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, 2016
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FIRST TRUST
ENHANCED EQUITY INCOME FUND (FFA)
SEMI-ANNUAL REPORT
FOR THE SIX MONTHS ENDED
JUNE 30, 2016
FIRST TRUST CHARTWELL INVESTMENT PARTNERS
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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, 2016
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, LLC ("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, 2016
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, 2016, including a market overview and a
performance analysis for the period. We encourage you to read this report and
discuss it with your financial advisor.
While markets were up and down during 2015, we believe there are three important
things to remember. First, the U.S. economy grew, despite the massive decline in
oil prices. Second, the tapering that began in 2014 by the Federal Reserve (the
"Fed") did not stop growth in the U.S. economy. Finally, the long-anticipated
rate hike by the Fed in December had little effect on the money supply, and the
stock market was not shocked by the hike. Early in 2016, many investors were
concerned that the volatility we saw in the market in 2015 would continue, and
it did. From December 31, 2015 through February 11, 2016, the S&P 500(R) Index
declined by 10.27%. Since then, the market has made a steady comeback, and as of
June 30, 2016, the S&P 500(R) Index was up 15.73%.
First Trust believes that having a long-term investment horizon and investing in
quality products can help you reach your goals, regardless of how the market
behaves. We have always maintained perspective about the markets and believe
investors should as well. We will continue to strive to provide quality
investment opportunities each and every day, which has been one of the hallmarks
of our firm since its inception 25 years ago.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value our relationship with you and will continue to focus on helping
investors like you reach your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
"AT A GLANCE"
AS OF JUNE 30, 2016 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FFA
Common Share Price $13.12
Common Share Net Asset Value ("NAV") $14.77
Premium (Discount) to NAV (11.17)%
Net Assets Applicable to Common Shares $294,926,808
Current Quarterly Distribution per Common Share (1) $0.240
Current Annualized Distribution per Common Share $0.960
Current Distribution Rate on Closing Common Share Price (2) 7.32%
Current Distribution Rate on NAV (2) 6.50%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
6/15 $14.58 $16.03
14.39 15.81
14.14 15.72
14.54 15.94
14.19 15.62
7/15 14.35 15.79
13.93 15.62
14.02 15.71
13.21 14.82
8/15 13.30 14.98
13.13 14.52
13.18 14.83
13.03 14.78
9/15 12.81 14.36
12.87 14.54
13.26 15.01
13.34 15.15
13.69 15.34
10/15 13.56 15.40
13.62 15.52
13.13 15.03
13.52 15.44
11/15 13.47 15.48
13.54 15.49
13.04 14.92
13.21 14.93
13.22 15.11
12/15 13.20 14.99
12.37 14.06
11.78 13.74
11.91 13.90
1/16 12.17 14.15
11.83 13.68
11.74 13.60
12.06 13.98
2/16 12.33 14.15
12.69 14.53
12.81 14.69
12.96 14.88
3/16 12.57 14.51
12.79 14.75
12.70 14.61
12.91 14.83
13.04 14.93
4/16 12.90 14.72
12.80 14.63
12.66 14.55
12.78 14.67
5/16 13.06 14.96
13.21 14.96
13.16 14.96
13.05 14.84
12.75 14.35
6/16 13.12 14.77
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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)
6/30/2016 6/30/2016 6/30/2016 6/30/2016 to 6/30/2016
FUND PERFORMANCE (3)
NAV 2.22% 1.07% 9.39% 6.43% 6.41%
Market Value 3.11% -1.66% 8.71% 5.88% 4.94%
INDEX PERFORMANCE
S&P 500(R) Index 3.84% 3.99% 12.09% 7.42% 7.79%
BXM Index 2.43% 3.99% 6.96% 4.62% 5.08%
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% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
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Apple, Inc. 4.1%
General Electric Co. 3.3
Microsoft Corp. 3.0
JPMorgan Chase & Co. 2.8
Pfizer, Inc. 2.8
Merck & Co., Inc. 2.5
PepsiCo, Inc. 2.3
Altria Group, Inc. 2.2
Medtronic PLC 2.2
Philip Morris International, Inc. 2.1
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Total 27.3%
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% OF TOTAL
SECTOR CLASSIFICATION INVESTMENTS
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Information Technology 19.1%
Financials 17.6
Health Care 15.2
Consumer Staples 12.6
Consumer Discretionary 11.9
Energy 9.2
Industrials 7.7
Utilities 2.6
Telecommunication Services 2.6
Materials 1.5
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Total 100.0%
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(1) Most recent distribution paid or declared through 6/30/2016. 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 6/30/2016. 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, 2016
SUB-ADVISOR
Chartwell Investment Partners, LLC ("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. TriState Capital
Holdings, Inc., Chartwell's parent company, closed on its acquisition of The
Killen Group on April 29, 2016. The Killen Group's investment team is the fifth
investment team under the Chartwell umbrella and works independently with no
involvement in the portfolio management or other services that Chartwell
provides 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
Overall, the S&P 500(R) Index (the "Index") returned 3.84% (inclusive of
dividends) for the six-month period ended June 30, 2016. Unlike the first half
of last year which saw one of the narrowest trading ranges on record, these six
months saw a great deal of volatility not only in stocks but in currencies, oil,
and interest rates as well. After a somewhat tumultuous summer of 2015, the
Index rallied steadily through the back-half of 2015 and closed 4.1% from its
record high set in the late spring of 2015. But as the calendar turned to 2016,
the stock market started to sell off. The Index suffered its worst ever one-week
return to start a calendar year, and the period from the start of 2016 through
February 11 was the worst 28 trading days to start a year in 68 years (down
10.3%, inclusive of dividends). During this period, it seemed as though the
markets were anticipating a coordinated global recession. There were a litany of
factors that contributed to these fears: questions about the stability of the
Chinese currency and stock markets; concerns around the liquidity of European
banks; uncertainty over the impact of negative interest rates in several large
countries; fears of the Federal Reserve (the "Fed") making a policy mistake by
possibly raising rates up to four times in 2016; and weakness in the price of
oil and several economic indicators. However, several events occurred around
February 12 that made the fear of global recession fade and allowed the stock
market to more than recover its losses from those first 28 trading days. Among
them were: better U.S. economic data; the Organization of the Petroleum
Exporting Countries' ("OPEC") rumored discussion of a production freeze which
reversed the slide in oil prices; easing of fears over bank credit profiles due
to recovered oil prices; and the Federal Reserve ("Fed") officials talking down
the possibility of the previously discussed four rate hikes. All of this
volatility drove investors into certain groups of stocks that are considered
more 'safe' than other groups. Oil's volatility saw a barrel of Brent crude go
from $38 to start the period to $28 in mid-February only to settle at $50 at the
end of June. Interest rates were another point of focus as the ten-year U.S.
