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 811-21727
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First Trust Mortgage Income Fund
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(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)
registrant's telephone number, including area code: 630-765-8000
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Date of fiscal year end: October 31
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Date of reporting period: October 31, 2013
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FIRST TRUST
BROOKFIELD
FIRST TRUST
MORTGAGE INCOME FUND (FMY)
ANNUAL REPORT
FOR THE YEAR ENDED
OCTOBER 31, 2013
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TABLE OF CONTENTS
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
ANNUAL REPORT
OCTOBER 31, 2013
Shareholder Letter......................................................... 1
At A Glance................................................................ 2
Portfolio Commentary....................................................... 3
Portfolio of Investments................................................... 6
Statement of Assets and Liabilities........................................ 12
Statement of Operations.................................................... 13
Statements of Changes in Net Assets........................................ 14
Statement of Cash Flows.................................................... 15
Financial Highlights....................................................... 16
Notes to Financial Statements.............................................. 17
Report of Independent Registered Public Accounting Firm.................... 23
Additional Information..................................................... 24
Board of Trustees and Officers............................................. 29
Privacy Policy............................................................. 31
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 Brookfield Investment Management Inc.
("Brookfield" 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 Mortgage Income Fund (the "Fund") to be materially different from
any future results, performance or achievements expressed or implied by the
forward-looking statements. When evaluating the information included in this
report, you are cautioned not to place undue reliance on these forward-looking
statements, which reflect the judgment of the Advisor and/or Sub-Advisor and
their respective representatives only as of the date hereof. We undertake no
obligation to publicly revise or update these forward-looking statements to
reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
Brookfield are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The risks of investing in the Fund are
spelled out in the prospectus, the statement of additional information, this
report and other Fund regulatory filings.
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SHAREHOLDER LETTER
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
OCTOBER 31, 2013
Dear Shareholders:
I am pleased to present you with the annual report for your investment in First
Trust Mortgage Income Fund (the "Fund").
As a shareholder, twice a year you receive a detailed report about your
investment, including portfolio commentary from the Fund's management team, a
performance analysis and a market and Fund outlook. Additionally, First Trust
Advisors L.P. ("First Trust") compiles the Fund's financial statements for you
to review. These reports are intended to keep you up-to-date on your investment,
and I encourage you to read this document and discuss it with your financial
advisor.
As you are probably aware, the twelve months covered by this report saw both
challenging economic and political issues in the U.S. However, the period was
still positive for the markets. In fact, the S&P 500 Index, as measured on a
total return basis, rose 27.18% during the twelve months ended October 31, 2013.
Of course, past performance can never be an indicator of future performance, but
First Trust believes that staying invested in quality products through up and
down markets and having a long-term horizon can help investors as they work
toward their financial goals.
First Trust continues to offer a variety of products that we believe could fit
many financial plans for investors seeking long-term investment success. Your
financial advisor can tell you about the other investments First Trust offers
that might fit your financial goals. We encourage you to discuss those goals
with your financial advisor regularly so that he or she can help keep you on
track and help you choose investments that match your goals.
First Trust will continue to make available up-to-date information about your
investments so you and your financial advisor are current on any First Trust
investments you own. We value our relationship with you, and thank you for the
opportunity to assist you in achieving your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST MORTGAGE INCOME FUND (FMY)
"AT A GLANCE"
AS OF OCTOBER 31, 2013 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FMY
Common Share Price $15.79
Common Share Net Asset Value ("NAV") $17.63
Premium (Discount) to NAV (10.44)%
Net Assets Applicable to Common Shares $74,258,752
Current Monthly Distribution per Common Share (1) $0.085
Current Annualized Distribution per Common Share $1.020
Current Distribution Rate on Closing Common Share Price (2) 6.46%
Current Distribution Rate on NAV (2) 5.79%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
10/31/2012 19.00 17.91
18.08 17.79
18.20 17.86
17.99 17.81
18.60 17.81
11/25/2012 18.49 17.79
17.87 17.76
18.19 17.86
17.96 17.79
12/30/2012 17.74 17.62
18.41 17.84
18.47 17.93
18.51 17.92
1/27/2013 17.29 17.98
17.25 18.00
17.56 17.98
17.44 18.00
2/24/2013 17.14 17.95
17.20 17.81
16.77 17.92
16.57 17.88
16.60 17.84
3/30/2013 16.43 17.85
16.49 17.72
16.45 17.70
16.54 17.71
4/27/2013 16.73 17.79
16.93 17.81
16.92 17.93
16.82 18.01
16.49 18.04
5/25/2013 16.23 17.94
15.96 17.73
15.79 17.65
15.62 17.70
6/29/2013 15.87 17.50
15.46 17.44
15.80 17.28
15.57 17.25
7/27/2013 15.53 17.31
15.41 17.33
15.26 17.34
15.18 17.50
15.18 17.49
8/31/2013 15.30 17.51
15.47 17.50
15.54 17.49
15.57 17.54
9/28/2013 15.55 17.54
15.52 17.50
15.48 17.50
15.40 17.54
15.65 17.59
10/31/2013 15.79 17.63
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PERFORMANCE
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Average Annual Total Return
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1 Year Ended 5 Years Ended Inception (5/25/2005)
10/31/2013 10/31/2013 to 10/31/2013
FUND PERFORMANCE (3)
NAV 6.04% 9.13% 7.26%
Market Value -10.47% 9.75% 5.29%
INDEX PERFORMANCE
Barclays Capital U.S. MBS: Agency
Fixed Rate MBS Index -0.38% 5.15% 4.90%
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PORTFOLIO CHARACTERISTICS
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Weighted Average Duration 1.51
Weighted Average Life (Years) 6.60
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% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS
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Mortgage-Backed Securities 67.8%
U.S. Government Agency Mortgage-Backed Securities 31.8
Asset-Backed Securities 0.4
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Total 100.0%
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% OF TOTAL
SECURITY TYPE INVESTMENTS
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Fixed Rate Securities 48.2%
Adjustable Rate Securities 39.9
Interest Only Securities 11.9
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Total 100.0%
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% OF TOTAL
FIXED-INCOME
CREDIT QUALITY (4) INVESTMENTS
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AAA 37.1%
AA+ 12.7
AA 3.6
A+ 14.1
A 5.8
BBB+ 2.3
BBB 2.1
BB+ 1.1
BB 3.2
B- 2.4
CCC+ 0.2
CCC 11.4
CCC- 0.8
CC 0.8
D 2.3
NR 0.1
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Total 100.0%
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(1) Most recent distribution paid or declared through 10/31/2013. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV, as applicable, as of 10/31/2013. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by the
Dividend Reinvestment Plan and changes in NAV per share for net asset value
returns and changes in Common Share price for market value returns. Total
returns do not reflect sales load and are not annualized for periods less
than one year. Past performance is not indicative of future results.
(4) The credit quality information presented reflects the ratings assigned by
one or more nationally recognized statistical rating organizations
(NRSROs), including Standard & Poor's Ratings Group, a division of the
McGraw Hill Companies, Inc., Moody's Investors Service, Inc., Fitch Ratings
or a comparably rated NRSRO. For situations in which a security is rated by
more than one NRSRO and ratings are not equivalent, the highest ratings are
used. Sub-investment grade ratings are those rated BB+/Ba1 or lower.
Investment grade ratings are those rated BBB-/Baa3 or higher. The credit
ratings shown relate to the creditworthiness of the issuers of the
underlying securities in the Fund, and not to the Fund or its shares.
Credit ratings are subject to change.
NR Not Rated
Page 2
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PORTFOLIO COMMENTARY
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
ANNUAL REPORT
OCTOBER 31, 2013
SUB-ADVISOR
Brookfield Investment Management Inc. ("Brookfield") serves as the Fund's
Sub-Advisor. Brookfield is a wholly-owned subsidiary of Brookfield Asset
Management, a global alternative asset manager with approximately $184 billion
in assets under management as of September 30, 2013. Brookfield Asset Management
has over a 100-year history of owning and operating assets with a focus on
property, renewable power, infrastructure and private equity. The company offers
a range of public and private investment products and services, which leverage
its expertise and experience and provide it with a competitive advantage in the
markets where it operates. On behalf of its clients, Brookfield Asset Management
is also an active investor in the public securities markets, where its
experience extends over 30 years. Over this time, the company has successfully
developed several investment operations and built expertise in the management of
institutional portfolios, retail mutual funds, and structured product
investments.
Brookfield Asset Management's public market activities are conducted by
Brookfield, a registered investment advisor. These activities complement
Brookfield Asset Management's core competencies and included global listed real
estate and infrastructure equities, corporate high yield investments,
opportunistic credit strategies and a dedicated insurance asset management
division. Headquartered in New York, NY, Brookfield maintains offices and
investment teams in Toronto, Chicago, Boston and London and had over $10 billion
of assets under management as of September 30, 2013.
PORTFOLIO MANAGEMENT TEAM
ANTHONY BREAKS, CFA - SENIOR DIRECTOR
CHRIS WU - DIRECTOR
COMMENTARY
FIRST TRUST MORTGAGE INCOME FUND
The Fund's primary investment objective is to seek a high level of current
income. As a secondary objective, the Fund seeks to preserve capital. The Fund
pursues its objectives by investing primarily in mortgage-backed securities
("MBS") representing part ownership in a pool of either residential or
commercial mortgage loans that, in the opinion of the Fund's Sub-Advisor, offer
an attractive combination of credit quality, yield and maturity. There can be no
assurance the Fund will achieve its investment objectives. The Fund may not be
appropriate for all investors.
MARKET RECAP AND OUTLOOK
Within the Securitized Products universe, Agency Residential Mortgage-Backed
Securities ("RMBS"), non-Agency RMBS and Collateralized Mortgage-Backed
Securities ("CMBS") all had strong returns for the 2013 fiscal year driven by
improving fundamentals and strong investor demand. As interest rates rose, the
Fund's low duration, or sensitivity to interest rates, also contributed to
performance. Issuance of new issue prime deals from dealer conduits and Real
Estate Investment Trusts ("REITs") have become more frequent, although volumes
remain far below pre-crisis levels. CMBS issuance continued its recovery with
$66 billion in new unguaranteed deals and $68 billion in Agency-guaranteed CMBS.
For the U.S. housing market, there have been 20 consecutive months of increases
to the home price index, even during winter months that generally see less
home-buying demand. Geographically, the improvement is widespread and some of
the most affected areas during the crisis, such as California, Arizona and
Nevada, have seen the sharpest gains. Investors in securitized products were
typically running conservative assumptions and so the rebound in housing
represents a change versus prior forward expectations. The evolution in
assumptions has come to incorporate a base line of home price appreciation and
along with it, lower losses for delinquent loans and faster prepayments, a
benefit for bonds still priced at a discount. We are seeing the improved
assumptions in higher prices for bonds, especially those backed by loans most
sensitive to housing prices, such as subprime securities, where we have placed
particular emphasis in the below "A" rated allocation.
We remain positive on most securitized products for the next year, based on
continued improvement in forecasts for collateral performance and expanding
credit for borrowers. Banks are more eager to lend now than they were one to two
years ago. As a result, more borrowers should be able to refinance their
mortgage, and homes which are for sale should attract a broader audience of
buyers. Rents have been rising for several years, and with interest rates still
low, many households have a financial incentive to purchase rather than rent.
All of these dynamics support the current increase in home prices and potential
for further increases.
Page 3
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PORTFOLIO COMMENTARY (CONTINUED)
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We remain focused on stability and income in evaluating mortgage investments
while maintaining a low level of interest rate risk. In many cases, this means a
focus on floating-rate securities backed by high quality loan pools or
floating-rate securities with structural protections. In addition, we have
included securities with sensitivity to home prices, such as subprime RMBS, to
improve the Fund's income and return. As home prices have increased, this has
been an important contribution to performance.
The valuation of Agency pass-through securities and Collateralized Mortgage
Obligations ("CMOs") fell over the past year due to sharply higher interest
rates. Technical factors, however, are still in favor of Agency pass-through
securities as the Federal Reserve is purchasing $40 billion of Agency MBS per
month and it is likely that the tapering of this program will not start until
March 2014. The Federal Reserve's mortgage purchase program will remain the
dominant factor in the supply and demand balance which we believe will support
mortgage prices. We are focused on To-Be-Announced securities and specified
pools as vehicles for earning stable income and leveraging the Fund's portfolio.
Agency derivatives, which include interest only ("IO") and inverse IO
securities, rose in price over the past 12 months. Rising interest rates and
slower prepayment speeds led to higher valuation for Agency derivatives. The
30-year mortgage rate rose by more than 100 basis points over this period of
time, which reduced the incentives to refinance. As a result, the prepayment
speeds of Agency mortgages had dropped to around 13 Constant Repayment Rate
("CPR") from a peak of over 30 CPR since late last year. Moreover, prepayment
speeds are expected to remain low as the impact of higher mortgage rates would
come into play for the next several months.
Overall, the Fund's Agency MBS exposure returned positively over the 12-month
period even though we have witnessed a dramatic rise in interest rates. This is
largely due to the outperformance of Agency derivatives. Going forward, we
believe Agency derivatives will benefit the portfolio as interest rates are
expected to shift upward in the long term. We continue to see value in the
Fund's derivative holdings for the protection from higher interest rates. We
will be focused on Agency IO securities to improve returns and reduce duration
risk.
