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 811-21586
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First Trust Enhanced Equity 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: December 31
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Date of reporting period: June 30, 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.
SEMI-ANNUAL REPORT
FOR THE SIX MONTHS ENDED
JUNE 30, 2013
First Trust
Enhanced Equity
Income Fund (FFA)
FIRST TRUST
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TABLE OF CONTENTS
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FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
SEMI-ANNUAL REPORT
JUNE 30, 2013
Shareholder Letter............................................................ 1
At A Glance................................................................... 2
Portfolio Commentary.......................................................... 3
Portfolio of Investments...................................................... 5
Statement of Assets and Liabilities...........................................11
Statement of Operations.......................................................12
Statements of Changes in Net Assets...........................................13
Financial Highlights..........................................................14
Notes to Financial Statements.................................................15
Additional Information........................................................20
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 Chartwell Investment Partners, L.P. ("Chartwell"
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 Enhanced Equity 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 objective. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Additional
Information 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
Chartwell 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 ENHANCED EQUITY INCOME FUND (FFA)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
JUNE 30, 2013
Dear Shareholders:
I am pleased to present you with the semi-annual report for your investment in
First Trust Enhanced Equity Income Fund (the "Fund").
The report you hold contains detailed information about your investment, a
portfolio commentary from the Fund's management team that provides a recap of
the period, a performance analysis and a market and Fund outlook. Additionally,
you will find the Fund's financial statements for the period this report covers.
I encourage you to read this document and discuss it with your financial
advisor. A successful investor is also typically a knowledgeable one, as we have
found to be the case at First Trust Advisors L.P. ("First Trust").
The six months covered by this report have been more positive for the U.S.
markets. In fact, the S&P 500 Index, as measured on a total return basis, rose
13.82% during the period, and many economists and investors have felt positive
about the current market environment. 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 reach their financial goals.
As you know, First Trust offers a variety of products that we believe could help
investors seeking long-term investment success. We encourage you to talk to your
advisor about the other investments First Trust offers that might fit your
financial goals and to discuss those goals with your advisor regularly so that
he or she can help keep you on track.
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. I look forward to
the remainder of 2013 and to the next edition of your Fund's report.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees and
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
"AT A GLANCE"
AS OF JUNE 30, 2013 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FFA
Common Share Price $12.61
Common Share Net Asset Value ("NAV") $13.98
Premium (Discount) to NAV (9.80)%
Net Assets Applicable to Common Shares $279,247,410
Current Quarterly Distribution per Common Share (1) $0.225
Current Annualized Distribution per Common Share $0.900
Current Distribution Rate on Closing Common Share Price (2) 7.14%
Current Distribution Rate on NAV (2) 6.44%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
6/12 11.77 13.12
7/12 11.81 13.09
11.73 13.11
11.77 13.20
11.87 13.33
8/12 11.96 13.44
12.03 13.59
12.17 13.66
12.05 13.60
12.02 13.55
9/12 12.19 13.80
12.39 14.01
12.23 13.78
12.21 13.58
10/12 12.29 13.76
12.26 13.49
12.30 13.53
12.00 13.34
11/12 12.12 13.34
11.70 13.07
11.32 12.90
11.91 13.35
11.91 13.43
12/12 11.82 13.39
11.77 13.37
11.86 13.31
11.60 13.05
1/13 12.17 13.64
12.35 13.74
12.43 13.85
12.58 13.93
2/13 12.61 14.07
12.69 14.11
12.78 14.06
12.77 14.01
3/13 12.77 14.02
12.87 14.31
13.24 14.43
12.91 14.09
12.83 14.17
4/13 12.70 14.03
13.02 14.36
12.71 14.00
12.91 14.25
5/13 13.06 14.45
13.22 14.57
13.33 14.74
13.27 14.63
13.06 14.43
6/13 13.04 14.56
12.94 14.44
12.35 13.89
12.61 13.98
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PERFORMANCE
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Average Annual Total Return
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6 Months Ended 1 Year Ended 5 Years Ended Inception (8/26/2004)
6/30/2013 6/30/2013 6/30/2013 to 6/30/2013
FUND PERFORMANCE (3)
NAV 9.09% 14.43% 7.60% 5.53%
Market Value 10.29% 15.05% 8.10% 3.76%
INDEX PERFORMANCE
S&P 500(R) Index 13.82% 20.60% 7.01% 6.60%
BXM Index 4.87% 5.29% 3.34% 4.39%
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% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
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JPMorgan Chase & Co. 3.5%
Apple, Inc. 3.4
Pfizer, Inc. 3.3
General Electric Co. 2.9
Philip Morris International, Inc. 2.8
International Business Machines Corp. 2.5
Occidental Petroleum Corp. 2.3
QUALCOMM, Inc. 2.2
Johnson & Johnson 2.2
Energy Transfer Partners, L.P. 2.2
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Total 27.3%
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% OF TOTAL
SECTOR CLASSIFICATION INVESTMENTS
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Information Technology 19.1%
Financials 16.7
Energy 13.1
Consumer Discretionary 12.3
Health Care 11.9
Industrials 9.8
Consumer Staples 9.2
Materials 3.0
Telecommunication Services 2.5
Utilities 2.4
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Total 100.0%
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(1) Most recent distribution paid or declared through 6/30/2013. 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 6/30/2013. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for NAV
returns and changes in Common Share price for market value returns. Total
returns do not reflect sales load and are not annualized for periods less
than one year. Past performance is not indicative of future results.
Page 2
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PORTFOLIO COMMENTARY
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FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
SEMI-ANNUAL REPORT
JUNE 30, 2013
SUB-ADVISOR
Chartwell Investment Partners, L.P. ("Chartwell") is an employee-owned
investment advisory firm founded on April 1, 1997, by nine investment
professionals from Delaware Investment Advisers. The firm is 75% owned by the
partners and employees of Chartwell and 25% owned by a limited partnership
comprised of three passive investors in the Philadelphia area. There are no
affiliates at this time. The firm is a research-based equity and fixed-income
manager with a disciplined, team-oriented investment process.
Timothy J. Riddle, an executive with 33 years of investment industry experience,
is the Chief Executive Officer of Chartwell. Michael J. McCloskey, an executive
with 25 years of management experience, serves as President. G. Gregory Hagar is
Chartwell's Chief Financial Officer and Chief Compliance Officer. He has 24
years of related experience.
