UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-Q
QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED MANAGEMENT
INVESTMENT COMPANY
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: September 30, 2011
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Form N-Q is to be used by management investment companies, other than small
business investment companies registered on Form N-5 (ss.ss. 239.24 and 274.5 of
this chapter), to file reports with the Commission, not later than 60 days after
the close of the first and third fiscal quarters, pursuant to rule 30b1-5 under
the Investment Company Act of 1940 (17 CFR 270.30b1-5). The Commission may use
the information provided on Form N-Q in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-Q, and
the Commission will make this information public. A registrant is not required
to respond to the collection of information contained in Form N-Q 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 the
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. SCHEDULE OF INVESTMENTS. The Schedule(s) of Investments is attached
herewith.
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a)
SEPTEMBER 30, 2011 (UNAUDITED)
SHARES DESCRIPTION VALUE
--------------- --------------------------------------------- ----------------
COMMON STOCKS - 90.8%
AEROSPACE & DEFENSE - 3.0%
75,900 Honeywell International, Inc. ............... $ 3,332,769
50,000 United Technologies Corp. (b)................ 3,518,000
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6,850,769
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AIR FREIGHT & LOGISTICS - 1.4%
50,000 United Parcel Service, Inc., Class B ........ 3,157,500
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BEVERAGES - 3.8%
80,000 Coca-Cola (The) Co. (b)...................... 5,404,800
50,000 PepsiCo, Inc. ............................... 3,095,000
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8,499,800
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CAPITAL MARKETS - 2.4%
40,000 Bank of New York Mellon (The) Corp. ......... 743,600
24,000 BlackRock, Inc. ............................. 3,552,240
70,000 Horizon Technology Finance Corp. ............ 1,026,200
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5,322,040
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CHEMICALS - 3.0%
30,000 Dow Chemical (The) Co. (c)................... 673,800
80,000 E.I. Du Pont de Nemours & Co. (b)............ 3,197,600
40,000 PPG Industries, Inc. (b)..................... 2,826,400
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6,697,800
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COMMERCIAL BANKS - 0.8%
35,000 PNC Financial Services Group, Inc. .......... 1,686,650
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COMMUNICATIONS EQUIPMENT - 3.0%
170,000 Cisco Systems, Inc. (b)...................... 2,633,300
85,000 QUALCOMM, Inc. .............................. 4,133,550
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6,766,850
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COMPUTERS & PERIPHERALS - 2.1%
10,000 Apple, Inc. (c) (d).......................... 3,811,800
40,000 Hewlett-Packard Co. (b)...................... 898,000
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4,709,800
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DIVERSIFIED FINANCIAL SERVICES - 2.0%
147,000 JPMorgan Chase & Co. ........................ 4,427,640
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DIVERSIFIED TELECOMMUNICATION SERVICES - 3.1%
62,100 AT&T, Inc. .................................. 1,771,092
240,005 Frontier Communications Corp. ............... 1,466,431
100,000 Verizon Communications, Inc. ................ 3,680,000
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6,917,523
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ELECTRIC UTILITIES - 1.3%
70,000 Southern Co. (c)............................. 2,965,900
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ELECTRICAL EQUIPMENT - 1.3%
69,100 Emerson Electric Co. ........................ 2,854,521
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See Notes to Quarterly Portfolio of Investments
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (Continued)
SEPTEMBER 30, 2011 (UNAUDITED)
SHARES DESCRIPTION VALUE
--------------- --------------------------------------------- ----------------
COMMON STOCKS - (Continued)
ELECTRONIC EQUIPMENT, INSTRUMENTS & COMPONENTS - 0.8%
60,000 TE Connectivity, Ltd. ....................... $ 1,688,400
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ENERGY EQUIPMENT & SERVICES - 1.1%
40,000 Schlumberger, Ltd. .......................... 2,389,200
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FOOD PRODUCTS - 2.4%
40,000 Kellogg Co. ................................. 2,127,600
100,000 Kraft Foods, Inc., Class A (b)............... 3,358,000
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5,485,600
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HOTELS, RESTAURANTS & LEISURE - 3.5%
