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 811-22039
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
WHEATON, IL 60187
(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
WHEATON, IL 60187
(Name and address of agent for service)
registrant's telephone number, including area code: 630-765-8000
Date of fiscal year end: NOVEMBER 30
Date of reporting period: MAY 31, 2009
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
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.
(GRAPH)
FIRST TRUST SPECIALTY
FINANCE AND FINANCIAL
OPPORTUNITIES FUND
SEMI-ANNUAL REPORT
FOR THE SIX MONTHS ENDED
MAY 31, 2009
(FIRST TRUST LOGO) (CONFLUENCE INVESTMENT MANAGEMENT LOGO)
TABLE OF CONTENTS
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
SEMI-ANNUAL REPORT
MAY 31, 2009
Shareholder Letter ........................................................ 1
At a Glance ............................................................... 2
Portfolio Commentary ...................................................... 3
Portfolio of Investments .................................................. 6
Statement of Assets and Liabilities ....................................... 9
Statement of Operations ................................................... 10
Statements of Changes in Net Assets ....................................... 11
Statement of Cash Flows ................................................... 12
Financial Highlights ...................................................... 13
Notes to Financial Statements ............................................. 14
Additional Information .................................................... 19
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 Confluence Investment Management LLC
("Confluence" 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 Specialty Finance and Financial Opportunities 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 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 investing in the Fund. See "Risk Considerations" in the Notes to
Financial Statements for a discussion of other risks of investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of the relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
Confluence are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The risks of investing in the Fund are
spelled out in the prospectus, the statement of additional information, this
report, and other regulatory filings.
SHAREHOLDER LETTER
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
SEMI-ANNUAL REPORT
MAY 31, 2009
Dear Shareholders:
2008 brought all sorts of challenges to investors. Throughout the year, the
financial sector was plagued with failures in banking, insurance and brokerage
firms. By year's end, after a meltdown in the credit markets, historically high
levels of volatility in the stock market, and the resulting turmoil to the
overall economy, the Dow Jones Industrial Average's (the "Dow") total return was
-31.92% (as of 12/31/08). In fact, 2008 was the Dow's third worst calendar year
since its inception in 1896. For the year, the negative total return performance
of the Dow was surpassed only by 1931 and 1907, two years in which the U.S. was
also enduring a major banking crisis. Of the thirty stocks in the Dow, only two
were up in 2008. However, many economists believe the recession that began in
December, 2007 ended in March, 2009. In fact, the Dow's total return from March
9 (the statistical end of the bear market) to May 31, 2009, was 30.83%. Of
course, no one can predict that this trend will continue.
Yet, regardless of the market, First Trust Advisors L.P. ("First Trust") has
always believed that in order to be successful in reaching your financial goals,
you should be invested for the long term. A long-term investor understands that
the market, from a historical perspective, has always experienced ups and downs.
But history has shown that the patient investor is typically rewarded over the
long term. While no one has the ability to predict when the markets will
recover, we believe that staying invested in quality products and having a
long-term perspective can help investors reach their financial goals.
The report you hold contains detailed information about your investment in First
Trust Specialty Finance and Financial Opportunities Fund (the "Fund"). It
contains a portfolio commentary from the Fund's portfolio management team that
provides a market recap for the period, a performance analysis and a market and
Fund outlook. Additionally, the report provides the Fund's financial statements
for the period covered by the report. I encourage you to read this document and
discuss it with your financial advisor.
First Trust has been through many types of markets and remains committed to
bringing you quality investment solutions regardless of the inevitable ups and
downs experienced in the market. We offer a variety of products that may fit
many financial plans to help those investors seeking long-term investment
success. As well, we are committed to making available up-to-date information
about your investments so you and your financial advisor have current
information on your portfolio.
We continue to value our relationship with you, and we thank you for the
opportunity to assist you in achieving your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
President of First Trust Specialty Finance and Financial Opportunities Fund
Page 1
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
"AT A GLANCE"
AS OF MAY 31, 2009 (UNAUDITED)
FUND STATISTICS
Symbol on New York Stock Exchange FGB
Common Share Price $ 4.09
Common Share Net Asset Value ("NAV") $ 4.42
Premium (Discount) to NAV (7.47)%
Net Assets Applicable to Common Shares $62,882,436
Current Quarterly Distribution per Common Share (1) $ 0.140
Current Annualized Distribution per Common Share $ 0.5600
Current Distribution Rate on Closing
Common Share Price (2) 13.69%
Current Distribution Rate on NAV (2) 12.67%
COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
(PERFORMANCE GRAPH)
Market NAV
------ -----
5/30/2008 12.46 12.44
6/6/2008 11.48 12.22
6/13/2008 11.05 11.71
6/20/2008 10.67 11.05
6/27/2008 9.11 10.12
7/3/2008 8.51 9.14
7/11/2008 7.4 9.1
7/18/2008 8.72 9.3
7/25/2008 8.65 9.5
8/1/2008 9.35 9.51
8/8/2008 9.2 9.61
8/15/2008 9.37 9.8
8/22/2008 8.89 9.44
8/29/2008 9.2 9.53
9/5/2008 9.27 9.49
9/12/2008 8.36 9.29
9/19/2008 8.74 9.92
9/26/2008 8.02 9.5
10/3/2008 6.72 7.81
10/10/2008 4.3 5.53
10/17/2008 5.67 5.96
10/24/2008 4.9 5.16
10/31/2008 5.38 6.19
11/7/2008 4.8 5.61
11/14/2008 3.71 4.56
11/21/2008 2.35 3.52
11/28/2008 3.29 4.51
12/5/2008 4.28 4.61
12/12/2008 3.47 4.64
12/19/2008 3.71 4.89
12/26/2008 3.66 4.8
1/2/2009 4.4 5.16
1/9/2009 4.49 5.12
1/16/2009 4.11 4.93
1/23/2009 4.2 4.6
1/30/2009 4.07 4.4
2/6/2009 3.84 4.26
2/13/2009 3.36 3.87
2/20/2009 2.76 3.3
2/27/2009 2.54 3.01
3/6/2009 1.93 2.4
3/13/2009 2.44 2.91
3/20/2009 2.53 3.07
3/27/2009 2.97 3.48
4/3/2009 3.51 3.91
4/9/2009 3.68 4.09
4/17/2009 3.76 4.13
4/24/2009 3.62 4.02
5/1/2009 3.85 4.15
5/8/2009 4.31 4.74
5/15/2009 3.95 4.38
5/22/2009 3.81 4.32
5/31/2009 4.09 4.42
PERFORMANCE
Average Annual
Total Return
6 Months Ended 1 Year Ended Inception (5/25/2007)
5/31/2009 5/31/2009 to 5/31/2009
-------------- ------------ ---------------------
Fund Performance
NAV (3) 9.52% -55.89% -43.24%
Market Value (4) 38.92% -59.24% -46.61%
Index Performance
Blended Benchmark (5) 10.10% -49.35% -42.53%
MSCI U.S. Investable Market Financials Index -4.81% -47.28% -39.27%
% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
--------------- -----------
Ares Capital Corp. 11.7%
Prospect Energy Corp. 9.1
MVC Capital, Inc. 6.6
BlackRock Kelso Capital Corp. 6.0
PennantPark Investment Corp. 5.6
Hercules Technology Growth Capital, Inc. 5.4
Hatteras Financial Corp. 5.1
Gladstone Capital Corp. 4.9
Medallion Financial Corp. 4.6
Apollo Investment Corp. 4.5
----
Total 63.5%
====
% OF TOTAL
INDUSTRY INVESTMENTS
-------- -----------
Capital Markets 71.5%
Real Estate Investment Trusts 20.0
Diversified Financial Services 8.5
-----
Total 100.0%
=====
% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS
-------------------- -----------
Business Development Companies 76.5%
Residential Mortgage REITs 15.9
Specialty Finance/Hybrid REITs 4.1
Exchange-Traded Funds 2.8
Common Stocks 0.7
-----
Total 100.0%
=====
(1) Most recent distribution paid or declared through 5/31/2009. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV as applicable, as of 5/31/2009. Subject to change
in the future.
