UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-22039
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First Trust Specialty Finance and Financial Opportunities 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: November 30
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Date of reporting period: May 31, 2013
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FIRST TRUST
Specialty Finance
and Financial
Opportunities Fund
SEMI-ANNUAL REPORT
FOR THE SIX MONTHS ENDED
MAY 31, 2013
FIRST TRUST CONFLUENCE
INVESTMENT MANAGEMENT
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TABLE OF CONTENTS
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FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
SEMI-ANNUAL REPORT
MAY 31, 2013
Shareholder Letter........................................................... 1
At A Glance.................................................................. 2
Portfolio Commentary......................................................... 3
Portfolio of Investments..................................................... 5
Statement of Assets and Liabilities.......................................... 8
Statement of Operations...................................................... 9
Statements of Changes in Net Assets.......................................... 10
Statement of Cash Flows...................................................... 11
Financial Highlights......................................................... 12
Notes to Financial Statements................................................ 13
Additional Information....................................................... 18
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Confluence Investment Management LLC
("Confluence" or the "Sub-Advisor") and their respective representatives, taking
into account the information currently available to them. Forward-looking
statements include all statements that do not relate solely to current or
historical fact. For example, forward-looking statements include the use of
words such as "anticipate," "estimate," "intend," "expect," "believe," "plan,"
"may," "should," "would" or other words that convey uncertainty of future events
or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust Specialty Finance and Financial Opportunities Fund (the "Fund") to
be materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. When evaluating the
information included in this report, you are cautioned not to place undue
reliance on these forward-looking statements, which reflect the judgment of the
Advisor and/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 objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money 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.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
Confluence are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The risks of investing in the Fund are
spelled out in the prospectus, the statement of additional information, this
report and other Fund regulatory filings.
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SHAREHOLDER LETTER
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FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
(FGB) SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
MAY 31, 2013
Dear Shareholders:
I am pleased to present you with the semi-annual report for your investment in
First Trust Specialty Finance and Financial Opportunities Fund (the "Fund").
The report you hold contains detailed information about your investment, a
portfolio commentary from the Fund's management team that provides a recap of
the period, a performance analysis and a market and Fund outlook. Additionally,
you will find the Fund's financial statements for the period this report covers.
I encourage you to read this document and discuss it with your financial
advisor. A successful investor is also typically a knowledgeable one, as we have
found to be the case at First Trust Advisors L.P. ("First Trust").
The six months covered by this report have been more positive for the U.S.
markets. In fact, the S&P 500 Index, as measured on a total return basis, rose
16.43% during the period, and many economists and investors have felt positive
about the current market environment. Of course, past performance can never be
an indicator of future performance. As I have written many times, First Trust
believes that staying invested in quality products through up and down markets
and having a long-term horizon can help investors reach their financial goals.
As you know, First Trust offers a variety of products that we believe could fit
many financial plans to help investors seeking long-term investment success. We
encourage you to talk to your advisor about the other investments First Trust
offers that might also fit your financial goals and to discuss those goals with
your advisor regularly so that he or she can help keep you on track.
First Trust will continue to make available up-to-date information about your
investments so you and your financial advisor are current on any First Trust
investments you own. We value our relationship with you, and thank you for the
opportunity to assist you in achieving your financial goals. I look forward to
the remainder of 2013 and to the next edition of your Fund's report.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees and
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
"AT A GLANCE"
AS OF MAY 31, 2013 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FGB
Common Share Price $8.38
Common Share Net Asset Value ("NAV") $8.26
Premium (Discount) to NAV 1.45%
Net Assets Applicable to Common Shares $117,961,405
Current Quarterly Distribution per Common Share (1) $0.1650
Current Annualized Distribution per Common Share $0.6600
Current Distribution Rate on Closing Common Share Price (2) 7.88%
Current Distribution Rate on NAV (2) 7.99%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
5/12 7.10 7.13
7.16 7.32
7.25 7.40
7.26 7.49
6/12 7.46 7.66
7.59 7.76
7.49 7.82
7.44 7.82
7/12 7.57 7.88
7.45 7.86
7.55 7.97
7.92 8.04
7.58 7.83
8/12 7.88 7.96
7.79 8.07
7.94 8.27
7.81 8.32
9/12 7.87 8.17
7.98 8.28
7.93 8.03
7.95 8.12
10/12 8.17 8.14
8.12 8.12
7.95 7.82
7.86 7.79
8.00 7.77
11/12 8.07 7.85
7.95 7.74
7.75 7.75
7.75 8.05
12/12 7.86 7.91
8.24 8.31
8.45 8.38
8.37 8.36
1/13 8.51 8.37
8.44 8.52
8.63 8.47
8.94 8.59
2/13 8.37 8.42
8.42 8.46
8.56 8.54
8.77 8.64
8.73 8.56
3/13 8.75 8.54
8.43 8.40
8.37 8.46
8.20 8.27
4/13 8.71 8.63
8.67 8.67
8.50 8.67
8.68 8.74
8.42 8.49
5/13 8.38 8.26
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PERFORMANCE
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Average Annual Total Return
----------------------------------------
Inception
6 Months Ended 1 Year Ended 5 Years Ended (5/25/2007)
5/31/2013 5/31/2013 5/31/2013 to 5/31/2013
FUND PERFORMANCE (3)
NAV 9.42% 25.57% 3.14% -2.76%
Market Value 7.98% 27.94% 3.41% -3.27%
INDEX PERFORMANCE
Blended Benchmark(4) 8.27% 23.59% 9.75% 2.33%
MSCI U.S. Investable Market Financials Index 23.02% 36.12% -13.59% -8.15%
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% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
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Ares Capital Corp. 9.7%
Golub Capital BDC, Inc. 7.1
PennantPark Investment Corp. 6.3
Medley Capital Corp. 5.4
THL Credit, Inc. 5.3
Hercules Technology Growth Capital, Inc. 5.0
Triangle Capital Corp. 4.5
Solar Capital Ltd. 4.1
TCP Capital Corp. 3.9
Annaly Capital Corp. 3.4
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Total 54.7%
=====
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% OF TOTAL
INDUSTRY INVESTMENTS
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Capital Markets 86.0%
Real Estate Investment Trusts (REITs) 11.4
Diversified Financial Services 2.6
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Total 100.0%
======
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% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS
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Common Stocks:
Business Development Companies 85.3%
Mortgage REITs 11.4
Master Limited Partnerships 2.6
Exchange-Traded Funds 0.7
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Total 100.0%
======
(1) Most recent distribution paid or declared through 5/31/2013. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV, as applicable, as of 5/31/2013. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for NAV
returns and changes in Common Share price for market value returns. Total
returns do not reflect sales load and are not annualized for periods less
than one year. Past performance is not indicative of future results.
