadlec and Robert F. Keith are qualified
to serve as audit committee financial experts serving on its audit committee and
that each of them is "independent," as defined by Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) AUDIT FEES (REGISTRANT) -- The aggregate fees billed for each of
the last two fiscal years for professional services rendered by the principal
accountant for the audit of the Registrant's annual financial statements or
services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements were $41,000 for 2007 and
$44,000 for 2008.
(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 $2,600 for 2007 and $0 for 2008. These fees were for
additional audit work.
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 $2,600 for 2007 and $0 for 2008.
These fees were for additional audit work.
(c) TAX FEES (REGISTRANT) -- The aggregate fees billed in each of the
last two fiscal years for professional services rendered by the principal
accountant for tax compliance, tax advice, and tax planning to the Registrant
were $0 for 2007 and $0 for 2008.
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 2007 and $0 for 2008.
(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 2007 and $0 for 2008.
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 2007 and $0 for
2008.
(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 2007 were $4,350 for the Registrant and $7,000
for the Registrant's investment adviser, respectively, and for 2008
were $8,589.90 for the Registrant and $12,143 for 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, NNielson, 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
The Advisers have adopted written Proxy Voting Policies and Procedures
("Proxy Procedures"), as required by Rule 206(4)-6 under the Advisers Act,
governing conflict of interest resolution, disclosure, reporting and
recordkeeping relating to voting proxies.
See SEC Release No. IA-2106 (Jan. 31, 2003). See also, SEC
Release No. IC-25922 (Jan. 31, 2003) relating to voting proxies of portfolio
securities of registered investment companies. The Proxy Procedures (and related
Proxy Voting Guidelines) are attached below.
Under the Proxy Procedures, Aberdeen votes proxies relating to equity
portfolio securities in the best interests of clients, unless the client
contract specifies that Aberdeen will not vote. Aberdeen seeks to develop
relationships with the management of portfolio companies to encourage
transparency and improvements in the treatment of shareholders and others. Thus,
Aberdeen may engage in dialogue with the management of portfolio companies with
respect to pending proxy voting issues. While Aberdeen has written guidelines
for certain issues on which votes may be cast, each vote is ultimately cast on a
case-by-case basis, taking into consideration the contractual obligations under
the respective advisory agreement, and all relevant facts and circumstances at
the time of the vote. Aberdeen may cast proxy votes in favor of management's
proposals or seek to change the views of management, considering specific
issues, as they arise, on their merits.
ABERDEEN U.S. REGISTERED ADVISERS
PROXY VOTING POLICIES AND PROCEDURES
AS OF FEBRUARY 8, 2006
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 ("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.
Pursuant to a Memorandum of Understanding ("MOU"), Aberdeen Asset
Managers Limited ("Aberdeen UK"), a non-US registered adviser, provides advisory
resources to certain U.S. clients of Aberdeen Singapore and Aberdeen AU. In
addition, Aberdeen UK provides advisory resources to certain U.S. clients of
Aberdeen US pursuant to another MOU. Under these MOUs, the affiliates of the
Aberdeen Advisers may provide various portfolio management resources, including
substantive advice on voting proxies for certain equity securities. To the
extent that Aberdeen UK provides advisory services to any clients of Aberdeen US
or to U.S. clients of Aberdeen Singapore or Aberdeen AU, Aberdeen UK will be
subject to the control and supervision of the registered adviser and will follow
these Policies and Procedures as part of providing such advisory services. 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. Any Aberdeen Adviser located in the United States follows these
Policies and Procedures for each of its respective 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. 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.
2. Limited Value. Aberdeen Advisers may abstain from voting a
client proxy if 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. Aberdeen 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, Aberdeen may follow the client's
direction or may request that the client vote the proxy directly.
G. Sources of Information. Aberdeen may conduct research internally
and/or use the resources of an independent research consultant. Aberdeen 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 will 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 Aberdeen clients.
I. Availability of Policies and Procedures. Aberdeen Advisers will
provide clients with a copy of these Policies and Procedures, as revised from
time to time, upon request.
J. Disclosure of Vote. As disclosed in Part II of each Aberdeen
Adviser's Form ADV, a client may obtain information on how its proxies were
voted by requesting such information from its Aberdeen Adviser. Aberdeen
Advisers do not generally disclose client proxy votes to third parties, other
than as required for Funds, unless specifically requested, in writing, by the
client.
III. SPECIFIC VOTING POLICIES
A. General Philosophy.
o Support existing management on votes on the financial
statements of a company and the election of the Board of Directors;
o Vote for the acceptance of the accounts unless there are
grounds to suspect that either the accounts as presented or audit
procedures used, do not present an accurate picture of company results;
and
o Support routine issues such as the appointment of independent
auditors, allocation of income and the declaration of stock (scrip)
dividend proposals provided there is a cash alternative.