In the non-Agency MBS side, virtually all sectors within the Fund's investment
guidelines rallied during the period. Collateral assumptions are trending toward
upside due to improving housing data as well as assumptions regarding defaults
and loss severities. For many securities, especially those projected to take
principal losses, this has supported forecasted yields even as prices have
risen. The assumption of better collateral performance leads to smaller bond
loss projections and therefore, better yields at a given price. For securities
expected to pay in full, improved collateral performance can improve investment
returns through an increased rate of prepayment, an advantage on bonds priced at
a discount to par value. For the Fund's "A" or better allocations, which are
approximately 73% of the Fund's total investments as of October 31, 2013, losses
are projected to be zero or minimal and so improvement is limited to
prepayments.
To the degree that we can, we look to sell bonds that have little performance
upside to improving housing fundamentals or prepayments in favor of those we
believe can and will continue to rally. The price appreciation potential can
make up for what can be modest yields to maturity and we also look for split
investment-grade rated and less liquid securities that offer higher yields. An
additional source of value going forward is the projected rise in short-term
interest rates. Intermediate and long term interest rates have increased almost
a full percentage point. This implies a future rise in the indices that drive
the coupons of the Fund's floating-rate holdings, such as 1-month, 6-month and
1-year LIBOR. While these interest rate indices remain low currently, the Fund
has avoided substantial market value losses associated with rising long-term
interest rates this year and is poised to capture the extra income associated
with any future increase in short-term interest rates. Investors are focusing
more and more on such short-duration assets and so we are optimistic that we
will see additional price performance from this preference.
PERFORMANCE ANALYSIS
For the one year ended October 31, 2013, the Fund had a total return1 of 6.04%
based on net asset value ("NAV"). For the period, the Fund traded from a premium
to NAV of 6.09% to a discount to NAV of -10.44%, resulting in a total return1 of
-10.47%, based on market price. During the period, the Fund's benchmark, the
Barclays Capital U.S. MBS: Agency Fixed Rate MBS Index returned -0.38%.
Changes in interest rates were not a material contributor to the Fund's returns
over the period. The 10-Year U.S. Treasury bond yield began at 1.69% and ended
the period at 2.56% with a range between nearly 3% and 1.58% over the period.
This increase in interest rates has caused bonds as a whole to underperform,
especially compared to equities. Some large retail bond funds saw meaningful
redemptions. Sales of bonds to meet these redemptions were an opportunity for
the Fund to make some attractive purchases. We anticipate interest rates to
increase in the next 18 to 24 months as employment continues its recovery and
issues such as debt ceiling and sequester are resolved on a more long-term
basis. Housing has historically been
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1 Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for NAV
returns and changes in Common Share price for market value returns and
does not reflect sales load. Past performance is not indicative of future
results.
Page 4
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PORTFOLIO COMMENTARY (CONTINUED)
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a material part of GDP and GDP growth and its reversal from a detractor to a
contributor seems to us undervalued by the broader investment base as it
projects growth. All these positive factors will likely lead to a reduction in
monetary stimulus and investors requiring higher yields to hold Treasury bonds.
Within the "A-" or below segment of the portfolio, we have emphasized Subprime
and Option Adjustable Rate Mortgage ("ARM") RMBS because we believe this type of
collateral would benefit most from improving housing data. As housing data
showed continued improvement over the period, the Fund's holdings of these
securities showed particularly strong price increases. We also continue to
select securities based on specific views of mortgage servicers and servicing
behavior as well as geographic differences which we believe are underappreciated
in the marketplace.
During the period, the Fund's primary purchases were investment grade Hybrid ARM
Prime RMBS and second priority CMBS. The purchases were funded with existing
cash, repaid principal on existing holdings and sales of portfolio holdings. As
of October 31, 2013, the Fund held 5.9% cash as a percentage of gross assets. It
held additional cash during the third quarter as various policy risks loomed
over the market and threatened increased volatility. Among those risks was the
government shutdown, an impasse over the debt ceiling and the timing of taper
reduction. As these risks subside, we may reduce the Fund's cash holdings
through additional investments.
We have been focused on purchasing securities rated "A" or better, and within
this quality spectrum, we preferred Prime Hybrid RMBS. We also looked to second
priority CMBS, securitizations of mortgage servicing cash flows and Agency MBS.
In considering the Fund's below "A" rated securities, to the extent we have
flexibility to purchase such securities, we find Subprime RMBS to be most
attractive.
All of these target sectors rallied during the period, which reflected improved
assumptions for collateral performance. As prices shift, we continuously
reassess the various sectors and security types for relative value. Early in the
period, we identified first priority CMBS as having reached a price point that
was difficult to sustain and exposed to adverse collateral performance. In this
case, credit and/or bond loss was not the issue but rather that unanticipated
loan liquidations would repay a premium security at par. The Fund made a switch
into second priority CMBS that is protected from this type of risk and has more
yield. Liquidity was favorable and we were able to reduce the Fund's cash
position and trade for relative value. We also were sellers of fixed-rate prime
MBS. Fixed-rate prime MBS has material interest-rate sensitivity and a higher
price point owing to the hefty fixed coupons. We had anticipated a developing
preference by investors for floating-rate assets at lower dollar prices and
during the period, we sold more than half the Fund's allocation to this sector.
As of October 31, 2013, the Fund's leverage was relatively low at 11.93% of
Managed Assets, given that the Fund may utilize leverage in an amount up to
33.33% of Managed Assets. Leverage contributed positively to the Fund's
performance during the reporting period. More recently, we preemptively reduced
leverage and increased cash due to increased volatility from policy risks such
as the partial government shutdown and debt ceiling impasse. In addition,
reverse repurchase borrowing remains expensive for many of the Fund's target
asset classes and so leverage is appealing on a more limited group of assets.
For this reason, we may continue to employ leverage below its maximum or to
choose alternative assets, such as Agency Guaranteed assets to use as
collateral. Financing costs may also fall, thereby reversing this current
dynamic. Where our overall budget for risk warrants it and when the return
opportunities are compelling, we are likely to increase leverage in an attempt
to improve returns. In periods of stability, this may be an especially important
tool.
An important factor impacting the return of the Fund relative to its benchmark
was the Fund's use of financial leverage through the use of reverse repurchase
agreements. Please note that the Fund's benchmark does not utilize leverage. The
Fund uses leverage because its managers believe that, over time, leverage
provides opportunities for additional income and total return for common
shareholders. However, the use of leverage also can expose common shareholders
to additional volatility. For example, as the prices of securities held by the
Fund decline, the negative impact of the valuation changes on common share net
asset value and common shareholder total return is magnified by the use of
leverage. Conversely, leverage may enhance common share returns during periods
when the prices of securities held by the Fund generally are rising.
The Fund's portfolio holdings are subject to change without notice. The mention
of specific securities is not a recommendation or solicitation for any person to
buy, sell or hold any particular security. There is no assurance that the Fund
currently holds these securities.
These views represent the opinions of Brookfield and are not intended to predict
or depict the performance of any investment. These views are as of the close of
business on October 31, 2013 and subject to change based on subsequent
developments.
Page 5
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 2013
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- --------------------------------------------- ---------- ------------ -------------
MORTGAGE-BACKED SECURITIES - 76.4%
COLLATERALIZED MORTGAGE OBLIGATIONS - 61.4%
Adjustable Rate Mortgage Trust
$ 108,122 Series 2004-5, Class 1A1 (a) ............. 2.80% 04/25/35 $ 106,567
Banc of America Mortgage Securities
102,339 Series 2002-L, Class 1A1 (a) (b) ......... 2.90% 12/25/32 93,020
Bear Stearns Adjustable Rate Mortgage Trust
792,222 Series 2004-9, Class 12A1 (a) ............ 3.20% 11/25/34 786,252
Chase Mortgage Finance Trust
179,714 Series 2007-A1, Class 1A3 (a) ............ 2.77% 02/25/37 179,338
Countrywide Alternative Loan Trust
752,103 Series 2006-41CB, Class 2A17 ............. 6.00% 01/25/37 605,158
87,171 Series 2007-11T1, Class A37 (c) .......... 39.00% 05/25/37 140,693
Countrywide Home Loan Mortgage Pass
Through Trust
246,289 Series 2004-HYB1, Class 2A (a) ........... 2.79% 05/20/34 233,037
769,223 Series 2006-21, Class A8 ................. 5.75% 02/25/37 677,787
Credit Suisse First Boston Mortgage
Securities Corp.
1,475,812 Series 2004-AR2, Class 1A1 (a) ........... 2.83% 03/25/34 1,438,354
1,569,343 Series 2004-AR8, Class 6A1 (a) ........... 2.53% 09/25/34 1,588,435
DSLA Mortgage Loan Trust
1,238,533 Series 2007-AR1, Class 2A1A (a) .......... 0.31% 04/19/47 1,023,843
GMAC Mortgage Corporation Loan Trust
301,047 Series 2004-AR1, Class 22A (a) ........... 3.45% 06/25/34 287,913
GSAMP Trust
1,001,446 Series 2006-NC1, Class A2 (a) ............ 0.35% 02/25/36 945,464
691,313 Series 2007-HE1, Class A2B (a) ........... 0.27% 03/25/47 633,643
262,241 Series 2007-NC1, Class A2B (a) ........... 0.27% 12/25/46 140,652
2,921,462 Series 2007-NC1, Class A2C (a) ........... 0.32% 12/25/46 1,576,967
Harborview Mortgage Loan Trust
218,850 Series 2004-1, Class 2A (a) .............. 2.54% 04/19/34 217,127
933,196 Series 2004-6, Class 3A1 (a) ............. 2.74% 08/19/34 926,903
HLSS Servicer Advance Receivables Trust
580,110 Series 2013-T3, Class C3 (d) ............. 2.39% 05/15/46 561,524
JP Morgan Mortgage Trust
2,228,863 Series 2005-ALT1, Class 4A1 (a) .......... 5.16% 10/25/35 2,088,625
655,216 Series 2006-A2, Class 4A1 (a) ............ 2.73% 08/25/34 646,784
224,785 Series 2006-A2, Class 5A3 (a) ............ 2.64% 11/25/33 226,797
JP Morgan Re-REMIC
1,719,124 Series 2009-7, Class 12A1 (d) ............ 6.25% 01/27/37 1,754,846
MASTR Asset Backed Securities Trust
1,298,412 Series 2006-HE5, Class A3 (a) ............ 0.33% 11/25/36 741,153
267,659 Series 2006-HE5, Class A4 (a) ............ 0.39% 11/25/36 154,057
1,848,012 Series 2006-NC2, Class A3 (a) ............ 0.28% 08/25/36 889,365
843,529 Series 2006-NC2, Class A5 (a) ............ 0.41% 08/25/36 415,182
Mellon Residential Funding Corp.
366,578 Series 2001-TBC1, Class A1 (a) ........... 0.87% 11/15/31 362,310
833,501 Series 2002-TBC2, Class A (a) ............ 1.03% 08/15/32 818,194
Page 6 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2013
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- --------------------------------------------- ---------- ------------ -------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Morgan Stanley Mortgage Loan Trust
$ 609,117 Series 2004-7AR, Class 2A6 (a)............ 2.47% 09/25/34 $ 599,747
Nationstar Home Equity Loan Trust
1,731,000 Series 2006-B, Class AV4 (a).............. 0.45% 09/25/36 1,500,488
Provident Funding Mortgage Loan Trust
316,828 Series 2005-1, Class 1A1 (a).............. 2.74% 05/25/35 312,516
Residential Accredit Loans, Inc.
