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, 2015
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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, 2015
FIRST TRUST
ENHANCED EQUITY
INCOME FUND (FFA)
FIRST TRUST CHARTWELL INVESTMENT PARTNERS
------------------------------------------
Institutional and Private Asset Management
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TABLE OF CONTENTS
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FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
SEMI-ANNUAL REPORT
JUNE 30, 2015
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...................................................... 21
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, Inc. ("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 section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund
performance on the Fund's webpage at http://www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. 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 material 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, 2015
Dear Shareholders:
Thank you for your investment in First Trust Enhanced Equity Income Fund (the
"Fund").
First Trust Advisors L.P. ("First Trust") is pleased to provide you with this
semi-annual report which contains detailed information about your investment for
the six months ended June 30, 2015, including a portfolio commentary from the
Fund's management team, a performance analysis and a market and Fund outlook.
Additionally, First Trust has compiled the Fund's financial statements for you
to review. We encourage you to read this report and discuss it with your
financial advisor.
U.S. markets, fueled by accelerating growth and an accommodating Federal
Reserve, enjoyed a prosperous year in 2014. However, for the six months covered
by this report, some economic and global factors, including the continued
conflict in the Middle East and a sharp decline in oil prices, created
volatility in the U.S. and global markets. Another factor that has impacted
markets is the fact that many economists are predicting the Federal Reserve will
begin to raise interest rates this year.
As I have written previously, First Trust believes investors should maintain
perspective about the markets and have realistic expectations about their
investments. Markets will always go up and down, but we believe that having a
long-term investment horizon and being invested in quality products can help you
reach your goals.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value the relationship and will continue to focus on our disciplined
investment approach and long-term perspective to help investors reach their
financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
"AT A GLANCE"
AS OF JUNE 30, 2015 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FFA
Common Share Price $14.36
Common Share Net Asset Value ("NAV") $15.73
Premium (Discount) to NAV (8.71)%
Net Assets Applicable to Common Shares $314,222,009
Current Quarterly Distribution per Common Share (1) $0.235
Current Annualized Distribution per Common Share $0.940
Current Distribution Rate on Closing Common Share Price (2) 6.55%
Current Distribution Rate on NAV (2) 5.98%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
6/30/14 $14.46 $15.91
7/3/14 14.58 16.08
7/11/14 14.55 15.94
7/18/14 14.57 16.00
7/25/14 14.57 15.99
8/1/14 14.05 15.58
8/8/14 13.97 15.68
8/15/14 14.37 15.90
8/22/14 14.73 16.14
8/29/14 14.76 16.29
9/5/14 14.93 16.30
9/12/14 14.63 16.20
9/19/14 14.79 16.38
9/26/14 14.34 15.95
10/3/14 14.27 15.81
10/10/14 13.88 15.27
10/17/14 13.63 15.15
10/24/14 14.30 15.75
10/31/14 14.57 16.00
11/7/14 14.68 16.11
11/14/14 14.65 16.14
11/21/14 14.87 16.30
11/28/14 14.92 16.27
12/5/14 14.85 16.39
12/12/14 14.44 15.72
12/19/14 14.84 16.26
12/26/14 14.80 16.14
1/2/15 14.31 15.95
1/9/15 14.49 15.88
1/16/15 14.17 15.66
1/23/15 14.47 15.89
1/30/15 14.18 15.43
2/6/15 14.37 15.90
2/13/15 14.92 16.28
2/20/15 14.66 16.36
2/27/15 14.84 16.35
3/6/15 14.61 16.08
3/13/15 14.44 15.92
3/20/15 14.52 16.06
3/27/15 14.27 15.85
4/2/15 14.29 15.96
4/10/15 14.65 16.27
4/17/15 14.68 16.18
4/24/15 15.01 16.32
5/1/15 15.05 16.40
5/8/15 15.00 16.42
5/15/15 15.19 16.47
5/22/15 15.27 16.50
5/29/15 15.06 16.39
6/5/15 14.99 16.27
6/12/15 14.94 16.27
6/19/15 15.11 16.35
6/26/15 14.58 16.03
6/30/15 14.36 15.73
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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 10 Years Ended Inception (8/26/2004)
6/30/2015 6/30/2015 6/30/2015 6/30/2015 to 6/30/2015
FUND PERFORMANCE (3)
NAV 1.87% 5.43% 14.68% 7.00% 6.92%
Market Value 3.44% 5.90% 15.03% 5.80% 5.57%
INDEX PERFORMANCE
S&P 500(R) Index 1.23% 7.42% 17.34% 7.89% 8.15%
BXM Index 3.67% 3.64% 9.99% 5.06% 5.18%
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% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
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Apple, Inc. 4.5%
JPMorgan Chase & Co. 4.1
General Electric Co. 3.1
Pfizer, Inc. 3.0
Merck & Co., Inc. 2.4
Philip Morris International, Inc. 2.3
Wells Fargo & Co. 2.3
Honeywell International, Inc. 2.2
Cisco Systems, Inc. 2.0
Gilead Sciences, Inc. 1.8
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Total 27.7%
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% OF TOTAL
SECTOR CLASSIFICATION INVESTMENTS
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Information Technology 20.2%
Financials 20.0
Health Care 14.4
Consumer Discretionary 12.1
Energy 9.4
Consumer Staples 9.0
Industrials 8.9
Materials 2.6
Utilities 2.2
Telecommunication Services 0.9
Other 0.3
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Total 100.0%
======
(1) Most recent distribution paid or declared through 6/30/2015. 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 6/30/2015. 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, 2015
SUB-ADVISOR
Chartwell Investment Partners, Inc. ("Chartwell"), a wholly-owned subsidiary of
TriState Capital Holdings, Inc., is a research-based equity and fixed-income
manager with a disciplined, team-oriented investment process. On July 1, 2015,
Chartwell changed its organizational form from a corporation to a limited
liability company to increase organizational tax efficiencies. This change has
no effect on Chartwell's ownership, management, or investment advisory services
to the Fund.