PORTFOLIO MANAGEMENT TEAM
BERNARD P. SCHAFFER
MANAGING PARTNER, SENIOR PORTFOLIO MANAGER
DOUGLAS W. KUGLER, CFA
PRINCIPAL, SENIOR PORTFOLIO MANAGER
PETER M. SCHOFIELD, CFA
PRINCIPAL, SENIOR PORTFOLIO MANAGER
COMMENTARY
FIRST TRUST ENHANCED EQUITY INCOME FUND
The investment objective of First Trust Enhanced Equity Income Fund (the "Fund")
is to provide a high level of current income and gains and, to a lesser extent,
capital appreciation. The Fund pursues its investment objective by investing in
a diversified portfolio of equity securities. Under normal market conditions,
the Fund pursues an integrated investment strategy in which the Fund invests
substantially all of its managed assets in a diversified portfolio of common
stocks of U.S. corporations and U.S. dollar-denominated equity securities of
foreign issuers. These securities are traded on U.S. securities exchanges. In
addition, on an ongoing and consistent basis, the Fund will write (sell) covered
call options on a portion of the Fund's managed assets. There can be no
assurance that the Fund's investment objective will be achieved.
MARKET RECAP
The S&P 500(R) Index ("Index") returned 13.82% (inclusive of dividends) during
the six-month period ended June 30, 2013. At the end of 2012, the Index
struggled as it closed out a strong year (up 16.0%) but as the calendar turned
to 2013, stocks began a surge that resulted in an all-time closing high for the
Index of 1,669.16 on May 21. The rally occurred as the threat of any large
impact from the "fiscal cliff" was removed and reported economic data met or
exceeded expectations. There were several things that were remarkable about the
market's rally during the first five months of 2013. The market closed higher
almost every week in the first quarter, advancing 10% in that period. Thus the
first quarter of 2013 was the 8th best returning quarter in the last 10 years
for the Index. The composition of the returns was unusual in that the Index was
led higher by the more defensive sectors of the market. Healthcare, Consumer
Staples and Utilities were the highest-returning sectors in the Index in that
first quarter. Many significant rallies are often led by the more cyclical
sectors of the market. It is believed that this unusual leadership was brought
about by the strong demand for higher yielding equities which are more
commonplace in the defensive sectors. The Index continued to increase in the
second quarter, adding another 2.4%. The second quarter was more volatile than
the previous three months as the market began to wrestle with mixed messages
regarding the future of the Fed's accommodative policies and news surrounding
possible continued slowing of the Chinese economy. Overall, the Index's 13.82%
return during the period took many by surprise. In hindsight, it was driven by a
combination of the removal of some negatives (systemic risk in Europe, fear of a
hard-landing in China, fiscal-cliff concerns) and the emergence of new positives
(improving U.S. economy, fund flows into equities) plus the continuation of
ongoing positives (central-bank accommodation, corporate profitability, low
interest rates).
Page 3
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PORTFOLIO COMMENTARY (CONTINUED)
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PERFORMANCE ANALYSIS
The Net Asset Value ("NAV") total return(1) of the Fund for the six-month period
ended June 30, 2013, was 9.09%, and the market value total return(1) of the Fund
was 10.29%. Both of these returns are inclusive of dividends paid during the
period. While measures of volatility of the market have declined significantly
over the last two years, the Fund continued to take advantage of volatility in
the market where it could and sold call options on a significant percentage of
the Fund's holdings. We continue to believe the strategy of combining high
dividend-paying stocks and an option overwrite program is an excellent long-term
strategy. The Fund's portfolio will continue to be primarily focused on high
quality, large-capitalization dividend-paying stocks which often tilt the
portfolio towards a value orientation. This focus was both beneficial and
detrimental during the first six months of 2013. Large-capitalization stocks
trailed small-capitalization stocks as measured by the returns of the S&P 500
Index versus the S&P SmallCap 600 Index. A BofA Merrill Lynch Index(2) of B or
Worse-rated stocks returned 3.21% more than the index of B+ or Better-rated
stocks and the index comprised of stocks rated C&D2 returned 19.85% for the
period. The Fund's tilt towards a value orientation was beneficial to
performance versus the Index during the period as Value returns outpaced those
of Growth. The effects from the outperformance of lower-quality and
smaller-capitalization stocks outweighed the benefit from the value tilt of the
portfolio. Positive contributions came from stock selection in the Financials
group as well as the allocation to Master Limited Partnerships (MLPs). Stocks
such as MetLife (up 40.6%), BlackRock (up 25.9%), and Enterprise Product
Partners (up 22.3%) are examples of the positive stock selection. Lagging stock
selection in the Industrials, Consumer Discretionary and Information Technology
groups, as well as an overweight in the Technology Hardware and Equipment group
(which was the worst performing group for the period), contributed negatively to
relative performance.
MARKET OUTLOOK
The Index is up well over 130% from its closing low of 676.53 on March 9, 2009.
Three of the four full calendar years from 2009 to 2012 saw double-digit
increases, and so far calendar 2013 is more of the same. The question is: what
is next? The market is currently wrestling with a number of issues which makes
for an uncertain environment - but these uncertainties can also provide positive
impetus to stock prices if they are resolved in a market-friendly manner. While
there have been periods of uncertainty since early 2009, stock prices rose on a
combination of the resolution of those uncertainties, strong earnings growth and
increased confidence in the economy's ability to continue to improve. We believe
this can continue but not without volatility. Companies have been cutting
operating and administrative costs aggressively and a good number of them have
taken advantage of temporarily low interest rates by refinancing higher-cost
debt to debt with lower rates. This has brought overall corporate profit margins
to near all-time highs. But this creates uncertainty regarding companies'
abilities to increase or even maintain margins at these levels. Concurrent to
this increase in corporate earnings and margins, the economy has been growing
the last few years but at an unspectacular pace. This "plow-horse" level of
growth has led to uncertainty regarding whether the domestic U.S. economy can
sustain this level of growth after the Federal Reserve reduces the amount of
"accommodation" it has been providing. Some view the potential reduction of help
from the Fed as a good thing - meaning that the economy would be strong enough
to move forward without help. Others are fearful that growth will stop when the
accommodation is reduced. What this has done is raise the level of interest
rates and add uncertainty. Also adding to uncertainty around the market is the
condition of certain international economies - most notably China, other
emerging markets and Europe. Each of these regions is dealing with their own
economic issues, which have had the effect of slowing economic growth outside of
the U.S.