893,709 Series 2004-QS2, Class CB ................ 5.75% 02/25/34 941,743
Residential Funding Mortgage Securities I
198,836 Series 2005-S5, Class A5 ................. 5.25% 07/25/35 197,986
Securitized Asset Backed Receivables LLC Trust
1,274,123 Series 2007-BR2, Class A2 (a)............. 0.40% 02/25/37 637,937
Thornburg Mortgage Securities Trust
1,049,800 Series 2004-3, Class A (a)................ 0.91% 09/25/44 1,021,950
Wachovia Mortgage Loan Trust, LLC
734,043 Series 2006-A, Class 3A1 (a).............. 2.65% 05/20/36 722,560
WaMu Mortgage Pass Through Certificates
748,291 Series 2004-AR1, Class A (a).............. 2.54% 03/25/34 744,576
1,044,835 Series 2004-AR10, Class A1B (a)........... 0.61% 07/25/44 1,007,431
1,541,661 Series 2005-AR11, Class A1A (a)........... 0.49% 08/25/45 1,491,083
1,262,398 Series 2005-AR2, Class 2A23 (a)........... 0.55% 01/25/45 1,186,254
1,433,578 Series 2005-AR6, Class 2A1A (a)........... 0.40% 04/25/45 1,353,193
677,868 Series 2005-AR9, Class A1A (a)............ 0.49% 07/25/45 656,543
1,294,677 Series 2006-AR5, Class A1A (a)............ 1.14% 06/25/46 1,120,814
Washington Mutual Alternative Mortgage
Pass-Through Certificates
53,464 Series 2007-5, Class A11 (c).............. 38.46% 06/25/37 93,382
Washington Mutual MSC Mortgage
Pass-Through Certificates
453,769 Series 2004-RA1, Class 2A ................ 7.00% 03/25/34 481,508
Wells Fargo Mortgage Backed Securities Trust
863,459 Series 2003-H, Class A1 (a)............... 2.62% 09/25/33 870,373
711,989 Series 2004-A, Class A1 (a)............... 4.56% 02/25/34 718,618
2,240,997 Series 2004-R, Class 1A1 (a).............. 2.62% 09/25/34 2,258,244
681,608 Series 2004-S, Class A1 (a)............... 2.63% 09/25/34 690,752
1,098,616 Series 2004-Y, Class 1A2 (a)............. 2.62% 11/25/34 1,085,013
650,454 Series 2005-AR10, Class 2A17 (a).......... 2.63% 06/25/35 658,615
438,552 Series 2005-AR16, Class 1A1 (a)........... 2.68% 08/25/33 446,888
570,273 Series 2005-AR3, Class 2A1 (a)............ 2.64% 03/25/35 571,789
915,592 Series 2005-AR8, Class 1A1 (a)............ 2.63% 06/25/35 922,044
402,197 Series 2006-AR1, Class 2A5 (a)............ 5.35% 03/25/36 396,084
1,186,127 Series 2006-AR10, Class 5A2 (a)........... 2.61% 07/25/36 1,139,762
660,581 Series 2007-16, Class 1A1................. 6.00% 12/28/37 692,010
697,959 Series 2007-2, Class 1A13................. 6.00% 03/25/37 655,210
169,553 Series 2007-8, Class 2A2.................. 6.00% 07/25/37 163,376
-------------
45,598,479
-------------
See Notes to Financial Statements Page 7
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2013
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- --------------------------------------------- ---------- ------------ -------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
COMMERCIAL MORTGAGE-BACKED SECURITIES - 15.0%
Banc of America Commercial Mortgage Trust
$ 1,000,000 Series 2006-6, Class AJ .................. 5.42% 10/10/45 $ 984,130
Credit Suisse Mortgage Capital Certificates
820,000 Series 2007-C2, Class A3 ................. 5.54% 01/15/49 912,487
GS Mortgage Securities Corp II
1,000,000 Series 2007-GG10, Class A4 (a) ........... 5.80% 08/10/45 1,111,332
HLSS Servicer Advance Receivables Trust
750,000 Series 2013-T5, Class CT5 (d)............. 2.52% 08/15/46 752,032
JP Morgan Chase Commercial Mortgage
Securities Trust
1,500,000 Series 2007-LD12, Class A4 ............... 5.88% 02/15/51 1,700,187
800,000 Series 2009-IWST, Class C (a) (d)......... 7.69% 12/05/27 961,753
LB-UBS Commercial Mortgage Trust
420,000 Series 2007-C1, Class AM ................. 5.46% 02/15/40 460,727
Merrill Lynch Mortgage Investors Trust
623,730 Series MLCC 2004-D, Class A1 (a).......... 0.83% 09/25/29 614,556
Mid-State Capital Corp.
642,683 Series 2004, Class M1..................... 6.50% 08/15/37 696,573
Morgan Stanley Capital I Trust
980,000 Series 2007-IQ16, Class AM (a)............ 6.09% 12/12/49 1,118,558
820,000 Series 2008-T29, Class AM (a)............. 6.28% 01/11/43 938,918
VNO Mortgage Trust
900,000 Series 2012-6AVE, Class A (d)............. 3.00% 11/15/30 860,719
-------------
11,111,972
-------------
TOTAL MORTGAGE-BACKED SECURITIES 56,710,451
(Cost $54,451,264) -------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 35.7%
COLLATERALIZED MORTGAGE OBLIGATIONS - 11.6%
Federal Home Loan Mortgage Corp.
2,556,681 Series 2807, Class SB, IO (c)............. 7.28% 11/15/33 423,767
28,029 Series 3195, Class SX (c)................. 45.02% 07/15/36 74,031
599,450 Series 3562, Class KI, IO ................ 4.50% 11/15/22 20,937
182,987 Series 3593, Class IP, IO ................ 5.00% 06/15/36 2,032
3,323,771 Series 3619, Class EI, IO ................ 4.50% 05/15/24 242,017
2,474,524 Series 3692, Class PS, IO (c)............. 6.43% 05/15/38 297,172
5,012,730 Series 3726, Class KI, IO ................ 3.50% 04/15/25 432,382
3,303,544 Series 3870, Class WS, IO (c)............. 6.43% 06/15/31 568,728
Federal Home Loan Mortgage Corp., STRIP
1,696,096 Series 232, Class IO, IO ................. 5.00% 08/01/35 293,850
Federal National Mortgage Association
1,144,536 Series 2005-122, Class SN (c)............. 27.92% 01/25/36 1,840,528
417,419 Series 2008-50, Class AI, IO ............. 5.50% 06/25/23 24,142
4,634,638 Series 2010-103, Class ID, IO ............ 5.00% 09/25/40 934,394
7,732,815 Series 2010-139, Class KI, IO ............ 1.09% 12/25/40 328,248
1,018,194 Series 2010-142, Class PS, IO (c)......... 5.88% 05/25/40 116,289
Page 8 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2013
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- --------------------------------------------- ---------- ------------ -------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Federal National Mortgage Association (Continued)
$ 1,339,446 Series 2010-145, Class TI, IO ............ 3.50% 12/25/20 $ 101,980
3,943,039 Series 2010-40, Class MI, IO ............. 4.50% 08/25/24 291,081
Federal National Mortgage Association, STRIP
1,910,781 Series 360, Class 2, IO .................. 5.00% 08/01/35 338,623
3,424,681 Series 406, Class 6, IO .................. 4.00% 01/25/41 603,776
Government National Mortgage Association
1,583,639 Series 2009-65, Class NJ, IO ............. 5.50% 07/20/39 158,240
3,936,048 Series 2010-115, Class IQ, IO ............ 4.50% 11/20/38 555,741
8,977,148 Series 2011-131, Class EI, IO ............ 4.50% 08/20/39 898,934
1,866,312 Series 2011-69, Class CI, IO ............. 5.00% 03/20/36 107,999
-------------
8,654,891
-------------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 4.3%
Government National Mortgage Association
17,192,649 Series 2011-152, Class IO, IO (a)......... 1.35% 08/16/51 1,014,684
8,924,621 Series 2012-100, Class IO, IO (a) (e)..... 0.89% 08/16/52 644,590
12,031,761 Series 2012-70, Class IO, IO (a) (e)...... 0.96% 08/16/52 804,023
7,440,304 Series 2012-78, Class IO, IO (a) (e)...... 1.06% 06/16/52 546,360
2,639,438 Series 2012-95, Class IO, IO (a) (e)...... 1.04% 02/16/53 230,651
-------------
3,240,308
-------------
PASS-THROUGH SECURITIES - 19.8%
954,043 Fannie Mae REMICs
Series 2005-83, Class LZ 5.50% 10/25/35 992,338
Federal Home Loan Mortgage Corp.
5,000,000 Gold Pool ................................ 3.50% 11/13/43 5,111,718
1,922,024 Gold Pool A94738 (e)...................... 4.50% 11/01/40 2,052,636
1,108,343 Gold Pool K36017 (e)...................... 5.00% 09/01/47 1,176,499
Federal National Mortgage Association
2,449,666 Pool 831145 (e)........................... 6.00% 12/01/35 2,714,620
2,410,520 Pool 843971 (e)........................... 6.00% 11/01/35 2,645,553
-------------
14,693,364
-------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES ................... 26,588,563
(Cost $28,990,372) -------------
ASSET-BACKED SECURITIES - 0.4%
Green Tree Financial Corp.
80,272 Series 1997-2, Class A6................... 7.24% 06/15/28 85,166
93,486 Series 1997-3, Class A6................... 7.32% 03/15/28 101,640
113,233 Series 1997-7, Class A6................... 6.76% 07/15/28 120,118
-------------
TOTAL ASSET-BACKED SECURITIES 306,924
(Cost $302,382) -------------
TOTAL INVESTMENTS - 112.5% 83,605,938
(Cost $83,744,018) (f) -------------
See Notes to Financial Statements Page 9
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2013
PRINCIPAL
VALUE DESCRIPTION AMOUNT
---------------- --------------------------------------------------------------------------- -------------
REVERSE REPURCHASE AGREEMENTS - (13.5%)
$ (1,428,000) With JP Morgan 1.02% dated 10/09/13, to be repurchased at
$1,429,219 on 11/08/13 ............................................. $ (1,428,000)
(5,098,000) With JP Morgan 0.42% dated 10/11/13, to be repurchased at
$5,103,412 on 01/10/14 ............................................. (5,098,000)
(3,066,000) With JP Morgan 0.43% dated 10/16/13, to be repurchased at
$3,069,369 on 01/16/14 ............................................. (3,066,000)
(462,000) With JP Morgan 1.24% dated 10/30/13, to be repurchased at
$463,466 on 01/30/14 ............................................... (462,000)
-------------
TOTAL REVERSE REPURCHASE AGREEMENTS ...................................... (10,054,000)
-------------
NET OTHER ASSETS AND LIABILITIES - 1.0% .................................. 706,814
-------------
NET ASSETS - 100.0%....................................................... $ 74,258,752
=============
(a) Floating or variable rate security. The interest rate shown reflects the
rate in effect at October 31, 2013.
(b) Illiquid, as determined by Brookfield Investment Management Inc.
("Brookfield"), the Fund's sub-advisor.
(c) Inverse floating rate instrument. The interest rate shown reflects the
rate in effect at October 31, 2013.
(d) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A of the Securities Act
of 1933, as amended, and may be resold in transactions exempt from
registration, normally to qualified institutional buyers. Pursuant to
procedures adopted by the Fund's Board of Trustees, this security has been
determined to be liquid by Brookfield. Although market instability can
result in periods of increased overall market illiquidity, liquidity for
each security is determined based on security specific factors and
assumptions, which require subjective judgment. At October 31, 2013,
securities noted as such amounted to $4,890,874, or 6.59% of net assets.
(e) This security or a portion of this security is segregated as collateral
for reverse repurchase agreements.
(f) Aggregate cost for federal income tax purposes is $86,703,713. As of
October 31, 2013, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$5,378,490 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$8,476,265.
IO Interest-Only Security - Principal amount shown represents par value on
which interest payments are based.
STRIP Separate Trading of Registered Interest and Principal of Securities
Page 10 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
OCTOBER 31, 2013
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of October 31,
2013 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
10/31/2013 PRICES INPUTS INPUTS
-------------- -------------- -------------- --------------
Mortgage-Backed Securities.......................... $ 56,710,451 $ -- $ 56,710,451 $ --
U.S. Government Agency Mortgage-Backed Securities... 26,588,563 -- 26,588,563 --
Asset-Backed Securities............................. 306,924 -- 306,924 --
-------------- -------------- -------------- --------------
TOTAL .............................................. $ 83,605,938 $ -- $ 83,605,938 $ --
============== ============== ============== ==============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
10/31/2013 PRICES INPUTS INPUTS
-------------- -------------- -------------- --------------
Reverse Repurchase Agreements....................... $ (10,054,000) $ -- $ (10,054,000) $ --
============== ============== ============== ==============
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at October 31, 2013.
See Notes to Financial Statements Page 11
FIRST TRUST MORTGAGE INCOME FUND (FMY)
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2013
ASSETS:
Investments, at value
(Cost $83,744,018).......................................................................... $ 83,605,938
Cash........................................................................................... 4,740,738
Restricted cash................................................................................ 562,000
Receivables:
Interest.................................................................................... 418,168
Investment securities sold.................................................................. 214,655
Prepaid expenses............................................................................... 6,249
------------
Total Assets................................................................................ 89,547,748
------------
LIABILITIES:
Reverse repurchase agreements.................................................................. 10,054,000
Payables:
Investment securities purchased............................................................. 5,060,877
Investment advisory fees.................................................................... 71,506
Audit and tax fees.......................................................................... 50,200
Custodian fees.............................................................................. 14,734
Printing fees............................................................................... 13,130
Administrative fees......................................................................... 11,338
Legal fees.................................................................................. 4,289
Transfer agent fees......................................................................... 3,650
Interest on reverse repurchase agreements................................................... 2,801
Trustees' fees and expenses................................................................. 1,606
Financial reporting fees.................................................................... 771
Other liabilities.............................................................................. 94
------------
Total Liabilities........................................................................... 15,288,996
------------
NET ASSETS..................................................................................... $ 74,258,752
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $ 79,212,199
Par value...................................................................................... 42,131
Accumulated net investment income (loss)....................................................... (425,117)
Accumulated net realized gain (loss) on investments............................................ (4,432,381)
Net unrealized appreciation (depreciation) on investments...................................... (138,080)
------------
NET ASSETS..................................................................................... $ 74,258,752
============
NET ASSET VALUE, per Common Share outstanding (par value $0.01 per Common Share)............... $ 17.63
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 4,213,115
============
Page 12 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 2013
INVESTMENT INCOME:
Interest....................................................................................... $ 6,692,738
------------
Total investment income..................................................................... 6,692,738
------------
EXPENSES:
Investment advisory fees....................................................................... 889,277
At the market offering costs................................................................... 146,310
Administrative fees............................................................................ 114,822
Interest expense on reverse repurchase agreements.............................................. 100,375
Audit and tax fees............................................................................. 52,064
Transfer agent fees............................................................................ 40,108
Printing fees.................................................................................. 33,922
Trustees' fees and expenses.................................................................... 18,532
Custodian fees................................................................................. 16,720
Legal fees..................................................................................... 10,252
Financial reporting fees....................................................................... 9,250
Other.......................................................................................... 32,074
------------
Total expenses.............................................................................. 1,463,706
------------
NET INVESTMENT INCOME.......................................................................... 5,229,032
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments..................................................... 1,859,581
Net increase from payment by the sub-advisor (a)............................................ 5,310
Net change in unrealized appreciation (depreciation) on investments......................... (3,064,553)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ (1,199,662)
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ 4,029,370
============
(a) See Note 3 in the Notes to Financial Statements.