B. Anti-takeover Measures. Aberdeen Advisers vote on anti-takeover
measures on a case-by-case basis taking into consideration such factors as the
long-term financial performance of the target company relative to its industry
competition. Key measures of performance will include the growth rates for
sales, operating income, net income and total shareholder returns. Other factors
which will be considered include margin analysis, cash flow and debt levels.
C. Proxy Contests for Control. Aberdeen Advisers vote on proxy contests
for control on a case-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 to the
relevant proxy committees 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 PA for each Aberdeen Adviser will ensure that each
proxy statement is directed to the appropriate Analyst. If a third party
recommendation service has been retained, the relevant PA 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. The Analyst may consult with the PA 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 Proxy Committee ("PC") of each Aberdeen
Adviser in voting portfolio securities and the extent to which the Aberdeen
Advisers rely on third party service providers.
1. Aberdeen US Clients
The designated PA for Aberdeen US ("PA-US"), and the
designated PA for Aberdeen UK ("PA-UK"), are responsible for ensuring
that votes for Aberdeen US 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 sub-advised by Aberdeen US, 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. Under Aberdeen-US's MOU with Aberdeen
Singapore, the relevant Analyst for Far East equity securities will
generally reside in 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 Aberdeen US proxy committee ("PC-US/UK"). Under
Aberdeen US's MOU with Aberdeen UK, the PC-US/UK is headquartered in
Scotland, and includes the Chief Investment Officer or Deputy Chief
Investment Officer, the head of the Socially Responsible Investing
("SRI") Team and a member of the Compliance team.,. The PC-US/UK meets
as needed to consider material conflicts of interest or any other items
raising unique issues. If the PC-US/UK 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 PC-US/UK
will follow the conflict of interest procedures set forth in Section
IV.B.2., above.
Aberdeen US has engaged ProxyEdge, a third party service
provider, to cast votes electronically for certain clients and to
maintain records of such votes electronically. The Phoenix Funds,
sub-advised by Aberdeen US, require electronic voting through
ProxyEdge. Custodians for certain other clients also provide the PA-US
with access to ProxyEdge. . Pursuant to the MOU, Aberdeen UK votes
proxies for certain U.S. clients of Aberdeen US. 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, Aberdeen
US 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, Aberdeen US will follow the
procedures outlined in Section IV.B.2, above.
2. Aberdeen Singapore Clients
Aberdeen AU and Aberdeen Singapore are responsible for
deciding how to vote for the US closed-end Funds and the Canadian
investment funds and will instruct the PA-US Aberdeen US accordingly.
The PA-US shall ensure that the votes are cast and cast in accordance
with the relevant Proxy Voting Policy and Procedure of the relevant
Fund. The PA-US uses ProxyEdge to electronically cast votes for the
Funds and to maintain electronic records of the votes cast.
Responsibility for considering the substantive issues relating
to any Fund vote and for deciding how the shares will be voted resides
with relevant equity and/or fixed income Analyst. The relevant analyst
may be a member of the Fund portfolio management team in Aberdeen
Singapore, Aberdeen AU, Aberdeen UK, or AAMISL In the event that a
material conflict of interest is identified, decisions on how to vote
will be referred to the proxy committee ("PC-Asia") located in
Singapore and Australia, comprised of a representative from each of
equity fund management, fixed income fund management and compliance
teams respectively. The PC-Asia meets as needed to consider a material
conflict of interest or any other items raising unique issues. If the
PC-Asia determines there is no material conflict of interest, the vote
recommendation will be forwarded to the PA-US to be cast. If a material
conflict of interest is identified, the PC-Asia will follow the
conflict of interest procedures set forth in Section IV.B.2., above,
and in the Aberdeen Funds Proxy Voting Policy and Procedures.
E. Review. Each designated PA is 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 PAs are responsible for:
1. Implementing and updating these Policies and Procedures;
2. Overseeing the proxy voting process;
3. Consulting with portfolio managers/analysts for the relevant
portfolio security; and
4. 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 of Aberdeen US will be maintained by either ISS and
Proxy Edge, depending on the client account. Similarly, electronic
proxy statements and the record of each vote cast by each U.S. client
account of Aberdeen Singapore will be maintained by Proxy Edge.
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
US 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. For US Funds, Aberdeen US, Aberdeen AU, Aberdeen
Singapore, and AAMISL 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, Aberdeen US, Aberdeen AU,
Aberdeen Singapore, and AAMISL 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 the US closed-end 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. Each
Compliance Department maintains information regarding the PA and the PC for 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
Aberdeen Asset Management Inc. (the "Sub-Adviser"), serves as the investment
sub-adviser for the Registrant. As of December 31, 2008, the management team
operates in an open-plan environment with collective responsibility for
investment decisions and ideas. Investment decisions are typically made by the
team as a whole and not by any one individual. By making team decisions, the
team seeks to ensure that the investment process results in consistent returns
across all portfolios with similar objectives.