Treasury yield moved from 2.14% to 1.66% and then settled at 1.47% on June 30,
2016. The yield curve flattened during the period as the difference between
two-year and ten-year U.S. Treasury yields went from 1.21% to 0.89%. The
fixed-income market appears to believe short-term rates will rise but
longer-term economic activity will be subdued.
PERFORMANCE SUMMARY
For the six months ended June 30, 2016, the Fund's net asset value ("NAV") and
market value total returns(1) were 2.22% and 3.11%, respectively. The Index
returned 3.84% and CBOE S&P 500 BuyWrite Monthly Index ("BXM Index") returned
2.43% on a total return basis over the same period. The equity portion of the
Fund's assets was up approximately 2.70% over the period, trailing the Index.
The Fund's options overwriting program was essentially neutral to returns as the
-----------------------------
(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, 2016
large and sharp moves in the market made it difficult to add value through
written options. Returns in the market for the period were dominated by what we
call "safe haven" groups. When combined, the Utilities, Telecommunications and
Consumer Staples groups accounted for over 65% of the Index's return for the
period while only comprising 16.5% of the average weight during the period. This
level of concentration in returns made it difficult for the Fund to outperform
the benchmark in the period. Within the equity portion of the portfolio, an
underweight in the Utilities group and an overweight in the Financials group was
detrimental to relative performance as the Utilities group returned 23.57% for
the period (the second highest group return with Telecommunications returning
24.85%) while the Financials group was down 3.12%, the worst return of the ten
major groups. An overweight in the Energy group, which was up 16.07%, and an
underweight in the Software and Services group partially offset the negative
impacts from the Utilities and Financials groups. Stock selection in the
Information Technology, Banks and Media groups was a positive contributor to
relative returns while stock selection in the Retailing, Consumer Services and
Diversified Financials groups detracted from relative performance. Several of
the Fund's holdings performed quite well during the period. NVIDIA (+43.51% on
strong earnings), American Water Works (+42.92%, a water utility), Altria Group
(+20.59%), Philip Morris International (+18.11%), and Arthur J. Gallagher
(+18.29%, an insurance broker). The last four stocks mentioned benefited from
being "safe haven" type stocks. In total, 31 portfolio holdings rose more than
10% during the period. Of course not all stocks performed as strongly as the
portfolio was not positioned for a market which favored "safe haven" stocks as
much as it did. L Brands (-27.08%), a retailer and owner of the Victoria's
Secret brand, fell on a surprise negative earnings report and the announcement
of several changes including a change to their promotional efforts. Carnival
Corp. (-17.76%) fell on Brexit fears (on June 23, 2016, voters in the UK
approved a referendum to leave the European Union) as well as concerns over
possible over-supply of cruise ships in the rapidly growing Chinese cruise
market. Finally, Charles Schwab Corp. (-22.74%) declined on the impact of lower
interest rates.
MARKET OUTLOOK
We expected that the markets would remain volatile, but we did not expect the
level of volatility that was seen in the first quarter of this year. The almost
manic swings between the market's recent highs and lows have been caused by
macro-level events or fears. What is the Fed going to do? Are there really four
more hikes on the way? How will China's economy/stock market/currency act? Is
the decline in oil prices going to cause excessive defaults in the high yield
bond market and/or ruin the balance sheets of banks? Are we headed towards a
U.S./global recession? Our inclination at this point is to take the positive
side on these issues. It seems that the Fed has seen what the fear of moving too
fast can do to the U.S. and global markets; we believe they will act with
caution. In our view, the Chinese government wants to stay in power and will
keep attempting to drive their domestic economy higher while transitioning to
more domestic-led growth in GDP (though they will be accepting of a lower growth
rate). We believe the over-supply of oil will dissipate through increased demand
and lower supply - just as a free market should respond (as long as OPEC
continues to be unable to come to an agreement). Therefore, lenders to
oil-related companies may suffer some losses but not catastrophic ones that
would jeopardize the financial system. That is not to say we believe there is
little risk in this market. There is plenty of risk. Our positive bias towards
these issues could turn out to be wrong. New issues can (and most certainly
will) crop up. Geo-political hotspots exist throughout the world and any of them
could escalate and worry the market as Brexit has done.