PORTFOLIO MANAGEMENT TEAM
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 (the "Index") returned 1.23% (inclusive of dividends)
during the six-month period ended June 30, 2015. During this time, the market
generally drifted higher but in a fairly tight range. A research piece published
by Strategas Research Partners found that the first five months of 2015 had the
eighth narrowest trading range (7.8%) in the Index going back roughly 70 years.
Despite the narrow trading range, other markets had a much more volatile
six-month period. Oil stayed in the headlines, as the price of a barrel of Brent
crude ranged from a low of $47 to a high of $68 and settled at $63 at the end of
June. Interest rates were another point of focus as the U.S. 10-year Treasury
yield moved from 2.17% at the end of last year to a low of 1.64%, back to a high
of 2.48% before settling at 2.35% on June 30th. Significant attention remains on
the short end of the yield curve, as the market attempts to figure out when the
Federal Reserve (the "Fed") will start to increase rates, how many increases may
occur, and how long the tightening phase will last. Foreign currency was yet
another issue as the U.S. dollar strengthened and companies with meaningful
foreign exchange exposure reported weaker results.
Consistently solid GDP growth remained elusive as first quarter 2015 growth was
measured at +0.6%, although analysts expect GDP growth to pick up in the back
half of the year. The unemployment rate continued to move downward, coming in at
5.3% for the month of June. For the six-month period ended June 30, 2015,
performance by sector within the Index was in a range of down -10.7% to up 9.7%,
with the bottom three sectors being Utilities (-10.7%), Energy (-4.7%), and
Industrials (-3.0%), while the best three were Health Care (+9.7%), Consumer
Discretionary (+6.8%), and Telecommunication Services (+3.2%). Overall, for the
stock market, it was a less turbulent six months compared to recent periods, as
the market waited for some visibility on the trajectory of economic improvement
as well as the path of short-term interest rates.
PERFORMANCE ANALYSIS
For the six-month period ended June 30, 2015, the Fund returned 1.87% on a net
asset value ("NAV") total return(1) basis and 3.44% on a market value total
return(1) basis. The S&P 500(R) Index returned 1.23% and the CBOE S&P 500
BuyWrite Index ("BXM") returned 3.67% on a total return basis over the same
period. In addition, while the premiums received from writing options were lower
-----------------------------
(1) Total return is based on the combination of reinvested dividends, capital
gains 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 loads and are not annualized for
periods less than one year. Past performance is not indicative of future
results.
Page 3
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
SEMI-ANNUAL REPORT
JUNE 30, 2015
than normal due to lower volatility, the Fund did benefit from its options
overwriting program. Within the equity portion of the portfolio, an underweight
in the Health Care Equipment & Services industry group was a detriment to
relative performance, as that group returned an Index best 13.31% for the
period. Stock selection in the Consumer Staples, Industrials and Financials
sectors was a positive contributor to relative returns while stock selection in
the Health Care, Information Technology, and Consumer Discretionary sectors
detracted from relative performance. Several of the Fund's holdings performed
extremely well during the period. Kraft Foods Group (+32.73%) received a
takeover offer from Heinz during the period (the Fund's position was
subsequently sold), LyondellBasell Industries (+32.46%) benefited from the
recovery in energy prices and higher earnings expectations and Gilead Sciences
(+24.66%) benefited from improving sentiment, as concerns involving competition
with their blockbuster Hepatitis C drugs declined. In total, 10 stocks owned by
the Fund were up over 10% in the period. Of course not all stocks performed so
strongly. Micron Technology (-38.77%), a semi-conductor manufacturer, reported
disappointing earnings and provided lower than expected earnings guidance;
National Oilwell Varco (-24.95%), a supplier of equipment to the energy
industry, declined as oil prices fell and earnings expectations were lowered;
and Freeport-McMoRan, Inc. (-18.89%), a copper miner and oil producer, fell as
copper prices declined and the company reduced its dividend.
MARKET OUTLOOK
The Index ended June, 2015 a little more than 3% below the record high it set in
late May, as fears around both Greece and China caused a small decline from the
recent peak. Despite the decline, the Index was still up over 200% from its
closing low of 676.53 on March 9, 2009. Five of the six full calendar years from
2009 to 2014 saw double-digit increases, with 2013 and 2014 in total up just
over 50%. The current year has seen a continuation of this uptrend but with
apparently less conviction. We believe this lower conviction level has been
brought about by the combination of higher equity valuations despite the
slowdown in earnings growth and the apparent imminence of a Federal Funds rate
hike for the first time in more than six years. Since the "Great Recession", the
markets have been provided with extremely low interest rates and sizeable sums
of liquidity. The liquidity firehose (at least in the U.S.) was turned off a
little earlier with the end of bond buying by the Fed and the stock market
seemed to accept that well. But the main questions on investors' minds at the
time of this writing are: When will the Fed start to "normalize" short-term
interest rates? What will be the pace of the "normalization"? How will the
economy and markets react? While the debate over the timing of Federal Funds
rate "lift-off" is interesting, the debate over its impact on the economy and
the stock market is probably more important, given that some increase in
short-term rates is fully expected.