See Notes to Financial Statements Page 13
FIRST TRUST MORTGAGE INCOME FUND (FMY)
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
10/31/2013 10/31/2012
------------- -------------
OPERATIONS:
Net investment income (loss)....................................................... $ 5,229,032 $ 5,302,779
Net realized gain (loss)........................................................... 1,859,581 (1,903,304)
Net increase from payment by the sub-advisor (a)................................... 5,310 --
Net change in unrealized appreciation (depreciation)............................... (3,064,553) 2,616,211
------------- -------------
Net increase (decrease) in net assets resulting from operations.................... 4,029,370 6,015,686
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................................................. (5,244,634) (8,321,681)
------------- -------------
Total distributions to shareholders................................................ (5,244,634) (8,321,681)
------------- -------------
CAPITAL TRANSACTIONS:
Proceeds from Common Shares sold through at the market offerings................... -- 2,403,089
Proceeds from Common Shares reinvested............................................. 35,399 327,282
------------- -------------
Net increase (decrease) in net assets resulting from capital transactions.......... 35,399 2,730,371
------------- -------------
Total increase (decrease) in net assets............................................ (1,179,865) 424,376
NET ASSETS:
Beginning of period................................................................ 75,438,617 75,014,241
------------- -------------
End of period...................................................................... $ 74,258,752 $ 75,438,617
============= =============
Accumulated net investment income (loss) at end of period.......................... $ (425,117) $ (1,191,667)
============= =============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period............................................... 4,211,129 4,070,832
Common Shares sold through at the market offerings................................. -- 122,655
Common Shares issued as reinvestment under the Dividend Reinvestment Plan.......... 1,986 17,642
------------- -------------
Common Shares at end of period..................................................... 4,213,115 4,211,129
============= =============
(a) See Note 3 in the Notes to Financial Statements.
Page 14 See Notes to Financial Statements
FIRST TRUST MORTGAGE INCOME FUND (FMY)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations ................ $ 4,029,370
Adjustments to reconcile net increase (decrease) in net assets resulting
from operations to net cash provided by operating activities:
Purchases of investments.................................................. (96,794,110)
Sales, maturities and paydowns on investments............................. 111,188,412
Net amortization/accretion of premiums/discounts on investments........... 847,649
Net realized gain/loss on investments..................................... (1,859,581)
Net increase from payment by sub-advisor.................................. (5,310)
Net change in unrealized appreciation/depreciation on investments......... 3,064,553
CHANGES IN ASSETS AND LIABILITIES:
Decrease in interest receivable........................................... 192,405
Decrease in prepaid expenses.............................................. 117,267
Decrease in restricted cash............................................... 305,000
Decrease in interest payable on reverse repurchase agreements............. (10,828)
Decrease in investment advisory fees payable.............................. (11,737)
Increase in audit and tax fees payable.................................... 2,364
Decrease in legal fees payable............................................ (2,019)
Decrease in printing fees payable......................................... (2,344)
Increase in administrative fees payable................................... 3,838
Increase in custodian fees payable........................................ 10,642
Decrease in transfer agent fees payable................................... (1,221)
Decrease in Trustees' fees and expenses payable........................... (54)
Decrease in other liabilities............................................. (8,192)
-------------
CASH PROVIDED BY OPERATING ACTIVITIES..................................... $ 21,066,104
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of Common Shares reinvested...................................... 35,399
Distributions to Common Shareholders from net investment income........... (5,244,634)
Repurchases of reverse repurchase agreements.............................. (157,410,768)
Reverse repurchase agreements borrowings.................................. 143,204,593
-------------
CASH USED IN FINANCING ACTIVITIES............................................... (19,415,410)
-------------
Increase in cash................................................................ 1,650,694
Cash at beginning of period..................................................... 3,090,044
-------------
CASH AT END OF PERIOD........................................................... $ 4,740,738
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest........................................ $ 111,203
=============
See Notes to Financial Statements Page 15
FIRST TRUST MORTGAGE INCOME FUND (FMY)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
10/31/2013 10/31/2012 10/31/2011 (b) 10/31/2010 (a) 10/31/2009
-------------- -------------- -------------- -------------- --------------
Net asset value, beginning of period $ 17.91 $ 18.43 $ 19.59 $ 19.63 $ 18.03
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)............... 1.25 1.28 1.69 2.06 1.57
Net realized and unrealized gain (loss) ... (0.28) 0.17 (0.82) (0.45) 1.40
---------- ---------- ---------- ---------- ----------
Total from investment operations........... 0.97 1.45 0.87 1.61 2.97
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income...................... (1.25) (2.03) (2.03) (1.65) (1.37)
---------- ---------- ---------- ---------- ----------
Total from distributions................... (1.25) (2.03) (2.03) (1.65) (1.37)
---------- ---------- ---------- ---------- ----------
Premium from shares sold in at the market
offering............................... -- 0.06 -- -- --
---------- ---------- ---------- ---------- ----------
Net asset value, end of period............. $ 17.63 $ 17.91 $ 18.43 $ 19.59 $ 19.63
========== ========== ========== ========== ==========
Market value, end of period................ $ 15.79 $ 19.00 $ 18.94 $ 20.70 $ 17.91
========== ========== ========== ========== ==========
TOTAL RETURN BASED ON NET ASSET VALUE (c).. 6.04% (d) 8.30% 4.60% 9.01% 18.21%
========== ========== ========== ========== ==========
TOTAL RETURN BASED ON MARKET VALUE (c) .... (10.47)% 11.86% 1.68% 26.18% 23.91%
========== ========== ========== ========== ==========
-----------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)....... $ 74,259 $ 75,439 $ 75,014 $ 79,495 $ 79,462
Ratio of total expenses to average
net assets.............................. 1.96% 2.47% 2.23% 2.00% 2.07%
Ratio of total expenses to average net
assets excluding interest expense....... 1.83% 2.20% 2.14% 1.95% 1.99%
Ratio of net investment income (loss) to
average net assets...................... 7.01% 7.28% 8.74% 10.50% 9.01%
Portfolio turnover rate.................... 109% 52% 47% 36% 39%
-----------------------------
(a) On September 20, 2010, the Fund's Board of Trustees approved a new
investment management agreement with First Trust Advisors L.P. and a new
investment sub-advisory agreement with Fixed Income Discount Advisory
Company ("FIDAC"), and on December 6, 2010, the Fund's shareholders voted
to approve both agreements.
(b) Effective April 29, 2011, the Fund's Board of Trustees approved Brookfield
Investment Management Inc.("Brookfield") as the investment sub-advisor to
the Fund, replacing FIDAC. The Fund's shareholders approved the investment
sub-advisory agreement with Brookfield on July 25, 2011.
(c) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by the
Dividend Reinvestment Plan, and changes in net asset value per share for
net asset value returns and changes in Common Share price for market value
returns. Total returns do not reflect sales load and are not annualized for
periods less than one year. Past performance is not indicative of future
results.
(d) The Fund received reimbursements from Brookfield in the amount of $5,310.
The reimbursements from Brookfield represent less than $0.01 per share and
had no effect on the Fund's total return.
Page 16 See Notes to Financial Statements
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NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2013
1. ORGANIZATION
First Trust Mortgage Income Fund (the "Fund") is a diversified, closed-end
management investment company organized as a Massachusetts business trust on
February 22, 2005, 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 FMY on the New York Stock Exchange
("NYSE").
The Fund's primary investment objective is to seek a high level of current
income. As a secondary objective, the Fund seeks to preserve capital. The Fund
pursues these objectives by investing primarily in mortgage-backed securities
that, in the opinion of Brookfield Investment Management Inc. ("Brookfield" or
the "Sub-Advisor"), offer an attractive combination of credit quality, yield and
maturity. There can be no assurance that the Fund's investment objectives will
be achieved. The Fund may not be appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of the Fund is determined
daily, as of the close of regular trading on the NYSE, normally 4:00 p.m.
Eastern time, on each day the NYSE is open for trading. If the NYSE closes early
on a valuation day, the NAV is determined as of that time. Domestic debt
securities and foreign securities are priced using data reflecting the earlier
closing of the principal markets for those securities. The NAV per Common Share
is calculated by dividing the value of all assets of the Fund (including accrued
interest and dividends), less all liabilities (including accrued expenses,
dividends declared but unpaid and any borrowings of the Fund), by the total
number of Common Shares outstanding.
The Fund's investments are valued daily in accordance with valuation procedures
adopted by the Fund's Board of Trustees, and in accordance with provisions of
the 1940 Act. Market quotations and prices used to value the Fund's investments
are primarily obtained from third party pricing services. The Fund's securities
will be valued as follows:
U.S. government securities, mortgage-backed securities, asset-backed
securities and other debt securities are valued on the basis of valuations
provided by dealers who make markets in such securities or by an
independent pricing service approved by the Fund's Board of Trustees,
which may use the following valuation inputs when available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Debt securities having a remaining maturity of sixty days or less when
purchased are valued at cost adjusted for amortization of premiums and
accretion of discounts.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Fund's Board of Trustees or its
delegate at fair value. These securities generally include, but are not limited
to, restricted securities (securities which may not be publicly sold without
registration under the Securities Act of 1933, as amended) for which a pricing
service is unable to provide a market price; securities whose trading has been
formally suspended; a security whose market price is not available from a
pre-established pricing source; a security with respect to which an event has
occurred that is likely to materially affect the value of the security after the
market has closed but before the calculation of the Fund's NAV or make it
difficult or impossible to obtain a reliable market quotation; and a security
whose price, as provided by the pricing service, does not reflect the security's
"fair value." As a general principle, the current "fair value" of a security
would appear to be the amount which the owner might reasonably expect to receive
for the security upon its current sale. The use of fair value prices by the Fund
generally results in prices used by the Fund that may differ from current market
quotations or official closing prices on the applicable exchange. A variety of
factors may be considered in determining the fair value of such securities,
including, but not limited to, the following:
Page 17
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2013
1) the fundamental business data relating to the issuer;
2) an evaluation of the forces which influence the market in which
these securities are purchased and sold;
3) the type, size and cost of a security;
4) the financial statements of the issuer;
5) the credit quality and cash flow of the issuer, based on the
Sub-Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities (or
equity securities) of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing
the security;
10) the business prospects of the issuer, including any ability to
obtain money or resources from a parent or affiliate and an
assessment of the issuer's management;
11) the prospects for the issuer's industry, and multiples (of earnings
and/or cash flows) being paid for similar businesses in that
industry; and
12) other relevant factors.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodology used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of October 31, 2013, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Interest income is recorded daily on the accrual basis. Amortization of premiums
and the accretion of discounts are recorded using the effective interest method.
The Fund invests in interest-only securities. For these securities, if there is
a change in the estimated cash flows, based on an evaluation of current
information, then the estimated yield is adjusted. Additionally, if the
evaluation of current information indicates a permanent impairment of the
security, the cost basis of the security is written down and a loss is
recognized. Debt obligations may be placed on non-accrual status and the related
interest income may be reduced by ceasing current accruals and writing off
interest receivables when the collection of all or a portion of interest has
become doubtful based on consistently applied procedures. A debt obligation is
removed from non-accrual status when the issuer resumes interest payments or
when collectability of interest is reasonably assured.
Securities purchased or sold on a when-issued, delayed-delivery or forward
purchase commitment basis may have extended settlement periods. The value of the
security so purchased is subject to market fluctuations during this period. The
Fund maintains liquid assets with a current value at least equal to the amount
of its when-issued, delayed-delivery or forward purchase commitments until
payment is made. At October 31, 2013, the Fund had no when-issued,
delayed-delivery or forward purchase commitments.
Page 18
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2013
C. REVERSE REPURCHASE AGREEMENTS:
Reverse repurchase agreements were utilized as leverage for the Fund. A reverse
repurchase agreement, although structured as a sale and repurchase obligation,
acts as a financing under which Fund assets are pledged as collateral to secure
a short-term loan. Generally, the other party to the agreement makes the loan in
an amount equal to a percentage of the market value of the pledged collateral.
At the maturity of the reverse repurchase agreement, the loan will be repaid and
the collateral will correspondingly be received back by the Fund. While used as
collateral, the assets continue to pay principal and interest which are for the
benefit of the Fund.