The market has been essentially unchanged since the start of 2015. Will this
respite allow the market to advance more strongly in the coming years or is it a
forbearer of tougher markets to come? We believe that depends on how the litany
of risks we discussed above play out - including those that are unexpected. All
that said, these uncertainties can provide positive impetus to stock prices if
they are resolved in a market-friendly manner.
Given that valuations in the equity markets are above longer-term averages, we
believe that earnings growth will have to improve in order for the equity market
to move substantially higher. While this earnings growth has proven to be more
difficult than in prior years, we believe that certain factors (the sharp oil
price decline, the large rise in the value of the U.S. dollar) have been strong
headwinds for overall earnings growth and that those factors will dissipate
going forward. Absent a global recession, we believe that revenues should move
higher and companies will continue to be vigilant on controlling costs, thereby
keeping margins at or near current high levels. Earnings should therefore begin
to rise again. In addition, we believe that the uptick in mergers and
acquisitions will continue as will strong stock repurchases which should help
corporations in their search for earnings growth. Low interest rates have helped
facilitate these corporate actions and, at least in the near-term, we believe
rates will remain low enough to continue to drive these actions.
Our outlook is essentially unchanged. Despite the uncertainties, the economy
should continue to grow at a reasonable but not overly strong rate and corporate
profits should begin to resume their growth. This could provide a solid backdrop
for the market going forward. However, with valuation of the stock market no
longer at the lower end of historical norms, and with earnings growth flattening
out, moves higher in the Index will likely be more muted going forward with the
increased likelihood of periods of price decline. No matter the outcome of these
issues, we will manage the Fund with the dual objectives 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, 2016 (UNAUDITED)
SHARES DESCRIPTION VALUE
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COMMON STOCKS - 95.3%
AEROSPACE & DEFENSE - 2.9%
47,500 Honeywell International, Inc. (a).................. $ 5,525,200
23,000 Raytheon Co. (a)................................... 3,126,850
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8,652,050
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AIR FREIGHT & LOGISTICS - 1.4%
28,000 FedEx Corp. (a).................................... 4,249,840
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AUTOMOBILES - 1.3%
130,000 General Motors Co. (a)............................. 3,679,000
--------------
BANKS - 7.5%
200,000 Bank of America Corp. (a).......................... 2,654,000
45,000 First Republic Bank (a)............................ 3,149,550
135,000 JPMorgan Chase & Co. (a)........................... 8,388,900
28,000 M&T Bank Corp. (a)................................. 3,310,440
100,000 Wells Fargo & Co. (a).............................. 4,733,000
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22,235,890
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BEVERAGES - 4.0%
37,500 Anheuser-Busch InBev SA/NV, ADR (a)................ 4,938,000
65,000 PepsiCo, Inc. (a).................................. 6,886,100
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11,824,100
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BIOTECHNOLOGY - 2.4%
30,000 Celgene Corp. (a) (b).............................. 2,958,900
48,700 Gilead Sciences, Inc. (a).......................... 4,062,554
--------------
7,021,454
--------------
CAPITAL MARKETS - 1.8%
6,000 BlackRock, Inc. (a)................................ 2,055,180
125,000 Charles Schwab (The) Corp. (a)..................... 3,163,750
--------------
5,218,930
--------------
CHEMICALS - 1.5%
30,000 LyondellBasell Industries N.V., Class A............ 2,232,600
20,000 PPG Industries, Inc................................ 2,083,000
--------------
4,315,600
--------------
COMMUNICATIONS EQUIPMENT - 1.7%
170,000 Cisco Systems, Inc. (a)............................ 4,877,300
--------------
CONSUMER FINANCE - 1.4%
66,500 American Express Co. (a)........................... 4,040,540
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 2.6%
100,000 AT&T, Inc. (a)..................................... 4,321,000
32,000 SBA Communications Corp., Class A (a) (b).......... 3,454,080
--------------
7,775,080
--------------
ELECTRIC UTILITIES - 1.4%
110,000 PPL Corp. (a)...................................... 4,152,500
--------------
See Notes to Financial Statements Page 5
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2016 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------ --------------------------------------------------- --------------
COMMON STOCKS (CONTINUED)
ENERGY EQUIPMENT & SERVICES - 2.4%
75,000 National Oilwell Varco, Inc. (a)................... $ 2,523,750