Our position is that, despite these uncertainties, the U.S. economy should
continue to grow at a reasonable, but not strong, rate and corporate profits
should continue to grow at a subdued pace when compared to previous years. This
could provide a solid backdrop for the market going forward. However, with
valuation of the stock market no longer at the lower end of historical norms,
and with earnings growth flattening out, moves higher in the Index will likely
be more muted going forward with the increased likelihood of periods of price
declines. No matter the outcome of these issues, we will manage the Fund with
the objective of generating a high level of current income while seeking capital
appreciation over the market cycle.
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1 Total return is based on the combination of reinvested dividends, 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.
2 The BofA Merrill Lynch MLQS Quality Indices. The BofA Merrill Lynch MLQS
Quality Indices are designed to represent the performance of groups of
U.S. companies based on their quality rankings based on the S&P Common
Stock Rankings. The C&D Index is designed to represent the performance of
U.S. companies with the lowest quality rankings while the B+ or Better and
the B or Worse Indices are designed to represent the performance of U.S.
companies rated as described in their titles. The indices are
equal-weighted and rebalanced monthly.
Page 4
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
PORTFOLIO OF INVESTMENTS
JUNE 30, 2013 (UNAUDITED)
SHARES DESCRIPTION VALUE
----------- --------------------------------------------------- -------------
COMMON STOCKS - 96.4%
AEROSPACE & DEFENSE - 1.7%
60,000 Honeywell International, Inc....................... $ 4,760,400
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AIR FREIGHT & LOGISTICS - 1.6%
45,000 FedEx Corp......................................... 4,436,100
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BEVERAGES - 2.3%
90,000 Coca-Cola (The) Co................................. 3,609,900
35,000 PepsiCo, Inc....................................... 2,862,650
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6,472,550
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CAPITAL MARKETS - 1.3%
14,000 BlackRock, Inc..................................... 3,595,900
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CHEMICALS - 1.3%
70,000 E.I. Du Pont de Nemours & Co....................... 3,675,000
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COMMERCIAL BANKS - 3.4%
55,000 PNC Financial Services Group, Inc.................. 4,010,600
130,000 Wells Fargo & Co................................... 5,365,100
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9,375,700
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COMMUNICATIONS EQUIPMENT - 3.8%
190,000 Cisco Systems, Inc................................. 4,618,900
100,000 QUALCOMM, Inc...................................... 6,108,000
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10,726,900
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COMPUTERS & PERIPHERALS - 5.1%
24,000 Apple, Inc......................................... 9,505,920
200,000 EMC Corp........................................... 4,724,000
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14,229,920
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CONSUMER FINANCE - 1.6%
70,000 Capital One Financial Corp......................... 4,396,700
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DIVERSIFIED FINANCIAL SERVICES - 3.5%
187,900 JPMorgan Chase & Co................................ 9,919,241
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DIVERSIFIED TELECOMMUNICATION SERVICES - 1.9%
105,000 AT&T, Inc.......................................... 3,717,000
30,000 Verizon Communications, Inc........................ 1,510,200
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5,227,200
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ELECTRIC UTILITIES - 1.2%
110,000 PPL Corp........................................... 3,328,600
-------------
ENERGY EQUIPMENT & SERVICES - 2.6%
35,000 Helmerich & Payne, Inc............................. 2,185,750
70,000 Schlumberger Ltd................................... 5,016,200
-------------
7,201,950
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FOOD & STAPLES RETAILING - 0.7%
42,000 Walgreen Co........................................ 1,856,400
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See Notes to Financial Statements Page 5
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2013 (UNAUDITED)
SHARES DESCRIPTION VALUE
----------- --------------------------------------------------- -------------
COMMON STOCKS (CONTINUED)
FOOD PRODUCTS - 2.8%
100,000 Kraft Foods Group, Inc............................. $ 5,587,000
75,000 Mondelez International, Inc., Class A ............. 2,139,750
-------------
7,726,750
-------------
HEALTH CARE EQUIPMENT & SUPPLIES - 1.8%
80,000 Covidien PLC ...................................... 5,027,200
-------------
HEALTH CARE PROVIDERS & SERVICES - 1.5%
90,000 Cardinal Health, Inc............................... 4,248,000
-------------
HOTELS, RESTAURANTS & LEISURE - 5.5%
85,000 Carnival Corp...................................... 2,914,650
53,900 McDonald's Corp.................................... 5,336,100
60,000 Starwood Hotels & Resorts Worldwide, Inc........... 3,791,400
25,000 Wynn Resorts Ltd................................... 3,200,000
-------------
15,242,150
-------------
HOUSEHOLD DURABLES - 2.1%
50,000 Lennar Corp., Class A ............................. 1,802,000
89,200 Newell Rubbermaid, Inc............................. 2,341,500
55,000 Toll Brothers, Inc. (a) ........................... 1,794,650
-------------
5,938,150
-------------
INDUSTRIAL CONGLOMERATES - 2.9%
350,000 General Electric Co................................ 8,116,500
-------------
INSURANCE - 3.8%
67,000 Lincoln National Corp.............................. 2,443,490
120,000 MetLife, Inc....................................... 5,491,200
35,000 Travelers (The) Cos., Inc.......................... 2,797,200
-------------
10,731,890
-------------
IT SERVICES - 3.8%
52,000 Automatic Data Processing, Inc..................... 3,580,720
37,000 International Business Machines Corp............... 7,071,070
-------------
10,651,790
-------------
LIFE SCIENCES TOOLS & SERVICES - 1.6%
105,000 Agilent Technologies, Inc.......................... 4,489,800
-------------
MACHINERY - 2.4%
37,000 Caterpillar, Inc................................... 3,052,130
45,000 Deere & Co......................................... 3,656,250
-------------
6,708,380
-------------
MEDIA - 1.7%
75,000 Walt Disney (The) Co............................... 4,736,250
-------------
METALS & MINING - 0.9%