(4) Blended benchmark consists of the following (Source: Bloomberg):
Wells Fargo BDC Index (70%), FTSE NAREIT Mortgage REIT Index (20%) and
S&P SmallCap Financials Index (10%)
From 2009-2012, the blended benchmark consisted of the following:
Red Rocks Global Listed Private Equity Index (70%), FTSE NAREIT Mortgage
REIT Index (20%) and S&P SmallCap Financials Index (10%)
Certain of these indices were discontinued during 2012, therefore the
blended benchmark was changed. From 2007-2009, the blended benchmark
consisted of the following:
Red Rocks Listed Private Equity Index (40%), FTSE NAREIT Mortgage REIT
Index (20%), FTSE NAREIT Hybrid REIT Index (20%), Merrill Lynch
Preferred Stock Hybrid Securities Index (10%) and Russell 2000 Financial
Services Index (10%)
Certain of these indices were discontinued during 2009, therefore the
blended benchmark was changed.
Page 2
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PORTFOLIO COMMENTARY
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FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
SEMI-ANNUAL REPORT
MAY 31, 2013
SUB-ADVISOR
Confluence Investment Management LLC, a registered investment advisor
("Confluence" or the "Sub-Advisor"), located in Saint Louis, Missouri, serves as
the sub-advisor to First Trust Specialty Finance and Financial Opportunities
Fund ("FGB" or the "Fund"). The investment professionals at Confluence have over
80 years of aggregate portfolio management experience. Confluence professionals
have invested in a wide range of specialty finance and other financial company
securities during various market cycles, working to provide attractive
risk-adjusted returns to clients.
CONFLUENCE PORTFOLIO MANAGEMENT TEAM
MARK KELLER, CFA
CHIEF EXECUTIVE OFFICER AND CHIEF INVESTMENT OFFICER
DAVID MIYAZAKI, CFA
SENIOR VICE PRESIDENT AND PORTFOLIO MANAGER
DANIEL WINTER, CFA
SENIOR VICE PRESIDENT AND PORTFOLIO MANAGER
COMMENTARY
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND (FGB)
The primary investment objective of the Fund is to seek a high level of current
income. As a secondary objective, the Fund seeks an attractive total return. The
Fund pursues its investment objectives by investing at least 80% of its managed
assets in a portfolio of securities of specialty finance and other financial
companies that the Fund's Sub-Advisor believes offer attractive opportunities
for income and capital appreciation. There can be no assurance that the Fund's
investment objectives will be achieved. The Fund may not be appropriate for all
investors.
MARKET RECAP
FGB is a financial sector fund with a particular focus on a niche called
business development companies ("BDCs"). BDCs lend to and invest in private
companies, oftentimes working with those not large enough to efficiently access
the public markets. Each BDC has a unique profile, determined by its respective
management team. Some specialize in particular industries, while others apply a
more generalized approach and maintain a diversified portfolio. Both approaches
can work effectively and offer shareholders a unique and differentiated return
opportunity derived from the private markets. As of May 31, 2013, the Fund had
over three-fourths of its assets invested in 30 BDCs.
Over the past few years, the equity markets have begun each year generally
moving in the right direction. But by the second quarter, various issues have
often arisen, causing a bit of a retraction. Issues related to European debt
have been one of the primary catalysts. This year, we followed a similar path,
but the retraction was seemingly sparked by domestic issues. Of particular note
was a message from the Federal Reserve ("Fed"), which publicly contemplated a
"tapering" of its monetary policy known as quantitative easing (QE has lowered
intermediate and long-term interest rates through a massive bond purchase
program). The Fed shared thoughts that the economy had finally improved enough
that a timeframe for allowing rates to move higher might be nearing.
The financial market's response to potential tapering was quite acute. After
almost five years of ultra-low interest rate policy, the bond market had adopted
a paradigm that the Fed would maintain low interest rates indefinitely. Long and
intermediate bond prices declined, driving yields rapidly higher. Equity markets
were also seemingly surprised, with many dividend-paying stocks hit particularly
hard. Investors became concerned that rising rates might make dividend-paying
stocks less attractive.
Because BDCs pay substantial dividends, in the second quarter they also
experienced a broad decline in valuations. Although such a trend was not
particularly constructive for the Fund's net asset value ("NAV"), it did present
opportunities to purchase BDCs at attractive valuations and to rotate a portion
of the Fund's portfolio. We manage the Fund's positions to earn meaningful
income in the current period, while balancing the overall portfolio with
investments that can help grow the Fund's income in the future. In the second
quarter, there were opportunities to work on both of these objectives.
Page 3
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PORTFOLIO COMMENTARY (CONTINUED)
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A growing income stream is important, because it can be an effective way to
address rising interest rates. If a particular security (or the Fund itself) can
increase its dividend, it can remain attractive even when the yields of
alternate investments move higher. We are pleased that the majority of the
Fund's BDC holdings have growing dividends, a characteristic that has
contributed to the Fund's ability to grow its own dividend over the past few
years.