(3) Total return based on NAV is the combination of reinvested dividend
distributions and reinvested capital gain distributions, if any, at prices
obtained by the Dividend Reinvestment Plan and changes in NAV per share and
does not reflect sales load. Past performance is not indicative of future
results.
(4) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share price. Past performance is not indicative of future results.
(5) Blended benchmark consists of the following (Source: Bloomberg):
Red Rocks Listed Private Equity Index (40%)
FTSE NAREIT Mortgage REIT Index (20%)
FTSE NAREIT Hybrid REIT Index (20%)
Merrill Lynch Preferred Stock Hybrid Securities Index (10%)
Russell 2000 Financial Services Index (10%)
Page 2
PORTFOLIO COMMENTARY
SUB-ADVISOR
Confluence Investment Management LLC, a registered investment advisor
("Confluence" or "Sub-Advisor") located in St. Louis, Missouri, has served as
the Sub-Advisor to First Trust Specialty Finance and Financial Opportunities
Fund, (NYSE:FGB) (the "Fund"), since July 29, 2008.
PORTFOLIO MANAGEMENT TEAM
MARK A. KELLER, CFA - CHIEF EXECUTIVE OFFICER AND CHIEF INVESTMENT OFFICER
(PHOTO OF MARK A. KELLER)
Mr. Keller has nearly 30 years of investment experience with a focus on
value-oriented equity analysis and management. Prior to joining Confluence, from
1994 to May 2008, he was the Chief Investment Officer of Gallatin Asset
Management, Inc., and its predecessor organization, A.G. Edwards Asset
Management, the investment management arm of A.G. Edwards, Inc. From 1999 to
2008, Mr. Keller was Chairman of the A.G. Edwards Investment Strategy Committee,
which set investment policy and established asset allocation models for the
entire organization. Mr. Keller was a founding member of the A.G. Edwards
Investment Strategy Committee, on which he served for over 20 years, the last
ten years as Chairman. He began his career with A.G. Edwards in 1978, serving as
an equity analyst for the firm's Securities Research Department from 1979 to
1994. During his last five years in Securities Research, Mr. Keller was Equity
Strategist and manager of the firm's Focus List. Mr. Keller was a Senior Vice
President of A.G. Edwards & Sons, Inc. and of Gallatin Asset Management, Inc.,
and was a member of the Board of Directors of both companies. Mr. Keller
received a Bachelor of Arts from Wheaton College (Illinois) and is a CFA
charterholder.
DAVID B. MIYAZAKI, CFA - SENIOR VICE PRESIDENT AND PORTFOLIO MANAGER
(PHOTO OF DAVID B. MIYAZAKI)
Prior to joining Confluence in May 2008, Mr. Miyazaki served as a Portfolio
Manager and Analyst with Gallatin Asset Management, Inc. Mr. Miyazaki was
responsible for equity investments in value-oriented separately managed
accounts. He also co-managed the Fund during the time the Fund was sub-advised
by Gallatin Asset Management, Inc., as well as A.G. Edwards' ETF-based asset
allocation program. In addition to portfolio management, Mr. Miyazaki served as
a member of the A.G. Edwards Investment Strategy Committee. As a strategist, he
was responsible for the firm's quantitative asset allocation models, including
its Cyclical Asset Allocation program. Prior to joining A.G. Edwards in 1999,
Mr. Miyazaki was a Portfolio Manager at Koch Industries in Wichita, Kansas. His
previous experience includes working as an Investment Analyst at Prudential
Capital Group in Dallas, Texas, and as a Bond Trader at Barre & Company, also in
Dallas. Mr. Miyazaki received a Bachelor of Business Administration from Texas
Christian University and is a CFA charterholder.
DANIEL T. WINTER, CFA - SENIOR VICE PRESIDENT AND PORTFOLIO MANAGER
(PHOTO OF DANIEL T. WINTER)
Prior to joining Confluence in May 2008, Mr. Winter served as a Portfolio
Manager and Analyst with Gallatin Asset Management, Inc., the Fund's prior
sub-advisor, While at Gallatin, Mr. Winter chaired the portfolio management team
responsible for the firm's six value oriented equity strategies. His
responsibilities included directing the strategy implementation and trading
execution for the equity portfolios. Additionally, Mr. Winter co-managed the
Fund during the time the Fund was sub-advised by Gallatin Asset Management, Inc.
Mr. Winter also served as a portfolio manager for the Cyclical Growth ETF
Portfolio and the Cyclical Growth and Income ETF Portfolio which were offered
through variable annuities. He was also a member of the firm's Allocation
Advisor Committee which oversaw the A.G. Edwards exchange-traded fund focused
strategies. Prior to joining the firm's Asset Management division in 1996, Mr.
Winter served as a portfolio manager for A.G. Edwards Trust Company. Mr. Winter
earned a Bachelor of Arts in business management from Eckerd College and a
Master of Business Administration from Saint Louis University. Mr. Winter is a
CFA charterholder.
Page 3
PORTFOLIO COMMENTARY (CONTINUED)
COMMENTARY
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
The primary investment objective of the First Trust Specialty Finance and
Financial Opportunities Fund ("FGB" or the "Fund") is to seek a high level of
current income. As a secondary objective, the Fund seeks an attractive total
return. The Fund pursues its investment objectives by investing at least 80% of
its managed assets in a portfolio of securities of specialty finance and other
financial companies that the Fund's Sub-Advisor believes offer attractive
opportunities for income and capital appreciation. There can be no assurance
that the Fund's investment objectives will be achieved. The Fund may not be
appropriate for all investors.
MARKET RECAP
FGB is a financial sector fund, unique in its focus on business development
companies ("BDCs"). This niche of the financial services industry invests in and
lends to private companies, usually ones that are small to mid-sized. Therefore,
BDCs create a bridge into the world of private equity and debt for public
investors. As of the end of May 2009, three-quarters of the Fund's assets were
invested in BDCs.
Although stock prices of BDCs have followed the broad trends of the financial
sector, their fundamentals have varied, often holding up in substantially better
form. The credit crisis in 2008 was largely a result of bad loans and
investments (including subprime mortgages), made by companies with enormous
amounts of leverage. In contrast, BDCs principally make business loans (not
mortgages), and have some of the lowest leverage levels among financial
companies. So while the credit crisis and recession have presented challenges to
BDCs, many in the group (but not all) have made it through with their business
models intact.
Of course, there's a big difference between merely surviving, and having the
ability to grow and deliver attractive returns to shareholders. Companies with
capital to invest today have a tremendous opportunity because rates of return
are relatively high, while more stringent loan covenants and terms have lowered
the amount of risk. Accordingly, we look for companies that can participate in
this environment, and as a result, the Fund's allocation to BDCs is actually
quite different relative to a passive, market-weighted BDC exposure.
As an illustration, the Fund has had no position in either American Capital
Strategies (ACAS) or Allied Capital (ALD) for quite some time. Both of these
BDCs were once considered industry heavyweights and represented a substantial
portion of the industry's overall market capitalization. However, poorly
performing investments and the inability to effectively manage their balance
sheets took a heavy toll on these companies. It may be quite some time before
they can normalize operations at these companies.