While the impact of the expected rate hike is unknown, there are certain things
which are known and which bode well for the economy and the stock market. The
employment situation is showing continued improvement, wages appear to be
increasing after a period of stagnation, published inflation measures are still
subdued and the rather wild changes in both the price of oil and the foreign
exchange value of the dollar have stabilized (at least for now). Also, the
geo-political environment, while being somewhat tumultuous (e.g., Greek debt
repayment, Russia/Ukraine, continuing unrest in the Middle East) has so far
lacked any significantly threatening situations. Over the last few years, the
market has climbed the proverbial "wall of worry", as various controversies and
risks were resolved. The current situation is no different. Besides the
aforementioned geo-political environment and uncertainty over short-term
interest rates, other "bricks" in the wall are: the debate over the impact of
weather and/or "seasonal adjustments" on first quarter GDP growth, questions
about the sustainability of corporate profits and margins, and questions about
the slowing Chinese economy and the impacts of the recent sharp decline in their
stock market. As we have said in the past, we believe these uncertainties can
provide a positive impetus to stock prices if they are resolved in a market
friendly manner.
Our position is that, despite these uncertainties, the very slight U.S. GDP
growth rate of the first quarter of 2015 should prove to be an aberration and
the domestic and global economies should continue to grow at a reasonable rate.
Also, we believe U.S. corporate profits should continue to grow but at a subdued
pace when compared to previous years. Companies have been increasing corporate
cash flow which has provided them the wherewithal to increase share repurchases
and dividends. Low absolute interest rates and rising stock valuations have
contributed greatly to the large uptick in mergers and acquisitions that has
occurred over the last few quarters and which should continue, in our opinion.
These factors should provide a solid backdrop for the market going forward.
However, as we have been emphasizing, with the valuation of the stock market now
above its longer-term averages, and with earnings growth flattening out, moves
higher in the Index will likely be more muted going forward, with an 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.
Page 4
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
PORTFOLIO OF INVESTMENTS
JUNE 30, 2015 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------ -------------------------------------------------- -------------
COMMON STOCKS - 96.1%
AEROSPACE & DEFENSE - 3.2%
68,000 Honeywell International, Inc. (a)................. $ 6,933,960
15,000 Precision Castparts Corp.......................... 2,998,050
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9,932,010
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AIR FREIGHT & LOGISTICS - 1.5%
28,000 FedEx Corp. (a)................................... 4,771,200
-------------
AUTOMOBILES - 1.2%
110,000 General Motors Co................................. 3,666,300
-------------
BANKS - 8.8%
120,000 BB&T Corp. (a).................................... 4,837,200
190,000 JPMorgan Chase & Co. (a).......................... 12,874,400
23,000 M&T Bank Corp..................................... 2,873,390
127,000 Wells Fargo & Co. (a)............................. 7,142,480
-------------
27,727,470
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BEVERAGES - 2.9%
35,000 Anheuser-Busch InBev N.V., ADR (a)................ 4,223,450
52,000 PepsiCo, Inc. (a)................................. 4,853,680
-------------
9,077,130
-------------
BIOTECHNOLOGY - 2.9%
30,000 Celgene Corp. (b)................................. 3,472,050
48,700 Gilead Sciences, Inc.............................. 5,701,796
-------------
9,173,846
-------------
CAPITAL MARKETS - 3.7%
9,000 BlackRock, Inc. (a)............................... 3,113,820
100,000 Invesco Ltd. (a).................................. 3,749,000
60,000 State Street Corp. (a)............................ 4,620,000
-------------
11,482,820
-------------
CHEMICALS - 1.1%
34,000 LyondellBasell Industries N.V., Class A........... 3,519,680
-------------
COMMUNICATIONS EQUIPMENT - 3.4%
225,000 Cisco Systems, Inc. (a)........................... 6,178,500
70,000 QUALCOMM, Inc. (a)................................ 4,384,100
-------------
10,562,600
-------------
CONSUMER FINANCE - 1.2%
48,000 American Express Co............................... 3,730,560
-------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.9%
60,000 Verizon Communications, Inc. (a).................. 2,796,600
-------------
ELECTRIC UTILITIES - 1.0%
110,000 PPL Corp. (a)..................................... 3,241,700
-------------
ELECTRICAL EQUIPMENT - 1.1%
28,000 Rockwell Automation, Inc. (a)..................... 3,489,920
-------------
See Notes to Financial Statements Page 5
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2015 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------ -------------------------------------------------- -------------
COMMON STOCKS (CONTINUED)
ENERGY EQUIPMENT & SERVICES - 2.7%
70,000 National Oilwell Varco, Inc. (a).................. $ 3,379,600