The Fund also maintained an allocation to Agency Mortgage-Backed Securities Real
Estate Investment Trusts ("MBS REITs"). This industry experienced a dramatic
decline in valuations in the second quarter and significantly underperformed
other companies in the financial sector. The Fed has been the largest single
buyer of Agency MBS over the past several quarters. News of the aforementioned
tapering caused MBS prices to significantly decline, pressuring down the value
of the Agency MBS REIT portfolios, while increasing their effective leverage.
The industry is likely to face ongoing challenges and sentiment toward the
stocks may remain negative; however, there is a side of the glass that isn't
empty. The nature of how rates change, not just the absolute direction, is also
important to these REITs. We believe the recent changes in interest rates should
allow these companies to earn more profitable net interest margins, which could
open the door to higher profits and potential dividend increases. Therefore, we
have at times opportunistically added to the Fund's holdings as a part of
pursuing its income objective.
The balance of the Fund's investments are in companies intended to help pursue
both income and growth objectives. At times, some of the positions in this
allocation may be in stocks with small or non-existent dividends. However, we
believe these companies are well-positioned to compound their earnings and
thereby help the Fund compound its own NAV. In recent quarters, we have exited
several positions, realizing attractive gains. Over time, this allocation may
rise and fall, depending upon the opportunities we identify and overall market
conditions.
PERFORMANCE ANALYSIS
SIX MONTHS
ENDING 5/31/13
FGB Market Value Total Return 7.98%
FGB NAV Total Return 9.42%
Blended Benchmark* 8.27%
* Components of the blended benchmark: Wells Fargo BDC Index (70%); FTSE/NAREIT
Mortgage REIT (20%); S&P SmallCap Financials Index (10%).
Source: Bloomberg, BNY Mellon
The Fund's market value total return1 of 7.98% was a bit below the Fund's NAV
total return of 9.42%, as the Fund's stock price premium to NAV narrowed, moving
from 2.80% to 1.45% during the six months ended May 31, 2013. Both of these
metrics of the Fund's performance were similar to the 8.27% total return of the
Fund's blended benchmark. It is important to note that because FGB is unique in
its focus on BDCs, it often performs in a much different manner than most
benchmarks, including its own blended benchmark.
The Fund uses leverage because we believe that, over time, leverage provides
opportunities for additional income and total return for shareholders. However,
the use of leverage can also expose shareholders to additional volatility. For
example, if the prices of securities held by the Fund decline, the negative
impact of valuation changes on NAV and shareholder total return is magnified by
the use of leverage. Conversely, leverage may enhance returns during periods
when the prices of securities held by the Fund generally are rising. Leverage
had a positive impact on the performance of the Fund over this reporting period.
MARKET AND FUND OUTLOOK
From a syntax perspective, there is little difference between tapering and
tampering. The same might be said with regard to how the Fed's policy changes
affect market interest rates. Regardless, the market has been informed that it
should not expect ultra-low interest rates to remain in place indefinitely.
Looking forward, it is likely we could experience higher levels of volatility as
interest rates are increasingly determined by the markets, as opposed to being
distorted by the Fed.
Rising volatility usually increases risk, but it is also often accompanied with
more opportunities. We expect this to be the case for many BDCs, Agency MBS
REITs and the Fund itself. Most of the companies owned by the Fund should have
the opportunity to make higher-return loans and investments; at the same time,
we may have the opportunity to make constructive portfolio adjustments as
valuations change.
It is our pleasure to manage FGB and we look forward to continuing to seek to
meet the Fund's income and growth objectives.
-------------------
1 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 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.
Page 4
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
PORTFOLIO OF INVESTMENTS
MAY 31, 2013 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------ ------------------------------------------------------- -------------
COMMON STOCKS - BUSINESS DEVELOPMENT COMPANIES - 101.7%
CAPITAL MARKETS - 101.7%
139,032 American Capital Ltd. (a) (b) ......................... $ 1,853,296
465,108 Apollo Investment Corp. (b) ........................... 3,855,745
791,552 Ares Capital Corp. (b) ................................ 13,583,032
214,420 BlackRock Kelso Capital Corp. (b) ..................... 2,135,623
83,451 Fidus Investment Corp.................................. 1,587,238
79,094 Fifth Street Finance Corp. (b) ........................ 830,487
147,536 Full Circle Capital Corp. (b) ......................... 1,146,355
420,716 Gladstone Capital Corp. (b) ........................... 3,538,221
183,333 Gladstone Investment Corp. (b) ........................ 1,332,831
545,793 Golub Capital BDC, Inc. (b) ........................... 9,556,835
22,948 Golub Capital BDC, Inc. (c) ........................... 401,817
8,699 Harvest Capital Credit Corp............................ 131,790
524,718 Hercules Technology Growth Capital, Inc. (b) .......... 7,031,221
222,697 Horizon Technology Finance Corp. (b) .................. 3,122,212
290,857 KCAP Financial, Inc. (b) .............................. 3,202,336
41,708 Main Street Capital Corp. (b) ......................... 1,209,532
458,100 MCG Capital Corp. (b) ................................. 2,267,595
260,853 Medallion Financial Corp. (b) ......................... 3,876,276
523,162 Medley Capital Corp. (b) .............................. 7,612,007
256,394 MVC Capital, Inc. (b) ................................. 3,261,332
259,507 New Mountain Finance Corp. (b) ........................ 3,952,292
333,937 NGP Capital Resources Co. (b) ......................... 2,270,772
115,879 OFS Capital Corp....................................... 1,329,132
169,897 PennantPark Floating Rate Capital Ltd. (b) ............ 2,488,991
794,500 PennantPark Investment Corp. (b) ...................... 8,850,730
12,176 Prospect Capital Corp.................................. 126,509
14,085 Saratoga Investment Corp............................... 256,629
251,597 Solar Capital Ltd. (b) ................................ 5,786,731
55,050 Solar Senior Capital Ltd. (b) ......................... 1,019,526
117,363 Stellus Capital Investment Corp........................ 1,766,313
343,105 TCP Capital Corp. (b) ................................. 5,489,680
494,594 THL Credit, Inc. (b) .................................. 7,502,991
124,337 TICC Capital Corp. (b) ................................ 1,219,746
224,601 Triangle Capital Corp. (b) ............................ 6,383,160
-------------
TOTAL COMMON STOCKS - BUSINESS DEVELOPMENT COMPANIES .. 119,978,983
(Cost $120,019,572) -------------
COMMON STOCKS - 13.5%
REAL ESTATE INVESTMENT TRUSTS - 13.5%
354,500 Annaly Capital Management, Inc. (b) ................... 4,814,110
10,000 Ares Commercial Real Estate Corp....................... 162,100
192,307 CYS Investments, Inc. (c) ............................. 1,976,916
447,573 CYS Investments, Inc. (b) ............................. 4,601,051
171,282 Hatteras Financial Corp. (b) .......................... 4,422,501
-------------
TOTAL COMMON STOCKS ................................... 15,976,678
(Cost $17,593,092) -------------
See Notes to Financial Statements Page 5
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2013 (UNAUDITED)
SHARES/
UNITS DESCRIPTION VALUE
------------ ------------------------------------------------------- -------------
MASTER LIMITED PARTNERSHIPS - 3.2%
DIVERSIFIED FINANCIAL SERVICES - 3.2%