85,000 Carnival Corp. .............................. 2,575,500
35,000 McDonald's Corp. (c)......................... 3,073,700
60,000 Starwood Hotels & Resorts Worldwide, Inc. (b) 2,329,200
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7,978,400
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INDUSTRIAL CONGLOMERATES - 3.0%
40,000 3M Co. ...................................... 2,871,600
250,000 General Electric Co. ........................ 3,810,000
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6,681,600
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INSURANCE - 4.0%
155,000 Lincoln National Corp. (b)................... 2,422,650
50,000 Marsh & McLennan Co., Inc. .................. 1,327,000
116,795 MetLife, Inc. ............................... 3,271,428
42,000 Travelers (The) Cos., Inc. .................. 2,046,660
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9,067,738
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IT SERVICES - 4.8%
50,000 Accenture PLC (b)............................ 2,634,000
42,000 Automatic Data Processing, Inc. ............. 1,980,300
35,000 International Business Machines Corp. ....... 6,126,050
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10,740,350
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LEISURE EQUIPMENT & PRODUCTS - 1.3%
110,000 Mattel, Inc. (c)............................. 2,847,900
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LIFE SCIENCES TOOLS & SERVICES - 1.2%
90,000 Agilent Technologies, Inc. (d)............... 2,812,500
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MACHINERY - 2.8%
50,000 Caterpillar, Inc. ........................... 3,692,000
33,000 Cummins, Inc. ............................... 2,694,780
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6,386,780
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MARINE - 0.8%
150,000 Seaspan Corp. ............................... 1,719,000
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MEDIA - 0.9%
180,000 Regal Entertainment Group, Class A .......... 2,113,200
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METALS & MINING - 0.9%
65,000 Freeport-McMoRan Copper & Gold, Inc. ........ 1,979,250
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See Notes to Quarterly Portfolio of Investments
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (Continued)
SEPTEMBER 30, 2011 (UNAUDITED)
SHARES DESCRIPTION VALUE
--------------- --------------------------------------------- ----------------
COMMON STOCKS - (Continued)
MULTI-UTILITIES - 0.1%
10,000 Xcel Energy, Inc. ........................... $ 246,900
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MULTILINE RETAIL - 1.3%
60,000 Target Corp. (b)............................. 2,942,400
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OIL, GAS & CONSUMABLE FUELS - 9.2%
40,000 Chevron Corp. ............................... 3,700,800
45,000 ConocoPhillips .............................. 2,849,400
120,000 Exxon Mobil Corp. ........................... 8,715,600
76,000 Occidental Petroleum Corp. (b)............... 5,434,000
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20,699,800
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PAPER & FOREST PRODUCTS - 0.8%
80,000 International Paper Co. (b).................. 1,860,000
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PERSONAL PRODUCTS - 1.0%
120,000 Avon Products, Inc. ......................... 2,352,000
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PHARMACEUTICALS - 7.9%
215,000 Bristol-Myers Squibb Co. (b)................. 6,746,700
63,000 Merck & Co., Inc. ........................... 2,060,730
50,000 Novartis AG, ADR ............................ 2,788,500
350,000 Pfizer, Inc. ................................ 6,188,000
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17,783,930
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REAL ESTATE INVESTMENT TRUSTS (REITS) - 1.9%
150,900 Annaly Capital Management, Inc. (b).......... 2,509,467
250,000 MFA Mortgage Investments, Inc. .............. 1,755,000
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4,264,467
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SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 2.7%
200,000 Intel Corp. ................................. 4,266,000
60,000 Microchip Technology, Inc. .................. 1,866,600
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6,132,600
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SOFTWARE - 3.1%
100,000 Microsoft Corp. ............................. 2,489,000
160,000 Oracle Corp. (b)............................. 4,598,400
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7,087,400
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SPECIALTY RETAIL - 2.7%
70,000 Home Depot (The), Inc. ...................... 2,300,900
100,000 Limited Brands, Inc. (b)..................... 3,851,000
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6,151,900
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TOBACCO - 3.5%