90,000 Freeport-McMoRan Copper & Gold, Inc................ 2,484,900
-------------
MULTILINE RETAIL - 1.3%
55,000 Target Corp........................................ 3,787,300
-------------
Page 6 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2013 (UNAUDITED)
SHARES DESCRIPTION VALUE
----------- --------------------------------------------------- -------------
COMMON STOCKS (CONTINUED)
OIL, GAS & CONSUMABLE FUELS - 7.5%
35,000 Chevron Corp....................................... $ 4,141,900
45,000 ConocoPhillips .................................... 2,722,500
90,000 Kinder Morgan, Inc................................. 3,433,500
120,000 Marathon Oil Corp.................................. 4,149,600
72,000 Occidental Petroleum Corp.......................... 6,424,560
-------------
20,872,060
-------------
PAPER & FOREST PRODUCTS - 0.8%
50,000 International Paper Co............................. 2,215,500
-------------
PHARMACEUTICALS - 8.6%
80,000 Bristol-Myers Squibb Co............................ 3,575,200
71,000 Johnson & Johnson ................................. 6,096,060
100,000 Merck & Co., Inc................................... 4,645,000
326,886 Pfizer, Inc........................................ 9,156,076
17,929 Zoetis, Inc........................................ 553,835
-------------
24,026,171
-------------
REAL ESTATE INVESTMENT TRUSTS - 2.4%
100,000 Annaly Capital Management, Inc..................... 1,257,000
45,000 Digital Realty Trust, Inc.......................... 2,745,000
40,000 Mid-America Apartment Communities, Inc............. 2,710,800
-------------
6,712,800
-------------
ROAD & RAIL - 1.2%
150,000 CSX Corp........................................... 3,478,500
-------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 0.9%
102,500 Intel Corp......................................... 2,482,550
-------------
SOFTWARE - 3.9%
157,500 Microsoft Corp..................................... 5,438,475
175,000 Oracle Corp........................................ 5,376,000
-------------
10,814,475
-------------
SPECIALTY RETAIL - 1.7%
95,000 L Brands, Inc...................................... 4,678,750
-------------
TOBACCO - 3.5%
55,000 Altria Group, Inc.................................. 1,924,450
90,000 Philip Morris International, Inc................... 7,795,800
-------------
9,720,250
-------------
WATER UTILITIES - 1.2%
80,000 American Water Works Co., Inc...................... 3,298,400
-------------
WIRELESS TELECOMMUNICATION SERVICES - 0.6%
60,000 Vodafone Group PLC, ADR ........................... 1,724,400
-------------
TOTAL COMMON STOCKS ............................... 269,115,477
(Cost $234,030,936) -------------
See Notes to Financial Statements Page 7
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2013 (UNAUDITED)
SHARES/
UNITS DESCRIPTION VALUE
----------- --------------------------------------------------- -------------
MASTER LIMITED PARTNERSHIPS - 3.0%
OIL, GAS & CONSUMABLE FUELS - 3.0%
120,000 Energy Transfer Partners, L.P...................... $ 6,064,800
40,000 Enterprise Products Partners, L.P.................. 2,486,000
-------------
TOTAL MASTER LIMITED PARTNERSHIPS ................. 8,550,800
(Cost $3,595,214) -------------
COMMON STOCKS - BUSINESS DEVELOPMENT COMPANIES - 0.7%
CAPITAL MARKETS - 0.7%
110,000 Ares Capital Corp.................................. 1,892,000
-------------
TOTAL COMMON STOCKS - BUSINESS DEVELOPMENT
COMPANIES ...................................... 1,892,000
(Cost $1,799,672) -------------
TOTAL INVESTMENTS - 100.1% ........................ 279,558,277
(Cost $239,425,822) (b) -------------
NUMBER OF
CONTRACTS DESCRIPTION VALUE
----------- --------------------------------------------------- -------------
CALL OPTIONS WRITTEN - (0.5%)
Apple, Inc. Call
100 @ $425.00 due July 2013 ........................... (16,700)
-------------
Blackrock, Inc. Call
50 @ 260.00 due July 2013 ........................... (29,500)
-------------
Bristol-Myers Squibb Co. Call
250 @ 48.00 due July 2013 ........................... (2,500)
-------------
Capital One Financial Corp. Call
200 @ 62.50 due July 2013 ........................... (37,800)
-------------
Carnival Corp. Call
300 @ 33.50 due July 2013 ........................... (36,000)
-------------
General Electric Co. Call
750 @ 24.00 due July 2013 ........................... (9,000)
-------------
International Business Machines Corp. Call
200 @ 200.00 due July 2013 ........................... (32,800)
-------------
International Paper Co. Call
200 @ 47.00 due July 2013 ........................... (4,400)
-------------
Lennar Corp., Class A Call
250 @ 39.00 due July 2013 ........................... (9,250)
-------------
Marathon Oil Corp. Call
300 @ 36.00 due July 2013 ........................... (11,400)
-------------
Page 8 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2013 (UNAUDITED)
NUMBER OF
CONTRACTS DESCRIPTION VALUE
----------- --------------------------------------------------- -------------
CALL OPTIONS WRITTEN (CONTINUED)
Metlife, Inc. Call
400 @ $47.00 due July 2013............................. $ (25,600)
-------------
Microsoft Corp. Call
400 @ 34.00 due July 2013............................. (43,200)
-------------
Oracle Corp. Call
300 @ 31.00 due July 2013............................. (12,000)
-------------
S&P 500 Index Calls (c)
150 @ 1,610.00 due July 2013 ......................... (338,250)
500 @ 1,630.00 due July 2013 ......................... (527,500)
300 @ 1,650.00 due July 2013 ......................... (138,000)
-------------
(1,003,750)
-------------
Starwood Hotels & Resorts Worldwide, Inc. Call
250 @ 70.00 due July 2013 ............................ (1,875)
-------------
Toll Brothers, Inc. Call
350 @ 34.00 due July 2013 ............................ (22,750)
-------------
Walgreen Co. Call
250 @ 52.50 due July 2013 ............................ (750)
-------------
Wells Fargo & Co. Calls
250 @ 41.00 due July 2013............................. (28,250)
400 @ 42.00 due July 2013............................. (22,000)
-------------
(50,250)
-------------
Wynn Resorts Ltd. Call
150 @ 130.00 due July 2013............................ (43,500)
-------------
TOTAL CALL OPTIONS WRITTEN ........................ (1,393,025)
(Premiums received $1,398,491) -------------
NET OTHER ASSETS AND LIABILITIES - 0.4% ........... 1,082,158
-------------
NET ASSETS - 100.0% $ 279,247,410
=============
(a) Non-income producing security.
(b) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of June 30, 2013, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $45,614,743 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $5,482,288.
(c) Call options on securities indices were written on a portion of the common
stock positions that were not used to cover call options written on
individual equity securities held in the Fund's portfolio.