125,000 Noble Corp. PLC.................................... 1,030,000
46,000 Schlumberger, Ltd. (a)............................. 3,637,680
--------------
7,191,430
--------------
FOOD & STAPLES RETAILING - 3.1%
25,000 Costco Wholesale Corp. (a)......................... 3,926,000
55,000 CVS Health Corp. (a)............................... 5,265,700
--------------
9,191,700
--------------
FOOD PRODUCTS - 1.2%
40,000 Kraft Heinz (The) Co............................... 3,539,200
--------------
HEALTH CARE EQUIPMENT & SUPPLIES - 2.2%
75,000 Medtronic PLC (a).................................. 6,507,750
--------------
HEALTH CARE PROVIDERS & SERVICES - 2.1%
29,000 Cardinal Health, Inc. (a).......................... 2,262,290
28,000 UnitedHealth Group, Inc. (a)....................... 3,953,600
--------------
6,215,890
--------------
HOTELS, RESTAURANTS & LEISURE - 1.7%
110,000 Carnival Corp. (a)................................. 4,862,000
--------------
HOUSEHOLD DURABLES - 1.6%
100,000 Newell Brands, Inc................................. 4,857,000
--------------
INDUSTRIAL CONGLOMERATES - 3.3%
310,000 General Electric Co. (a)........................... 9,758,800
--------------
INSURANCE - 4.1%
75,000 Arthur J. Gallagher & Co. (a)...................... 3,570,000
40,000 Chubb, Ltd. (a).................................... 5,228,400
80,000 MetLife, Inc. (a).................................. 3,186,400
--------------
11,984,800
--------------
IT SERVICES - 1.8%
57,500 Automatic Data Processing, Inc. (a)................ 5,282,525
--------------
LIFE SCIENCES TOOLS & SERVICES - 2.0%
40,000 Thermo Fisher Scientific, Inc. (a)................. 5,910,400
--------------
MEDIA - 4.1%
72,500 CBS Corp., Class B (a)............................. 3,946,900
80,000 Cinemark Holdings, Inc. (a)........................ 2,916,800
80,000 Comcast Corp., Class A (a)......................... 5,215,200
--------------
12,078,900
--------------
OIL, GAS & CONSUMABLE FUELS - 5.0%
42,000 Chevron Corp. (a).................................. 4,402,860
25,000 Exxon Mobil Corp. (a).............................. 2,343,500
65,000 HollyFrontier Corp................................. 1,545,050
120,000 Marathon Oil Corp. (a)............................. 1,801,200
Page 6 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2016 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------ --------------------------------------------------- --------------
COMMON STOCKS (CONTINUED)
OIL, GAS & CONSUMABLE FUELS (CONTINUED)
62,000 Occidental Petroleum Corp. (a)..................... $ 4,684,720
--------------
14,777,330
--------------
PHARMACEUTICALS - 6.4%
14,000 Allergan PLC (a) (b)............................... 3,235,260
130,000 Merck & Co., Inc. (a).............................. 7,489,300
235,000 Pfizer, Inc. (a)................................... 8,274,350
--------------
18,998,910
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 5.2%
85,000 Applied Materials, Inc. (a)........................ 2,037,450
15,500 Broadcom Ltd....................................... 2,408,700
135,000 Intel Corp. (a).................................... 4,428,000
130,000 Micron Technology, Inc. (b)........................ 1,788,800
56,000 NVIDIA Corp........................................ 2,632,560
25,000 NXP Semiconductor N.V. (b)......................... 1,958,500
--------------
15,254,010
--------------
SOFTWARE - 6.4%
58,500 Check Point Software Technologies Ltd. (a) (b)..... 4,661,280
175,000 Microsoft Corp. (a)................................ 8,954,750
130,000 Oracle Corp. (a)................................... 5,320,900
--------------
18,936,930
--------------
SPECIALTY RETAIL - 0.5%
12,000 Home Depot (The), Inc.............................. 1,532,280
--------------
TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS - 4.1%
125,000 Apple, Inc. (a).................................... 11,950,000
--------------
TEXTILES, APPAREL & LUXURY GOODS - 2.7%
63,000 NIKE, Inc., Class B................................ 3,477,600
72,500 VF Corp. (a)....................................... 4,458,025
--------------
7,935,625
--------------
TOBACCO - 4.3%
95,000 Altria Group, Inc. (a)............................. 6,551,200
60,000 Philip Morris International, Inc. (a).............. 6,103,200
--------------
12,654,400
--------------
WATER UTILITIES - 1.2%
43,500 American Water Works Co., Inc. (a)................. 3,676,185
--------------
TOTAL COMMON STOCKS................................ 281,138,349
(Cost $254,677,122) --------------
REAL ESTATE INVESTMENT TRUSTS - 2.9%
65,000 Lamar Advertising Co., Class A (a)................. 4,309,500
19,000 Simon Property Group, Inc.......................... 4,121,100
--------------
TOTAL REAL ESTATE INVESTMENT TRUSTS................ 8,430,600
(Cost $7,290,551) --------------
See Notes to Financial Statements Page 7
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2016 (UNAUDITED)
UNITS DESCRIPTION VALUE
------------ --------------------------------------------------- --------------
MASTER LIMITED PARTNERSHIPS - 1.7%
OIL, GAS & CONSUMABLE FUELS - 1.7%
55,000 Energy Transfer Partners, L.P. (a)................. $ 2,093,850