112,000 Noble Corp. PLC................................... 1,723,680
40,000 Schlumberger, Ltd. (a)............................ 3,447,600
-------------
8,550,880
-------------
FOOD & STAPLES RETAILING - 1.3%
40,000 CVS Health Corp................................... 4,195,200
-------------
FOOD PRODUCTS - 1.0%
75,000 Mondelez International, Inc., Class A (a)......... 3,085,500
-------------
HEALTH CARE EQUIPMENT & SUPPLIES - 1.8%
75,000 Medtronic PLC..................................... 5,557,500
-------------
HEALTH CARE PROVIDERS & SERVICES - 1.5%
57,500 Cardinal Health, Inc. (a)......................... 4,809,875
-------------
HOTELS, RESTAURANTS & LEISURE - 2.5%
100,000 Carnival Corp. (a)................................ 4,939,000
35,000 Starwood Hotels & Resorts Worldwide, Inc. (a)..... 2,838,150
-------------
7,777,150
-------------
INDUSTRIAL CONGLOMERATES - 3.0%
360,000 General Electric Co. (a).......................... 9,565,200
-------------
INSURANCE - 3.3%
28,000 ACE Ltd........................................... 2,847,040
66,000 Arthur J. Gallagher & Co. (a)..................... 3,121,800
80,000 MetLife, Inc. (a)................................. 4,479,200
-------------
10,448,040
-------------
IT SERVICES - 1.3%
52,000 Automatic Data Processing, Inc. (a)............... 4,171,960
-------------
LIFE SCIENCES TOOLS & SERVICES - 1.9%
70,000 Agilent Technologies, Inc. (a).................... 2,700,600
25,000 Thermo Fisher Scientific, Inc..................... 3,244,000
-------------
5,944,600
-------------
MEDIA - 3.7%
57,500 CBS Corp., Class B (a)............................ 3,191,250
70,000 Comcast Corp., Class A (a)........................ 4,209,800
50,000 Time Warner, Inc. (a)............................. 4,370,500
-------------
11,771,550
-------------
METALS & MINING - 0.7%
122,000 Freeport-McMoRan, Inc. (a)........................ 2,271,640
-------------
MULTILINE RETAIL - 1.3%
65,000 Kohl's Corp. (a).................................. 4,069,650
-------------
OIL, GAS & CONSUMABLE FUELS - 4.5%
42,000 Chevron Corp. (a)................................. 4,051,740
25,000 Exxon Mobil Corp. (a)............................. 2,080,000
120,000 Marathon Oil Corp. (a)............................ 3,184,800
62,000 Occidental Petroleum Corp. (a).................... 4,821,740
-------------
14,138,280
-------------
Page 6 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2015 (UNAUDITED)
SHARES/UNITS DESCRIPTION VALUE
------------ -------------------------------------------------- -------------
COMMON STOCKS (CONTINUED)
PAPER & FOREST PRODUCTS - 0.7%
55,655 Domtar Corp. (a).................................. $ 2,304,117
-------------
PHARMACEUTICALS - 7.1%
10,000 Allergan PLC (b).................................. 3,034,600
40,000 AstraZeneca PLC, ADR (a).......................... 2,548,400
130,000 Merck & Co., Inc. (a)............................. 7,400,900
276,886 Pfizer, Inc. (a).................................. 9,283,987
-------------
22,267,887
-------------
REAL ESTATE INVESTMENT TRUSTS - 1.9%
60,000 Lamar Advertising Co., Class A (a)................ 3,448,800
35,000 Mid-America Apartment Communities, Inc. (a)....... 2,548,350
-------------
5,997,150
-------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 3.8%
120,000 Intel Corp. (a)................................... 3,649,800
80,000 Microchip Technology, Inc. (a).................... 3,794,000
100,000 Micron Technology, Inc. (b)....................... 1,884,000
135,000 NVIDIA Corp....................................... 2,714,850
-------------
12,042,650
-------------
SOFTWARE - 5.0%
65,000 Check Point Software Technologies Ltd. (a) (b).... 5,170,750
117,600 Microsoft Corp.................................... 5,192,040
130,000 Oracle Corp. (a).................................. 5,239,000
-------------
15,601,790
-------------
SPECIALTY RETAIL - 1.8%
65,000 L Brands, Inc..................................... 5,572,450
-------------
TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS - 5.8%
111,500 Apple, Inc. (a)................................... 13,984,899
160,000 EMC Corp. (a)..................................... 4,222,400
-------------
18,207,299
-------------
TEXTILES, APPAREL & LUXURY GOODS - 1.6%
70,000 VF Corp. (a)...................................... 4,881,800
-------------
TOBACCO - 3.8%
95,000 Altria Group, Inc. (a)............................ 4,646,450
90,000 Philip Morris International, Inc. (a)............. 7,215,300
-------------
11,861,750
-------------
WATER UTILITIES - 1.2%
75,000 American Water Works Co., Inc. (a)................ 3,647,250
-------------
TOTAL COMMON STOCKS............................... 301,913,004
(Cost $264,899,757) -------------
MASTER LIMITED PARTNERSHIPS - 2.1%
OIL, GAS & CONSUMABLE FUELS - 2.1%
55,000 Energy Transfer Partners, L.P. (a)................ 2,871,000
130,000 Enterprise Products Partners, L.P. (a)............ 3,885,700
-------------
TOTAL MASTER LIMITED PARTNERSHIPS................. 6,756,700
(Cost $3,313,331) -------------
See Notes to Financial Statements Page 7
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2015 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------ -------------------------------------------------- -------------
COMMON STOCKS - BUSINESS DEVELOPMENT COMPANIES - 1.0%
CAPITAL MARKETS - 1.0%
187,000 Ares Capital Corp. (a)............................ $ 3,078,020
-------------