Instead, much of our focus is on companies that can grow, instead of repair, as
the markets and economy improve. Examples include Ares Capital (ARCC) and
Prospect Capital (PSEC), two companies that have capital available to invest. We
also favor companies that are successfully applying specialized skills in market
niches. Medallion Financial (TAXI), which makes loans secured by taxi medallions
to taxi cab owners, and Hercules Technology (HTGC), which makes venture capital
loans and private equity investments, are two companies with this profile.
As of the end of May 2009, 16% of the Fund's assets were invested in
Mortgage-Backed Real Estate Investment Trusts. Despite the turmoil in the
mortgage markets, these companies have performed well. Their balance sheets have
remained stable, enabling them to deliver attractive dividends, even as the
credit markets locked up. We believe that a high priority for the Federal
Reserve is a functioning mortgage market, which should help maintain the
positive investment environment for these companies.
One of the challenges in managing a portfolio of BDCs through the credit crisis
has been the widespread expectation that these companies would follow the path
of high-profile collapses in the financial sector. This viewpoint became
particularly pronounced in the Fund's fiscal quarter ended in February, 2009,
but reversed dramatically in the subsequent quarter ended in May, 2009. As a
group, the BDCs continue to make progress, demonstrating their durability, and
differentiating their business models from other financial companies.
Page 4
PORTFOLIO COMMENTARY (CONTINUED)
SIX MONTHS
PERFORMANCE ANALYSIS ENDED 5/31/09
-------------------- -------------
FGB Market Value Total Return 38.92%
FGB NAV Total Return 9.52%
Blended Benchmark* 10.10%
* Components of the blended benchmark: Red Rocks Listed Private Equity Index
(40%); FTSE NAREIT Mortgage REIT Index (20%); FTSE NAREIT Hybrid REIT Index
(20%); Merrill Lynch Preferred Stock Hybrid Securities Index (10%); Russell
2000 Financial Services Index (10%).
SOURCE:BLOOMBERG
The Fund's market value total return (+38.92%) over the first half of its fiscal
year was derived from an improving Net Asset Value ("NAV"), continuing dividends
and a substantial narrowing of the Fund's price discount to NAV (-27.05% to
-7.47%). The Fund's NAV growth (+9.52%) was positive relative to small cap
financials, as represented by the Russell 2000 Financial Services Index (-1.0%),
as well as the private equity index the Red Rocks Listed Private Equity Index
(+2.3%). The Fund underperformed its blended benchmark (+10.1%), whose strong
performance was principally driven by the hybrid REIT component (+42.1%).
Although the Fund has positions in hybrid REITs, the proportion of these
investments has steadily declined and is significantly below the benchmark
weight.
MARKET & FUND OUTLOOK
It has clearly been a difficult path for the BDCs and other specialty finance
companies. Generally, the fundamentals of these companies have often been much
different than that of the broader financial sector. More recently, we have
observed investors showing a growing degree of differentiation between the
companies that were severely damaged in the credit crisis and those built upon
more durable capital structures. We view this trend positively, as it reflects a
shift in sentiment from panic to cautious investing.
As a group, the BDCs continue to face challenges. Most notable is a shortage of
capital to take advantage of the current investing environment. Banks are
offering only limited credit...and it's expensive. Meanwhile, equity capital is
difficult to raise because most BDCs are trading below NAV. In this environment,
the benefits may accrue disproportionately to the few who do have available
capital. Others may be more dependent upon their existing portfolios.
We believe the BDC industry is likely to evolve substantially in coming
quarters. Consolidation and/or privatization may be the best option for some,
while asset sales and the downsizing of business models are likely for others.
But many, if not most, are likely to find a path forward. It may come from
successfully focusing on a niche, or patiently recycling capital. There remain
several talented management teams at the helm of durable companies. We believe
they will develop ways to grow their businesses and deliver attractive returns
to shareholders. We will continue to position the Fund in these types of
companies, striving to deliver private market investment benefits to the
shareholders of FGB.
Page 5
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
PORTFOLIO OF INVESTMENTS (a) (b)
MAY 31, 2009 (UNAUDITED)
SHARES DESCRIPTION VALUE
--------- ----------------------------------------------------- ------------
COMMON STOCKS - 114.9%
CAPITAL MARKETS - 81.2%
606,806 Apollo Investment Corp. ............................. $ 3,343,501
1,138,333 Ares Capital Corp. .................................. 8,708,247
690,000 BlackRock Kelso Capital Corp. ....................... 4,491,900
508,000 Gladstone Capital Corp. ............................. 3,622,040
183,333 Gladstone Investment Corp. .......................... 777,332
50,500 GSC Investment Corp. ................................ 146,450
534,556 Hercules Technology Growth Capital, Inc. ............ 4,009,170
50,000 Highland Distressed Opportunities, Inc. ............. 124,000
607,167 Kohlberg Capital Corp. .............................. 2,525,815
19,774 Main Street Capital Corp. ........................... 238,277
432,000 MCG Capital Corp. ................................... 933,120
603,700 MVC Capital, Inc. ................................... 4,889,970
351,737 NGP Capital Resources Co. ........................... 2,771,688
600,000 Patriot Capital Funding, Inc. ....................... 1,134,000
610,000 PennantPark Investment Corp. ........................ 4,148,000
795,052 Prospect Energy Corp. ............................... 6,773,843
475,485 TICC Capital Corp. .................................. 2,082,624
36,000 Triangle Capital Corp. .............................. 367,020
------------
51,086,997
------------
DIVERSIFIED FINANCIAL SERVICES - 10.1%
57,800 Compass Diversified Holdings ........................ 508,640
252,000 Fifth Street Finance Corp. .......................... 2,414,160
459,504 Medallion Financial Corp. ........................... 3,395,735
------------
6,318,535
------------
REAL ESTATE INVESTMENT TRUSTS (REITS) - 23.6%
204,500 Annaly Capital Management, Inc. ..................... 2,850,730
162,000 Arbor Realty Trust, Inc. ............................ 252,720
192,307 Cypress Sharpridge Investments, Inc. (c) (d) ........ 2,534,606
86,900 Gramercy Capital Corp. .............................. 194,656
153,195 Hatteras Financial Corp. ............................ 3,817,619
85,000 iStar Financial, Inc. ............................... 263,500
420,000 MFA Financial, Inc. ................................. 2,629,200
698,018 NorthStar Realty Finance Corp. ...................... 2,317,420
------------
14,860,451
------------
TOTAL COMMON STOCKS
(Cost $162,569,687) ................................. 72,265,983
------------
EXCHANGE-TRADED FUNDS - 3.4%
CAPITAL MARKETS - 3.4%
60,000 SPDR Barclays Capital High Yield Bond ETF ........... 2,100,000
------------
TOTAL EXCHANGE-TRADED FUNDS
(Cost $1,887,481) ................................... 2,100,000
------------
See Notes to Financial Statements
Page 6
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
PORTFOLIO OF INVESTMENTS (a) (b) - (CONTINUED)
MAY 31, 2009 (UNAUDITED)
SHARES DESCRIPTION VALUE
--------- ----------------------------------------------------- ------------
CANADIAN INCOME TRUSTS - 0.0%
OIL, GAS & CONSUMABLE FUELS - 0.0%
100 ARC Energy Trust .................................... $ 1,591
81 Progress Energy Resources Corp. ..................... 792
------------
TOTAL CANADIAN INCOME TRUSTS
(Cost $3,343) ....................................... 2,383
------------
WARRANTS - 0.0%
REAL ESTATE INVESTMENT TRUSTS (REITS) - 0.0%
576,923 Cypress Sharpridge Investments, Inc., expires
04/30/11 (c) (d) (e) ............................. 0
------------
TOTAL WARRANTS
(Cost $0) ........................................... 0
------------
TOTAL INVESTMENTS - 118.3%
(Cost $164,460,511) (f) ............................. 74,368,366
LOAN OUTSTANDING - (19.7)% .......................... (12,350,000)
NET OTHER ASSETS AND LIABILITIES - 1.4% ............. 864,070
------------
NET ASSETS - 100.0% ................................. $ 62,882,436
============
----------
(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) All or a portion of the securities are available to serve as collateral on
the loan outstanding.