100,000 Enterprise Products Partners, L.P. (a)............. 2,926,000
--------------
TOTAL MASTER LIMITED PARTNERSHIPS.................. 5,019,850
(Cost $2,835,970) --------------
TOTAL INVESTMENTS - 99.9%.......................... 294,588,799
(Cost $264,803,643) (c) --------------
NUMBER OF
CONTRACTS DESCRIPTION VALUE
------------ --------------------------------------------------- --------------
CALL OPTIONS WRITTEN - (0.3%)
Altria Group, Inc. Call
300 @ $67.50 due July 2016............................. (76,200)
--------------
Apple, Inc. Call
300 @ 100.00 due July 2016............................ (3,000)
--------------
AT&T, Inc. Call
300 @ 41.00 due July 2016............................. (62,400)
--------------
Automatic Data Processing, Inc. Call
300 @ 90.00 due July 2016............................. (66,000)
--------------
Carnival Corp. Call
350 @ 52.50 due July 2016............................. (700)
--------------
Comcast Corp. Call
500 @ 65.00 due July 2016............................. (38,000)
--------------
Energy Transfer Partners L.P. Calls
100 @ 40.00 due July 2016............................. (4,200)
200 @ 41.00 due July 2016............................. (6,000)
--------------
(10,200)
--------------
Exxon Mobil Corp. Call
170 @ 92.50 due July 2016............................. (29,750)
--------------
Honeywell International, Inc. Call
200 @ 120.00 due July 2016............................ (2,000)
--------------
Intel Corp. Call
400 @ 33.00 due July 2016............................. (15,200)
--------------
JPMorgan Chase & Co. Call
400 @ 65.00 due July 2016............................. (7,600)
--------------
Lamar Advertising Co. Call
300 @ 65.00 due July 2016............................. (36,000)
--------------
Marathon Oil Corp. Calls
300 @ 16.00 due July 2016............................. (6,300)
300 @ 17.00 due July 2016............................. (2,700)
--------------
(9,000)
--------------
Page 8 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2016 (UNAUDITED)
NUMBER OF
CONTRACTS DESCRIPTION VALUE
------------ --------------------------------------------------- --------------
CALL OPTIONS WRITTEN (CONTINUED)
Merck & Co., Inc. Call
400 @ $58.00 due July 2016............................. $ (18,800)
--------------
National Oilwell Varco, Inc. Call
250 @ 40.00 due July 2016 (d)......................... (1,250)
--------------
Newell Brands, Inc. Call
300 @ 50.00 due July 2016............................. (4,500)
--------------
NVIDIA Corp. Call
200 @ 49.00 due July 2016............................. (6,600)
--------------
Oracle Corp. Call
325 @ 41.00 due July 2016............................. (13,325)
--------------
Raytheon Co. Call
75 @ 140.00 due July 2016............................ (1,650)
--------------
S&P 500 Index Calls (e)
100 @ 2,100.00 due July 2016.......................... (183,500)
200 @ 2,115.00 due July 2016.......................... (209,000)
300 @ 2,130.00 due July 2016.......................... (171,000)
--------------
(563,500)
--------------
UnitedHealth Group, Inc. Calls
70 @ 140.00 due July 2016............................ (15,540)
70 @ 145.00 due July 2016............................ (1,750)
--------------
(17,290)
--------------
TOTAL CALL OPTIONS WRITTEN......................... (982,965)
(Premiums received $813,654) --------------
NET OTHER ASSETS AND LIABILITIES - 0.4%............ 1,320,974
--------------
NET ASSETS - 100.0%................................ $ 294,926,808
==============
-----------------------------
(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, 2016, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $46,745,887 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $16,960,731.
(d) This investment is fair valued by the Advisor's Pricing Committee in
accordance with procedures adopted by the Fund's Board of Trustees, and in
accordance with the provisions of the Investment Company Act of 1940, as
amended. At June 30, 2016, investments noted as such are valued at
$(1,250) or (0.0)% of net assets.
(e) 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, 2016 (UNAUDITED)
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of June 30, 2016
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
6/30/2016 PRICES INPUTS INPUTS
------------- ------------- ------------- -------------
Common Stocks*.................................... $ 281,138,349 $ 281,138,349 $ -- $ --
Real Estate Investment Trusts..................... 8,430,600 8,430,600 -- --
Master Limited Partnerships*...................... 5,019,850 5,019,850 -- --
------------- ------------- ------------- -------------
Total Investments................................. $ 294,588,799 $ 294,588,799 $ -- $ --
============= ============= ============= =============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
6/30/2016 PRICES INPUTS INPUTS
------------- ------------- ------------- -------------
Call Options Written.............................. $ (982,965) $ (981,715) $ (1,250) $ --
============= ============= ============= =============
* 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, 2016.