TOTAL COMMON STOCKS - BUSINESS DEVELOPMENT
COMPANIES...................................... 3,078,020
(Cost $3,148,066) -------------
INVESTMENT COMPANIES - 0.3%
CAPITAL MARKETS - 0.3%
5,000 SPDR S&P 500 ETF Trust............................ 1,029,250
-------------
TOTAL INVESTMENT COMPANIES........................ 1,029,250
(Cost $1,053,985) -------------
TOTAL INVESTMENTS - 99.5%......................... 312,776,974
(Cost $272,415,139) (c) -------------
NUMBER OF
CONTRACTS DESCRIPTION VALUE
------------ -------------------------------------------------- -------------
CALL OPTIONS WRITTEN - (0.1%)
Allergan PLC Call
40 @ $ 315.00 due July 2015.......................... (6,880)
-------------
Anheuser-Busch InBev N.V., ADR Call
150 @ 130.00 due July 2015.......................... (3,750)
-------------
BB&T Corp. Call
300 @ 42.00 due July 2015.......................... (6,600)
-------------
Cardinal Health, Inc. Call
200 @ 92.50 due July 2015.......................... (400)
-------------
Carnival Corp. Call
250 @ 50.00 due July 2015.......................... (17,500)
-------------
Comcast Corp., Class A Call
350 @ 60.00 due July 2015.......................... (36,400)
-------------
CVS Health Corp. Call
200 @ 107.00 due July 2015.......................... (13,200)
-------------
EMC Corp. Call
500 @ 28.00 due July 2015.......................... (4,000)
-------------
Exxon Mobil Corp. Call
250 @ 85.00 due July 2015.......................... (10,500)
-------------
Freeport-McMoRan, Inc. Call
300 @ 23.00 due July 2015.......................... (1,500)
-------------
General Electric Co. Call
750 @ 28.00 due July 2015.......................... (6,000)
-------------
Gilead Sciences, Inc. Call
125 @ 125.00 due July 2015.......................... (5,500)
-------------
JPMorgan Chase & Co. Call
750 @ 70.00 due July 2015.......................... (27,000)
-------------
LyondellBasell Industries N.V., Class A Call
170 @ 110.00 due July 2015.......................... (4,250)
-------------
MetLife, Inc. Call
300 @ 57.50 due July 2015......................... (15,900)
-------------
Page 8 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2015 (UNAUDITED)
NUMBER OF
CONTRACTS DESCRIPTION VALUE
------------ -------------------------------------------------- --------------
CALL OPTIONS WRITTEN (CONTINUED)
Microsoft Corp. Call
500 @ $ 49.00 due July 2015.......................... $ (1,000)
-------------
Mondelez International, Inc., Class A Call
300 @ 42.00 due July 2015.......................... (10,800)
-------------
Noble Corp. PLC Calls
300 @ 19.00 due July 2015.......................... (1,200)
200 @ 20.00 due September 2015..................... (1,500)
-------------
(2,700)
-------------
Oracle Corp. Call
300 @ 45.00 due July 2015.......................... (300)
-------------
Precision Castparts Corp. Call
60 @ 220.00 due July 2015.......................... (900)
-------------
S&P 500 Index Calls (d)
125 @ 2,120.00 due July 2015.......................... (61,250)
100 @ 2,135.00 due July 2015.......................... (20,300)
175 @ 2,150.00 due July 2015.......................... (15,750)
250 @ 2,160.00 due August 2015........................ (127,500)
-------------
(224,800)
-------------
Starwood Hotels & Resorts Worldwide, Inc. Call
150 @ 87.50 due July 2015.......................... (3,750)
-------------
Time Warner, Inc. Call
250 @ 90.00 due July 2015.......................... (12,500)
-------------
Wells Fargo & Co. Call
400 @ 57.50 due July 2015.......................... (17,600)
-------------
TOTAL CALL OPTIONS WRITTEN........................ (433,730)
(Premiums received $798,950) -------------
NET OTHER ASSETS AND LIABILITIES - 0.6%........... 1,878,765
-------------
NET ASSETS - 100.0%............................... $ 314,222,009
=============
(a) All or a portion of this security is pledged to cover index call options
written.
(b) Non-income producing security.
(c) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of June 30, 2015, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $49,248,533 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $8,886,698.
(d) 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, 2015 (UNAUDITED)
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of June 30, 2015
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 6/30/2015 PRICES INPUTS INPUTS
--------------------------------------------------- ------------- ------------- ------------- -------------
Common Stocks*..................................... $ 301,913,004 $ 301,913,004 $ -- $ --
Master Limited Partnerships*....................... 6,756,700 6,756,700 -- --
Common Stocks - Business Development
Companies*..................................... 3,078,020 3,078,020 -- --
Investment Companies*............................. 1,029,250 1,029,250 -- --
------------- ------------- ------------- -------------
TOTAL INVESTMENTS.................................. $ 312,776,974 $ 312,776,974 $ -- $ --
============= ============= ============= =============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
6/30/2015 PRICES INPUTS INPUTS
------------- ------------- ------------- -------------
Call Options Written............................... $ (433,730) $ (433,730) $ -- $ --
============= ============= ============= =============
* 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, 2015.