216,200 Compass Diversified Holdings (b) ...................... $ 3,729,450
-------------
TOTAL MASTER LIMITED PARTNERSHIPS ..................... 3,729,450
(Cost $1,026,079) -------------
EXCHANGE-TRADED FUNDS - 0.9%
CAPITAL MARKETS - 0.9%
25,000 SPDR Barclays High Yield Bond ETF (b) ................. 1,014,500
-------------
TOTAL EXCHANGE-TRADED FUNDS ........................... 1,014,500
(Cost $882,178) -------------
TOTAL INVESTMENTS - 119.3% ............................ 140,699,611
(Cost $139,520,921) (d)
OUTSTANDING LOAN - (19.5%) ............................ (23,000,000)
NET OTHER ASSETS AND LIABILITIES - 0.2% ............... 261,794
-------------
NET ASSETS - 100.0%.................................... $ 117,961,405
=============
-----------------------------
(a) Non-income producing security.
(b) All or a portion of this security serves as collateral on the outstanding
loan.
(c) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under the Securities
Act of 1933, as amended, and may be resold in transactions exempt from
registration, normally to qualified institutional buyers (see Note 2C -
Restricted Securities in the Notes to Financial Statements).
(d) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of May 31, 2013, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $19,644,190 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $18,465,500.
Page 6 See Notes to Financial Statements
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2013 (UNAUDITED)
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of May 31, 2013,
is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
INVESTMENTS 5/31/2013 PRICES INPUTS INPUTS
------------------------------------------------------ ------------ ------------ ------------ ------------
Common Stocks - Business Development Companies*....... $119,978,983 $119,978,983 $ -- $ --
Common Stocks*........................................ 15,976,678 15,976,678 -- --
Master Limited Partnerships*.......................... 3,729,450 3,729,450 -- --
Exchange-Traded Funds*................................ 1,014,500 1,014,500 -- --
------------ ------------ ------------ ------------
Total Investments..................................... $140,699,611 $140,699,611 $ -- $ --
============ ============ ============ ============
* See Portfolio of Investments for industry breakout.
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 values. As of May 31,
2013, the Fund transferred common stocks valued at $401,817 from Level 2 to
Level 1 of the fair value hierarchy. The common stock that transferred from
Level 2 to Level 1 did so as a result of quoted prices received from an
independent third party pricing service.
See Notes to Financial Statements Page 7
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2013 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $139,520,921) ....................................................................... $140,699,611
Cash .......................................................................................... 273,766
Foreign currency (Cost $26) ................................................................... 25
Receivables:
Dividends.................................................................................. 254,449
Investment securities sold................................................................. 105,636
Interest................................................................................... 32
Prepaid expenses .............................................................................. 17,935
------------
Total Assets............................................................................. 141,351,454
------------
LIABILITIES:
Outstanding loan .............................................................................. 23,000,000
Payables:
Investment securities purchased............................................................ 185,405
Investment advisory fees................................................................... 124,095
Audit and tax fees......................................................................... 28,607
Administrative fees........................................................................ 11,561
Custodian fees............................................................................. 10,624
Printing fees.............................................................................. 10,039
Legal fees................................................................................. 7,798
Transfer agent fees........................................................................ 5,049
Trustees' fees and expenses................................................................ 3,633
Interest and fees on loan.................................................................. 1,469
Financial reporting fees................................................................... 771
Other liabilities.............................................................................. 998
------------
Total Liabilities........................................................................ 23,390,049
------------
NET ASSETS .................................................................................... $117,961,405
============
NET ASSETS CONSIST OF:
Paid-in capital ............................................................................... $266,655,989
Par value ..................................................................................... 142,830
Accumulated net investment income (loss) ...................................................... (2,052,924)
Accumulated net realized gain (loss) on investments ........................................... (147,963,179)
Net unrealized appreciation (depreciation) on investments ..................................... 1,178,689
------------
NET ASSETS .................................................................................... $117,961,405
============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share) .......................... $ 8.26
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 14,283,015
============
Page 8 See Notes to Financial Statements
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31, 2013 (UNAUDITED)
INVESTMENT INCOME:
Dividends...................................................................................... $ 6,482,530
Interest....................................................................................... 793
------------
Total investment income..................................................................... 6,483,323
------------
EXPENSES:
Investment advisory fees....................................................................... 710,917
Interest and fees on loan...................................................................... 135,272
Administrative fees............................................................................ 64,257
Printing fees.................................................................................. 31,559
Audit and tax fees............................................................................. 23,407
Transfer agent fees............................................................................ 15,651
Trustees' fees and expenses.................................................................... 10,482
Legal fees..................................................................................... 8,176
Custodian fees................................................................................. 7,931
Financial reporting fees....................................................................... 4,625
Other.......................................................................................... 10,785
------------
Total expenses.............................................................................. 1,023,062
------------
NET INVESTMENT INCOME (LOSS)................................................................... 5,460,261
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments........................................................ (906,112)
------------
Net change in unrealized appreciation (depreciation) on:
