UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-21586
FIRST TRUST ENHANCED EQUITY INCOME FUND
(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
WHEATON, IL 60187
(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
(Name and address of agent for service)
registrant's telephone number, including area code: (630) 765-8000
---------------
Date of fiscal year end: DECEMBER 31
Date of reporting period: DECEMBER 31, 2008
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.
ANNUAL REPORT
FOR THE YEAR ENDED
DECEMBER 31, 2008
(GRAPHIC)
FIRST TRUST
ENHANCED EQUITY
INCOME FUND
CHARTWELL INVESTMENT PARTNERS
INSTITUTIONAL AND PRIVATE ASSET MANAGEMENT
(FIRST TRUST LOGO)
(GRAPHIC)
TABLE OF CONTENTS
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2008
Shareholder Letter ....................................... 1
At a Glance .............................................. 2
Portfolio Commentary ..................................... 3
Portfolio of Investments ................................. 5
Statement of Assets and Liabilities ...................... 13
Statement of Operations .................................. 14
Statements of Changes in Net Assets ...................... 15
Financial Highlights ..................................... 16
Notes to Financial Statements ............................ 17
Report of Independent Registered Public Accounting Firm .. 23
Additional Information ................................... 24
Board of Trustees and Officers ........................... 26
Privacy Policy ........................................... 30
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Chartwell Investment Partners, L.P. ("Chartwell"
or the "Sub-Advisor") and their respective representatives, taking into account
the information currently available to them. Forward-looking statements include
all statements that do not relate solely to current or historical fact. For
example, forward-looking statements include the use of words such as
"anticipate," "estimate," "intend," "expect," "believe," "plan," "may,"
"should," "would" or other words that convey uncertainty of future events or
outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust Enhanced Equity Income Fund (the "Fund") to be materially different
from any future results, performance or achievements expressed or implied by the
forward-looking statements. When evaluating the information included in this
report, you are cautioned not to place undue reliance on these forward-looking
statements, which reflect the judgment of the Advisor and Chartwell and their
respective representatives only as of the date hereof. We undertake no
obligation to publicly revise or update these forward-looking statements to
reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market value
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 investing in the Fund. See "Risk Considerations" in the Notes to
Financial Statements for a discussion of other risks of investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
Chartwell are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. Of course, the risks of investing in the
Fund are spelled out in the prospectus, the statement of additional information,
this report and other regulatory filings.
SHAREHOLDER LETTER
FIRST TRUST ENHANCED EQUITY INCOME FUND
ANNUAL REPORT
DECEMBER 31, 2008
Dear Shareholders:
The year ended December 31, 2008 brought all sorts of challenges to investors.
Throughout 2008, the financial sector was plagued with failures in banking,
insurance and by brokerage firms. By year's end, after a meltdown in the credit
markets, historically high levels of volatility in the stock market, and the
resulting turmoil to the overall economy, the Dow Jones Industrial Average's
(the "Dow") total return was -31.92% (as of 12/31/08). In fact, 2008 was the
Dow's third worst calendar year since its inception in 1896. For the year, the
negative total return performance of the Dow was surpassed only by 1931 and
1907, two years in which the U.S. was also enduring a major banking crisis. Of
the thirty stocks in the Dow, only two were up in 2008.
Yet, regardless of the market, First Trust Advisors L.P. ("First Trust") has
always believed that in order to be successful in reaching your financial goals,
you should be invested for the long term. A long-term investor understands that
the market, from a historical perspective, has always experienced ups and downs.
But history has shown that the patient investor is typically rewarded over the
long term. While no one has the ability to predict when the markets will
recover, we believe that staying invested in quality products and having a
long-term perspective can help investors reach their financial goals.
The report you hold contains detailed information about your investment in the
First Trust Enhanced Equity Income Fund (the "Fund"). It contains a portfolio
commentary from the Fund's portfolio management team that provides a market
recap for the period, a performance analysis and a market and Fund outlook.
Additionally, the report provides the Fund's financial statements for the period
covered by the report. I encourage you to read this document and discuss it with
your financial advisor.
First Trust has been through many types of markets and remains committed to
bringing you quality investment solutions regardless of the inevitable ups and
downs experienced in the market. We offer a variety of products that may fit
many financial plans to help those investors seeking long-term investment
success. As well, we are committed to making available up-to-date reports about
your investments so you and your financial advisor have current information on
your portfolio.