Restricted cash in the amount of $562,000, as shown on the Statement of Assets
and Liabilities, is associated with reverse repurchase agreements outstanding as
of October 31, 2013.
Information for the year ended October 31, 2013:
Maximum amount outstanding during the period ................. $24,242,850
Average amount outstanding during the period* ................ $14,299,591
Average Common Shares outstanding during the period........... 4,212,800
Average debt per Common Share outstanding during the period... $3.39
* The average amount outstanding during the period was calculated by adding the
borrowings at the end of each day and dividing the sum by the number of days in
the year ended October 31, 2013.
During the year ended October 31, 2013, the interest rates ranged from 0.35% to
1.76%, with a weighted average interest rate of 0.70%, on borrowings by the Fund
under reverse repurchase agreements, which had interest expense that aggregated
$100,375.
D. INVERSE FLOATING-RATE SECURITIES:
An inverse floating-rate security is one where the coupon is inversely indexed
to a short-term floating interest rate multiplied by a specific factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. The price of these securities may be more
volatile than the price of a comparable fixed-rate security. These instruments
are typically used to enhance the yield of the portfolio. These securities, if
any, are identified on the Portfolio of Investments.
E. STRIPPED MORTGAGE-BACKED SECURITIES:
Stripped Mortgage-Backed Securities are created by segregating the cash flows
from underlying mortgage loans or mortgage securities to create two or more new
securities, each with a specified percentage of the underlying security's
principal or interest payments. Mortgage securities may be partially stripped so
that each investor class receives some interest and some principal. When
securities are completely stripped, however, all of the interest is distributed
to holders of one type of security known as an interest-only security ("IO
Security") and all of the principal is distributed to holders of another type of
security known as a principal-only security. These securities, if any, are
identified on the Portfolio of Investments.
F. INTEREST-ONLY SECURITIES:
An IO Security is the interest-only portion of a mortgage-backed security that
receives some or all of the interest portion of the underlying mortgage-backed
security and little or no principal. A reference principal value called a
notional value is used to calculate the amount of interest due to the IO
Security. IO Securities are sold at a deep discount to their notional principal
amount. Generally speaking, when interest rates are falling and prepayment rates
are increasing, the value of an IO Security will fall. Conversely, when interest
rates are rising and prepayment rates are decreasing, generally the value of an
IO Security will rise. These securities, if any, are identified on the Portfolio
of Investments.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
The Fund will distribute to holders of its Common Shares monthly dividends of
all or a portion of its net income after the payment of interest and dividends
in connection with leverage, if any. 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 net investment income and capital gains are determined in
accordance with income tax regulations, which may differ from U.S. GAAP. Certain
capital accounts in the financial statements are periodically adjusted for
permanent differences in order to reflect their tax character. These permanent
differences are primarily due to the varying treatment of income and gain/loss
on portfolio securities held by the Fund and have no impact on net assets or NAV
per share. Temporary differences, which arise from recognizing certain items of
income, expense and gain/loss in different periods for financial statement and
tax purposes, will reverse at some point in the future. Permanent differences
incurred during the fiscal year ended October 31, 2013, primarily as a result of
differing book/tax treatment on
Page 19
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2013
recognition of amortization/accretion on portfolio holdings, have been
reclassified at year end to reflect an increase in accumulated net investment
income (loss) by $782,152, a decrease in accumulated net realized gain
(loss) on investments by $635,842 and a decrease to paid-in capital of $146,310.
Net assets were not affected by this reclassification.
The tax character of distributions paid during the fiscal year ended October 31,
2013, and 2012, was as follows:
Distributions paid from: 2013 2012
Ordinary income................................... $ 5,244,634 $ 8,321,681
Capital gain...................................... -- --
Return of capital................................. -- --
As of October 31, 2013, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income..................... $ 2,534,578
Undistributed capital gains....................... --
-----------
Total undistributed earnings...................... 2,534,578
Accumulated capital and other losses.............. (4,432,381)
Net unrealized appreciation (depreciation)........ (3,097,775)
-----------
Total accumulated earnings (losses)............... (4,995,578)
Other............................................. --
Paid-in capital................................... 79,254,330
-----------
Net assets........................................ $74,258,752
===========
H. INCOME TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
Under the Regulated Investment Company Modernization Act of 2010 (the "Act"),
net capital losses arising in taxable years after December 22, 2010, may be
carried forward indefinitely, and their character is retained as short-term
and/or long-term losses. Previously, net capital losses were carried forward for
up to eight years and treated as short-term losses. As a transition rule, the
Act requires that post-enactment net capital losses be used before pre-enactment
net capital losses. At October 31, 2013, the Fund had pre-enactment net capital
losses for federal income tax purposes of $4,432,381 expiring as follows:
EXPIRATION DATE AMOUNT
October 31, 2014 $ 1,082,509
October 31, 2017 $ 1,927,985
October 31, 2018 $ 1,421,887
During the taxable year ended October 31, 2013, the Fund utilized pre-enactment
capital loss carryforwards in the amount of $1,262,615.
The Fund is subject to certain limitations under the U.S. tax rules on the use
of capital loss carryforwards and net unrealized built-in losses. These
limitations apply when there has been a 50% change in ownership.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ended 2010, 2011,
2012 and 2013 remain open to federal and state audit. As of October 31, 2013,
management has evaluated the application of these standards to the Fund and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax positions.
I. EXPENSES:
The Fund will pay all expenses directly related to its operations.
Page 20
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2013
J. ACCOUNTING PRONOUNCEMENT:
In December 2011, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update No. 2011-11 "Disclosures about Offsetting Assets and
Liabilities" ("ASU 2011-11"). This disclosure requirement is intended to help
investors and other financial statement users better assess the effect or
potential effect of offsetting arrangements on a fund's financial position. ASU
2011-11 requires entities to disclose both gross and net information about both
instruments and transactions eligible for offset on the Statement of Assets and
Liabilities, and disclose instruments and transactions subject to master netting
or similar agreements. In addition, in January 2013, FASB issued Accounting
Standards Update No. 2013-1 "Clarifying the Scope of Offsetting Assets and
Liabilities" ("ASU 2013-1"), specifying which transactions are subject to
offsetting disclosures. The scope of the disclosure requirements is limited to
derivative instruments, repurchase agreements and reverse repurchase agreements,
and securities borrowing and securities lending transactions. ASU 2011-11 and
ASU 2013-1 are effective for financial statements with fiscal years beginning on
or after January 1, 2013, and interim periods within those fiscal years.
Management is currently evaluating the impact of the updated standards on the
Fund's financial statements, if any.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
investment management services, First Trust is entitled to a monthly fee
calculated at an annual rate of 1.00% of the Fund's Managed Assets (the average
daily total asset value of the Fund minus the sum of the Fund's liabilities
other than the principal amount of borrowings or reverse repurchase agreements,
if any). First Trust also provides fund reporting services to the Fund for a
flat annual fee in the amount of $9,250.
Brookfield serves as the Fund's sub-advisor and manages the Fund's portfolio
subject to First Trust's supervision. The Sub-Advisor receives a portfolio
management fee of 0.50% of Managed Assets that is paid monthly by First Trust
from its investment advisory fee.
During the fiscal year ended October 31, 2013, the Fund received reimbursements
from the Sub-Advisor of $5,310 in connection with a trade error.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
administrator, fund accountant and transfer agent in accordance with certain fee
arrangements. As administrator and fund accountant, BNYM IS is responsible for
providing certain administrative and accounting services to the Fund, including
maintaining the Fund's books of account, records of the Fund's securities
transactions, and certain other books and records. As transfer agent, BNYM IS is
responsible for maintaining shareholder records for the Fund. The Bank of New
York Mellon ("BNYM") serves as the Fund's custodian in accordance with certain
fee arrangements. As custodian, BNYM is responsible for custody of the Fund's
assets.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer of $125,000 per year and an annual per fund fee of $4,000 for each
closed-end fund or other actively managed fund and $1,000 for each index fund in
the First Trust Fund Complex. The fixed annual retainer is allocated pro rata
among each fund in the First Trust Fund Complex based on net assets.
Additionally, the Lead Independent Trustee is paid $15,000 annually, the
Chairman of the Audit Committee is paid $10,000 annually, and each of the
Chairmen of the Nominating and Governance Committee and the Valuation Committee
is paid $5,000 annually to serve in such capacities, with such compensation
allocated pro rata among each fund in the First Trust Fund Complex based on net
assets. Trustees are reimbursed for travel and out-of-pocket expenses in
connection with all meetings. The Lead Independent Trustee and each Committee
Chairman will serve two-year terms until December 31, 2013, before rotating to
serve as Chairman of another Committee or as Lead Independent Trustee. After
December 31, 2013, the Lead Independent Trustee and Committee Chairmen will
rotate every three years. The officers and "Interested" Trustee receive no
compensation from the funds for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
The cost of purchases of U.S. Government securities and non-U.S. Government
securities, excluding short-term investments, for the year ended October 31,
2013, were $68,361,451 and $27,766,551, respectively. The proceeds from sales
and paydowns of U.S. Government securities and non-U.S. Government securities,
excluding short-term investments, for the year ended October 31, 2013, were
$73,748,340 and $37,654,727, respectively.
Page 21
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2013
5. COMMON SHARE OFFERING
On June 21, 2012, the Fund, Advisor and Sub-Advisor entered into a sales
agreement with JonesTrading Institutional Services, LLC ("JonesTrading") whereby
the Fund may offer and sell up to 1,000,000 Common Shares from time to time
through JonesTrading as agent for the offer and sale of the Common Shares. Sales
of Common Shares pursuant to the sales agreement may be made in negotiated
transactions or transactions that are deemed to be "at the market" as defined in
Rule 415 under the Securities Act of 1933, as amended, including sales made
directly on the NYSE or sales made through a market maker other than on an
exchange, at an offering price equal to or in excess of the net asset value per
share of the Fund's Common Shares at the time such Common Shares are initially
sold. The Fund used the net proceeds from the sale of the Common Shares in
accordance with its investment objective and policies. Sales of Common Shares
made under the sales agreement were made pursuant to a "shelf" registration
statement on Form N-2 (the "Registration Statement") that will require the Fund
to obtain effectiveness from the SEC on an annual basis. The Registration
Statement has not been effective since February 2013 and therefore Common Shares
have not been offered under the sales agreement since that time. Any future
sales of Common Shares under the sales agreement will be made pursuant to an
effective Registration Statement. Transactions related to offerings under such
sales agreement are as follows:
COMMON NET PROCEEDS
SHARES NET PROCEEDS NET ASSET VALUE RECEIVED IN
SOLD RECEIVED OF SHARES SOLD EXCESS OF NET ASSET VALUE
--------- -------------- --------------- -------------------------
Year Ended 10/31/13 -- $ -- $ -- $ --
Year Ended 10/31/12 122,655 2,403,089 2,163,307 239,782
Additionally, offering costs of $212,203 related to this offering were recorded
as a prepaid asset and were amortized to expense by the Fund on a straight line
basis.
6. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
7. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined that there
were the following subsequent events:
On November 20, 2013, the Fund declared a dividend of $0.085 per share to Common
Shareholders of record on December 4, 2013, payable December 10, 2013.
On December 17, 2013, the Fund declared a dividend of $0.085 per share to Common
Shareholders of record on December 31, 2013, payable January 15, 2014.
Page 22
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST MORTGAGE INCOME FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust Mortgage Income Fund (the "Fund"), including the portfolio of investments,
as of October 31, 2013, and the related statements of operations and cash flows
for the year then ended, the statements of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
The Fund is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of October 31, 2013 by correspondence with the Fund's
custodian and brokers; where replies were not received, we performed other
auditing procedures. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
First Trust Mortgage Income Fund as of October 31, 2013, and the results of its
operations and its cash flows for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
December 20, 2013
Page 23
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2013 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) NAV per Common Share on that date or (ii)
95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and will
purchase Common Shares in the open market, on the NYSE or elsewhere,
for the participants' accounts. It is possible that the market price
for the Common Shares may increase before the Plan Agent has
completed its purchases. Therefore, the average purchase price per
share paid by the Plan Agent may exceed the market price at the time
of valuation, resulting in the purchase of fewer shares than if the
dividend or distribution had been paid in Common Shares issued by the
Fund. The Plan Agent will use all dividends and distributions
received in cash to purchase Common Shares in the open market within
30 days of the valuation date except where temporary curtailment or
suspension of purchases is necessary to comply with federal
securities laws. Interest will not be paid on any uninvested cash
payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
Page 24
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2013 (UNAUDITED)
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's website at http://www.sec.gov.
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR") in
Washington, DC. Information regarding the operation of the PRR may be obtained
by calling (800) SEC-0330.
NYSE CERTIFICATION INFORMATION
In accordance with Section 303A-12 of the New York Stock Exchange ("NYSE")
Listed Company Manual, the Fund's President has certified to the NYSE that, as
of May 14, 2013, he was not aware of any violation by the Fund of NYSE corporate
governance listing standards. In addition, the Fund's reports to the SEC on
Forms N-CSR, N-CSRS and N-Q contain certifications by the Fund's principal
executive officer and principal financial officer that relate to the Fund's
public disclosure in such reports and are required by Rule 30a-2 under the 1940
Act.