Investments................................................................................. 5,950,438
Foreign currency translation................................................................ (1)
------------
Net change in unrealized appreciation (depreciation)........................................... 5,950,437
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ 5,044,325
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS............................... $ 10,504,586
============
See Notes to Financial Statements Page 9
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
5/31/2013 ENDED
(UNAUDITED) 11/30/2012
------------ ------------
OPERATIONS:
Net investment income (loss)....................................................... $ 5,460,261 $ 8,436,796
Net realized gain (loss)........................................................... (906,112) (1,016,616)
Net change in unrealized appreciation (depreciation)............................... 5,950,437 14,269,307
------------ ------------
Net increase (decrease) in net assets resulting from operations.................... 10,504,586 21,716,487
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................................................. (4,713,395) (9,258,175)
Return of capital.................................................................. -- (22,689)
------------ ------------
Total distributions to shareholders................................................ (4,713,395) (9,280,864)
------------ ------------
CAPITAL TRANSACTIONS:
Proceeds from Common Shares reinvested............................................. 37,247 --
------------ ------------
Net increase (decrease) in net assets resulting from capital transactions.......... 37,247 --
------------ ------------
Total increase (decrease) in net assets............................................ 5,828,438 12,435,623
NET ASSETS:
Beginning of period................................................................ 112,132,967 99,697,344
------------ ------------
End of period...................................................................... $117,961,405 $112,132,967
============ ============
Accumulated net investment income (loss) at end of period.......................... $ (2,052,924) $ (2,799,790)
============ ============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period............................................... 14,278,252 14,278,252
Common Shares issued as reinvestment under the Dividend Reinvestment Plan.......... 4,763 --
------------ ------------
Common Shares at end of period..................................................... 14,283,015 14,278,252
============ ============
Page 10 See Notes to Financial Statements
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MAY 31, 2013 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations................... $ 10,504,586
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by operating activities:
Purchases of investments..................................................... (9,539,830)
Sales, maturities and paydowns of investments................................ 6,706,805
Return of capital received from investments on MLPs.......................... 155,664
Net realized gain/loss on investments........................................ 906,112
Net change in unrealized appreciation/depreciation on investments............ (5,950,438)
CHANGES IN ASSETS AND LIABILITIES:
Increase in interest receivable.............................................. (32)
Decrease in dividends receivable............................................. 20,813
Increase in prepaid expenses................................................. (12,199)
Decrease in interest and fees on loan payable................................ (44)
Increase in investment advisory fees payable................................. 13,431
Decrease in audit and tax fees payable....................................... (18,593)
Increase in legal fees payable............................................... 2,592
Decrease in printing fees payable............................................ (9,695)
Increase in administrative fees payable...................................... 1,881
Increase in custodian fees payable........................................... 7,931
Decrease in transfer agent fees payable...................................... (842)
Increase in Trustees' fees and expenses payable.............................. 130
Decrease in other liabilities................................................ (2,097)
------------
CASH PROVIDED BY OPERATING ACTIVITIES.............................................. $ 2,786,175
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Common Shares reinvested....................................... 37,247
Distributions to Common Shareholders from net investment income.............. (7,069,307)
------------
CASH USED IN FINANCING ACTIVITIES.................................................. (7,032,060)
------------
Decrease in cash................................................................... (4,245,885)
Cash and foreign currency at beginning of period................................... 4,519,676
------------
CASH AND FOREIGN CURRENCY AT END OF PERIOD......................................... $ 273,791
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees.................................. $ 135,316
============
See Notes to Financial Statements Page 11
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR YEAR YEAR YEAR YEAR
5/31/2013 ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) 11/30/2012 11/30/2011 11/30/2010 11/30/2009 11/30/2008 (a)
----------- ----------- ----------- ----------- ----------- -------------
Net asset value, beginning of period ....... $ 7.85 $ 6.98 $ 7.69 $ 5.98 $ 4.51 $ 13.73
--------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ............... 0.38 0.59 0.66 0.56 0.65 1.02
Net realized and unrealized gain (loss) .... 0.36 0.93 (0.74) 1.76 1.43 (8.88)
--------- --------- --------- --------- --------- ---------
Total from investment operations ........... 0.74 1.52 (0.08) 2.32 2.08 (7.86)
--------- --------- --------- --------- --------- ---------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income ...................... (0.33) (0.65) (0.63) (0.59) (0.55) (1.27)
Return of capital .......................... -- (0.00) (d) (0.00) (d) (0.02) (0.06) (0.09)
--------- --------- --------- --------- --------- ---------
Total from distributions ................... (0.33) (0.65) (0.63) (0.61) (0.61) (1.36)
--------- --------- --------- --------- --------- ---------
Net asset value, end of period ............. $ 8.26 $ 7.85 $ 6.98 $ 7.69 $ 5.98 $ 4.51
========= ========= ========= ========= ========= =========
Market value, end of period ................ $ 8.38 $ 8.07 $ 6.20 $ 7.50 $ 5.43 $ 3.29
========= ========= ========= ========= ========= =========
TOTAL RETURN BASED ON NET ASSET VALUE (b) .. 9.42% 22.48% (1.01)% 40.04% 56.00% (61.38)%
========= ========= ========= ========= ========= =========
TOTAL RETURN BASED ON MARKET VALUE (b) ..... 7.98% 41.76% (9.84)% 50.41% 94.18% (72.80)%
========= ========= ========= ========= ========= =========
--------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ....... $ 117,961 $ 112,133 $99,697 $109,861 $ 85,069 $ 64,208
Ratio of total expenses to average net
assets .................................. 1.72% 1.83% 1.85% 1.83% 2.29% 2.72%
Ratio of total expenses to average net
assets excluding interest expense ....... 1.49% 1.55% 1.58% 1.58% 1.94% 1.73%
Ratio of net investment income (loss) to
average net assets ...................... 9.16% 7.81% 8.32% 7.93% 13.36% 9.53%
Portfolio turnover rate .................... 5% 18% 11% 24% 20% 15%
INDEBTEDNESS:
Total loan outstanding (in 000's) .......... $ 23,000 $ 23,000 $ 20,000 $ 18,000 $ 14,350 $ 11,450
Asset coverage per $1,000 of
indebtedness (c) ........................ $ 6,129 $ 5,875 $ 5,985 $ 7,103 $ 6,928 $ 6,608
-----------------------------
(a) On July 29, 2008, Confluence Investment Management LLC became the
sub-advisor to the Fund.