We continue to value our relationship with you, and we thank you for the
opportunity to assist you in achieving your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
President of First Trust Enhanced Equity Income Fund
Page 1
FIRST TRUST ENHANCED EQUITY INCOME FUND
"AT A GLANCE" (UNAUDITED)
AS OF DECEMBER 31, 2008
FUND STATISTICS
Symbol on New York Stock Exchange FFA
Common Share Price $ 8.85
Common Share Net Asset Value ("NAV") $ 11.15
Premium (Discount) to NAV (20.63)%
Net Assets Applicable to Common Shares $222,675,369
Current Quarterly Distribution per Common Share (1) $ 0.400
Current Annualized Distribution per Common Share $ 1.600
Current Distribution Rate on Closing Common Share Price (2) 18.08%
Current Distribution Rate on NAV (2) 14.35%
COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
(PERFORMANCE GRAPH)
Common
Share Price NAV
----------- -----
12/31/07 16.14 18.38
1/4/08 15.78 17.68
1/11/08 15.9 17.46
1/18/08 14.79 16.63
1/25/08 15.13 16.78
2/1/08 16.13 17.53
2/8/08 15.56 17.02
2/15/08 15.39 17.17
2/22/08 15.48 17.18
2/29/08 15.50 16.94
3/7/08 14.74 16.40
3/14/08 14.53 16.28
3/20/08 14.06 16.44
3/28/08 14.31 16.32
4/4/08 14.90 16.83
4/11/08 14.42 16.42
4/18/08 14.84 16.98
4/25/08 15.00 17.06
5/2/08 15.21 17.23
5/9/08 15.09 16.98
5/16/08 15.44 17.41
5/23/08 15.05 16.92
5/30/08 15.30 17.14
6/6/08 14.86 16.64
6/13/08 14.74 16.45
6/20/08 13.85 15.57
6/27/08 13.31 15.03
7/3/08 12.97 14.91
7/11/08 12.64 14.67
7/18/08 12.96 14.88
7/25/08 12.88 14.85
8/1/08 13.11 14.92
8/8/08 13.39 15.36
8/15/08 13.35 15.44
8/22/08 13.21 15.35
8/29/08 13.29 15.36
9/5/08 12.97 14.99
9/12/08 12.82 15.12
9/19/08 11.92 14.74
9/26/08 11.38 14.31
10/3/08 10.7 13.07
10/10/08 7.77 10.84
10/17/08 9.22 11.36
10/24/08 8.77 10.71
10/31/08 9.76 11.61
11/7/08 9.30 11.36
11/14/08 8.59 10.76
11/21/08 8.45 10.01
11/28/08 8.55 10.98
12/5/08 8.20 10.94
12/12/08 8.31 11.11
12/19/08 8.10 10.82
12/26/08 8.36 10.82
12/31/08 8.85 11.15
PERFORMANCE
Total Return
1 Year Ended Inception (8/26/2004)
12/31/2008 to 12/31/2008
------------ ---------------------
Fund Performance
NAV (3) -30.54% -2.56%
Market Value (4) -37.22 -8.57%
Index Performance
S&P 500 Index -37.00% 2.62%
% OF LONG-TERM
TOP 10 HOLDINGS INVESTMENTS
--------------- --------------
Exxon Mobil Corp. 4.8%
Bristol-Myers Squibb Company 4.4
Abbott Laboratories 3.6
Verizon Communications, Inc. 3.3
Occidental Petroleum Corp. 3.1
Pfizer, Inc. 2.9
Emerson Electric Company 2.9
Annaly Capital Management, Inc. 2.7
Chevron Corp. 2.6
Intel Corp. 2.6
----
Total 32.9%
====
% OF LONG-TERM
SECTOR CLASSIFICATION INVESTMENTS
--------------------- --------------
Energy 19.0%
Financials 15.4
Industrials 12.3
Health Care 12.1
Consumer Staples 10.1
Information Technology 9.5
Telecommunication Services 8.1
Consumer Discretionary 7.2
Materials 3.2
Utilities 3.1
-----
Total 100.0%
=====
(1) Most recent distribution paid or declared through 12/31/2008. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the year ended 12/31/2008 and then
dividing by Common Share price or NAV, as applicable, as of 12/31/2008.