110,000 Altria Group, Inc. .......................... 2,949,100
80,000 Philip Morris International, Inc. ........... 4,990,400
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7,939,500
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WATER UTILITIES - 1.0%
74,200 American Water Works Co., Inc. .............. 2,239,356
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See Notes to Quarterly Portfolio of Investments
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (Continued)
SEPTEMBER 30, 2011 (UNAUDITED)
SHARES/
UNITS DESCRIPTION VALUE
--------------- --------------------------------------------- ----------------
COMMON STOCKS - (Continued)
WIRELESS TELECOMMUNICATION SERVICES - 0.9%
80,000 Vodafone Group PLC, ADR ..................... $ 2,052,000
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TOTAL COMMON STOCKS ......................... 204,498,964
(Cost $225,104,272) ----------------
MASTER LIMITED PARTNERSHIPS - 5.0%
OIL, GAS & CONSUMABLE FUELS - 5.0%
60,000 Copano Energy, LLC .......................... 1,788,600
77,000 Energy Transfer Partners, L.P. .............. 3,157,770
40,000 Enterprise Products Partners, L.P. .......... 1,606,000
60,000 Magellan Midstream Partners, L.P. ........... 3,624,000
25,000 TC Pipelines, L.P. .......................... 1,096,000
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TOTAL MASTER LIMITED PARTNERSHIPS ........... 11,272,370
(Cost $6,895,744) ----------------
EXCHANGE-TRADED FUNDS - 2.1%
CAPITAL MARKETS - 2.1%
264,200 SPDR KBW Bank ETF ........................... 4,634,068
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TOTAL EXCHANGE-TRADED FUNDS.................. 4,634,068
(Cost $3,925,808) ----------------
COMMON STOCKS - BUSINESS DEVELOPMENT COMPANIES - 1.8%
CAPITAL MARKETS - 1.8%
320,000 Apollo Investment Corp. ..................... 2,406,400
80,000 Solar Capital, Ltd. ......................... 1,610,400
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TOTAL COMMON STOCKS - BUSINESS
DEVELOPMENT COMPANIES .................... 4,016,800
(Cost $5,543,430) ----------------
CONVERTIBLE PREFERRED SECURITIES - 0.1%
AUTOMOBILES - 0.1%
10,000 General Motors Co., Ser B, 4.75% ............ 350,800
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TOTAL CONVERTIBLE PREFERRED SECURITIES ...... 350,800
(Cost $496,012) ----------------
TOTAL INVESTMENTS - 99.8% ................... 224,773,002
(Cost $241,965,266) (e) ----------------
NUMBER OF
CONTRACTS DESCRIPTION VALUE
--------------- --------------------------------------------- ----------------
CALL OPTIONS WRITTEN - (0.3%)
Accenture PLC Calls
100 @ 52.5 due October 11 ....................... (25,500)
100 @ 57.5 due October 11 ....................... (3,000)
(Cost $496,012) ----------------
(28,500)
(Cost $496,012) ----------------
See Notes to Quarterly Portfolio of Investments
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (Continued)
SEPTEMBER 30, 2011 (UNAUDITED)
NUMBER OF
CONTRACTS DESCRIPTION VALUE
--------------- --------------------------------------------- ----------------
CALL OPTIONS WRITTEN - (Continued)
Annaly Capital Management, Inc. Call
500 @ 18 due October 11 ......................... $ (2,000)
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Apple, Inc. Calls
50 @ 425 due October 11 ........................ (20,000)
50 @ 450 due October 11 ........................ (7,400)
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(27,400)
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Bristol-Myers Squibb Co. Call
500 @ 32 due October 11 ......................... (22,000)
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Cisco Systems, Inc. Call
300 @ 17 due October 11 ......................... (3,600)
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Coca-Cola (The) Co. Calls
200 @ 70 due October 11 ......................... (18,000)
400 @ 75 due October 11 ......................... (3,200)
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(21,200)
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Dow Chemical (The) Co. Call
300 @ 29 due October 11 ......................... (1,200)
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E.I. Du Pont de Nemours & Co. Call
300 @ 48 due October 11 ......................... (2,100)
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Hewlett-Packard Co. Call
200 @ 25 due October 11 ......................... (9,800)
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International Paper Co. Calls
200 @ 28 due October 11 ......................... (2,200)
300 @ 30 due October 11 ......................... (1,500)
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(3,700)
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Kraft Foods, Inc. Class A Call
300 @ 36 due October 11 ......................... (2,700)
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Limited Brands, Inc. Calls
200 @ 39 due October 11 ......................... (36,000)
200 @ 42 due October 11 ......................... (12,000)
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(48,000)