ADR American Depositary Receipt
See Notes to Financial Statements Page 9
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2013 (UNAUDITED)
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of June 30, 2013
is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
INVESTMENTS 6/30/2013 PRICES INPUTS INPUTS
--------------------------------------------------- ------------ ------------ ------------ ------------
Common Stocks*..................................... $269,115,477 $269,115,477 $ -- $ --
Master Limited Partnerships*....................... 8,550,800 8,550,800 -- --
Common Stocks - Business Development
Companies*.................................... 1,892,000 1,892,000 -- --
------------ ------------ ------------ ------------
TOTAL INVESTMENTS.................................. $279,558,277 $279,558,277 $ -- $ --
============ ============ ============ ============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
6/30/2013 PRICES INPUTS INPUTS
------------ ------------ ------------ ------------
Call Options Written............................... $ (1,393,025) $ (1,393,025) $ -- $ --
============ ============ ============ ============
*See the Portfolio of Investments for industry breakdown.
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 June 30, 2013.
Page 10 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2013 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $239,425,822)........................................................................ $279,558,277
Cash........................................................................................... 702,624
Receivables:
Dividends................................................................................... 708,602
Interest.................................................................................... 11
Prepaid expenses............................................................................... 16,938
------------
Total Assets............................................................................. 280,986,452
------------
LIABILITIES:
Options written, at value (Premiums received $1,398,491)....................................... 1,393,025
Payables:
Investment advisory fees.................................................................... 234,632
Audit and tax fees.......................................................................... 26,536
Legal fees.................................................................................. 26,283
Administrative fees......................................................................... 20,624
Custodian fees.............................................................................. 18,896
Transfer agent fees......................................................................... 7,708
Printing fees............................................................................... 7,094
Trustees' fees and expenses................................................................. 971
Financial reporting fees.................................................................... 771
Other liabilities.............................................................................. 2,502
------------
Total Liabilities........................................................................ 1,739,042
------------
NET ASSETS..................................................................................... $279,247,410
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $304,966,275
Par value...................................................................................... 199,732
Accumulated net investment income (loss)....................................................... (6,384,812)
Accumulated net realized gain (loss) on investments and written options transactions........... (59,671,706)
Net unrealized appreciation (depreciation) on investments and written options.................. 40,137,921
------------
NET ASSETS..................................................................................... $279,247,410
============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)........................... $ 13.98
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 19,973,164
============
See Notes to Financial Statements Page 11
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2013 (UNAUDITED)
INVESTMENT INCOME:
Dividends...................................................................................... $ 3,712,414
Interest....................................................................................... 305
------------
Total investment income..................................................................... 3,712,719
------------
EXPENSES:
Investment advisory fees....................................................................... 1,403,026
Administrative fees............................................................................ 122,533
Printing fees.................................................................................. 42,353
Legal fees..................................................................................... 26,086
Audit and tax fees............................................................................. 21,336
Transfer agent fees............................................................................ 18,136
Trustees' fees and expenses.................................................................... 13,773
Custodian fees................................................................................. 12,627
Financial reporting fees....................................................................... 4,625
Other.......................................................................................... 17,389
------------
Total expenses.............................................................................. 1,681,884
------------
NET INVESTMENT INCOME (LOSS)................................................................... 2,030,835
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments................................................................................. 13,012,090
Written option transactions (a)............................................................. (4,723,849)
------------
Net realized gain (loss)....................................................................... 8,288,241
------------
Net change in unrealized appreciation (depreciation) on:
Investments................................................................................. 13,239,174
Written options held (a).................................................................... (332,285)
------------
Net change in unrealized appreciation (depreciation)........................................... 12,906,889
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ 21,195,130
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ 23,225,965
============
(a) Primary risk exposure is equity option contracts.
Page 12 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
6/30/2013 ENDED
(UNAUDITED) 12/31/2012
------------ ------------
OPERATIONS:
Net investment income (loss)....................................................... $ 2,030,835 $ 5,064,559
Net realized gain (loss)........................................................... 8,288,241 9,425,237
Net change in unrealized appreciation (depreciation)............................... 12,906,889 18,652,517
Net increase from payment by the Sub-Advisor....................................... -- 77,318
------------ ------------
Net increase (decrease) in net assets resulting from operations.................... 23,225,965 33,219,631
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................................................. (8,987,924) (14,353,701)
Return of capital.................................................................. -- (3,622,147)
------------ ------------
Total distributions to shareholders................................................ (8,987,924) (17,975,848)
------------ ------------
Total increase (decrease) in net assets............................................ 14,238,041 15,243,783
NET ASSETS:
Beginning of period................................................................ 265,009,369 249,765,586
------------ ------------
End of period...................................................................... $279,247,410 $265,009,369
============ ============
Accumulated net investment income (loss) at end of period.......................... $ (6,384,812) $ 572,277
============ ============
COMMON SHARES:
Common Shares at end of period..................................................... 19,973,164 19,973,164
============ ============
See Notes to Financial Statements Page 13
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR YEAR YEAR YEAR YEAR
6/30/2013 ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) 12/31/2012 12/31/2011 12/31/2010 12/31/2009 12/31/2008
----------- ---------- ---------- ---------- ---------- ----------
Net asset value, beginning of period ..... $ 13.27 $ 12.51 $ 13.20 $ 12.32 $ 11.15 $ 18.38
--------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ............. 0.10 0.26 0.22 0.24 0.20 0.42
Net realized and unrealized gain (loss)... 1.06 1.40 (0.01) 1.52 1.93 (6.05)
--------- -------- -------- -------- -------- --------
Total from investment operations ......... 1.16 1.66 0.21 1.76 2.13 (5.63)
--------- -------- -------- -------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income .................... (0.45) (0.72) (0.68) (0.59) (0.19) (0.43)
Net realized gain ........................ -- -- -- -- -- (0.10)
Return of capital ........................ -- (0.18) (0.22) (0.29) (0.77) (1.07)
--------- -------- -------- -------- -------- --------
Total distributions to Common
Shareholders .......................... (0.45) (0.90) (0.90) (0.88) (0.96) (1.60)
========= ======== ======== ======== ======== ========
Net asset value, end of period ........... $ 13.98 $ 13.27 $ 12.51 $ 13.20 $ 12.32 $ 11.15
========= ======== ======== ======== ======== ========
Market value, end of period .............. $ 12.61 $ 11.84 $ 10.83 $ 12.63 $ 11.70 $ 8.85
========= ======== ======== ======== ======== ========
TOTAL RETURN BASED ON NET ASSET VALUE (a) 9.09% 14.18% (b) 2.42% 15.50% 22.24% (30.54)%
========= ======== ======== ======== ======== ========
TOTAL RETURN BASED ON MARKET VALUE (a) ... 10.29% 17.68% (7.33)% 16.37% 46.26% (37.22)%
========= ======== ======== ======== ======== ========
-----------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ..... $ 279,247 $265,009 $249,766 $263,614 $246,048 $222,675
Ratio of total expenses to average
net assets ............................. 1.20% (c) 1.21% 1.22% 1.25% 1.34% 1.31%
Ratio of net investment income (loss) to
average net assets ..................... 1.45% (c) 1.90% 1.65% 1.90% 1.80% 2.80%
Portfolio turnover rate .................. 18% 66% 52% 41% 74% 121%
-----------------------
(a) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, and changes in net asset value per share
for net asset value returns and changes in Common Share price for market
value returns. Total returns do not reflect sales load and are not
annualized for periods less than one year. Past performance is not
indicative of future results.