Page 10 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2015 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $272,415,139)............................................................................ $312,776,974
Cash.............................................................................................. 1,334,002
Receivables:
Dividends...................................................................................... 633,876
Investment securities sold..................................................................... 256,174
Dividend reclaims.............................................................................. 4,347
Interest....................................................................................... 11
Prepaid expenses.................................................................................. 15,667
------------
Total Assets................................................................................... 315,021,051
------------
LIABILITIES:
Options written, at value (Premiums received $798,950)............................................ 433,730
Payables:
Investment advisory fees....................................................................... 266,834
Investment securities purchased................................................................ 26,625
Audit and tax fees............................................................................. 26,368
Administrative fees............................................................................ 14,477
Printing fees.................................................................................. 12,845
Custodian fees................................................................................. 6,565
Legal fees..................................................................................... 6,364
Transfer agent fees............................................................................ 3,324
Financial reporting fees....................................................................... 797
Trustees' fees and expenses.................................................................... 157
Other liabilities................................................................................. 956
------------
Total Liabilities.............................................................................. 799,042
------------
NET ASSETS........................................................................................ $314,222,009
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................... $278,163,961
Par value......................................................................................... 199,732
Accumulated net investment income (loss).......................................................... (5,967,780)
Accumulated net realized gain (loss) on investments and written options........................... 1,099,041
Net unrealized appreciation (depreciation) on investments and written options..................... 40,727,055
------------
NET ASSETS........................................................................................ $314,222,009
============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share).............................. $ 15.73
============
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, 2015 (UNAUDITED)
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $12,538)............................................. $ 4,202,061
Interest.......................................................................................... 107
------------
Total investment income........................................................................ 4,202,168
------------
EXPENSES:
Investment advisory fees.......................................................................... 1,598,067
Printing fees..................................................................................... 43,103
Administrative fees............................................................................... 38,170
Audit and tax fees................................................................................ 21,422
Transfer agent fees............................................................................... 17,246
Custodian fees.................................................................................... 13,932
Trustees' fees and expenses....................................................................... 10,045
Legal fees........................................................................................ 5,578
Financial reporting fees.......................................................................... 4,651
Other............................................................................................. 15,690
------------
Total expenses................................................................................. 1,767,904
------------
NET INVESTMENT INCOME (LOSS)...................................................................... 2,434,264
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments.................................................................................... 16,834,511
Written options................................................................................ 3,078,986
------------
Net realized gain (loss).......................................................................... 19,913,497
------------
Net change in unrealized appreciation (depreciation) on:
Investments.................................................................................... (17,431,053)
Written options................................................................................ 52,697
------------
Net change in unrealized appreciation (depreciation).............................................. (17,378,356)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................... 2,535,141
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................... $ 4,969,405
============
Page 12 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
6/30/2015 ENDED
(UNAUDITED) 12/31/2014
------------ ------------
OPERATIONS:
Net investment income (loss)....................................................... $ 2,434,264 $ 4,804,048
Net realized gain (loss)........................................................... 19,913,497 35,892,048
Net change in unrealized appreciation (depreciation)............................... (17,378,356) (7,977,596)
------------ ------------
Net increase (decrease) in net assets resulting from operations.................... 4,969,405 32,718,500
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................................................. (9,387,387) (18,375,311)
------------ ------------
Total distributions to shareholders................................................ (9,387,387) (18,375,311)
------------ ------------
Total increase (decrease) in net assets............................................ (4,417,982) 14,343,189
NET ASSETS:
Beginning of period................................................................ 318,639,991 304,296,802
------------ ------------
End of period...................................................................... $314,222,009 $318,639,991
============ ============
Accumulated net investment income (loss) at end of period.......................... $ (5,967,780) $ 985,343
============ ============
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
6/30/2015 ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) 12/31/2014 (a) 12/31/2013 12/31/2012 12/31/2011 12/31/2010
----------- -------------- ---------- ---------- ---------- ----------
Net asset value, beginning of period..... $ 15.95 $ 15.24 $ 13.27 $ 12.51 $ 13.20 $ 12.32
-------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)............. 0.12 0.24 0.21 0.26 0.22 0.24
Net realized and unrealized gain (loss).. 0.13 1.39 2.66 1.40 (0.01) 1.52
-------- -------- -------- -------- -------- --------
Total from investment operations......... 0.25 1.63 2.87 1.66 0.21 1.76
-------- -------- -------- -------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income.................... (0.47) (0.92) (0.90) (0.72) (0.68) (0.59)
Return of capital........................ -- -- -- (0.18) (0.22) (0.29)
-------- -------- -------- -------- -------- --------
Total distributions to Common
Shareholders.......................... (0.47) (0.92) (0.90) (0.90) (0.90) (0.88)
-------- -------- -------- -------- -------- --------
Net asset value, end of period........... $ 15.73 $ 15.95 $ 15.24 $ 13.27 $ 12.51 $ 13.20
======== ======== ======== ======== ======== ========
Market value, end of period.............. $ 14.36 $ 14.34 $ 13.32 $ 11.84 $ 10.83 $ 12.63
======== ======== ======== ======== ======== ========
TOTAL RETURN BASED ON NET ASSET
VALUE (b)............................. 1.87% 11.63% 23.11% 14.18% (c) 2.42% 15.50%
======== ======== ======== ======== ======== ========
TOTAL RETURN BASED ON MARKET
VALUE (b)............................. 3.44% 14.83% 20.60% 17.68% (7.33)% 16.37%
======== ======== ======== ======== ======== ========
-----------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)..... $314,222 $318,640 $304,297 $265,009 $249,766 $263,614
Ratio of total expenses to average net
assets................................ 1.11% (d) 1.18% 1.19% 1.21% 1.22% 1.25%
Ratio of net investment income (loss) to
average net assets.................... 1.52% (d) 1.54% 1.45% 1.90% 1.65% 1.90%
Portfolio turnover rate.................. 24% 44% 40% 66% 52% 41%
-----------------------------
(a) On February 20, 2014, the Fund's Board of Trustees approved an interim and
new sub-advisory agreement with Chartwell Investment Partners, Inc.
("Chartwell"), which became the Fund's sub-advisor on March 5, 2014, under
the interim sub-advisory agreement. On July 2, 2014, the Fund's
shareholders voted to approve the new sub-advisory agreement.
(b) 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.
(c) The Fund received reimbursements from Chartwell Investment Partners, L.P.
(the predecessor to Chartwell) in the amount of $77,318. The
reimbursements represented less than $0.01 per share and had no effect on
the Fund's total return.
(d) Annualized.