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Lincoln National Corp. Call
350 @ 18 due October 11 ......................... (11,550)
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Mattel, Inc. Call
1,100 @ 30 due October 11 ......................... (11,000)
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See Notes to Quarterly Portfolio of Investments
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (Continued)
SEPTEMBER 30, 2011 (UNAUDITED)
NUMBER OF
CONTRACTS DESCRIPTION VALUE
--------------- --------------------------------------------- ----------------
CALL OPTIONS WRITTEN - (CONTINUED)
McDonald's Corp. Calls
175 @ 90 due October 11 ......................... $ (24,325)
175 @ 92.5 due October 11 ....................... (10,500)
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(34,825)
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Occidental Petroleum Corp. Call
200 @ 90 due October 11 ......................... (2,400)
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Oracle Corp. Call
400 @ 31 due October 11 ......................... (18,400)
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PPG Industries, Inc. Call
100 @ 80 due October 11 ......................... (5,000)
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S&P 500 Index Calls (f)
350 @ 1240 due October 11 ....................... (155,750)
300 @ 1270 due October 11 ....................... (55,500)
300 @ 1290 due October 11 ....................... (22,500)
200 @ 1230 due October 11 ....................... (108,000)
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(341,750)
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Southern Co. Call
700 @ 43 due October 11 ......................... (46,900)
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Starwood Hotels & Resorts Worldwide, Inc. Call
200 @ 45 due October 11 ......................... (7,800)
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Target Corp. Call
200 @ 52.5 due October 11 ....................... (9,200)
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United Technologies Corp. Calls
200 @ 75 due October 11 ......................... (23,000)
200 @ 80 due October 11 ......................... (4,200)
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(27,200)
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TOTAL CALL OPTIONS WRITTEN .................. (688,225)
(Premiums received $1,578,439) ----------------
NET OTHER ASSETS AND LIABILITIES - 0.5% ..... 1,213,212
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NET ASSETS - 100.0% ......................... $ 225,297,989
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(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) Call options were written on a portion of the common stock position and
are fully covered by the common stock position.
(c) Call options were written on this entire common stock position and are
fully covered by the common stock position.
(d) Non-income producing security.
See Notes to Quarterly Portfolio of Investments
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (Continued)
SEPTEMBER 30, 2011 (UNAUDITED)
(e) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of September 30, 2011,
the aggregate gross unrealized appreciation for all securities in which
there was an excess of value over tax cost was $18,741,842 and the
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over value was $35,934,106.
(f) Call options on securities indices were written on a portion of the common
stock positions that were not used to cover call options on individual
equity securities held in the Fund's portfolio.
ADR American Depositary Receipt
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VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of September 30,
2011 is as follows (see Note 1A - Portfolio Valuation in the Notes to Quarterly
Portfolio of Investments):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
9/30/2011 PRICES INPUTS INPUTS
--------------- --------------- --------------- ---------------
Common Stocks*................................ $ 204,498,964 $ 204,498,964 $ -- $ --
Master Limited Partnerships*.................. 11,272,370 11,272,370 -- --
Exchange-Traded Funds*........................ 4,634,068 4,634,068 -- --
Common Stocks - Business Development
Companies*.................................. 4,016,800 4,016,800 -- --
Convertible Preferred Securities*............. 350,800 350,800 -- --
--------------- --------------- --------------- ---------------
TOTAL INVESTMENTS............................. $ 224,773,002 $ 224,773,002 $ -- $ --
=============== =============== =============== ===============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
9/30/2011 PRICES INPUTS INPUTS
--------------- --------------- --------------- ---------------
Call Options Written.......................... $ (688,225) $ (688,225) $ -- $ --
=============== =============== =============== ===============
*See the Portfolio of Investments for industry breakdown.