The Sub-Adviser is a wholly owned subsidiary of Aberdeen Asset Management PLC.
The Sub-Adviser may, as needed, use the resources of its parent, Aberdeen Asset
Management PLC and its parent's wholly owned subsidiaries (collectively
"Aberdeen") for implementing certain portfolio transactions and for providing
research services. 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. Every task
undertaken by any individual, be it research, portfolio management or client
responsibility, has a dedicated alternate.
1. 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 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, he 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. Mr. Kaloo took his current position in July 2005. Mr. Kaloo
graduated with an MA (Hons) in Management and International Relations from St.
Andrews University in Scotland and holds a postgraduate degree in Investment
Analysis from Stirling University, also in Scotland.
2. 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.
3. ANDY BROWN
INVESTMENT MANAGER, GEM EQUITY TEAM
Mr. Brown is an assistant investment manager on the emerging markets ex Asia
desk. He graduated from the University of St. Andrews with BSc in Geography in
June 2003. Prior to joining Aberdeen in March 2005, Mr. Brown worked in the oil
field consumables industry in the United Arab Emirates.
4. 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.
5. MAX WOLMAN
PORTFOLIO MANAGER, EMERGING MARKET DEBT
Mr. Wolman joined Aberdeen in January 2001 and is portfolio manager on the
Global 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 Markets Debt investment committee at Aberdeen and is also
responsible for the daily implementation of the investment process.
(A)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM
MEMBER AND POTENTIAL CONFLICTS OF INTEREST
OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBER
The information in the table below is as of December 31, 2008
(assets in millions).
# OF
ACCOUNTS
MANAGED FOR TOTAL ASSETS
TOTAL WHICH FOR WHICH
NAME OF PORTFOLIO MANAGER # OF ADVISORY FEE ADVISORY FEE
OR TEAM MEMBER ACCOUNTS TOTAL IS BASED ON IS BASED ON
TYPE OF ACCOUNTS*** MANAGED ASSETS PERFORMANCE PERFORMANCE
1. DEVAN KALOO Registered Investment Companies: 1 $88.9 0 $0
Other Pooled Investment Vehicles: 12 $3,336.9 1 $51.6
Other Accounts: 35 $3,924.8 4 $559.3
2. JOANNE IRVINE Registered Investment Companies: 1 $88.9 0 $0
Other Pooled Investment Vehicles: 10 $3,205.5 1 $51.6
Other Accounts: 28 $3,435.0 3 $363.8
3. ANDY BROWN Registered Investment Companies: 1 $88.9 0 $0
Other Pooled Investment Vehicles: 10 $3,205.5 1 $51.3
Other Accounts: 28 $3,435.0 3 $363.8
4. BRETT DIMENT Registered Investment Companies: 3 $264.0 0 $0
Other Pooled Investment Vehicles: 10 $1,262.9 0 $0
Other Accounts: 14 $1,852.6 1 $42.0
5. MAX WOLMAN Registered Investment Companies: 3 $264.0 0 $0
Other Pooled Investment Vehicles: 10 $1,262.9 0 $0
Other Accounts: 14 $1,852.6 1 $42.0
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.
The Sub-Adviser 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
The Sub-adviser 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
Each Aberdeen Group member 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 the Aberdeen Group member 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.
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.
Each Aberdeen Group member recognizes that any remuneration policy must be
sufficiently flexible to take account of any changes in the business
environment. In accordance with this need for flexibility, the Aberdeen Group
takes into account the overall competitiveness of the total remuneration package
of all senior executives including some portfolio managers. When justified by
performance, the `at risk' performance elements will form the most significant
element of total remuneration for executive directors and senior employees.
Base Salary.
The base salary is determined by prevailing market conditions and the
compensation for similar positions across the industry. The Aberdeen Group uses
industry compensation surveys as a tool in determining each portfolio manager's
base salary.
Annual Bonus.
The Aberdeen Group's policy is to recognize corporate and individual
achievements each year through an appropriate bonus scheme. The aggregate
incentive compensation pool each year is determined by the Board of the parent
company, Aberdeen PLC, and is dependent on each member of the Aberdeen Group's
overall performance and profitability. The pool is comprised of a base level
plus an agreed proportion of each member of the Aberdeen Group's profitability.