(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) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the loan outstanding) and dividing by the loan
outstanding in 000's.
(d) Amount represents less than $0.01 per share.
Page 12 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
MAY 31, 2013 (UNAUDITED)
1. ORGANIZATION
First Trust Specialty Finance and Financial Opportunities Fund (the "Fund") is a
non-diversified, closed-end management investment company organized as a
Massachusetts business trust on March 20, 2007, and is registered with the
Securities and Exchange Commission ("SEC") under the Investment Company Act of
1940, as amended (the "1940 Act"). The Fund trades under the ticker symbol FGB
on the New York Stock Exchange ("NYSE").
The Fund's primary investment objective is to seek a high level of current
income. The Fund seeks attractive total return as a secondary objective. Under
normal market conditions, the Fund invests at least 80% of its Managed Assets in
a portfolio of securities of specialty finance and other financial companies
that Confluence Investment Management LLC ("Confluence" or the "Sub-Advisor")
believes offer attractive opportunities for income and capital appreciation.
Under normal market conditions, the Fund concentrates its investments in
securities of companies within industries in the financial sector. "Managed
Assets" means the total asset value of the Fund minus the sum of the Fund's
liabilities other than the principal amount of borrowings. There can be no
assurance that the Fund will achieve its investment objectives. The Fund may not
be appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America ("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, 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, dividends declared but unpaid,
and any borrowings of the Fund) by the total number of Common Shares
outstanding.
The Fund's investments are valued daily in accordance with valuation procedures
adopted by the Fund's Board of Trustees, and in accordance with provisions of
the 1940 Act. The Fund's securities will be valued as follows:
Common stocks, master limited partnerships ("MLPs") and other securities
listed on any national or foreign exchange (excluding the NASDAQ(R) Stock
Market LLC ("NASDAQ") and the London Stock Exchange Alternative Investment
Market ("AIM")) are valued at the last sale price on the exchange on which
they are principally traded or, for NASDAQ and AIM securities, the
official closing price. Securities traded on one or 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 valued at their
closing bid prices.
Short-term investments that mature in less than 60 days when purchased are
valued at amortized cost.
All market quotations used in valuing the Fund's securities 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. 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.
Page 13
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
MAY 31, 2013 (UNAUDITED)
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.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodology used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of May 31, 2013, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income, if any, is
recorded daily on the accrual basis, including the amortization of premiums and
accretion of discounts.
The Fund may hold real estate investment trusts ("REITs"). Distributions from
such investments may be comprised of return of capital, capital gains and
income. The actual character of amounts received during the year is not known
until after the REIT's fiscal year end. The Fund records the character of
distributions received from the 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.
The Fund may also hold business development companies ("BDCs") and
exchange-traded funds ("ETFs"). The tax character of distributions received from
these securities may vary when reported by the issuer after their tax reporting
periods conclude.
The Fund may also hold MLPs. For the six months ended May 31, 2013,
distributions of $155,664 received from MLPs have been reclassified as return of
capital.
C. RESTRICTED SECURITIES:
The Fund invests in restricted securities, which are securities that cannot be
offered for public sale without first being registered under the Securities Act
of 1933, as amended (the "1933 Act"). Prior to registration, restricted
securities may only be resold in transactions exempt from registration under
Rule 144A under the 1933 Act, normally to qualified institutional buyers. As of
May 31, 2013, the Fund held restricted securities as shown in the following
table. The Fund does not have the right to demand that such securities be
registered. These securities are valued according to the valuation procedures as
stated in the Portfolio Valuation note (Note 2A) and are not expressed as a
discount to the carrying value of a comparable unrestricted security.
ACQUISITION % OF
SECURITY DATE SHARES PRICE CARRYING COST VALUE NET ASSETS
----------- -------- ------- ------------- ----------- ----------
CYS Investments, Inc. 5/19/2008 192,307 $ 10.28 $ 2,575,125 $ 1,976,916 1.68%
Golub Capital BDC, Inc. 8/15/2012 22,948 17.51 334,879 401,817 0.34
------------- ----------- ------
$ 2,910,004 $ 2,378,733 2.02%
============= =========== ======
Page 14
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
MAY 31, 2013 (UNAUDITED)
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 tax character of distributions paid during the fiscal year ended November
30, 2012, was follows:
Distributions paid from:
Ordinary income................................... $ 9,258,175
Return of capital................................. 22,689
As of November 30, 2012, the distributable earnings and net assets on a tax
basis were as follows:
Undistributed ordinary income..................... $ --
Undistributed capital gains....................... --
-------------
Total undistributed earnings...................... --
Accumulated capital and other losses.............. (144,842,444)
Net unrealized appreciation (depreciation)........ (7,430,249)
-------------
Total accumulated earnings (losses)............... (152,272,693)
Other .......................................... (2,355,912)
Paid-in capital................................... 266,761,572
-------------
Net assets........................................ $ 112,132,967
=============
E. INCOME TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
Certain losses realized after October 31 may be deferred and treated as
occurring on the first day of the following fiscal year. For the fiscal year
ended November 30, 2012, the Fund did not incur any Post-October losses.