See Notes to Quarterly Portfolio of Investments
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS
FIRST TRUST ENHANCED EQUITY INCOME FUND
SEPTEMBER 30, 2011 (UNAUDITED)
1. VALUATION AND INVESTMENT PRACTICES
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of First Trust Enhanced Equity
Income Fund (the "Fund") is determined daily as of the close of regular trading
on the New York Stock Exchange ("NYSE"), normally 4:00 p.m. Eastern time, on
each day the NYSE is open for trading. If the NYSE closes early on a valuation
day, the NAV is determined as of that time. Domestic debt securities and foreign
securities are priced using data reflecting the earlier closing of the principal
markets for those securities. The NAV per Common Share is calculated by dividing
the value of all assets of the Fund (including accrued interest and dividends),
less all liabilities (including accrued expenses, the value of call options
written (sold) and dividends declared but unpaid) by the total number of Common
Shares outstanding.
The Fund's investments are valued daily in accordance with valuation procedures
adopted by the Fund's Board of Trustees, and in accordance with provisions of
the Investment Company Act of 1940, as amended (the "1940 Act"). The following
securities, for which accurate and reliable market quotations are readily
available, will be valued as follows:
Common stocks, master limited partnerships ("MLPs"), exchanged-traded
funds and other securities listed on any national or foreign exchange
(excluding the NASDAQ National Market ("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. If there
are no transactions on the valuation day, the securities are valued at the
mean between the most recent bid and asked prices.
Securities listed on the NASDAQ or the AIM are valued at the official
closing price. If there is no official closing price on the valuation day,
the securities are valued at the mean between the most recent bid and
asked prices.
Securities traded in the over-the-counter market are valued at their
closing bid prices.
Exchange-traded options and futures contracts are valued at the closing
price in the market where such contracts are principally traded. If no
closing price is available, exchange-traded options and futures contracts
are valued at the mean between the most recent bid and asked prices.
Over-the-counter options and futures contracts are valued at their closing
bid prices.
All market quotations used in valuing the Fund's securities will be obtained
from a third party pricing service. If no quotation is received from a pricing
service, attempts will be made to obtain one or more broker quotes for the
security. In the event the pricing service does not provide a valuation, broker
quotations are not readily available, or the valuations received are deemed
unreliable, the Fund's Board of Trustees has designated First Trust Advisors
L.P. ("First Trust") to use a fair value method to value the Fund's securities.
Additionally, if events occur after the close of the principal markets for
certain securities (e.g., domestic debt and foreign securities) that could
materially affect the Fund's NAV, First Trust will use a fair value method to
value the Fund's securities. The use of fair value pricing is governed by
valuation procedures adopted by the Fund's Board of Trustees, and in accordance
with the provisions of the 1940 Act. As a general principle, the fair value of a
security is the amount which the Fund might reasonably expect to receive for the
security upon its current sale. However, in light of the judgment involved in
fair valuations, there can be no assurance that a fair value assigned to a
particular security will be the amount which the Fund might be able to receive
upon its current sale. Fair valuation of a security will be based on the
consideration of all available information, including, but not limited to the
following:
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or the
appropriate stock exchange;
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might affect
the value of the security.
If the securities in question are foreign securities, the following additional
information may be considered:
1) the value of similar foreign securities traded on other foreign
markets;
2) ADR trading of similar securities;
3) closed-end fund trading of similar securities;
4) foreign currency exchange activity;
5) the trading prices of financial products that are tied to baskets of
foreign securities;
6) factors relating to the event that precipitated the pricing problem;
7) whether the event is likely to recur; and
8) whether the effects of the event are isolated or whether they affect
entire markets, countries or regions.
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS - (Continued)
FIRST TRUST ENHANCED EQUITY INCOME FUND
SEPTEMBER 30, 2011 (UNAUDITED)
Short-term investments that mature in less than 60 days when purchased are
valued at amortized cost.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical securities. An active market is a market in which
transactions for the security 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 securities in active markets.
o Quoted prices for identical or similar securities in markets
that are non-active. A non-active market is a market where
there are few transactions for the security, 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
security (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
security.