Page 14 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
JUNE 30, 2015 (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 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 Fund, which is an investment company within the scope of Financial
Accounting Standards Board ("FASB") Accounting Standards Update 2013-08, follows
accounting and reporting guidance under FASB Accounting Standards Codification
Topic 946, "Financial Services-Investment Companies." The following is a summary
of significant accounting policies consistently followed by the Fund in the
preparation of its financial statements. The preparation of financial statements
in accordance with accounting principles generally accepted in the United States
of America ("U.S. GAAP") requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
A. PORTFOLIO VALUATION
The net asset value ("NAV") of the Common Shares of the Fund is determined daily
as of the close of regular trading on the NYSE, normally 4:00 p.m. Eastern time,
on each day the NYSE is open for trading. If the NYSE closes early on a
valuation day, the NAV is determined as of that time. The Fund's 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 at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Pricing Committee of the Fund's
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"),
in accordance with valuation procedures adopted by the Fund's Board of Trustees,
and in accordance with provisions of the 1940 Act. Investments valued by the
Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to
the Portfolio of Investments. The Fund's investments are 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 an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Exchange-traded options 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 contracts are fair valued at the mean
of their most recent bid and asked price, if available, and otherwise at
their closing bid price. Over-the-counter options contracts are fair
valued at the mean of their most recent bid and asked price, if available,
and otherwise at their closing bid price.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Fund's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a pricing service is unable to provide a market
price; securities whose trading has been formally suspended; a security whose
market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
Page 15
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
JUNE 30, 2015 (UNAUDITED)
obtain a reliable market quotation; and a security whose price, as provided by
the pricing service, does not reflect the security's fair value. As a general
principle, the current fair value of a security would appear to be the amount
which the owner might reasonably expect to receive for the security upon its
current sale. When fair value prices are used, generally they will differ from
market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, 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 methodologies 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, 2015, 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, Inc. ("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.
Page 16
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
JUNE 30, 2015 (UNAUDITED)
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 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 options" 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, 2015, distributions of $207,400 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, 2015, it is likely that the Fund's distributions will
include a return of capital component for the fiscal year ending on December 31,
2015.
Page 17
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
JUNE 30, 2015 (UNAUDITED)
The tax character of distributions paid during the fiscal year ended December
31, 2014 was as follows:
Distributions paid from:
Ordinary income............................... $ 18,375,311
Long-term capital gain........................ --
Return of capital............................. --
As of December 31, 2014, 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.......... (13,039,607)
Net unrealized appreciation (depreciation).... 58,462,612
--------------
Total accumulated earnings (losses)........... 45,423,005
Other......................................... (5,146,707)
Paid-in capital............................... 278,363,693
--------------
Net assets.................................... $ 318,639,991
==============
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 up
to eight years and treated as short-term losses. As a transition rule, the Act
requires that post-enactment net capital losses be used before pre-enactment net
capital losses. At December 31, 2014, the Fund had pre-enactment capital loss
carryforwards for federal income tax purposes of $12,534,984 expiring December
31, 2017.
During the taxable year ended December 31, 2014, the Fund utilized pre-enactment
capital loss carryforwards in the amount of $34,163,729.
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 2011, 2012,
2013 and 2014 remain open to federal and state audit. As of June 30, 2015,
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.
Certain losses realized during the current fiscal year may be deferred and
treated as occurring on the first day of the following year for federal income
tax purposes. For the fiscal year ended December 31, 2014, the Fund intends to
elect to defer net capital losses of $504,623.
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 (FFA)
JUNE 30, 2015 (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 that is allocated pro rata among each fund in the First Trust Fund
Complex based on net assets. Each Independent Trustee is also paid an annual per
fund fee that varies based on whether the fund is a closed-end or other actively
managed fund, or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees 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 Committee Chairmen rotate every
three years. The officers and "Interested" Trustee receive no compensation from
the Fund 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, 2015, were $76,711,000 and
$80,802,183, respectively.
5. DERIVATIVES TRANSACTIONS
Written option activity for the Fund was as follows:
NUMBER
OF
WRITTEN OPTIONS CONTRACTS PREMIUMS
-------------------------------------------------------------------------------------------
Options outstanding at December 31, 2014........... 7,300 $ 965,198
Options Written.................................... 50,660 6,444,730
Options Expired.................................... (10,246) (2,045,348)
Options Exercised.................................. (24,019) (390,696)
Options Closed..................................... (15,950) (4,174,934)
--------- --------------
Options outstanding at June 30, 2015............... 7,745 $ 798,950
========= ==============
The following table presents the types of derivatives held by the Fund at June
30, 2015, the primary underlying risk exposure and the location of these
instruments as presented on the Statement of Assets and Liabilities.
ASSET DERIVATIVES LIABILITY DERIVATIVES
--------------------------------------- ---------------------------------------
DERIVATIVE STATEMENTS OF ASSETS AND STATEMENT OF ASSETS AND
INSTRUMENT RISK EXPOSURE LIABILITIES LOCATION VALUE LIABILITIES LOCATION VALUE
--------------- ------------- -------------------------- ----------- -------------------------- -----------
Written Options Equity Risk -- -- Options written, at value $ 433,730
The following table presents the amount of net realized gain (loss) and change
in net unrealized appreciation (depreciation) recognized for the six months
ended June 30, 2015, on derivative instruments, as well as the primary
underlying risk exposure associated with each instrument.
STATEMENT OF OPERATIONS LOCATION
--------------------------------------------------------------------------------
EQUITY RISK EXPOSURE
Net realized gain (loss) on written options $ 3,078,986
Net change in unrealized appreciation (depreciation) on written
options 52,697
The Fund does not have the right to offset financial assets and financial
liabilities related to option contracts on the Statement of Assets and
Liabilities.
Page 19
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
JUNE 30, 2015 (UNAUDITED)
6. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
7. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined that there
were no subsequent events requiring recognition or disclosure in the financial
statements that have not already been disclosed.