(c) This security, sold within the terms of a private placement memorandum, is
exempt from registration under Rule 144A under the Securities Act of 1933,
as amended, and may be resold in transactions exempt from registration,
normally to qualified institutional buyers. (see Note 2C-Restricted
Securities in the Notes to Financial Statements).
(d) Security is fair valued in accordance with procedures adopted by the Fund's
Board of Trustees.
(e) Non-income producing security.
(f) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of May 31, 2009, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $2,309,928 and the aggregate gross
unrealized depreciation for all securities in which there was an excess of
tax cost over value was $92,402,073.
See Notes to Financial Statements
Page 7
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
PORTFOLIO OF INVESTMENTS (a) (b) - (CONTINUED)
MAY 31, 2009 (UNAUDITED)
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of May 31, 2009
is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
VALUATION INPUTS INVESTMENTS
---------------- -----------
Level 1 - Quoted Prices ............................ $71,833,760
Level 2 - Other Significant Observable Inputs ...... --
Level 3 - Significant Unobservable Inputs .......... 2,534,606
-----------
TOTAL .............................................. $74,368,366
===========
The following table presents the Fund's investments measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for the period
presented.
INVESTMENTS AT FAIR VALUE USING SIGNIFICANT
UNOBSERVABLE INPUTS (LEVEL 3) INVESTMENTS
------------------------------------------- -----------
Balance as of November 30, 2008 .................... $2,419,222
Net unrealized appreciation (depreciation) ......... 115,384
----------
Balance as of May 31, 2009 ......................... $2,534,606
==========
Net unrealized depreciation from Level 3 investments held as of May 31, 2009 was
$465,383 and is included in "Net Change in unrealized appreciation
(depreciation) on investments" on the Statements of Operations.
See Notes to Financial Statements
Page 8
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2009 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $164,460,511) ................................ $ 74,368,366
Cash .................................................. 921,282
Prepaid expenses ...................................... 22,182
Receivables:
Dividends .......................................... 348,712
Interest ........................................... 345
-------------
Total Assets ....................................... 75,660,887
-------------
LIABILITIES:
Outstanding loan ...................................... 12,350,000
Payables:
Interest and fees due on loan ...................... 273,431
Investment advisory fees ........................... 62,828
Audit and tax fees ................................. 30,302
Printing fees ...................................... 27,216
Legal fees ......................................... 19,620
Administrative fees ................................ 8,333
Transfer agent fees ................................ 4,345
Custodian fees ..................................... 2,056
Accrued expenses and other liabilities ................ 320
-------------
Total Liabilities .................................. 12,778,451
-------------
NET ASSETS ............................................ $ 62,882,436
=============
NET ASSETS CONSIST OF:
Paid-in capital ....................................... $ 268,630,608
Par value ............................................. 142,313
Accumulated net investment income (loss) .............. (3,151,665)
Accumulated net realized gain (loss) on
investments ........................................ (112,646,675)
Net unrealized appreciation (depreciation) of
investments ........................................ (90,092,145)
-------------
NET ASSETS ............................................ $ 62,882,436
=============
NET ASSET VALUE, per Common Share (par value $0.01
per Common Share) .................................. $ 4.42
=============
Number of Common Shares outstanding (unlimited
number of Common Shares has been authorized) ....... 14,231,333
=============
See Notes to Financial Statements
Page 9
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31, 2009 (UNAUDITED)
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $11) ..... $ 5,802,793
Interest .............................................. 10,294
------------
Total investment income ............................ 5,813,087
------------
EXPENSES:
Investment advisory fees .............................. 346,724
Interest and fees on loan ............................. 121,082
Legal fees ............................................ 108,088
Printing fees ......................................... 61,199
Administrative fees ................................... 49,999
Audit and tax fees .................................... 27,065
Trustees' fees and expenses ........................... 19,174
Transfer agent fees ................................... 17,906
Custodian fees ........................................ 7,229
Other ................................................. 23,269
------------
Total expenses ..................................... 781,735
------------
NET INVESTMENT INCOME (LOSS) .......................... 5,031,352
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments ........................................ (24,974,128)
Foreign currency transactions ...................... (1)
------------
Net realized gain (loss) .............................. (24,974,129)
------------
Net change in unrealized appreciation (depreciation) on
investments ........................................ 23,242,700
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ............... (1,731,429)
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS ......................................... $ 3,299,923
============
See Notes to Financial Statements
Page 10
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED
5/31/2009 YEAR ENDED
(UNAUDITED) 11/30/2008
------------ -------------
OPERATIONS:
Net investment income (loss) ................................................ $ 5,031,352 $ 14,462,089
Net realized gain (loss) .................................................... (24,974,129) (80,922,293)
Net change in unrealized appreciation (depreciation) ........................ 23,242,700 (45,371,825)
------------ -------------
Net increase (decrease) in net assets resulting from operations ............. 3,299,923 (111,832,029)
------------ -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ....................................................... (4,625,183) (17,995,120)
Return of capital ........................................................... -- (1,293,149)
------------ -------------
Total distributions to shareholders ......................................... (4,625,183) (19,288,269)
------------ -------------
CAPITAL TRANSACTIONS:
Proceeds from Common Shares reinvested ...................................... -- 2,172,230
Offering costs .............................................................. -- 85,301
------------ -------------
Net increase (decrease) in net assets resulting from capital transactions ... -- 2,257,531
------------ -------------
Total increase (decrease) in net assets ..................................... (1,325,260) (128,862,767)
NET ASSETS:
Beginning of period ......................................................... 64,207,696 193,070,463
------------ -------------
End of period ............................................................... $ 62,882,436 $ 64,207,696
============ =============
Accumulated net investment income (loss) at end of period ................... $ (3,151,665) $ (3,557,834)
============ =============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period ........................................ 14,231,333 14,064,166
Common Shares issued as reinvestment under the Dividend Reinvestment Plan ... -- 167,167
------------ -------------
Common Shares at end of period .............................................. 14,231,333 14,231,333
============ =============
See Notes to Financial Statements
Page 11
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MAY 31, 2009 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from operations ............... $ 3,299,923
Adjustments to reconcile net increase (decrease) in net assets
resulting from operations to net cash provided by operating
activities:
Purchases of investments ........................................ (9,124,220)
Sales of investments ............................................ 5,349,357
Net realized gain/loss on investments ........................... 24,974,128
Net change in unrealized appreciation/depreciation on
investments .................................................. (23,242,700)
CHANGES IN ASSETS AND LIABILITIES:
Decrease in receivable for investment securities sold ........... 2,218,018
Increase in dividends receivable ................................ (27,732)
Increase in prepaid expenses .................................... (18,352)
Decrease in payable for investment securities purchased ......... (908,428)
Increase in interest and fees due on loan ....................... 121,082
Decrease in investment advisory fees payable .................... (3,252)
Decrease in audit and tax fees payable .......................... (18,898)
Increase in printing fees payable ............................... 952