The inputs or methodology used for valuing securities are not necessarily an
indication of the risk associated with investing in those securities. A summary
of the inputs used to value the Fund's investments as of September 30, 2011, is
included with the Fund's Portfolio of Investments.
B. OPTION CONTRACTS:
The Fund may write (sell) covered call options ("options") on all or a portion
of the equity securities held in the Fund's portfolio and on securities indices
as determined to be appropriate by Chartwell Investment Partners, L.P.
("Chartwell" or the "Sub-Advisor"), consistent with the Fund's investment
objective. The number of options the Fund can write (sell) is limited by the
amount of equity securities the Fund holds in its portfolio. Options on
securities indices are designed to reflect price fluctuations in a group of
securities or segment of the securities market rather than price fluctuations in
a single security and are similar to options on single securities, except that
the exercise of securities index options requires cash settlement payments and
does not involve the actual purchase or sale of securities. The Fund will not
write (sell) "naked" or uncovered options. If certain equity securities held in
the Fund's portfolio are not covered by a related call option on the individual
equity security, securities index options may be written on all or a portion of
such uncovered securities. By writing (selling) options, the Fund seeks to
generate additional income, in the form of premiums received, for writing
(selling) the options, and to provide a partial hedge against a market decline
in the underlying equity security. Options are marked-to-market daily and their
value will be affected by changes in the value and dividend rates of the
underlying equity securities, changes in interest rates, changes in the actual
or perceived volatility of the securities markets and the underlying equity
securities and the remaining time to the options' expiration. The value of
options may also be adversely affected if the market for the options becomes
less liquid or trading volume diminishes.
Options the Fund writes (sells) will either be exercised, expire or be cancelled
pursuant to a closing transaction. If the price of the underlying equity
security exceeds the option's exercise price, it is likely that the option
holder will exercise the option. If an option written (sold) by the Fund is
exercised, the Fund would be obligated to deliver the underlying equity security
to the option holder upon payment of the strike price. In this case, the option
premium received by the Fund will be added to the amount realized on the sale of
the underlying security for 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.
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS - (Continued)
FIRST TRUST ENHANCED EQUITY INCOME FUND
SEPTEMBER 30, 2011 (UNAUDITED)
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.
The Fund is subject to equity price risk in the normal course of pursuing its
investment objective. 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:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
The Fund may hold publicly-traded MLPs and real estate investment trusts
("REITs"). Distributions from such investments may include a return of capital
component from the MLP or REIT to the extent of the cost basis of such MLP or
REIT investments. The actual character of amounts received during the year is
not known until after the fiscal year end. The Fund records the character of
distributions received from the MLPs or REITs during the year based on estimates
available. The Fund's characterization may be subsequently revised based on
information received from the MLPs or REITs after their tax reporting periods
conclude.
2. OPTION ACTIVITY
Written option activity for the Fund for the period ended September 30, 2011 was
as follows:
NUMBER
OF
WRITTEN OPTIONS CONTRACTS PREMIUMS
--------------------------------------------------------------------------
Options outstanding at December 31, 2010... 6,463 $ 1,054,558
Options Written............................ 96,098 15,814,682
Options Expired............................ (52,402) (6,772,741)
Options Exercised.......................... (2,439) (132,282)
Options Closed............................. (38,370) (8,385,778)
--------- --------------
Options outstanding at September 30, 2011.. 9,350 $ 1,578,439
========= ==============
ITEM 2. 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 last fiscal quarter
that have materially affected, or are reasonably likely to materially
affect, the registrant's internal control over financial reporting.
ITEM 3. EXHIBITS.
Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 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 A. Bowen
---------------------------------------
James A. Bowen, Chairman of the Board,
President and Chief Executive Officer
(principal executive officer)
Date: November 21, 2011
---------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ James A. Bowen
---------------------------------------
James A. Bowen, Chairman of the Board,
President and Chief Executive Officer
(principal executive officer)
Date: November 21, 2011
---------------------
By (Signature and Title)* /s/ Mark R. Bradley
---------------------------------------
Mark R. Bradley, Treasurer, Chief Financial
Officer and Chief Accounting Officer
(principal financial officer)
Date: November 21, 2011
---------------------
* Print the name and title of each signing officer under his or her signature.