Page 10 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2016 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $264,803,643)............................................................................ $294,588,799
Cash.............................................................................................. 1,066,447
Receivables:
Dividends...................................................................................... 529,585
Dividend reclaims.............................................................................. 20,686
Interest....................................................................................... 16
Prepaid expenses.................................................................................. 8,533
------------
Total Assets................................................................................... 296,214,066
------------
LIABILITIES:
Options written, at value (Premiums received $813,654)............................................ 982,965
Payables:
Investment advisory fees....................................................................... 243,232
Audit and tax fees............................................................................. 26,471
Administrative fees............................................................................ 11,906
Printing fees.................................................................................. 9,979
Custodian fees................................................................................. 4,929
Transfer agent fees............................................................................ 3,815
Legal fees..................................................................................... 2,134
Financial reporting fees....................................................................... 771
Trustees' fees and expenses.................................................................... 505
Other liabilities................................................................................. 551
------------
Total Liabilities.............................................................................. 1,287,258
------------
NET ASSETS........................................................................................ $294,926,808
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................... $271,294,694
Par value......................................................................................... 199,732
Accumulated net investment income (loss).......................................................... (6,785,771)
Accumulated net realized gain (loss) on investments and written options........................... 602,308
Net unrealized appreciation (depreciation) on investments and written options..................... 29,615,845
------------
NET ASSETS........................................................................................ $294,926,808
============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share).............................. $ 14.77
============
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, 2016 (UNAUDITED)
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $9,328).............................................. $ 3,745,447
Interest.......................................................................................... 96
------------
Total investment income........................................................................ 3,745,543
------------
EXPENSES:
Investment advisory fees.......................................................................... 1,438,706
Administrative fees............................................................................... 70,020
Printing fees..................................................................................... 39,395
Audit and tax fees................................................................................ 21,481
Transfer agent fees............................................................................... 17,835
Custodian fees.................................................................................... 13,274
Trustees' fees and expenses....................................................................... 9,480
Financial reporting fees.......................................................................... 4,625
Legal fees........................................................................................ 3,412
Other............................................................................................. 19,670
------------
Total expenses................................................................................. 1,637,898
------------
NET INVESTMENT INCOME (LOSS)...................................................................... 2,107,645
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments.................................................................................... 9,642,330
Written options................................................................................ 433,051
------------
Net realized gain (loss).......................................................................... 10,075,381
------------
Net change in unrealized appreciation (depreciation) on:
Investments.................................................................................... (6,251,193)
Written options................................................................................ (806,470)
------------
Net change in unrealized appreciation (depreciation).............................................. (7,057,663)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................... 3,017,718
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.................................. $ 5,125,363
============
Page 12 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
6/30/2016 ENDED
(UNAUDITED) 12/31/2015
------------ ------------
OPERATIONS:
Net investment income (loss)....................................................... $ 2,107,645 $ 4,166,263
Net realized gain (loss)........................................................... 10,075,381 16,788,987
Net change in unrealized appreciation (depreciation)............................... (7,057,663) (21,431,903)
------------ ------------
Net increase (decrease) in net assets resulting from operations.................... 5,125,363 (476,653)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................................................. (9,587,119) (12,083,764)
Net realized gain.................................................................. -- (6,691,010)
------------ ------------
Total distributions to shareholders................................................ (9,587,119) (18,774,774)
------------ ------------
Total increase (decrease) in net assets............................................ (4,461,756) (19,251,427)
NET ASSETS:
Beginning of period................................................................ 299,388,564 318,639,991
------------ ------------
End of period...................................................................... $294,926,808 $299,388,564
============ ============
Accumulated net investment income (loss) at end of period.......................... $ (6,785,771) $ 693,703
============ ============
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 ENDED DECEMBER 31,
6/30/2016 ------------------------------------------------------------------
(UNAUDITED) 2015 2014 (a) 2013 2012 2011
---------- ---------- ---------- ---------- ---------- ----------
Net asset value, beginning of period......... $ 14.99 $ 15.95 $ 15.24 $ 13.27 $ 12.51 $ 13.20
-------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)................. 0.11 0.20 0.24 0.21 0.26 0.22
Net realized and unrealized gain (loss)...... 0.15 (0.22) 1.39 2.66 1.40 (0.01)
-------- -------- -------- -------- -------- --------
Total from investment operations............. 0.26 (0.02) 1.63 2.87 1.66 0.21
-------- -------- -------- -------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income........................ (0.48) (0.60) (0.92) (0.90) (0.72) (0.68)
Net realized gain............................ -- (0.34) -- -- -- --
Return of capital............................ -- -- -- -- (0.18) (0.22)
-------- -------- -------- -------- -------- --------
Total distributions to Common
Shareholders.............................. (0.48) (0.94) (0.92) (0.90) (0.90) (0.90)
-------- -------- -------- -------- -------- --------
Net asset value, end of period............... $ 14.77 $ 14.99 $ 15.95 $ 15.24 $ 13.27 $ 12.51
======== ======== ======== ======== ======== ========
Market value, end of period.................. $ 13.12 $ 13.20 $ 14.34 $ 13.32 $ 11.84 $ 10.83
======== ======== ======== ======== ======== ========
TOTAL RETURN BASED ON NET ASSET VALUE (b).... 2.22% 0.72% 11.63% 23.11% 14.18% (c) 2.42%
======== ======== ======== ======== ======== ========
TOTAL RETURN BASED ON MARKET VALUE (b)....... 3.11% (1.35)% 14.83% 20.60% 17.68% (7.33)%
======== ======== ======== ======== ======== ========
-----------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)......... $294,927 $299,389 $318,640 $304,297 $265,009 $249,766
Ratio of total expenses to average net
assets.................................... 1.14% (d) 1.12% 1.18% 1.19% 1.21% 1.22%
Ratio of net investment income (loss) to
average net assets........................ 1.46% (d) 1.33% 1.54% 1.45% 1.90% 1.65%
Portfolio turnover rate...................... 16% 45% 44% 40% 66% 52%
-----------------------------
(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, which represents
less than $0.01 per share. Since the Fund was reimbursed, there was 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, 2016 (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, real estate investment trusts ("REITs"), master limited
partnerships ("MLPs"), exchange-traded funds and other equity securities
listed on any national or foreign exchange (excluding The Nasdaq 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, 2016 (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 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, 2016, 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, LLC ("Chartwell" or the
"Sub-Advisor"), consistent with the Fund's investment objective. The number of
options the Fund can write (sell) is limited by the amount of equity securities
the Fund holds in its portfolio. Options on securities indices are designed to
reflect price fluctuations in a group of securities or segment of the securities
market rather than price fluctuations in a single security and are similar to
options on single securities, except that the exercise of securities index
options requires cash settlement payments and does not involve the actual
purchase or sale of securities. The Fund will not write (sell) "naked" or
uncovered options. If certain equity securities held in the Fund's portfolio are
not covered by a related call option on the individual equity security,
securities index options may be written on all or a portion of such uncovered
securities. When the Fund writes (sells) an option, an amount equal to the
premium received by the Fund is included in "Options written, at value" on the
Fund's Statement of Assets and Liabilities. Options are marked-to-market daily
and their value will be affected by changes in the value and dividend rates of
the underlying equity securities, changes in interest rates, changes in the
actual or perceived volatility of the securities markets and the underlying
equity securities and the remaining time to the options' expiration. The value
of options may also be adversely affected if the market for the options becomes
less liquid or trading volume diminishes.