TAX INFORMATION
Of the ordinary income (including short-term capital gain) distributions made by
the Fund during the year ended October 31, 2013, none qualify for the corporate
dividends received deduction available to corporate shareholders or as qualified
dividend income.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, First Trust Energy
Income and Growth Fund, First Trust Enhanced Equity Income Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income Fund,
First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging
Opportunity Fund, First Trust Specialty Finance and Financial Opportunities
Fund, First Trust Dividend and Income Fund (formerly First Trust Active Dividend
Income Fund), First Trust High Income Long/Short Fund and First Trust Energy
Infrastructure Fund, was held on April 17, 2013 (the "Annual Meeting"). At the
Annual Meeting, Trustees James A. Bowen and Niel B. Nielson were elected by the
Common Shareholders of the First Trust Mortgage Income Fund as Class III
Trustees for three-year terms expiring at the Fund's annual meeting of
shareholders in 2016. The number of votes cast in favor of Mr. Bowen was
3,691,670, the number of votes against was 220,385 and the number of abstentions
was 301,060. The number of votes cast in favor of Mr. Nielson was 3,695,816, the
number against was 216,239 and the number of abstentions was 301,060. Richard E.
Erickson, Thomas R. Kadlec and Robert F. Keith are the other current and
continuing Trustees.
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING APPROVAL OF INVESTMENT MANAGEMENT AND INVESTMENT
SUB-ADVISORY AGREEMENTS
The Board of Trustees of First Trust Mortgage Income Fund (the "Fund"),
including the Independent Trustees, approved the continuation of the Investment
Management Agreement (the "Advisory Agreement") between the Fund and First Trust
Advisors L.P. (the "Advisor") and the Investment Sub Advisory Agreement (the
"Sub Advisory Agreement" and together with the Advisory Agreement, the
"Agreements") among the Fund, the Advisor and Brookfield Investment Management
Inc. (the "Sub Advisor"), at a meeting held on June 9-10, 2013. The Board
determined that the continuation of the Agreements is in the best interests of
the Fund in light of the extent and quality of the services provided and such
other matters as the Board considered to be relevant in the exercise of its
reasonable business judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. To assist the Board in its evaluation of the Agreements, the
Independent Trustees received a separate report from each of the Advisor and the
Sub Advisor in advance of the Board meeting responding to a request for
information from counsel to the Independent
Page 25
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2013 (UNAUDITED)
Trustees. The reports, among other things, outlined the services provided by the
Advisor and the Sub Advisor (including the relevant personnel responsible for
these services and their experience); the advisory and sub advisory fees for the
Fund as compared to fees charged to other clients of the Advisor and the Sub
Advisor and as compared to fees charged by investment advisors and sub advisors
to comparable funds; expenses of the Fund as compared to expense ratios of
comparable funds; the nature of expenses incurred in providing services to the
Fund and the potential for economies of scale, if any; financial data on the
Advisor and the Sub Advisor; any fall out benefits to the Advisor and the Sub
Advisor; and information on the Advisor's and the Sub Advisor's compliance
programs. Following receipt of this information, the Independent Trustees and
their counsel met separately to discuss the information provided by the Advisor
and the Sub Advisor. The Board applied its business judgment to determine
whether the arrangements between the Fund and the Advisor and among the Fund,
the Advisor and the Sub Advisor are reasonable business arrangements from the
Fund's perspective as well as from the perspective of shareholders. The Board
considered that shareholders chose to invest or remain invested in the Fund
knowing that the Advisor and the Sub Advisor manage the Fund. The Board noted
that the Sub Advisor had begun serving as such on April 29, 2011.
In reviewing the Agreements, the Board considered the nature, extent and quality
of services provided by the Advisor and the Sub Advisor under the Agreements.
The Board considered the Advisor's statements regarding the incremental benefits
associated with the Fund's advisor/sub advisor management structure. With
respect to the Advisory Agreement, the Board considered that the Advisor is
responsible for the overall management and administration of the Fund and
reviewed the services provided by the Advisor to the Fund, including the
oversight of the Sub Advisor. The Board noted the compliance program that had
been developed by the Advisor and considered that it includes a robust program
for monitoring the Sub Advisor's compliance with the 1940 Act and the Fund's
investment objectives and policies. With respect to the Sub Advisory Agreement,
the Board reviewed the materials provided by the Sub-Advisor and considered the
services that the Sub-Advisor provides to the Fund, including the Sub-Advisor's
day-to-day management of the Fund's investments since April 2011. In light of
the information presented and the considerations made, the Board concluded that
the nature, extent and quality of services provided to the Fund by the Advisor
and the Sub Advisor under the Agreements have been and are expected to remain
satisfactory and that the Sub Advisor, under the oversight of the Advisor, has
managed the Fund consistent with its investment objectives and policies.
The Board considered the advisory and sub advisory fees paid under the
Agreements. The Board considered the advisory fees charged by the Advisor to
similar funds and other non fund clients, noting that the Advisor does not
provide advisory services to other funds with investment objectives and policies
similar to the Fund's, but does provide services to certain separately managed
accounts with investment objectives and policies similar to the Fund's. The
Board noted that the Advisor charges a lower advisory fee rate to the separately
managed accounts, as well as the Advisor's statement that the nature of the
services provided to the separately managed accounts is not comparable to those
provided to the Fund. The Board considered the sub advisory fee and how it
relates to the Fund's overall advisory fee structure and noted that the sub
advisory fee is paid by the Advisor from its advisory fee. The Board also
considered information provided by the Sub Advisor as to the fees it charges to
other closed end funds it manages, noting that the Fund's sub advisory fee rate
is lower than the advisory fee rate charged by the Sub Advisor to the other
funds it manages. In addition, the Board reviewed data prepared by Lipper Inc.
("Lipper"), an independent source, showing the advisory fees and expense ratios
of the Fund as compared to the advisory fees and expense ratios of an expense
peer group selected by Lipper and similar data from the Advisor for a separate
peer group selected by the Advisor. The Board noted that the Lipper and Advisor
peer groups included only three overlapping peer funds. The Board discussed with
representatives of the Advisor the limitations in creating a relevant peer group
for the Fund, including that (i) the Fund is unique in its composition, which
makes assembling peers with similar strategies and asset mix difficult; (ii)
peer funds may use different types of leverage which have different costs
associated with them; (iii) most peer funds do not employ an advisor/sub advisor
management structure; and (iv) most of the peer funds are larger than the Fund,
which causes the Fund's fixed expenses to be higher on a percentage basis as
compared to the larger peer funds. The Board took these limitations into account
in considering the peer data. The Board also noted that certain one-time
expenses related to an at-the-market offering of additional common shares and
excise taxes paid by the Fund in 2012 affected the Fund's expense ratio relative
to its peers. In reviewing the peer data, the Board noted that the Fund's
contractual advisory fee was above the median of the Lipper peer group.
The Board also considered performance information for the Fund, noting that the
performance information included the Fund's quarterly performance report, which
is part of the process that the Board has established for monitoring the Fund's
performance and portfolio risk on an ongoing basis. The Board determined that
this process continues to be effective for reviewing the Fund's performance. In
addition to the Board's ongoing review of performance, the Board also received
data prepared by Lipper comparing the Fund's performance to a performance peer
universe selected by Lipper and to a benchmark. In reviewing the Fund's
performance as compared to the performance of the Lipper performance peer
universe, the Board took into account the limitations described above with
respect to creating a relevant peer group for the Fund. The Board also
considered the Fund's dividend yield as of March 28, 2013 and an analysis
prepared by the Advisor on the continued benefits provided by the Fund's
leverage. In addition, the Board compared the Fund's premium/discount over the
past eight quarters to the average and median premium/discount of the Advisor
peer group over the same period and considered the factors that may impact a
fund's premium/discount.
Page 26
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2013 (UNAUDITED)
On the basis of all the information provided on the fees, expenses and
performance of the Fund, the Board concluded that the advisory and sub advisory
fees were reasonable and appropriate in light of the nature, extent and quality
of services provided by the Advisor and Sub Advisor under the Agreements.
The Board noted that the Advisor has continued to invest in personnel and
infrastructure and considered whether fee levels reflect any economies of scale
for the benefit of shareholders. The Board determined that due to the Fund's
closed end structure, the potential for realization of economies of scale as
Fund assets grow was not a material factor to be considered. The Board also
considered the costs of the services provided and profits realized by the
Advisor from serving as investment advisor to the Fund for the twelve months
ended December 31, 2012, as set forth in the materials provided to the Board.
The Board noted the inherent limitations in the profitability analysis, and
concluded that the Advisor's estimated profitability appeared to be not
excessive in light of the services provided to the Fund. In addition, the Board
considered fall out benefits described by the Advisor that may be realized from
its relationship with the Fund, including the Advisor's compensation for fund
reporting services pursuant to a separate Fund Reporting Services Agreement.
The Board noted the Sub Advisor's expenses in providing investment services to
the Fund and considered the Sub Advisor's statement that it does not expect
economies of scale to be present in connection with its provision of services to
the Fund. The Board considered that the sub advisory fee rate was negotiated at
arm's length between the Advisor and the Sub Advisor, an unaffiliated third
party. The Board also considered data provided by the Sub Advisor with respect
to the profitability of the Sub Advisory Agreement to the Sub Advisor. The Board
noted the inherent limitations in the profitability analysis and concluded that
the profitability analysis for the Advisor was more relevant, although the
profitability of the Sub-Advisory Agreement appeared to be not excessive in
light of the services provided to the Fund. The Board noted that the Sub Advisor
does not maintain any soft-dollar arrangements and that the Sub Advisor
indicated that it does not anticipate any material fall out benefits from its
relationship to the Fund.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, unanimously determined that the terms
of the Agreements continue to be fair and reasonable and that the continuation
of the Agreements is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
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. 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
distributions. Security prices can fluctuate for several reasons including the
general condition of the securities market, or when political or economic events
affecting the issuers occur, including the risk that borrowers do not pay their
mortgages. 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 Advisor or Sub-Advisor may take
temporary defensive positions.
SUBORDINATED DEBT RISK: A portion of the Fund's Managed Assets may be invested
in subordinated classes of MBS, including debt obligations issued by private
originators or issuers backed by residential mortgage loans and multi-class debt
or pass-through or pay-through securities backed by a mortgage loan or pool of
mortgage loans on commercial real estate. Such subordinated classes are subject
to a greater degree of non-payment risk than are senior classes of the same
issuer or agency.
PREPAYMENT RISK: If borrowers prepay their mortgage loans at rates that are
faster than expected, this results in prepayments that are faster than expected
on MBS. These faster than expected prepayments may adversely affect the Fund's
profitability, particularly if the prepayments must be reinvested at market
interest rates that are below the Fund portfolio's current earnings rate.
Moreover, the Fund may also hold MBS that are less affected by prepayments.
While the Sub-Advisor seeks to minimize prepayment risk to the extent practical,
they must balance prepayment risk against other risks and the potential returns
of each investment in selecting investments. No strategy can completely insulate
the Fund from prepayment risk.
INTEREST RATE RISK: The Fund may also hold MBS which are Stripped
Mortgage-Backed Securities, IO securities and PO securities. Generally speaking,
when interest rates are falling and prepayment rates are increasing, the value
of a PO security will rise and the value of an IO security will fall.
Conversely, when interest rates are rising and prepayment rates are decreasing,
generally the value of a PO security will fall and the value of an IO security
will rise.
Page 27
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2013 (UNAUDITED)
LEVERAGE RISK: Borrowings up to 33-1/3% (or such other percentage as permitted
by law) of Fund assets (including the amount borrowed) less liabilities other
than borrowings may be utilized in the Fund. Leverage may be used for investment
purposes and to meet cash requirements. The leveraged capital structure creates
special risks not associated with unleveraged funds having similar investment
objectives and policies. These include the possibility of higher volatility of
the NAV of the Fund. Reverse repurchase agreements are used to leverage the
Fund's assets. Reverse repurchase agreements are subject to the risks that the
market value of the Fund's securities sold may decline below the price of the
securities the Fund is obligated to repurchase, and that the securities may not
be returned to the Fund. From time to time the amount of the leverage may be
changed in response to actual or anticipated changes in interest rates or the
value of the Fund's investment portfolio. There can be no assurance that the
leverage strategies will be successful.
FIXED-INCOME SECURITIES RISK: Debt securities, including high yield securities,
are subject to certain risks, including: (i) issuer risk, which is the risk that
the value of fixed-income securities may decline for a number of reasons which
directly relate to the issuer, such as management performance, financial
leverage and reduced demand for the issuer's goods and services or, in the case
of asset-backed issuers, a decline in the value and/or cash flows of the
underlying assets; (ii) reinvestment risk, which is the risk that income from
the Fund's portfolio will decline if the proceeds from matured, traded or called
bonds are invested at market interest rates that are below the Fund portfolio's
current earnings rate; and (iii) 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.