Staff performance is reviewed formally once a year, with mid-term reviews. The
review process looks at all of the ways in which an individual has contributed
to the Aberdeen Group, and specifically, in the case of portfolio managers, to
the relevant investment team. Discretionary bonuses are based on a combination
of both the team and the individual's performance. Overall participation in team
meetings, generation of original research ideas and contribution to presenting
the team externally are also evaluated. Discretionary bonuses are not formally
laid down and generally range from 10% to 50% of annual salary for portfolio
managers.
In the calculation of a portfolio manager's bonus, the Aberdeen Group takes into
consideration investment matters (which include the performance of funds,
adherence to the company investment process, and quality of company meetings) as
well as more subjective issues such as team participation and effectiveness at
client presentations. The split between the two will vary but generally around
80% of bonus will be determined by investment related matters, the remaining 20%
will be more subjective in nature. Each Fund's performance is judged against the
benchmark as established in the relevant Fund's most recent shareholder report.
Portfolio manager performance on investment matters is judged over all of the
accounts the portfolio manager contributes to and is documented in the appraisal
process. A combination of the team's and individual's performance is considered.
Although performance is not a substantial portion of a portfolio manager's
compensation, the Aberdeen Group also recognizes that fund performance can often
be driven by factors outside one's control, such as (irrational) markets, and as
such pays attention to the effort by portfolio managers to ensure integrity of
our core process by sticking to disciplines and processes set, regardless of
momentum and `hot' themes. Short-terming is thus discouraged and
trading-oriented managers will thus find it difficult to thrive in the Aberdeen
Group's environment. Additionally, if any of the aforementioned undue risks were
to be taken by a portfolio manager, not only would the portfolio manager be in
breach of the Aberdeen Group Code of Ethics, but any such trend would be
identified via Aberdeen's dynamic compliance monitoring system.
Long Term Incentives.
As part of an effective remuneration package, a long term incentive plan is used
to structure the package so as to retain, motivate, and reward key staff members
with a view to improving performance and thereby increasing the value of the
Aberdeen Group for the benefit of shareholders. Long-term incentive plans can be
either cash or share based and typically vest over a three year period.
The Aberdeen Group offers a meritocracy and a very flat management structure.
The culture of the company is entrepreneurial, and enthusiastic, hard-working
and talented employees are given plenty of opportunity to prove themselves and
obtain a high level of job satisfaction.
The Aberdeen Group does not "tie in" portfolio managers with long-term and
restrictive contractual obligations, however. The Aberdeen Group aims to retain
key individuals primarily through the provision of competitive compensation and
other benefits. It is the policy of the Aberdeen Group to mitigate the effects
of any individual leaving the company by ensuring that portfolios are managed on
a team basis.
(A)(4) DISCLOSURE OF SECURITIES OWNERSHIP
The information below is as of December 31, 2008:
NAME OF PORTFOLIO MANAGER DOLLAR ($) RANGE OF
OR FUND SHARES
TEAM MEMBER BENEFICIALLY OWNED
Devan Kaloo $0
Joanne Irvine $0
Andy Brown $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
REGISTRANT PURCHASES OF EQUITY SECURITIES
(C) TOTAL NUMBER OF SHARES (D) MAXIMUM NUMBER (OR APPROXIMATE
(A) TOTAL NUMBER (B) AVERAGE (OR UNITS) PURCHASED AS PART DOLLAR VALUE) OF SHARES (OR UNITS)
OF SHARES (OR PRICE PAID PER OF PUBLICLY ANNOUNCED PLANS THAT MAY YET BE PURCHASED UNDER THE
PERIOD UNITS) PURCHASED SHARE (OR UNIT) OR PROGRAMS PLANS OR PROGRAMS
Month #1
(identify
beginning and N/A
ending dates)
Month #2
(identify
beginning and N/A
ending dates)
Month #3
(identify
beginning and N/A
ending dates)
Month #4
(identify
beginning and N/A
ending dates)
Month #5
(identify
beginning and 13,450 $9.1695 13,450 695,178
ending dates)
Month #6
(identify
beginning and 36,598 $9.8355 50,048 658,580
ending dates)
Total 50,048 $9.6565 50,048 658,580
On November 17, 2008, the Registrant announced that the Board of Trustees of the
Registrant had approved a share repurchase program whereby the Registrant may
purchase up to 708,628 of its outstanding common shares (12% on November 17,
2008). The share repurchase program will continue until the earlier of (i) the
repurchase of up to 12% of the Fund's current outstanding common shares, or (ii)
May 17, 2009.
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 2/26/09
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Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /S/ JAMES A. BOWEN
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James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date 2/26/09
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By (Signature and Title)* /S/ MARK R. BRADLEY
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Mark R. Bradley, Treasurer, Controller, Chief
Financial Officer and Chief Accounting Officer
(principal financial officer)
Date 2/26/09
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* Print the name and title of each signing officer under his or her signature.