Options the Fund writes (sells) will either be exercised, expire or be cancelled
pursuant to a closing transaction. If the price of the underlying equity
security exceeds the option's exercise price, it is likely that the option
holder will exercise the option. If an option written (sold) by the Fund is
exercised, the Fund would be obligated to deliver the underlying equity security
Page 16
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
JUNE 30, 2016 (UNAUDITED)
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 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, 2016, distributions of $206,250 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, 2016, it is likely that the Fund's distributions will
include a return of capital component for the fiscal year ending on December 31,
2016.
Page 17
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
JUNE 30, 2016 (UNAUDITED)
The tax character of distributions paid during the fiscal year ended December
31, 2015 was as follows:
Distributions paid from:
Ordinary income..................................... $ 12,083,764
Long-term capital gain.............................. 6,691,010
Return of capital................................... --
As of December 31, 2015, 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................ (3,330,902)
Net unrealized appreciation (depreciation).......... 35,675,202
--------------
Total accumulated earnings (losses)................. 32,344,300
Other............................................... (4,450,162)
Paid-in capital..................................... 271,494,426
--------------
Net assets.......................................... $ 299,388,564
==============
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 and 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, 2015, the Fund had no pre- or post-enactment
capital loss carryforwards for federal income tax purposes.
During the taxable year ended December 31, 2015, the Fund utilized pre-enactment
capital loss carryforwards in the amount of $13,292,078.
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 2012, 2013,
2014 and 2015 remain open to federal and state audit. As of June 30, 2016,
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, 2015, the Fund intends to
elect to defer net capital losses of $3,330,902.
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.
Page 18
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
JUNE 30, 2016 (UNAUDITED)
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.
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. BNYM IS and BNYM are subsidiaries of The Bank of New York Mellon
Corporation, a financial holding company.
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 equally among each fund in the First Trust Fund
Complex. 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.
Independent 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, 2016, were $46,363,847 and
$53,539,381, respectively.
5. DERIVATIVE TRANSACTIONS
Written option activity for the Fund was as follows:
NUMBER OF
WRITTEN OPTIONS CONTRACTS PREMIUMS
-------------------------------------------------------------------------------------------
Options outstanding at December 31, 2015........... 7,115 $ 974,414
Options Written.................................... 43,485 7,656,358
Options Expired.................................... (27,965) (2,291,436)
Options Exercised.................................. (2,315) (175,774)
Options Closed..................................... (13,610) (5,349,908)
--------- --------------
Options outstanding at June 30, 2016............... 6,710 $ 813,654
========= ==============
The following table presents the types of derivatives held by the Fund at June
30, 2016, 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 $ 982,965
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, 2016, on derivative instruments, as well as the primary
underlying risk exposure associated with each instrument.
STATEMENT OF OPERATIONS LOCATION
--------------------------------------------------------------------------------
EQUITY RISK
Net realized gain (loss) on written options $ 433,051
Net change in unrealized gain (loss) on written options (806,470)
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, 2016 (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, 2016 (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, 2016 (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 Form N-Qs
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 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 22, 2016 (the "Annual Meeting"). At the Annual Meeting, James A.