Under the Regulated Investment Company Modernization Act of 2010 (the "Act"),
net capital losses recognized in taxable years beginning 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 November 30, 2012, the Fund had capital
loss carryforward for federal income tax purposes of $144,842,444, expiring as
follows:
EXPIRATION DATE AMOUNT
November 30, 2015 $ 5,166,354
November 30, 2016 62,747,095
November 30, 2017 55,647,845
November 30, 2018 14,556,882
November 30, 2019 5,452,015
Non-expiring 1,272,253
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 ended 2009, 2010,
2011 and 2012 remain open to federal and state audit. As of May 31, 2013,
management has evaluated the application of these standards to the Fund and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax positions.
Page 15
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
MAY 31, 2013 (UNAUDITED)
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.
Confluence serves as the Fund's sub-advisor and manages the Fund's portfolio
subject to First Trust's supervision. The Sub-Advisor receives a monthly
portfolio management fee calculated at an annual rate of 0.50% of Managed Assets
that is paid by First Trust from its investment advisory fee.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
administrator, fund accountant and transfer agent in accordance with certain fee
arrangements. As administrator and fund accountant, BNYM IS is responsible for
providing certain administrative and accounting services to the Fund, including
maintaining the Fund's books of account, records of the Fund's securities
transactions, and certain other books and records. As transfer agent, BNYM IS is
responsible for maintaining shareholder records for the Fund. The Bank of New
York Mellon ("BNYM") serves as the Fund's custodian in accordance with certain
fee arrangements. As custodian, BNYM is responsible for custody of the Fund's
assets.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer of $125,000 per year and an annual per fund fee of $4,000 for each
closed-end fund or other actively managed fund and $1,000 for each index fund in
the First Trust Fund Complex. The fixed annual retainer is allocated pro rata
among each fund in the First Trust Fund Complex based on net assets.
Additionally, the Lead Independent Trustee is paid $15,000 annually, the
Chairman of the Audit Committee is paid $10,000 annually, and each of the
Chairmen of the Nominating and Governance Committee and the Valuation Committee
is paid $5,000 annually to serve in such capacities, with such compensation
allocated pro rata among each fund in the First Trust Fund Complex based on net
assets. Trustees are reimbursed for travel and out-of-pocket expenses in
connection with all meetings. The Lead Independent Trustee and each Committee
Chairman will serve two-year terms until December 31, 2013, before rotating to
serve as Chairman of another Committee or as Lead Independent Trustee. After
December 31, 2013, the Lead Independent Trustee and Committee Chairmen will
rotate every three years. The officers and "Interested" Trustee receive no
compensation from the funds for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding short-term
investments, for the six months ended May 31, 2013, were $8,648,672 and
$6,809,925 respectively.
5. CREDIT AGREEMENT
The Fund entered into a committed facility agreement (the "BNP Facility") with
BNP Paribas Prime Brokerage, Inc. ("BNP"), which currently has a maximum
commitment amount of $25,000,000. Absent certain events of default or failure to
maintain certain collateral requirements, BNP may not terminate the BNP Facility
except upon 180 calendar days prior notice. The borrowing rate under the BNP
Facility is equal to the 3-month LIBOR plus 80 basis points. In addition, under
the BNP Facility, the Fund pays a commitment fee of 0.85% on the undrawn amount.
The average amount outstanding for the six months ended May 31, 2013, was
$23,000,000, with a weighted average interest rate of 1.09%. As of May 31, 2013,
the Fund had outstanding borrowings of $23,000,000 under the BNP Facility. The
high and low annual interest rates for the six months ended May 31, 2013, were
1.11% and 1.07%, respectively, and the interest rate at May 31, 2013, was 1.08%.
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. FINANCIAL SECTOR CONCENTRATION RISK
Under normal market conditions, the Fund will invest at least 80% of its total
assets in securities of companies within industries in the financial sector. A
fund concentrated in a single industry or sector is likely to present more risks
than a fund that is broadly diversified over several industries or groups of
industries. Compared to the broad market, an individual sector may be more
strongly affected by changes in the economic climate, broad market shifts, moves
in a particular dominant stock, or regulatory changes. Specialty finance and
other financial companies in general are subject to extensive government
regulation, which may change frequently. The profitability of specialty finance
and other financial companies is largely dependent upon the availability and
cost of capital funds, and may fluctuate significantly in response to
Page 16
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
MAY 31, 2013 (UNAUDITED)
changes in interest rates, as well as changes in general economic conditions.
From time to time, severe competition may also affect the profitability of
specialty finance and other financial companies. Financial companies can be
highly dependent upon access to capital markets and any impediments to such
access, such as general economic conditions or a negative perception in the
capital markets of a company's financial condition or prospects, could adversely
affect its business. Leasing companies can be negatively impacted by changes in
tax laws which affect the types of transactions in which such companies engage.