Page 28
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BOARD OF TRUSTEES AND OFFICERS
------------------------------------------------------------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2013 (UNAUDITED)
NUMBER OF OTHER
PORTFOLIOS IN TRUSTEESHIPS OR
THE FIRST TRUST DIRECTORSHIPS
NAME, ADDRESS, TERM OF OFFICE FUND COMPLEX HELD BY TRUSTEE
DATE OF BIRTH AND AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE FUND SERVICE(1) DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Three-Year Term Physician; President, Wheaton 105 None
c/o First Trust Advisors L.P. Orthopedics; Limited Partner,
120 East Liberty Drive, Gundersen Real Estate Limited
Suite 400 o Since Fund Partnership; Member, Sportsmed LLC
Wheaton, IL 60187 Inception
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Three-Year Term President (March 2010 to Present), 105 Director of ADM
c/o First Trust Advisors L.P. Senior Vice President and Chief Investor Services,
120 East Liberty Drive, Financial Officer (May 2007 to Inc. and ADM
Suite 400 March 2010), ADM Investor Services, Investor Services
Wheaton, IL 60187 o Since Fund Inc.(Futures Commission Merchant) International
D.O.B.: 11/57 Inception
Robert F. Keith, Trustee o Three-Year Term President (2003 to Present), Hibs 105 Director of Trust
c/o First Trust Advisors L.P. Enterprises (Financial and Management Company of
120 East Liberty Drive, o Since June 2006 Consulting) Illinois
Suite 400
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Three-Year Term President and Chief Executive 105 Director of
c/o First Trust Advisors L.P. Officer (June 2012 to Present), Covenant
120 East Liberty Drive, o Since Fund Dew Learning LLC (Educational Transport Inc.
Suite 400 Inception Products and Services); President
Wheaton, IL 60187 (June 2002 to June 2013), Covenant
D.O.B.: 03/54 College
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(2), Trustee, o Three-Year Term Chief Executive Officer (December 105 None
Chairman of the Board 2010 to Present), President (until
120 East Liberty Drive, December 2010), First Trust Advisors
Suite 400 o Since Fund L.P. and First Trust Portfolios L.P.;
Wheaton, IL 60187 Inception Chairman of the Board of Directors,
D.O.B.: 09/55 BondWave LLC (Software Development
Company/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 2014 annual meeting of shareholders. Richard E. Erickson
and Thomas R. Kadlec, as Class II Trustees, are serving as trustees until
the Fund's 2015 annual meeting of shareholders. James A. Bowen and Niel B.
Nielson, as Class III Trustees, are serving as trustees until the Fund's
2016 annual meeting of shareholders.
(2) Mr. Bowen is deemed an "interested person" of the Fund due to his position
as Chief Executive Officer of First Trust Advisors L.P., investment
advisor of the Fund.
Page 29
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BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
------------------------------------------------------------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2013 (UNAUDITED)
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(3)
------------------------------------------------------------------------------------------------------------------------------------
Mark R. Bradley President and Chief o Indefinite Term Chief Operating Officer (December 2010 to Present)
120 E. Liberty Drive, Executive Officer and Chief Financial Officer, First Trust Advisors
Suite 400 o Since January 2012 L.P. and First Trust Portfolios L.P.; Chief
Wheaton, IL 60187 Financial Officer, BondWave LLC(Software
D.O.B.: 11/57 Development Company/Investment Advisor) and
Stonebridge Advisors LLC (Investment Advisor)
James M. Dykas Treasurer, Chief Financial o Indefinite Term Controller (January 2011 to Present), Senior Vice
120 E. Liberty Drive, Officer and Chief President (April 2007 to January 2011), Vice
Suite 400 Accounting Officer o Since January 2012 President (January 2005 to April 2007), First
Wheaton, IL 60187 Trust Advisors L.P. and First Trust Portfolios
D.O.B.: 01/66 L.P.
W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P., First
120 E. Liberty Drive, Legal Officer Trust Portfolios L.P.; Secretary, BondWave LLC
Suite 400 o Since Fund Inception (Software Development Company/Investment
Wheaton, IL 60187 Advisor) and Stonebridge Advisors LLC
D.O.B.: 05/60 (Investment Advisor)
Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present), Senior
120 E. Liberty Drive, Vice President (September 2005 to July 2012),
Suite 400 o Since Fund Inception First Trust Advisors L.P. and First Trust
Wheaton, IL 60187 Portfolios L.P.
D.O.B.: 02/70
Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel, First Trust
120 E. Liberty Drive, and Assistant Secretary Advisors L.P. and First Trust Portfolios L.P.
Suite 400 o Chief Compliance
Wheaton, IL 60187 Officer since
D.O.B.: 12/66 January 2011
o Assistant Secretary
since Fund Inception
--------------------------
(3) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 30
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PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST MORTGAGE INCOME FUND (FMY)
OCTOBER 31, 2013 (UNAUDITED)
PRIVACY POLICY
First Trust values our relationship with you and considers your privacy an
important priority in maintaining that relationship. We are committed to
protecting the security and confidentiality of your personal information.
SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and your broker-dealer, investment
advisor or financial representative through interviews,
applications, agreements or other forms;
o Information about your transactions with us, our affiliates or
others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies".
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians
and trustees, or that assist us in the distribution of investor
materials such as trustees, banks, financial representatives, proxy
services, solicitors and printers.
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information within First Trust.
PRIVACY ONLINE
We allow third-party companies, including AddThis (a social media sharing
service), to collect certain anonymous information when you visit our website.
These companies may use non-personally identifiable information during your
visits to this and other websites in order to provide advertisements about goods
and services likely to be of greater interest to you. These companies typically
use a cookie, third party web beacon or pixel tags, to collect this information.
To learn more about this behavioral advertising practice, you can visit
www.networkadvertising.org.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, First Trust restricts access to
your nonpublic personal information to those First Trust employees who need to
know that information to provide products or services to you. We maintain
physical, electronic and procedural safeguards to protect your nonpublic
personal information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time, however, if we do change
it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).
Page 31
This Page Left Blank Intentionally.
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Brookfield Investment Management Inc.
3 World Financial Center
200 Vesey Street, 10th Floor
New York, NY 10281
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
The Bank of New York Mellon
101 Barclay Street, 20th Floor
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
(a) The registrant, as of the end of the period covered by this report, has
adopted a code of ethics that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or
a third party.
(c) There have been no amendments, during the period covered by this report,
to a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by the
registrant or a third party, and that relates to any element of the code
of ethics description.
(d) The registrant has not granted any waivers, including an implicit waiver,
from a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by the
registrant or a third party, that relates to one or more of the items set
forth in paragraph (b) of this item's instructions.
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 for those fiscal years were $42,000 for the fiscal year
ended October 31, 2012 and $45,000 for the fiscal year ended 2013.
(b) Audit-Related Fees (Registrant) -- The aggregate fees billed in each
of the last two fiscal years for assurance and related services by
the principal accountant that are reasonably related to the
performance of the audit of the registrant's financial statements
and are not reported under paragraph (a) of this Item were $0 for
the fiscal year ended October 31, 2012 and $0 for the fiscal year
ended October 31, 2013.
Audit-Related Fees (Investment Advisor) -- The aggregate fees billed
in each of the last two fiscal years for assurance and related
services by the principal accountant that are reasonably related to
the performance of the audit of the registrant's financial
statements and are not reported under paragraph (a) of this Item
were $0 for the fiscal year ended October 31, 2012 and $0 for the
fiscal year ended October 31, 2013.
(c) Tax Fees (Registrant) -- The aggregate fees billed in each of the
last two fiscal years for professional services rendered by the
principal accountant for tax compliance, tax advice, and tax
planning were $0 for the fiscal year ended October 31, 2012 and
$5,200 for the fiscal year ended October 31, 2013. These fees were
for tax return preparation.
Tax Fees (Investment Advisor) -- 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 were $0 for the fiscal year ended October 31, 2012 and $0
for the fiscal year ended October 31, 2013.
(d) All Other Fees (Registrant) -- The aggregate fees billed in each of
the last two fiscal years for products and services provided by the
principal accountant to the Registrant, other than the services
reported in paragraphs (a) through (c) of this Item were $0 for the
fiscal year ended October 31, 2012 and $0 for the fiscal year ended
October 31, 2013.
All Other Fees (Investment Adviser) The aggregate fees billed in
each of the last two fiscal years for products and services provided
by the principal accountant to the Registrant, other than the
services reported in paragraphs (a) through (c) of this Item were $0
for the fiscal year ended October 31, 2012 and $0 for the fiscal
year ended October 31, 2013.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
Pursuant to its charter and its Audit and Non-Audit Services Pre-Approval
Policy, the Audit Committee (the "Committee") is responsible for the
pre-approval of all audit services and permitted non-audit services (including
the fees and terms thereof) to be performed for the registrant by its
independent auditors. The Chairman of the Committee is authorized to give such
pre-approvals on behalf of the Committee up to $25,000 and report any such
pre-approval to the full Committee.
The Committee is also responsible for the pre-approval of the independent
auditor's engagements for non-audit services with the registrant's adviser (not
including a sub-adviser whose role is primarily portfolio management and is
sub-contracted or overseen by another investment adviser) and any entity
controlling, controlled by or under common control with the investment adviser
that provides ongoing services to the registrant, if the engagement relates
directly to the operations and financial reporting of the registrant, subject to
the de minimis exceptions for non-audit services described in Rule 2-01 of
Regulation S-X. If the independent auditor has provided non-audit services to
the registrant's adviser (other than any sub-adviser whose role is primarily
portfolio management and is sub-contracted with or overseen by another
investment adviser) and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to its policies, the Committee
will consider whether the provision of such non-audit services is compatible
with the auditor's independence.
(e)(2) The percentage of services described in each of paragraphs (b)
through (d) for the Registrant and the Registrant's investment
adviser of this Item that were approved by the audit committee
pursuant to the pre-approval exceptions included in paragraph
(c)(7)(i)(c) or paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X
are as follows:
(b) 0%
(c) 0%
(d) 0%
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the
most recent fiscal year that were attributed to work performed by
persons other than the principal accountant's full-time, permanent
employees was less than fifty percent.
(g) The aggregate non-audit fees billed by the registrant's accountant
for services rendered to the registrant, and rendered to the
registrant's investment adviser (not including any sub-adviser whose
role is primarily portfolio management and is subcontracted with or
overseen by another investment adviser), and any entity controlling,
controlled by, or under common control with the adviser that
provides ongoing services to the registrant for the Registrant's
fiscal year ended October 31, 2012 were $0 for the Registrant and
$6,600 for the Registrant's investment adviser and for the
Registrant's fiscal year ended October 31, 2013 were $5,200 for the
Registrant and $3,000 for the Registrant's investment adviser.
(h) The registrant's audit committee of the board of directors has
considered whether the provision of non-audit services that were
rendered to the registrant's investment adviser (not including any
sub-adviser whose role is primarily portfolio management and is
subcontracted with or overseen by another investment adviser), and
any entity controlling, controlled by, or under common control with
the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with
maintaining the principal accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(a) The Registrant has a separately designated audit committee consisting of
all the independent directors of the Registrant. The members of the audit
committee are: Thomas R. Kadlec, Niel B. Nielson, Richard E. Erickson and
Robert F. Keith.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Proxy Voting Policies are attached herewith.
BROOKFIELD INVESTMENT MANAGEMENT INC.
PORTFOLIO PROXY VOTING POLICIES AND PROCEDURES
MAY 2012
The Portfolio Proxy Voting Policies and Procedures (the "Policies and
Procedures") set forth the proxy voting policies, procedures and guidelines to
be followed by Brookfield Investment Management Inc. and its subsidiaries and
affiliates (collectively, "BIM") in voting portfolio proxies relating to
securities that are held in the portfolios of the investment companies or other
clients ("Clients") for which BIM has been delegated such proxy voting
authority.
A. PROXY VOTING COMMITTEE
BIM's internal proxy voting committee (the "Committee") is responsible for
overseeing the proxy voting process and ensuring that BIM meets its regulatory
and corporate governance obligations in voting of portfolio proxies.
The Committee shall oversee the proxy voting agent's compliance with these
Policies and Procedures, including any deviations by the proxy voting agent from
the proxy voting guidelines ("Guidelines").
B. ADMINISTRATION AND VOTING OF PORTFOLIO PROXIES
1. FIDUCIARY DUTY AND OBJECTIVE
As an investment adviser that has been granted the authority to vote on
portfolio proxies, BIM owes a fiduciary duty to its Clients to monitor corporate
events and to vote portfolio proxies consistent with the best interests of its
Clients. In this regard, BIM seeks to ensure that all votes are free from
unwarranted and inappropriate influences. Accordingly, BIM generally votes
portfolio proxies in a uniform manner for its Clients and in accordance with
these Policies and Procedures and the Guidelines.
In meeting its fiduciary duty, BIM generally view proxy voting as a way to
enhance the value of the company's stock held by the Clients. Similarly, when
voting on matters for which the Guidelines dictate a vote be decided on a
case-by-case basis, BIM's primary consideration is the economic interests its
Clients.
2. PROXY VOTING AGENT
BIM may retain an independent third party proxy voting agent to assist BIM in
its proxy voting responsibilities in accordance with these Policies and
Procedures and in particular, with the Guidelines. As discussed above, the
Committee is responsible for monitoring the proxy voting agent.