(b) The Fund received reimbursements from Chartwell Investment Partners, L.P.
(the "Sub-Advisor") in the amount of $77,318. The reimbursements from the
Sub-Advisor represent less than $0.01 per share and had no effect on the
Fund's total return.
(c) Annualized.
Page 14 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2013 (UNAUDITED)
1. ORGANIZATION
First Trust Enhanced Equity Income Fund (the "Fund") is a diversified,
closed-end management investment company organized as a Massachusetts business
trust on May 20, 2004, 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 FFA on the New York Stock
Exchange ("NYSE").
The Fund's investment objective is to provide a high level of current income and
gains and, to a lesser extent, capital appreciation. The Fund pursues its
investment objective by investing in a diversified portfolio of equity
securities. Under normal market conditions, the Fund pursues an integrated
investment strategy in which the Fund invests substantially all of its managed
assets in a diversified portfolio of common stocks of U.S. corporations and U.S.
dollar-denominated equity securities of non-U.S. issuers, in each case that are
traded on U.S. securities exchanges, and on an ongoing and consistent basis
writes (sells) covered call options on a portion of the Fund's managed assets.
Managed assets means the total asset value of the Fund minus the sum of the
Fund's liabilities, including the value of call options written (sold). There
can be no assurance that the Fund will achieve its investment objective. 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 New York Stock Exchange ("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.
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, the value of call options written (sold) and
dividends declared but unpaid) 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. The Fund's securities will be valued as follows:
Common stocks, master limited partnerships ("MLPs"), exchange-traded funds
and other equity securities listed on any national or foreign exchange
(excluding the NASDAQ(R) Stock Market LLC ("NASDAQ") and the London Stock
Exchange Alternative Investment Market ("AIM")) are valued at the last
sale price on the exchange on which they are principally traded or, for
NASDAQ and AIM securities, the official closing price. Securities traded
on more than one securities exchange are valued at the last sale price or
official closing price, as applicable, at the close of the securities
exchange representing the principal market for such securities.
Securities traded in the over-the-counter market are valued at their
closing bid prices.
Exchange-traded options and futures contracts are valued at the closing
price in the market where such contracts are principally traded. If no
closing price is available, exchange-traded options and futures contracts
are valued at the mean between the most recent bid and asked prices.
Over-the-counter options and futures contracts are valued at their closing
bid prices.
Short-term investments that mature in less than 60 days when purchased are
valued at amortized cost.
All market quotations used in valuing the Fund's securities are obtained from a
third party pricing service. If no quotation is received from a pricing service,
attempts will be made to obtain one or more broker quotes for the security. In
the event the pricing service does not provide a valuation, broker quotations
are not readily available, or the valuations received 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. Additionally,
if events occur after the close of the principal markets for certain securities
that could materially affect the Fund's NAV, First Trust will use a fair value
method to value the Fund's securities. The use of fair value pricing is governed
by valuation procedures adopted by the Fund's Board of Trustees, and in
accordance with the provisions of the 1940 Act. As a general principle, the fair
value of a security is the amount which the Fund might reasonably expect to
receive for the security upon its current sale. In light of the judgment
involved in fair
Page 15
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2013 (UNAUDITED)
valuations, there can be no assurance that a fair value assigned to a particular
security will be the amount which the Fund might be able to receive upon its
current sale. Fair valuation of a security will be based on the consideration of
all available information, including, but not limited to, the following:
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or the
appropriate stock exchange;
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might affect
the value of the security.
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 June 30, 2013, is
included with the Fund's Portfolio of Investments.
B. OPTION CONTRACTS:
The Fund is subject to equity price risk in the normal course of pursuing its
investment objective and may write (sell) options to hedge against changes in
the value of equities. Also, the Fund seeks to generate additional income, in
the form of premiums received, from writing (selling) the options. The Fund may
write (sell) covered call options ("options") on all or a portion of the equity
securities held in the Fund's portfolio and on securities indices as determined
to be appropriate by Chartwell Investment Partners, L.P. ("Chartwell" or the
"Sub-Advisor"), consistent with the Fund's investment objective. The number of
options the Fund can write (sell) is limited by the amount of equity securities
the Fund holds in its portfolio. Options on securities indices are designed to
reflect price fluctuations in a group of securities or segment of the securities
market rather than price fluctuations in a single security and are similar to
options on single securities, except that the exercise of securities index
options requires cash settlement payments and does not involve the actual
purchase or sale of securities. The Fund will not write (sell) "naked" or
uncovered options. If certain equity securities held in the Fund's portfolio are
not covered by a related call option on the individual equity security,
securities index options may be written on all or a portion of such uncovered
securities. When the Fund writes (sells) an option, an amount equal to the
premium received by the Fund is included in "Options written, at value" on the
Fund's Statement of Assets and Liabilities. Options are marked-to-market daily
and their value will be affected by changes in the value and dividend rates of
the underlying equity securities, changes in interest rates, changes in the
actual or perceived volatility of the securities markets and the underlying
equity securities and the remaining time to the options' expiration. The value
of options may also be adversely affected if the market for the options becomes
less liquid or trading volume diminishes.
Options the Fund writes (sells) will either be exercised, expire or be cancelled
pursuant to a closing transaction. If the price of the underlying equity
security exceeds the option's exercise price, it is likely that the option
holder will exercise the option. If an option written (sold) by the Fund is
exercised, the Fund would be obligated to deliver the underlying equity security
to the option holder upon payment of the strike price. In this case, the option
premium received by the Fund will be added to the amount realized on the sale of
the underlying security for
Page 16
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2013 (UNAUDITED)
purposes of determining gain or loss. If the price of the underlying equity
security is less than the option's strike price, the option will likely expire
without being exercised. The option premium received by the Fund will, in this
case, be treated as short-term capital gain on the expiration date of the
option. The Fund may also elect to close out its position in an option prior to
its expiration by purchasing an option of the same series as the option written
(sold) by the Fund. Gain or loss on options is presented separately as "Net
realized gain (loss) on written option transactions" on the Statement of
Operations.