Increase in legal fees payable .................................. 4,590
Decrease in custodian fees payable .............................. (1,526)
Decrease in Trustees' fees and expenses payable ................. (10,053)
Increase in transfer agent fees payable ......................... 1,822
Increase in accrued expenses and other liabilities .............. 1,384
------------
CASH PROVIDED BY OPERATING ACTIVITIES .............................. $ 2,616,095
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders from net investment
income ....................................................... (8,183,016)
Issuances of loan ............................................... 3,000,000
Repayments of loan .............................................. (2,100,000)
------------
CASH USED IN FINANCING ACTIVITIES .................................. (7,283,016)
-----------
Decrease in cash ................................................... (4,666,921)
Cash at beginning of period ........................................ 5,588,203
-----------
Cash at end of period .............................................. $ 921,282
===========
See Notes to Financial Statements
Page 12
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR PERIOD
5/31/2009 ENDED ENDED
(UNAUDITED) 11/30/2008(h) 11/30/2007 (a)
----------- ------------- --------------
Net asset value, beginning of period .............................. $ 4.51 $ 13.73 $ 19.10(b)
------- ------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ...................................... 0.35 1.02 0.70
Net realized and unrealized gain (loss) ........................... (0.11) (8.88) (5.32)
------- ------- --------
Total from investment operations .................................. 0.24 (7.86) (4.62)
------- ------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income ............................................. (0.33) (1.27) (0.71)
Return of capital ................................................. -- (0.09) --
------- ------- --------
Total from distributions .......................................... (0.33) (1.36) (0.71)
------- ------- --------
Common Shares offering costs charged to paid-in capital ........... -- -- (0.04)
------- ------- --------
Net asset value, end of period .................................... $ 4.42 $ 4.51 $ 13.73
======= ======= ========
Market value, end of period ....................................... $ 4.09 $ 3.29 $ 14.23
======= ======= ========
TOTAL RETURN BASED ON NET ASSET VALUE (c) (d) ..................... 9.52% (61.38)% (24.53)%
======= ======= ========
TOTAL RETURN BASED ON MARKET VALUE (d) (e) ........................ 38.92% (72.80)% (25.36)%
======= ======= ========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) .............................. $62,882 $64,208 $193,070
Ratio of total expenses to average net assets ..................... 2.68%(f) 2.72% 1.99%(f)
Ratio of total expenses to average net assets excluding
interest expense and fees ...................................... 2.26%(f) 1.73% 1.41%(f)
Ratio of net investment income to average net assets .............. 17.22%(f) 9.53% 8.64%(f)
Portfolio turnover rate ........................................... 8% 15% 3%
INDEBTEDNESS:
Loan outstanding (in 000's) ....................................... $12,350 $11,450 $ 36,000
Asset Coverage per $1,000 of indebtedness (g) ..................... $ 6,092 $ 6,608 $ 6,363
----------
(a) Initial seed date of April 23, 2007. The Fund commenced operations on May
25, 2007.
(b) Net of sales load of $0.90 per share on initial offering.
(c) Total return based on net asset value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in net
asset value per share and does not reflect sales load.
(d) Total return is not annualized for periods less than one year.
(e) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share price.
(f) Annualized.
(g) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the loan outstanding) and dividing by the
outstanding loan balance in 000's.
(h) On July 29, 2008, the Fund's Board of Trustees approved a sub-advisory
agreement with Confluence Investment Management LLC.
See Notes to Financial Statements
Page 13
NOTES TO FINANCIAL STATEMENTS
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
MAY 31, 2009 (UNAUDITED)
1. FUND DESCRIPTION
First Trust Specialty Finance and Financial Opportunities Fund (the "Fund") is a
non-diversified, closed-end management investment company organized as a
Massachusetts business trust on March 20, 2007, 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 FGB
on the New York Stock Exchange ("NYSE").
The Fund's primary investment objective is to seek a high level of current
income. The Fund seeks attractive total return as a secondary objective. Under
normal market conditions, the Fund invests at least 80% of its Managed Assets in
a portfolio of securities of specialty finance and other financial companies
that Confluence Investment Management LLC ("Confluence" or the "Sub-Advisor")
believes offer attractive opportunities for income and capital appreciation.
Under normal market conditions, the Fund concentrates its investments in
securities of companies within industries in the financial sector. "Managed
Assets" means the average daily gross asset value of the Fund (including assets
attributable to the principal amount of borrowings) minus the sum of the Fund's
accrued and unpaid dividends and accrued liabilities (other than the principal
amount of any borrowings incurred by the Fund). There can be no assurance that
the Fund will achieve its investment objectives. 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 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. 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 at market value or, in the absence of
market value with respect to any portfolio securities, at fair value according
to procedures adopted by the Fund's Board of Trustees. A majority of the Fund's
assets are valued using market information supplied by third parties. In the
event that market quotations are not readily available, the pricing service does
not provide a valuation for a particular asset, or the valuations are deemed
unreliable, the Fund's Board of Trustees has designated First Trust Advisors
L.P. ("First Trust") to use a fair value method to value the Fund's securities
and investments. Additionally, if events occur after the close of the principal
markets for particular securities (e.g., domestic debt and foreign securities),
but before the Fund values its assets, that could materially affect NAV, First
Trust may use a fair value method to value the Fund's securities and
investments. The use of fair value pricing by the Fund is governed by valuation
procedures adopted by the Fund's Board of Trustees and in accordance with the
provisions of the 1940 Act.
Portfolio securities listed on any exchange other than the NASDAQ National
Market ("NASDAQ") are valued at the last sale price on the business day as of
which such value is being determined. If there has been no sale on such day, the
securities are valued at the mean of the most recent bid and asked prices on
such day. Securities traded on the NASDAQ are valued at the NASDAQ Official
Closing Price as determined by NASDAQ. Portfolio securities traded on more than
one securities exchange are valued at the last sale price on the business day as
of which such value is being determined at the close of the exchange
representing the principal market for such securities. Portfolio securities
traded in the over-the-counter market, but excluding securities traded on the
NASDAQ, are valued at the closing bid prices. Short-term investments that mature
in less than 60 days when purchased are valued at amortized cost.
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 157, "Fair Value Measurements"
("FAS 157"), effective for fiscal years beginning after November 15, 2007. This
standard clarifies the definition of fair value for financial reporting,
establishes a framework for measuring fair value and requires additional
disclosures about the use of fair value measurements. The three levels of the
fair value hierarchy under FAS 157 are described as follows:
Page 14
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
MAY 31, 2009 (UNAUDITED)
- Level 1 - quoted prices in active markets for identical securities
- Level 2 - other significant observable inputs (including quoted prices
for similar securities, interest rates, prepayment speeds, credit
risk, etc.)
- Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not necessarily an
indication of the risk associated with investing in those securities. A summary
of the inputs used to value the Fund's investments as of May 31, 2009 is
included in the Fund's Portfolio of Investments.
In April 2009, FASB issued FASB Staff Position No. 157-4, "Determining Fair
Value when the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly" ("FSP
157-4"). FSP 157-4 is effective for fiscal years and interim periods ending
after June 15, 2009. FSP 157-4 provides additional guidance for estimating fair
value in accordance with FAS 157, when the volume and level of activity for the
asset or liability have significantly decreased. FSP 157-4 also includes
guidance on identifying circumstances that indicate a transaction is not
orderly. Management is currently evaluating the impact the implementation of FSP
157-4 will have on the Fund's financial statement disclosures, if any.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
on the accrual basis.