Bowen and Niel B. Nielson were elected by the Common Shareholders of the First
Trust Enhanced Equity Income Fund as Class III Trustees for a three-year term
expiring at the Fund's annual meeting of shareholders in 2019. The number of
votes cast in favor of Mr. Bowen was 16,721,095, the number of votes against was
1,299,842 and the number of broker non-votes was 1,952,227. The number of votes
cast in favor of Mr. Nielson was 16,736,669, the number of votes against was
1,284,268 and the number of broker non-votes was 1,952,227. Rickard E. Erickson,
Thomas R. Kadlec, and Robert F. Keith 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, 2016 (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") for a one-year period ending June
30, 2017 at a meeting held on June 13, 2016. 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 22, 2016 and June 13, 2016, 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 fee rates payable by 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 compiled 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 22, 2016, prior to 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 the information provided in response to those requests
was considered at an executive session of the Independent Trustees and
independent legal counsel held prior to the June 13, 2016 meeting, as well as at
the meeting held that day. 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 continue to be reasonable business arrangements
from the Fund's perspective as well as from the perspective of shareholders. The
Board determined that, given the totality of the information provided with
respect to the Agreements, the Board had received sufficient information to
renew the Agreements. 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 the 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 all of the services provided by the Advisor to the Fund,
including the oversight of the Sub-Advisor. In reviewing the services provided,
the Board noted the compliance program that had been developed by the Advisor
and considered that it includes a robust program for monitoring the Advisor's,
the Sub-Advisor's and the Fund's compliance with the 1940 Act, as well as the
Fund's compliance with its investment objective and policies. In addition, as
part of the Board's consideration of the Advisor's services, the Advisor, in its
written materials and at the April 22, 2016 meeting, described to the Board the
scope of its ongoing investment in additional infrastructure and personnel to
maintain and improve the quality of services provided to the Fund and the other
funds in the First Trust Fund Complex. With respect to the Sub-Advisory
Agreement, in addition to the written materials provided by the Sub-Advisor, at
the June 13, 2016 meeting, the Board also received a presentation from
representatives of the Sub-Advisor, including the portfolio managers, discussing
the services that the Sub-Advisor provides to the Fund and how the Sub-Advisor
Page 23
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
JUNE 30, 2016 (UNAUDITED)
manages the Fund's investments. In considering the Sub-Advisor's management of
the Fund, the Board noted the background and experience of the Sub-Advisor's
portfolio management team. In light of the information presented and the
considerations made, the Board concluded that the nature, extent and quality of
the services provided to the Fund by the Advisor and the Sub-Advisor under the
Agreements have been and are expected to remain satisfactory and that the
Sub-Advisor, under the oversight of the Advisor, has managed the Fund consistent
with its investment objective and policies.
The Board considered the advisory and sub-advisory fee rates payable under the
Agreements for the services provided. The Board noted that the sub-advisory fee
is paid by the Advisor from its advisory fee. The Board received and reviewed
information showing the advisory fee rates and expense ratios of the peer funds
in the MPI Peer Group, as well as advisory fee rates charged by the Advisor and
the Sub-Advisor to other fund and non-fund clients, as applicable. With respect
to 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) only two of the peer funds
employ an advisor/sub-advisor management structure, and none of the peer funds
employs an unaffiliated sub-advisor; and (iii) some of the peer funds are part
of a larger fund complex that may allow for additional economies of scale. The
Board took these limitations into account in considering the peer data, and
noted that the advisory fee rate payable by the Fund, based on average net
assets, was above the median of the MPI Peer Group. With respect to fees charged
to other clients, the Board considered differences between the Fund and other
clients that limited their comparability. In considering the advisory fee rate
overall, the Board also considered the Advisor's statement that it seeks to meet
investor needs through innovative and value-added investment solutions and the
Advisor's description of its long-term commitment to the Fund.
The Board considered performance information for the Fund. The Board noted the
process it has established for monitoring the Fund's performance and portfolio
risk on an ongoing basis, which includes quarterly performance reporting from
the Advisor and Sub-Advisor for the Fund. The Board determined that this process
continues to be effective for reviewing the Fund's performance. The Board
received and reviewed information comparing the Fund's performance for periods
ended December 31, 2015 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.
Based on the information provided on net asset value performance, the Board
noted that the Fund outperformed the MPI Peer Group average for the three- and
five-year periods and underperformed the MPI Peer Group average for the one-year
period ended December 31, 2015. The Board also noted that the Fund
underperformed the S&P 500 Index in each period and outperformed the CBOE
BuyWrite Monthly 1x Index in the three- and five-year periods, but
underperformed in the one-year period. The Board also received information on
the Fund's annual distribution rate as of December 31, 2015 and the Fund's
average trading discount during 2015 and comparable information for the peer
group.
On the basis of all the information provided on the fees, expenses and
performance of the Fund and the ongoing oversight by the Board, the Board
concluded that the advisory and sub-advisory fees continued to be reasonable and
appropriate in light of the nature, extent and quality of the services provided
by the Advisor and the Sub-Advisor under the Agreements.
The Board considered information and discussed with the Advisor whether there
were any economies of scale in connection with providing advisory services to
the Fund and noted the Advisor's statement that it expects its expenses to
increase over the next twelve months as the Advisor continues to make
investments in personnel and infrastructure. 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
considered the revenues and allocated costs (including the allocation
methodology) of the Advisor in serving as investment advisor to the Fund for the
twelve months ended December 31, 2015 and the estimated profitability level for
the Fund calculated by the Advisor based on such data, as well as complex-wide
and product-line profitability data for the same period. The Board noted the
inherent limitations in the profitability analysis, and concluded that, based on
the information provided, the Advisor's profitability level for the Fund was 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, LLC
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/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: August 22, 2016
------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: August 22, 2016
------------------
By (Signature and Title)* /s/ Donald P. Swade
----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: August 22, 2016
------------------
* Print the name and title of each signing officer under his or her signature.