The options that the Fund writes (sells) give the option holder the right, but
not the obligation, to purchase a security from the Fund at the strike price on
or prior to the option's expiration date. The ability to successfully implement
the writing (selling) of covered call options depends on the ability of the
Sub-Advisor to predict pertinent market movements, which cannot be assured.
Thus, the use of options may require the Fund to sell portfolio securities at
inopportune times or for prices other than current market value, which may limit
the amount of appreciation the Fund can realize on an investment, or may cause
the Fund to hold a security that it might otherwise sell. As the writer (seller)
of a covered option, the Fund foregoes, during the option's life, the
opportunity to profit from increases in the market value of the security
covering the option above the sum of the premium and the strike price of the
option, but has retained the risk of loss should the price of the underlying
security decline. The writer (seller) of an option has no control over the time
when it may be required to fulfill its obligation as a writer (seller) of the
option. Once an option writer (seller) has received an exercise notice, it
cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver the underlying security to the
option holder at the exercise price.
Over-the-counter options have the risk of the potential inability of
counterparties to meet the terms of their contracts. The Fund's maximum equity
price risk for purchased options is limited to the premium initially paid. In
addition, certain risks may arise upon entering into option contracts including
the risk that an illiquid secondary market will limit the Fund's ability to
close out an option contract prior to the expiration date and that a change in
the value of the option contract may not correlate exactly with changes in the
value of the securities hedged.
C. 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, if any, is
recorded daily on the accrual basis, including amortization of premiums and
accretion of discounts.
The Fund may hold securities of publicly-traded real estate investment trusts
("REITs"). Distributions from such investments may be comprised of return of
capital, capital gains and income. The actual character of amounts received
during the year is not known until after the REITs fiscal year end. The Fund
records the character of distributions received from REITs during the year based
on estimates available. The characterization of distributions received by the
Fund may be subsequently revised based on information received from the REITs
after their tax reporting periods conclude.
For the six months ended June 30, 2013, distributions of $292,700 received from
MLPs have been reclassified as return of capital. The cost basis of the
applicable MLPs has been reduced accordingly.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income of the Fund are declared and paid quarterly
or as the Board of Trustees may determine from time to time. Distributions of
any net realized 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 realized 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. The character of
distributions for tax reporting purposes will depend on the Fund's investment
experience during the remainder of its fiscal year. Based on information for the
period through June 30, 2013, it is likely that the Fund's distributions will
include a return of capital component for the fiscal year ending on December 31,
2013.
Page 17
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2013 (UNAUDITED)
The tax character of distributions paid during the fiscal year ended December
31, 2012 was as follows:
Distributions paid from:
Ordinary income................................... $ 14,353,701
Long-term capital gain............................ --
Return of capital................................. 3,622,147
As of December 31, 2012, the distributable earnings and net assets on a tax
basis were as follows:
Undistributed ordinary income..................... $ --
Undistributed capital gains....................... --
--------------
Total undistributed earnings...................... --
Accumulated capital and other losses.............. (61,149,168)
Net unrealized appreciation (depreciation)........ 26,611,283
--------------
Total accumulated earnings (losses)............... (34,537,885)
Other............................................. (5,618,753)
Paid-in capital................................... 305,166,007
--------------
Net assets........................................ $ 265,009,369
==============
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. 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
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 December 31, 2012, the Fund had capital loss carryforwards
for federal income tax purposes of $61,149,168 expiring December 31, 2017.
During the taxable year ended December 31, 2012, the Fund utilized pre-enactment
capital loss carryforwards in the amount of $9,220,440.
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 ending 2009, 2010,
2011 and 2012 remain open to federal and state audit. As of June 30, 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.
F. EXPENSES:
The Fund will pay all expenses directly related to its operations.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
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. First Trust
also provides fund reporting services to the Fund for a flat annual fee in the
amount of $9,250.
Chartwell manages the Fund's portfolio subject to First Trust's supervision.
Chartwell receives a monthly portfolio management fee calculated at an annual
rate of 0.50% of the Fund's Managed Assets that is paid monthly by First Trust
out of its investment advisory fee.
Page 18
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2013 (UNAUDITED)
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
Cost of purchases and proceeds from sales of investments, excluding short-term
investments, for the six months ended June 30, 2013, were $49,563,228 and
$59,713,204, respectively.
Written option activity for the Fund was as follows:
NUMBER
OF
WRITTEN OPTIONS CONTRACTS PREMIUMS
------------------------------------------------------------------------
Options outstanding at December 31, 2012... 13,800 $ 858,201
Options Written............................ 95,895 9,241,113
Options Expired............................ (41,291) (2,780,924)
Options Exercised.......................... (6,946) (331,993)
Options Closed............................. (55,158) (5,587,906)
-------- -----------
Options outstanding at June 30, 2013....... 6,300 $ 1,398,491
======== ===========
5. 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.
6. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined that there
were no subsequent events requiring recognition or disclosure in the financial
statements that have not already been disclosed.
Page 19
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2013 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) NAV per Common Share on that date or
(ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the NYSE or
elsewhere, for the participants' accounts. It is possible that the
market price for the Common Shares may increase before the Plan
Agent has completed its purchases. Therefore, the average purchase
price per share paid by the Plan Agent may exceed the market price
at the time of valuation, resulting in the purchase of fewer shares
than if the dividend or distribution had been paid in Common Shares
issued by the Fund. The Plan Agent will use all dividends and
distributions received in cash to purchase Common Shares in the open
market within 30 days of the valuation date except where temporary
curtailment or suspension of purchases is necessary to comply with
federal securities laws. Interest will not be paid on any uninvested
cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
--------------------------------------------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio investments during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
Page 20
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2013 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR") in
Washington, DC. Information regarding the operation of the PRR may be obtained
by calling (800) SEC-0330.