C. RESTRICTED SECURITIES:
The Fund invests in restricted securities, which are securities that cannot be
offered for public sale without first being registered under the Securities Act
of 1933, as amended (the "1933 Act"). Prior to registration, restricted
securities may only be resold in transactions exempt from registration under
Rule 144A of the 1933 Act. As of May 31, 2009, the Fund held restricted
securities as shown in the following table. The Fund does not have the right to
demand that such securities be registered. These securities are valued according
to the valuation procedures as stated in the Portfolio Valuation footnote (Note
2A) and are not expressed as a discount to the carrying value of comparable
unrestricted securities.
CARRYING
ACQUISITION VALUE PER % OF
SECURITY DATE SHARES SHARE CARRYING COST VALUE NET ASSETS
-------- ----------- ------- --------- ------------- ---------- ----------
Cypress Sharpridge
Investments, Inc. 5/19/08 192,307 $13.18 $2,999,989 $2,534,606 4.03%
Cypress Sharpridge
Investments, Inc.,
Warrants 5/19/08 576,923 -- -- -- --
------- ---------- ---------- ----
769,230 $2,999,989 $2,534,606 4.03%
======= ========== ========== ====
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income, if any, of the Fund are declared and paid
quarterly or as the Board of Trustees may determine from time to time.
Distributions of any net capital gains earned by the Fund are distributed at
least annually. Distributions will automatically be reinvested into additional
Common Shares pursuant to the Fund's Dividend Reinvestment Plan unless cash
distributions are elected by the shareholder.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from accounting principles generally
accepted in the United States of America. These differences are primarily due to
differing treatments of income and gains on various investment securities held
by the Fund, timing differences and differing characterization of distributions
made by the Fund.
Page 15
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
MAY 31, 2009 (UNAUDITED)
The tax character of distributions paid during the fiscal year ended November
30, 2008 was as follows:
Distributions paid from:
Ordinary Income ........ $17,995,120
Return of Capital ...... 1,293,149
As of November 30, 2008, the components of distributable earnings on a tax basis
were as follows:
Undistributed Ordinary Income ....................... $ --
Net Unrealized Appreciation (Depreciation) .......... (113,930,149)
Accumulated Capital and Other Losses ................ (87,077,243)
E. INCOME TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes.
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward for eight years following the
year of loss and offset such loss against any future realized capital gains. At
November 30, 2008, the Fund had available realized capital losses of $5,166,354
and $62,586,895 to offset future net capital gains through the fiscal years
ending 2015 and 2016, respectively.
Certain capital losses realized after October 31 may be deferred and treated as
occurring on the first day of the following fiscal year. For the fiscal year
ended November 30, 2008, the Fund intends to elect to defer net realized capital
losses of $19,323,993 and foreign currency losses of $1 incurred between
November 1, 2008 through November 30, 2008.
In June 2006, FASB issued Interpretation No. 48 "Accounting for Uncertainty in
Income Taxes" ("FIN 48"). FIN 48 establishes the minimum threshold for
recognizing, and a system for measuring, the benefits of a tax position taken or
expected to be taken in a tax return and is effective for the Fund's current
fiscal year. As of May 31, 2009, management has evaluated the application of FIN
48 to the Fund, and has determined that no provision for income tax is required
in the Fund's financial statements.
F. EXPENSES:
The Fund pays all expenses directly related to its operations.
G. ORGANIZATION AND OFFERING COSTS:
Organization costs consisted of costs incurred to establish the Fund and enable
it to legally do business. These costs included filing fees, listing fees, legal
services pertaining to the organization of the business and audit fees relating
to the initial registration and auditing the initial statement of assets and
liabilities, among other fees. Offering costs consisted of legal fees pertaining
to the Fund's Common Shares offered for sale, registration fees, underwriting
fees, and printing of the initial prospectus, among other fees. First Trust and
Gallatin Asset Management, Inc. ("Gallatin"), the Fund's prior sub-advisor, paid
all organization costs and all offering costs of the Fund (other than sales
load) that exceeded $0.04 per Common Share. The Fund's share of Common Share
offering costs, $561,210, was recorded as a reduction of the proceeds from the
sale of Common Shares during the fiscal period ended November 30, 2007. During
the fiscal year ended November 30, 2008, it was determined that actual offering
costs were less than the estimated offering costs by $85,301. Therefore,
paid-in-capital was increased by that amount for the fiscal year ended November
30, 2008, as reflected in the Statements of Changes in Net Assets.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, The Charger Corporation. First Trust
serves as investment advisor to the Fund pursuant to an Investment Management
Agreement. First Trust is responsible for the ongoing monitoring of the Fund's
investment portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
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.
Confluence serves as the Fund's sub-advisor and manages the Fund's portfolio
subject to First Trust's supervision. The Sub-Advisor receives a monthly
portfolio management fee calculated at an annual rate of 0.50% of Managed Assets
that is paid by First Trust from its investment advisory fee.
Page 16
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
MAY 31, 2009 (UNAUDITED)
PNC Global Investment Servicing (U.S.) Inc., an indirect majority-owned
subsidiary of The PNC Financial Services Group, Inc., serves as the Fund's
Administrator, Fund Accountant and Transfer Agent in accordance with certain fee
arrangements. PFPC Trust Company, also an indirect, majority-owned subsidiary of
The PNC Financial Services Group, Inc., serves as the Fund's Custodian in
accordance with certain fee arrangements.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid an annual retainer
of $10,000 per trust for the first 14 trusts of the First Trust Fund Complex and
an annual retainer of $7,500 per trust for each additional trust in the First
Trust Fund Complex. The annual retainer is allocated equally among each of the
trusts. No additional meeting fees are paid in connection with board or
committee meetings.
Additionally, the Lead Independent Trustee is paid $10,000 annually, the
Chairman of the Audit Committee is paid $5,000 annually, and each of the
chairmen of the Nominating and Governance Committee and the Valuation Committee
are paid $2,500 annually to serve in such capacities, with such compensation
paid by the trusts in the First Trust Fund Complex and divided among those
trusts. Trustees are also reimbursed by the trusts in the First Trust Fund
Complex for travel and out-of-pocket expenses in connection with all meetings.
The Lead Independent Trustee and each Committee chairman will serve two-year
terms ending December 31, 2009, before rotating to serve as a chairman of
another committee or as Lead Independent Trustee. The officers and "Interested"
Trustee receive no compensation from the Fund for serving in such capacities.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investment securities, excluding
U.S. government and short-term investments, for the six months ended May 31,
2009, were $9,124,220 and $5,349,357, respectively.
5. LEVERAGE
On September 12, 2008, the Fund entered into a Customer Agreement and a Credit
Annex thereto with Credit Suisse Securities (USA) LLC, which currently provides
for an uncommitted credit facility to be used as leverage for the Fund (the
"Credit Suisse Facility"). The Credit Suisse Facility provides for a secured,
uncommitted line of credit for the Fund, where Fund assets are pledged against
advances made to the Fund. Under the requirements of the 1940 Act, the Fund,
immediately after any such borrowings, must have an "asset coverage" of at least
300% (33 1/3% of the Fund's total assets after borrowings). The total amount of
loans that may be outstanding at any one time under the Credit Suisse Facility
is $70,000,000. For the six months ended May 31, 2009, the daily average amount
outstanding under the Credit Suisse Facility was $10,931,319. The high and low
annual interest rates during the six months ended May 31, 2009 were 3.41% and
1.81%, respectively, and the weighted average interest rate was 2.03%. The
interest rate at May 31, 2009 was 1.82%.
6. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
7. RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some of the risks
that should be considered for the Fund. For additional information about the
risks associated with investing in the Fund, please see the Fund's prospectus
and statement of additional information, as well as other Fund regulatory
filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund dividends
and distributions. Security prices can fluctuate for several reasons including
the general condition of the equity market, or when political or economic events
affecting the issuers occur. When the Advisor or Sub-Advisor determines that it
is temporarily unable to follow the Fund's investment strategy or that it is
impractical to do so (such as when a market disruption event has occurred and
trading in the securities is extremely limited or absent), the Fund may take
temporary defensive positions.
The Fund's performance was adversely impacted by the weakness in the credit
markets and broad stock market that occurred beginning in late 2008, and may
continue to be adversely affected if the weakness in the credit and stock
markets continue. In response to the financial crises affecting the banking
system and financial markets, the U.S. and foreign governments have intervened
to an unprecedented degree in the financial and credit markets. Among other
things, U.S. government regulators have encouraged, and in some cases structured
and provided financial assistance for, banks, securities firms, insurers and
other financial companies. Additional intervention programs have
Page 17
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
MAY 31, 2009 (UNAUDITED)
been adopted and proposed which will have a further impact on the securities
markets. Many of the recently enacted or proposed government measures are
far-reaching and without historical precedent. Furthermore, the U.S. government
has stated its willingness to implement additional measures as it may see fit to
address changes in market conditions. There can be no assurance that any or all
of these measures will succeed in stabilizing and providing liquidity to the
U.S. financial markets, including the extreme levels of volatility currently
being experienced. Such continued volatility could materially and adversely
affect the financial condition of the Fund.
FINANCIAL SECTOR CONCENTRATION RISK: Under normal market conditions, the Fund
will invest at least 25% of its total assets in securities of companies within
industries in the financial sector. A fund concentrated in a single industry or
sector is likely to present more risks than a fund that is broadly diversified
over several industries or groups of industries. Compared to the broad market,
an individual sector may be more strongly affected by changes in the economic
climate, broad market shifts, moves in a particular dominant stock, or
regulatory changes. Specialty finance and other financial companies in general
are subject to extensive government regulation, which may change frequently. The
profitability of specialty finance and other financial companies is largely
dependent upon the availability and cost of capital funds, and may fluctuate
significantly in response to changes in interest rates, as well as changes in
general economic conditions. From time to time, severe competition may also
affect the profitability of specialty finance and other financial companies.
Financial companies can be highly dependent upon access to capital markets and
any impediments to such access, such as general economic conditions or a
negative perception in the capital markets of a company's financial condition or
prospects, could adversely affect its business. Leasing companies can be
negatively impacted by changes in tax laws which affect the types of
transactions in which such companies engage.
BUSINESS DEVELOPMENT COMPANY ("BDC") RISK: Investments in closed-end funds that
elect to be treated as BDCs may be subject to a high degree of risk. BDCs
typically invest in small and medium-sized private and certain public companies
that may not have access to public equity markets or capital raising. As a
result, a BDC's portfolio typically will include a substantial amount of
securities purchased in private placements, and its portfolio may carry risks
similar to those of a private equity or venture capital fund. Securities that
are not publicly registered may be difficult to value and may be difficult to
sell at a price representative of their intrinsic value. Investments in BDCs are
subject to various risks, including management's ability to meet the BDC's
investment objective, and to manage the BDC's portfolio when the underlying
securities are redeemed or sold, during periods of market turmoil and as
investors' perceptions regarding a BDC or its underlying investments change. BDC
shares are not redeemable at the option of the BDC shareholder and, as with
shares of other closed-end funds, they may trade in the secondary market at a
discount to their NAV.
REIT, MORTGAGE-RELATED AND ASSET-BACKED SECURITIES RISKS: Investing in REITs
involves certain unique risks in addition to investing in the real estate
industry in general. REITs are subject to interest rate risk (especially
mortgage REITs) and the risk of default by lessees or borrowers. An equity REIT
may be affected by changes in the value of the underlying properties owned by
the REIT. A mortgage REIT may be affected by the ability of the issuers of its
portfolio of mortgages to repay their obligations. REITs whose underlying assets
are concentrated in properties used by a particular industry are also subject to
risks associated with such industry. REITs may have limited financial resources,
their securities may trade less frequently and in a limited volume, and their
securities may be subject to more abrupt or erratic price movements than larger
company securities.
In addition to REITs, the Fund may invest in a variety of other mortgage-related
securities, including commercial mortgage securities and other mortgage-backed
instruments. Rising interest rates tend to extend the duration of
mortgage-related securities, making them more sensitive to changes in interest
rates, and may reduce the market value of the securities. In addition,
mortgage-related securities are subject to prepayment risk, the risk that
borrowers may pay off their mortgages sooner than expected, particularly when
interest rates decline. This can reduce the Fund's returns because the Fund may
have to reinvest that money at lower prevailing interest rates.
The Fund's investments in other asset-backed securities are subject to risks
similar to those associated with mortgage-backed securities, as well as
additional risks associated with the nature of the assets and the servicing of
those assets.
LEVERAGE RISK: The use of leverage results in additional risks and can magnify
the effect of any losses. The funds borrowed pursuant to a leverage borrowing
program constitute a substantial lien and burden by reason of their prior claim
against the income of the Fund and against the net assets of the Fund in
liquidation. The rights of lenders to receive payments of interest on and
repayments of principal on any borrowings made by the Fund under a leverage
borrowing program are senior to the rights of holders of Common Shares with
respect to the payment of dividends or upon liquidation. If the Fund is not in
compliance with certain credit facility provisions, the Fund may not be
permitted to declare dividends or other distributions or purchase Common Shares.
NON-DIVERSIFICATION RISK: Because the Fund is non-diversified, it is only
limited as to the percentage of its assets which may be invested in the
securities of any one issuer by the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended. Because the Fund may invest a
relatively high percentage of its assets in a limited number of issuers, the
Fund may be more susceptible to any single economic, political or regulatory
occurrence and to the financial conditions of the issuers in which it invests.
Page 18
ADDITIONAL INFORMATION
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
MAY 31, 2009 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by PNC
Global Investment Servicing (U.S.) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above NAV at the time of valuation,
the Fund will issue new shares at a price equal to the greater of (i)
NAV per Common Share on that date or (ii) 95% of the market price on
that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and will
purchase Common Shares in the open market, on the NYSE or elsewhere,
for the participants' accounts. It is possible that the market price
for the Common Shares may increase before the Plan Agent has completed
its purchases. Therefore, the average purchase price per share paid by
the Plan Agent may exceed the market price at the time of valuation,
resulting in the purchase of fewer shares than if the dividend or
distribution had been paid in Common Shares issued by the Fund. The
Plan Agent will use all dividends and distributions received in cash
to purchase Common Shares in the open market within 30 days of the
valuation date except where temporary curtailment or suspension of
purchases is necessary to comply with federal securities laws.
Interest will not be paid on any uninvested cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (800) 331-1710, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized, although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing PNC Global Investment
Servicing (U.S.) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's website at http://www.sec.gov.