8. 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 17
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
MAY 31, 2013 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) NAV per Common Share on that date or
(ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the NYSE or
elsewhere, for the participants' accounts. It is possible that the
market price for the Common Shares may increase before the Plan
Agent has completed its purchases. Therefore, the average purchase
price per share paid by the Plan Agent may exceed the market price
at the time of valuation, resulting in the purchase of fewer shares
than if the dividend or distribution had been paid in Common Shares
issued by the Fund. The Plan Agent will use all dividends and
distributions received in cash to purchase Common Shares in the open
market within 30 days of the valuation date except where temporary
curtailment or suspension of purchases is necessary to comply with
federal securities laws. Interest will not be paid on any uninvested
cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio investments during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
Page 18
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
MAY 31, 2013 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR") in
Washington, DC. Information regarding the operation of the PRR may be obtained
by calling (800) SEC-0330.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of First Trust
Energy Infrastructure Fund, Macquarie/First Trust Global
Infrastructure/Utilities Dividend & Income Fund, First Trust Energy Income and
Growth Fund, First Trust Enhanced Equity Income Fund, First Trust/Aberdeen
Global Opportunity Income Fund, First Trust Mortgage Income Fund, First Trust
Strategic High Income Fund II, First Trust/Aberdeen Emerging Opportunity Fund,
First Trust Specialty Finance and Financial Opportunities Fund, First Trust
Dividend and Income Fund (formerly known as First Trust Active Dividend Income
Fund), and First Trust High Income Long/Short Fund was held on April 17, 2013
(the "Annual Meeting"). At the Annual Meeting, Trustees James A. Bowen and Niel
B. Nielson were elected by the Common Shareholders of the First Trust Specialty
Finance and Financial Opportunities Fund as Class III Trustees for three-year
terms expiring at the Fund's annual meeting of shareholders in 2016. The number
of votes cast in favor of Mr. Bowen was 12,745,015, the number of votes against
was 174,795 and the number of abstentions was 1,363,205. The number of votes
cast in favor of Mr. Nielson was 12,740,511, the number of votes against was
179,299 and the number of abstentions was 1,363,205. Richard E. Erickson, Thomas
R. Kadlec and Robert F. Keith are the other current and continuing Trusteees.
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.
BUSINESS DEVELOPMENT COMPANY ("BDC") RISK: Investments in closed-end funds that
elect to be treated as BDCs may be subject to a high degree of risk. BDCs
typically invest in small and medium-sized private and certain public companies
that may not have access to public equity markets or capital raising. As a
result, a BDC's portfolio could include a substantial amount of securities
purchased in private placements, and its portfolio may carry risks similar to
those of a private equity or venture capital fund. Securities that are not
publicly registered may be difficult to value and may be difficult to sell at a
price representative of their intrinsic value. Investments in BDCs are subject
to various risks, including management's ability to meet the BDC's investment
objective, and to manage the BDC's portfolio when the underlying securities are
redeemed or sold, during periods of market turmoil and as investors' perceptions
regarding a BDC or its underlying investments change. BDC shares are not
redeemable at the option of the BDC shareholder and, as with shares of other
closed-end funds, they may trade in the secondary market at a discount to their
NAV.
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.
LEVERAGE RISK: The use of leverage results in additional risks and can magnify
the effect of any losses. The funds borrowed pursuant to a leverage borrowing
program constitute a substantial lien and burden by reason of their prior claim
against the income of the Fund and against the net assets of the Fund in
liquidation. If the Fund is not in compliance with certain credit facility
provisions, the Fund may not be permitted to declare dividends or other
distributions.
Page 19
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
MAY 31, 2013 (UNAUDITED)
NON-DIVERSIFICATION RISK: Because the Fund is non-diversified, it is only
limited as to the percentage of its assets which may be invested in the
securities of any one issuer by the diversification requirements imposed by the
Internal Revenue Code of 1986, as amended. Because the Fund may invest a
relatively high percentage of its assets in a limited number of issuers, the
Fund may be more susceptible to any single economic, political or regulatory
occurrence and to the financial conditions of the issuers in which it invests.
REIT, MORTGAGE-RELATED AND ASSET-BACKED SECURITIES RISKS: Investing in REITs
involves certain unique risks in addition to investing in the real estate
industry in general. REITs are subject to interest rate risk (especially
mortgage REITs) and the risk of default by lessees or borrowers. An equity REIT
may be affected by changes in the value of the underlying properties owned by
the REIT. A mortgage REIT may be affected by the ability of the issuers of its
portfolio of mortgages to repay their obligations. REITs whose underlying assets
are concentrated in properties used by a particular industry are also subject to
risks associated with such industry. REITs may have limited financial resources,
their securities may trade less frequently and in a limited volume, and their
securities may be subject to more abrupt or erratic price movements than larger
company securities.
In addition to REITs, the Fund may invest in a variety of other mortgage-related
securities, including commercial mortgage securities and other mortgage-backed
instruments. Rising interest rates tend to extend the duration of
mortgage-related securities, making them more sensitive to changes in interest
rates, and may reduce the market value of the securities. In addition,
mortgage-related securities are subject to prepayment risk, the risk that
borrowers may pay off their mortgages sooner than expected, particularly when
interest rates decline. This can reduce the Fund's returns because the Fund may
have to reinvest that money at lower prevailing interest rates.
The Fund's investments in other asset-backed securities are subject to risks
similar to those associated with mortgage-backed securities, as well as
additional risks associated with the nature of the assets and the servicing of
those assets.
Page 20
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Confluence Investment Management LLC
349 Marshall Avenue, Suite 302
Saint Louis, MO 63119
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
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 has been no change, as of the date of this filing, in any of the
portfolio managers identified in response to paragraph (a)(1) of this Item
in the registrant's most recently filed annual report on Form N-CSR.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of trustees, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the "1940
Act") (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days
of the filing date of the report that includes the disclosure required by
this paragraph, based on their evaluation of these controls and
procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR
270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities
Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the registrant's second fiscal quarter
of the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Not applicable.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) First Trust Specialty Finance and Financial Opportunities Fund
----------------------------------------------------------------
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: July 23, 2013
---------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: July 23, 2013
---------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: July 23, 2013
---------------------
* Print the name and title of each signing officer under his or her signature.