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 Active Dividend Income Fund, First Trust Energy Infrastructure
Fund, Macquarie/First Trust Global Infrastructure/Utilities Dividend & Income
Fund and First Trust High Income Long/Short Fund was held on April 17, 2013 (the
"Annual Meeting"). At the Annual Meeting, James A. Bowen and Niel B. Nielson
were elected by the Common Shareholders of the First Trust Enhanced Equity
Income Fund as Class III Trustees for a three-year term expiring at the Fund's
annual meeting of shareholders in 2016. The number of votes cast in favor of Mr.
Bowen was 18,143,662, the number of votes against was 373,929 and the number of
abstentions was 1,455,573. The number of votes cast in favor of Mr. Nielson was
18,220,786, the number of votes against was 296,805 and the number of
abstentions was 1,455,573. 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 CONTINUATION OF INVESTMENT MANAGEMENT AND
SUB-ADVISORY AGREEMENTS
The Board of Trustees of First Trust Enhanced Equity 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 Chartwell Investment Partners,
L.P. (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 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.
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 objective and policies. With respect to the Sub-Advisory Agreement,
the Board received a presentation from representatives of the Sub-Advisor
discussing the services that the Sub-Advisor provides to the Fund and how the
Sub-Advisor manages the Fund's investments. In light of the
Page 21
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2013 (UNAUDITED)
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 objective 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 provides
advisory services to one other closed-end fund with investment objectives and
policies similar to the Fund's and also provides services to certain separately
managed accounts with investment objectives and policies similar to the Fund's.
The Board noted that the Advisor charges the same advisory fee rate to the other
closed-end fund and 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 clients with
investment objectives and policies similar to the Fund's, noting that, while
none of the other clients are registered investment companies, the sub-advisory
fee rate is within the range of the fee rates charged by the Sub-Advisor to
these other clients. 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 and Sub-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) most peer funds do not employ an
advisor/sub-advisor management structure; and (iii) many 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. 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 two benchmarks. 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, and noted the
Sub-Advisor's statement that, in the context of the Fund's lower risk profile,
it believed the performance for 2012 was satisfactory. The Board also considered
the Fund's dividend yield as of March 28, 2013. 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 factors that may impact a fund's premium/discount.
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 considered that the Sub-Advisor had continually reinvested its capital
to build a large, experienced group of professionals to serve its clients,
including the Fund. The Board noted the Sub-Advisor's statement that economies
of scale in providing services to the Fund are not available at current asset
levels. 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 as 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 considered fall-out
benefits realized by the Sub-Advisor from its relationship with the Fund,
including soft-dollar arrangements, and considered a summary of such
arrangements.
Page 22
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND
JUNE 30, 2013 (UNAUDITED)
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, but not all,
of the risks that should be considered for the Fund. For additional information
about the risks associated with investing in the Fund, please see the Fund's
prospectus and statement of additional information, as well as other Fund
regulatory filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. 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 securities markets, 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.
EQUITY SECURITIES RISK: The Fund invests in equity securities. An adverse event
affecting an issuer, such as an unfavorable earnings report, may depress the
value of a particular equity security held by the Fund. Also, the prices of
equity securities are sensitive to general movements in the stock market and a
drop in the stock market may depress the prices of equity securities to which
the Fund has exposure. Equity securities prices fluctuate for several reasons,
including changes in investors' perceptions of the financial condition of an
issuer or the general condition of the relevant stock market, or when political
or economic events affecting the issuers or their industries occur.
OPTION RISK: The Fund may write (sell) covered call options on all or a portion
of the equity securities held in the Fund's portfolio as determined to be
appropriate by the Fund's Sub-Advisor, consistent with the Fund's investment
objective. The ability to successfully implement the Fund's investment strategy
depends on the Sub-Advisor's ability to predict pertinent market movements,
which can not be assured. Thus, the use of options may require the Fund to sell
portfolio securities at inopportune times or for prices other than current
market values, may limit the amount of appreciation the Fund can realize on an
investment, or may cause the Fund to hold an equity security that it might
otherwise sell. There can be no assurance that a liquid market for the options
will exist when the Fund seeks to close out an option position. Additionally, to
the extent that the Fund purchases options pursuant to a hedging strategy, the
Fund will be subject to additional risks.
INDUSTRY RISK: The Fund may not invest 25% or more of its total assets in
securities of issuers in any single industry. If the Fund is focused in an
industry, it may present more risks than if it were broadly diversified over
numerous industries of the economy. Individual industries may be subject to
unique risks which may include, among others, governmental regulation,
inflation, technological innovations that may render existing products and
equipment obsolete, competition from new entrants, high research and development
costs, and rising interest rates.
INCOME RISK: Net investment income paid by the Fund to its Common Shareholders
is derived from the premiums it receives from writing (selling) call options and
from the dividends and interest it receives from the equity securities and other
investments held in the Fund's portfolio and short-term gains thereon. Premiums
from writing (selling) call options and dividends and interest payments made by
the securities in the Fund's portfolio can vary widely over time. Dividends on
equity securities are not fixed but are declared at the discretion of an
issuer's board of directors. There is no guarantee that the issuers of the
equity securities in which the Fund invests will declare dividends in the future
or that if declared they will remain at current levels. The Fund cannot assure
as to what percentage of the distributions paid on the Common Shares, if any,
will consist of qualified dividend income or long-term capital gains, both of
which are taxed at lower rates for individuals than are ordinary income and
short-term capital gains.
NON-U.S. RISK: The Fund may invest a portion of its assets in the equity
securities of issuers domiciled in jurisdictions other than the U.S. Investments
in the securities and instruments of non-U.S. issuers involve certain
considerations and risks not ordinarily associated with investments in
securities and instruments of U.S. issuers. Non-U.S. companies are not generally
subject to uniform accounting, auditing and financial standards and requirements
comparable to those applicable to U.S. companies. Non-U.S. securities exchanges,
brokers and listed companies may be subject to less government supervision and
regulation than exists in the United States. Dividend and interest income may be
subject to withholding and other non-U.S. taxes, which may adversely affect the
net return on such investments. A related risk is that there may be difficulty
in obtaining or enforcing a court judgment abroad.
Page 23
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
Chartwell Investment Partners, L.P.
1235 Westlakes Drive, Suite 400
Berwyn, PA 19312
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.
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 have been no changes, as of the date of filing, in any of the
Portfolio Managers identified in response to paragraph (a)(1) of this item
in the Registrant's most recent 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 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) 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 Enhanced Equity Income Fund
------------------------------------------------------
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: August 9, 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: August 9, 2013
--------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: August 9, 2013
--------------------
* Print the name and title of each signing officer under his or her signature.