In general, BIM may consider the proxy voting agent's research and analysis as
part of BIM's own review of a proxy proposal in which the Guidelines recommend
that the vote be considered on a case-by-case basis. BIM bears ultimate
responsibility for how portfolio proxies are voted. Unless instructed otherwise
by BIM, the proxy voting agent, when retained, will vote each portfolio proxy in
accordance with the Guidelines. The proxy voting agent also will assist BIM in
maintaining records of BIM's portfolio proxy votes, including the appropriate
records necessary for registered investment companies to meet their regulatory
obligations regarding the annual filing of proxy voting records on Form N-PX
with the Securities and Exchange Commission ("SEC").
3. MATERIAL CONFLICTS OF INTEREST
BIM votes portfolio proxies without regard to any other business relationship
between BIM and the company to which the portfolio proxy relates. To this end,
BIM must identify material conflicts of interest that may arise between a Client
and BIM, such as the following relationships:
o BIM provides significant investment advisory or other services to a
portfolio company or its affiliates (the "Company") whose management
is soliciting proxies or BIM is seeking to provide such services;
o BIM serves as an investment adviser to the pension or other
investment account of the Company or BIM is seeking to serve in that
capacity; or
o BIM and the Company have a lending or other financial-related
relationship.
In each of these situations, voting against the Company management's
recommendation may cause BIM a loss of revenue or other benefit.
BIM generally seeks to avoid such material conflicts of interest by maintaining
separate investment decision-making and proxy voting decision-making processes.
To further minimize possible conflicts of interest, BIM and the Committee employ
the following procedures, as long as BIM determines that the course of action is
consistent with the best interests of the Clients:
o If the proposal that gives rise to a material conflict is
specifically addressed in the Guidelines, BIM will vote the
portfolio proxy in accordance with the Guidelines, provided that the
Guidelines do not provide discretion to BIM on how to vote on the
matter (i.e., case-by-case); or
o If the previous procedure does not provide an appropriate voting
recommendation, BIM may retain an independent fiduciary for advice
on how to vote the proposal or the Committee may direct BIM to
abstain from voting because voting on the particular proposal is
impracticable and/or is outweighed by the cost of voting.
4. CERTAIN FOREIGN SECURITIES
Portfolio proxies relating to foreign securities held by Clients are subject to
these Policies and Procedures. In certain foreign jurisdictions, however, the
voting of portfolio proxies can result in additional restrictions that have an
economic impact to the security, such as "share-blocking." If BIM votes on the
portfolio proxy, share-blocking may prevent BIM from selling the shares of the
foreign security for a period of time. In determining whether to vote portfolio
proxies subject to such restrictions, BIM, in consultation with the Committee,
considers whether the vote, either in itself or together with the votes of other
shareholders, is expected to affect the value of the security that outweighs the
cost of voting. If BIM votes on a portfolio proxy and during the "share-blocking
period," BIM would like to sell the affected foreign security, BIM, in
consultation with the Committee, will attempt to recall the shares (as allowable
within the market time-frame and practices).
C. FUND BOARD REPORTING AND RECORDKEEPING
BIM will prepare periodic reports for submission to the Boards of Directors of
its affiliated funds (the "Funds") describing:
o any issues arising under these Policies and Procedures since the
last report to the Funds' Boards of Directors/Trustees and the
resolution of such issues, including but not limited to, information
about conflicts of interest not addressed in the Policies and
Procedures; and
o any proxy votes taken by BIM on behalf of the Funds since the last
report to such Funds' Boards of Directors/Trustees that deviated
from these Policies and Procedures, with reasons for any such
deviations.
In addition, no less frequently than annually, BIM will provide the Boards of
Directors/Trustees of the Funds with a written report of any recommended changes
based upon BIM's experience under these Policies and Procedures, evolving
industry practices and developments in the applicable laws or regulations.
BIM will maintain all records that are required under, and in accordance with,
all applicable regulations, including the Investment Company Act of 1940, as
amended, and the Investment Advisers Act of 1940, which include, but not limited
to:
o these Policies and Procedures, as amended from time to time;
o records of votes cast with respect to portfolio proxies, reflecting
the information required to be included in Form N-PX, as applicable;
o records of written client requests for proxy voting information and
any written responses of BIM to such requests; and
o any written materials prepared by BIM that were material to making a
decision in how to vote, or that memorialized the basis for the
decision.
D. AMENDMENTS TO THESE PROCEDURES
The Committee shall periodically review and update these Policies and Procedures
as necessary. Any amendments to these Procedures and Policies (including the
Guidelines) shall be provided to the Board of Directors of BIM and to the Boards
of Directors of the Funds for review and approval.
E. PROXY VOTING GUIDELINES
Guidelines are available upon request.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(a)(1) IDENTIFICATION OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS.
Information provided as of January 2, 2014.
Brookfield Investment Management Inc. ("Brookfield") serves as the Fund's
Sub-Advisor. Brookfield is a wholly-owned subsidiary of Brookfield Asset
Management, a global alternative asset manager with approximately $184 billion
in assets under management as of September 30, 2013. Brookfield Asset Management
has over a 100-year history of owning and operating assets with a focus on
property, renewable power, infrastructure and private equity. The company offers
a range of public and private investment products and services, which leverage
its expertise and experience and provide it with a competitive advantage in the
markets where it operates. On behalf of its clients, Brookfield Asset Management
is also an active investor in the public securities markets, where its
experience extends over 30 years. Over this time, the company has successfully
developed several investment operations and built expertise in the management of
institutional portfolios, retail mutual funds, and structured product
investments.
Brookfield Asset Management's public market activities are conducted by
Brookfield Investment Management, a registered investment advisor. These
activities complement Brookfield Asset Management's core competencies and
include global listed real estate and infrastructure equities, corporate
high-yield investments, opportunistic credit strategies and a dedicated
insurance asset management division. Headquartered in New York, NY, Brookfield
Investment Management maintains offices and investment teams in Toronto,
Chicago, Boston and London and has over $10 billion of assets under management
as of September 30, 2013.
Anthony Breaks, CFA, Director
Mr. Breaks is a Portfolio Manager on the Securitized Products Investments team
and has worked for the firm since May 2002. Mr. Breaks is a team leader in
MBS/ABS and is a member of the team's securities analysis committee. Mr. Breaks
also has managed securitized product vehicles, such as SIV, ABCP and CDOs, for
Brookfield and has experience in insurance company asset management. Mr. Breaks
earned a Bachelor of Science degree in Electrical Engineering from the
Massachusetts Institute of Technology. He holds the Chartered Financial Analyst
designation.
Chris Wu, Director
Mr. Wu is a Portfolio Manager on the Securitized Products Investment Team
focusing on agency MBS. He has worked for the firm since March 2007 and is
responsible for the firm's agency MBS exposures. He develops quantitative tools
to formulate research and develop trading strategies for agency MBS exposures.
Mr. Wu holds an MBA from New York University as well as a Master of Science
degree in Computer Science from University of Saskatchewan. He also earned a
Bachelor of Economics from Huazhong University of Science and Technology in
China.
(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBER AND
POTENTIAL CONFLICTS OF INTEREST
Information provided as of October 31, 2013.
# of Accounts Total Assets
Managed for which for which
Total Advisory Fee is Advisory Fee
Name of Portfolio Manager or # of Accounts Based on is Based on
Team Member Type of Accounts* Managed Total Assets Performance Performance
-----------------
1. Anthony Breaks Registered Investment Companies: 1 $481M 0 $ 0
--------------------------------
Other Pooled Investment Vehicles: 0 $0 0 $ 0
---------------------------------
Other Accounts: 2 $431M 0 $ 0
---------------
2. Chris Wu Registered Investment Companies: 0 $ 0 0 $ 0
--------------------------------
Other Pooled Investment Vehicles: 0 $ 0 0 $ 0
---------------------------------
Other Accounts: 0 $ 0 0 $ 0
---------------
PORTFOLIO MANAGER POTENTIAL CONFLICTS OF INTERESTS
Potential conflicts of interest may arise when a fund's portfolio manager has
day-to-day management responsibilities with respect to one or more other funds
or other accounts, as is the case for the portfolio managers of the Fund. These
potential conflicts may include:
Allocation of Limited Time and Attention. A portfolio manager who is responsible
for managing multiple funds and/or accounts may devote unequal time and
attention to the management of those funds and/or accounts. As a result, the
portfolio manager may not be able to formulate as complete a strategy or
identify equally attractive investment opportunities for each of those accounts
as the case may be if he or she were to devote substantially more attention to
the management of a single fund. The effects of this potential conflict may be
more pronounced where funds and/or accounts overseen by a particular portfolio
manager have different investment strategies.
Allocation of Limited Investment Opportunities. If a portfolio manager
identifies a limited investment opportunity that may be suitable for multiple
funds and/or accounts, the opportunity may be allocated among these several
funds or accounts, which may limit a client's ability to take full advantage of
the investment opportunity.
Pursuit of Differing Strategies. At times, a portfolio manager may determine
that an investment opportunity may be appropriate for only some of the funds
and/or accounts for which he or she exercises investment responsibility, or may
decide that certain of the funds and/or accounts should take differing positions
with respect to a particular security. In these cases, the portfolio manager may
place separate transactions for one or more funds or accounts which may affect
the market price of the security or the execution of the transaction, or both,
to the detriment or benefit of one or more other funds and/or accounts.
Variation in Compensation. A conflict of interest may arise where the financial
or other benefits available to the portfolio manager differ among the funds
and/or accounts that he or she manages. If the structure of the investment
adviser's management fee and/or the portfolio manager's compensation differs
among funds and/or accounts (such as where certain funds or accounts pay higher
management fees or performance-based management fees), the portfolio manager
might be motivated to help certain funds and/or accounts over others. The
portfolio manager might be motivated to favor funds and/or accounts in which he
or she has an interest or in which the investment advisor and/or its affiliates
have interests. Similarly, the desire to maintain or raise assets under
management or to enhance the portfolio manager's performance record or to derive
other rewards, financial or otherwise, could influence the portfolio manager to
lend preferential treatment to those funds and/or accounts that could most
significantly benefit the portfolio manager.
Related Business Opportunities. The investment adviser or its affiliates may
provide more services (such as distribution or recordkeeping) for some types of
funds or accounts than for others. In such cases, a portfolio manager may
benefit, either directly or indirectly, by devoting disproportionate attention
to the management of fund and/or accounts that provide greater overall returns
to the investment manager and its affiliates.
Brookfield Investment Management Inc. ("Brookfield") has adopted compliance
policies and procedures that are designed to address the various conflicts of
interest that may arise for it and the individuals that it employs. For example,
Brookfield seeks to minimize the effects of competing interests for the time and
attention of portfolio managers by assigning portfolio managers to manage funds
and accounts that share a similar investment style. Brookfield also has adopted
trade allocation procedures that are designed to facilitate the fair allocation
of limited investment opportunities among multiple funds and accounts.
(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBERS
PORTFOLIO MANAGER COMPENSATION
Information provided as of October 31, 2013.
The Fund's portfolio managers are compensated by the sub-advisor. Brookfield
compensates its portfolio managers based on the scale and complexity of their
portfolio responsibilities, the total return performance of funds and accounts
managed by the portfolio manager on an absolute basis and versus appropriate
peer groups of similar size and strategy, as well as the management skills
displayed in managing their subordinates and the teamwork displayed in working
with other members of the firm. Since the portfolio managers are responsible for
multiple funds and accounts, investment performance is evaluated on an aggregate
basis almost equally weighted among performance, management and teamwork. Base
compensation for Brookfield's portfolio managers varies in line with a portfolio
manager's seniority and position. The compensation of portfolio managers with
other job responsibilities (such as acting as an executive officer of Brookfield
or supervising various departments) includes consideration of the scope of such
responsibilities and the portfolio manager's performance in meeting them.
Brookfield seeks to compensate portfolio managers commensurate with their
responsibilities and performance, and competitive with other firms within the
investment management industry. Salaries, bonuses and stock-based compensation
also are influenced by the operating performance of Brookfield and its parent
company, Brookfield Asset Management Inc. While the salaries of Brookfield's
portfolio managers are comparatively fixed, cash bonuses and stock-based
compensation may fluctuate significantly from year to year. Bonuses are
determined on a discretionary basis by the senior executives of Brookfield and
measured by individual and team-oriented performance guidelines. The amount of
the Long Term Incentive Plan (LTIP) is approved by the board of directors
annually and there is a rolling vesting schedule to aid in retention of key
people. A key component of this program is achievement of client objectives in
order to properly align interests with our clients. Further, the incentive
compensation of all investment personnel who work on each strategy is directly
tied to the relative performance of the strategy and its clients.
(4) DISCLOSURE OF SECURITIES OWNERSHIP
Information provided as of October 31, 2013.
DOLLAR RANGE OF FUND
SHARES BENEFICIALLY
NAME OWNED
Anthony Breaks $ 0
Chris Wu $ 0
(b) Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the "1940
Act") (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days
of the filing date of the report that includes the disclosure required by
this paragraph, based on their evaluation of these controls and
procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR
270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities
Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the 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 Mortgage Income Fund
----------------------------------------------------
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: December 20, 2013
--------------------
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/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: December 20, 2013
--------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: December 20, 2013
--------------------
* Print the name and title of each signing officer under his or her signature.