Page 19
ADDITIONAL INFORMATION - (CONTINUED)
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
MAY 31, 2009 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available (1) by calling (800)
988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; (3)
on the SEC's website at http://www.sec.gov; and (4) for review and copying at
the SEC's Public Reference Room ("PRR") in Washington, DC. Information regarding
the operation of the PRR may be obtained by calling (800) SEC-0330.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of Macquarie/First Trust Global
Infrastructure/Utilities Dividend & Income Fund, Energy Income and Growth Fund,
First Trust Enhanced Equity Income Fund, First Trust/Aberdeen Global Opportunity
Income Fund, First Trust/FIDAC Mortgage Income Fund, First Trust Strategic High
Income Fund, First Trust Strategic High Income Fund II, First Trust
Tax-Advantaged Preferred Income Fund, First Trust Specialty Finance and
Financial Opportunities Fund and First Trust Active Dividend Income Fund, was
held on April 16, 2009. At the Annual Meeting, Independent Trustees Richard E.
Erickson and Thomas R. Kadlec were elected by the holders of Common Shares of
the Fund as Class II Trustees for three-year terms expiring at the Fund's annual
meeting of shareholders in 2012. The number of votes cast in favor of Dr.
Erickson was 13,407,180, the number of votes against was 449,823 and the number
of abstentions was 374,330. The number of votes cast in favor of Mr. Kadlec was
13,389,221, the number of votes against was 467,782 and the number of
abstentions was 374,330. James A. Bowen, Robert F. Keith and Niel B. Nielson are
the current and continuing Trustees.
INVESTMENT MANAGEMENT AGREEMENT
BOARD CONSIDERATIONS REGARDING CONTINUATION OF INVESTMENT MANAGEMENT AGREEMENT
The Board of Trustees of First Trust Specialty Finance and Financial
Opportunities Fund (the "Fund"), including the Independent Trustees, unanimously
approved the continuation of the Investment Management Agreement (the
"Agreement") between the Fund and First Trust Advisors L.P. (the "Advisor") at a
meeting held on March 1-2, 2009. The Board determined that the terms of the
Agreement are fair and reasonable and that the Agreement continues to be in the
best interests of the Fund.
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 Agreement, the
Independent Trustees received a report from the Advisor in advance of the Board
meeting responding to a request for information from counsel to the Independent
Trustees. The report, among other things, outlined the services provided by the
Advisor (including the relevant personnel responsible for these services and
their experience); the advisory fees for the Fund as compared to fees charged to
other clients of the Advisor and as compared to fees charged by investment
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; any fall-out benefits to the Advisor; and information on the Advisor's
compliance program. The Independent Trustees also met separately with their
independent legal counsel to discuss the information provided by the Advisor.
The Board applied its business judgment to determine whether the arrangement
between the Fund and the Advisor is a reasonable business arrangement from the
Fund's perspective as well as from the perspective of shareholders.
The Board considered the nature, quality and extent of services provided by the
Advisor under the Agreement. The Board considered the Advisor's statements
regarding the incremental benefits associated with the Fund's
advisor/sub-advisor management structure. The Board considered that the Advisor
is responsible for the overall management and administration of 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 the
compliance program includes policies and procedures for monitoring the
sub-advisor's compliance with the 1940 Act and the Fund's investment objectives
and policies. The Board also noted the enhancements made by the Advisor to the
compliance program in 2008. The Board considered the assistance provided by the
Advisor in selecting a sub-advisor for the Fund upon the termination of the
prior sub-advisory agreement.
The Board considered the advisory fees paid under the Agreement. The Board
considered the advisory fees paid to the Advisor by similar funds, and noted
that the Advisor does not provide advisory services to other clients with
investment objectives and policies similar to the Fund's. In addition, the Board
received data prepared by Lipper Inc. ("Lipper"), an independent source, showing
the management fees and expense ratios of the Fund as compared to the management
fees and expense ratios of a combined peer group selected by Lipper and the
Advisor. The Board discussed with representatives of the Advisor the limitations
in creating a relevant peer group for the Fund, including that (i) the peer
funds may use different types of leverage which have different costs associated
with them; (ii) most peer funds
Page 20
ADDITIONAL INFORMATION - (CONTINUED)
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
MAY 31, 2009 (UNAUDITED)
do not employ an advisor/sub-advisor management structure; (iii) the peer funds
may not have the same fiscal year as the Fund, which may cause the expense data
used by Lipper to be measured over different time periods; (iv) many of the peer
funds are larger than the Fund; and (v) many of the peer funds have an inception
date prior to the Fund's inception date and their fee and expense structures may
not reflect newer pricing practices in the market. The Board reviewed the Lipper
materials, but based on its discussions with the Advisor, the Board determined
that the Lipper data was of limited value for purposes of its consideration of
the renewal of the Agreement.
The Board also considered performance information for the Fund, noting that,
similar to almost all other funds, the Fund's performance was impacted by the
severe market downturn in 2008. The Board noted 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 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 the combined peer group selected by Lipper and the
Advisor, as well as to a larger group. The Board reviewed the Lipper materials,
but for similar reasons to those described above, the Board determined that the
performance data provided by Lipper was of limited value. The Board considered
changes made to the Fund's leverage arrangements in 2008 as a result of market
events and considered an analysis prepared by the Advisor on the continued
benefits provided by the Fund's leverage. In addition, the Board considered the
market price and net asset value performance of the Fund since inception, and
compared the Fund's premium/discount to the average and median premium/discount
of the combined peer group, noting that the Fund's premium/discount was
generally indicative of the asset class and market events. Based on the
information provided and the Board's ongoing review of the Fund's performance,
and taking into account the historic market events of 2008, the Board concluded
that the Fund's performance was reasonable.
On the basis of all the information provided on the fees, expenses and
performance of the Fund, the Board concluded that the advisory fees were
reasonable and appropriate in light of the nature, quality and extent of
services provided by the Advisor under the Agreement.
The Board noted that the Advisor has continued to invest in personnel and
infrastructure and had noted that the advisory fee is not structured to pass the
benefits of any economies of scale on to the shareholders as the Fund's assets
grow. The Board concluded that the management fee reflects an appropriate level
of sharing of any economies of scale. The Board also considered the costs of the
services provided and profits realized by the Advisor from serving as investment
manager to closed-end funds for the twelve months ended December 31, 2008, 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
profitability appeared to be not excessive in light of the services provided to
the Fund. In addition, the Board considered and discussed any ancillary benefits
derived by the Advisor from its relationship with the Fund and noted that the
typical fall-out benefits to the Advisor such as soft dollars are not present.
The Board concluded that any other fall-out benefits received by the Advisor or
its affiliates would appear to be limited.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, determined that the terms of the
Agreement continue to be fair and reasonable and that the continuation of the
Agreement is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
Page 21
(FIRST TRUST LOGO)
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Confluence Investment Management LLC
349 Marshall Avenue, Suite 302
Saint Louis, MO 63119
ADMINISTRATOR, FUND ACCOUNTANT & TRANSFER AGENT
PNC Global Investment Servicing (U.S.) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
PFPC Trust Company
8800 Tinicum Boulevard
Philadelphia, PA 19153
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
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.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(a) Not applicable.
(b) There has been no change, as of the date of this filing, in any of the
portfolio managers identified in response to paragraph (a)(1) of this Item in
the registrant's most recently filed annual report on Form N-CSR.
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 trustees, 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) Not applicable.
(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 SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
By (Signature and Title)* /S/ JAMES A. BOWEN
-------------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date JULY 23, 2009
----------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /S/ JAMES A. BOWEN
-------------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date JULY 23, 2009
----------------------------------------------------------------------------
By (Signature and Title)* /S/ MARK R. BRADLEY
-------------------------------------------------------
Mark R. Bradley, Treasurer, Controller,
Chief Financial Officer
and Chief Accounting Officer
(principal financial officer)
Date JULY 23, 2009
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.