Page 20
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
JUNE 30, 2015 (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 21
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
JUNE 30, 2015 (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 Dividend and Income Fund, First Trust High Income Long/Short
Fund, First Trust Energy Infrastructure Fund, First Trust MLP and Energy Income
Fund, First Trust Intermediate Duration Preferred & Income Fund and First Trust
New Opportunities MLP & Energy Fund was held on April 20, 2015 (the "Annual
Meeting"). At the Annual Meeting, Richard E. Erickson and Thomas R. Kadlec were
elected by the Common Shareholders of the First Trust Enhanced Equity Income
Fund as Class II Trustees for a three-year term expiring at the Fund's annual
meeting of shareholders in 2018. The number of votes cast in favor of Mr.
Erickson was 17,437,693, the number of votes against was 451,105 and the number
of broker non-votes was 2,084,366. The number of votes cast in favor of Mr.
Kadlec was 17,459,722, the number of votes against was 429,076 and the number of
broker non-votes was 2,084,366. James A. Bowen, Robert F. Keith and Niel B.
Nielson are the other current and continuing Trustees.
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
Page 22
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
JUNE 30, 2015 (UNAUDITED)
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.
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, unanimously 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, Inc. (the "Sub-Advisor"), at a meeting held on June 16,
2015. 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. At meetings held on April 20, 2015 and June 16, 2015, the
Board, including the Independent Trustees, reviewed materials provided by the
Advisor and the Sub-Advisor responding to requests for information from counsel
to the Independent Trustees that, 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 to a peer group
of funds selected by Management Practice, Inc. ("MPI"), an independent source
(the "MPI Peer Group"); expenses of the Fund as compared to expense ratios of
the funds in the MPI Peer Group; performance information for the Fund; 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. The
Board reviewed initial materials with the Advisor at a special meeting held on
April 20, 2015, at which the Independent Trustees and their counsel met
separately to discuss the information provided by the Advisor and the
Sub-Advisor. Following the April meeting, independent legal counsel on behalf of
the Independent Trustees requested certain clarifications and supplements to the
materials provided, and those were considered at an executive session of the
Independent Trustees and independent legal counsel held prior to the June 16,
2015 meeting, as well as at the meeting. 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.
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. The Board considered the significant asset
growth of the First Trust Fund Complex and the Advisor's concomitant investment
in infrastructure and personnel dedicated to the First Trust funds. With respect
to the Sub-Advisory Agreement, the Board noted the background and experience of
the Sub-Advisor's portfolio management team. The Board reviewed the materials
provided by the Sub-Advisor and considered the services that the Sub-Advisor
provides to the Fund, including the Sub-Advisor's day-to-day management of the
Fund's investments. In light of the information presented and the considerations
made, the Board concluded that the nature, extent and quality of services
provided to the Fund by the Advisor and the Sub-Advisor under the Agreements
have been and are expected to remain satisfactory and that the Sub-Advisor,
under the oversight of the Advisor, has managed the Fund consistent with its
investment objective and policies.
Page 23
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
JUNE 30, 2015 (UNAUDITED)
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 another closed-end fund sub-advised by the Sub-Advisor and
certain separately managed accounts that may have investment objectives and
policies similar to the Fund's. The Board noted that the Advisor charges the
same advisory fee rate to the Fund and the other closed end fund sub advised by
the Sub Advisor and a lower advisory fee rate to the separately managed
accounts. The Board noted 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, noting that the Sub-Advisor does not charge a lower advisory or
sub-advisory fee to any client for which it provides comparable services. In
addition, the Board reviewed data prepared by MPI showing the advisory fee and
expense ratio of the Fund as compared to the advisory fees and expense ratios of
the MPI Peer Group. The Board discussed with representatives of the Advisor the
limitations in creating a relevant peer group for the Fund, including that (i)
the Fund is unique in its composition, which makes assembling peers with similar
strategies and asset mix difficult; (ii) most of the peer funds do not employ an
advisor/sub-advisor management structure; and (iii) most of the peer funds are
larger than the Fund, which causes the Fund's fixed expenses to be higher on a
percentage basis as compared to the larger peer funds. The Board took these
limitations into account in considering the peer data. In reviewing the peer
data, the Board noted that the Fund's advisory fee, based on average net assets,
was above the median of the MPI 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 reviewed
data prepared by MPI comparing the Fund's performance for periods ended December
31, 2014 to the performance of the MPI Peer Group and to two benchmark indexes.
In reviewing the Fund's performance as compared to the performance of the MPI
Peer Group, the Board took into account the limitations described above with
respect to creating a relevant peer group for the Fund. The Board also
considered data from MPI on the Fund's annual distribution rate as of December
31, 2014 as compared to the MPI Peer Group. In addition, the Board compared the
Fund's premium/discount over the past eight quarters to the average and median
premium/discount over the same period of a peer group selected by the Advisor,
as well as data on the average premium/discount for 2014 for the funds in the
MPI Peer Group, 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 the Sub-Advisor under the Agreements.
The Board noted that the Advisor has made and continues to make significant
investment 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, 2014, as well as product-line
profitability data for the same period, as set forth in the materials provided
to the Board. The Board noted the inherent limitations in the profitability
analysis, and concluded that the pre-tax profits estimated to have been realized
by the Advisor in connection with the management of the Fund were not
unreasonable. 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 the Sub-Advisor's representation that assets in the Fund
have not grown considerably, so further economies of scale have not been
achieved and the sub-advisory rate continues to be appropriate. 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 estimated profitability
of the Sub-Advisory Agreement appeared to be not unreasonable in light of the
services provided to the Fund. The Board considered fall-out benefits that may
be realized by the Sub-Advisor from its relationship with the Fund, including
that the Sub-Advisor may enter into soft-dollar arrangements, and considered a
summary of such arrangements.
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.
Page 24
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Chartwell Investment Partners, Inc.
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 14, 2015
------------------
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 14, 2015
------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: August 14, 2015
------------------
* Print the name and title of each signing officer under his or her signature.