(3) Total return based on NAV is the combination of reinvested dividend
distributions and reinvested capital gain distributions, if any, at prices
obtained by the Dividend Reinvestment Plan and changes in NAV per share and
does not reflect sales load. Past performance is not indicative of future
results.
(4) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share price. Past performance is not indicative of future results.
Page 2
PORTFOLIO COMMENTARY
SUB-ADVISOR
Founded in 1997, Chartwell Investment Partners, L.P. ("Chartwell") is an
employee-owned investment firm focusing on institutional, sub-advisory and
private client relationships. The firm is a research-based equity and
fixed-income manager with a disciplined, team-oriented investment process.
PORTFOLIO MANAGEMENT TEAM
(PHOTO OF BERNARD P. SCHAFFER)
BERNARD P. SCHAFFER
MANAGING PARTNER, SENIOR PORTFOLIO MANAGER
Mr. Schaffer is a founding partner of Chartwell and has 37 years of investment
industry experience. He serves as senior portfolio manager for Chartwell's
closed-end fund and hedged large-cap equity strategies. As the lead portfolio
manager for the Fund, he focuses on securities in the Energy, Financials and
Staples industries. He was employed as a Senior Portfolio Manager at Delaware
Investment Advisers from 1990 to 1997, managing two closed-end equity income
funds. These funds utilized option strategies to generate portfolio gains. Mr.
Schaffer earned a Bachelor's degree in Economics from Villanova University and
an MBA from the University of Pennsylvania's Wharton School.
(PHOTO OF DOUGLAS W. KUGLER)
DOUGLAS W. KUGLER, CFA
PRINCIPAL, PORTFOLIO MANAGER
Mr. Kugler is a portfolio manager on Chartwell's large-cap equity portfolio
management team and has 11 years of investment industry experience. His areas of
focus include the Transportation and Consumer Discretionary segments of the
market. From 1993 to 2003, he held several positions at Morgan Stanley
Investment Management (Miller Anderson & Sherrerd) including Head of Mutual Fund
Administration and Vice President and Treasurer of the MAS Funds, Junior
Associate in the Equity Department and his last position held prior to joining
Chartwell was Senior Associate and Analyst for the Large Cap Value team. Prior
to joining Morgan Stanley, he was an Assistant Vice President and Senior
Accounting Officer at Provident Financial Processing Corporation. Mr. Kugler is
a member of the CFA (Chartered Financial Analysts) Institute and the CFA Society
of Philadelphia. Mr. Kugler earned a Bachelor's degree in Accounting from the
University of Delaware.
(PHOTO OF KEVIN A. MELICH)
KEVIN A. MELICH, CFA
MANAGING PARTNER, SENIOR PORTFOLIO MANAGER
Mr. Melich is a founding partner of Chartwell and has 44 years of investment
industry experience. He is a member of Chartwell's large-cap equity portfolio
management team and implements portfolio management decisions for high-yield
equity institutional portfolios, including the Fund. His areas of focus are in
the Automotive, Machinery, Office Electronics and REITs industries. He was
employed as a Senior Portfolio Manager at Delaware Investment Advisers from 1983
to 1997 where he managed over $1.6 billion for institutional accounts in the
value style. From 1979 to 1983, Mr. Melich was a Partner with the economics
consulting firm, A.B. Laffer Associates. From 1964 to 1979, he was the Senior
Investment Officer and Manager of the Trust and Investment Division of Security
Trust Company. Mr. Melich is a member of the CFA Institute and the CFA Society
of Philadelphia. He earned a Bachelor of Science degree in economics from St.
John Fisher College.
COMMENTARY
FIRST TRUST ENHANCED EQUITY INCOME FUND
The investment objective of First Trust Enhanced Equity Income Fund ("FFA" or
the "Fund") is to provide a high level of current income and gains and, to a
lesser extent, capital appreciation. The Fund pursues its investment objective
by investing in a diversified portfolio of equity securities. Under normal
market conditions, the Fund pursues an integrated investment strategy in which
the Fund invests substantially all of its managed assets in a diversified
portfolio of common stocks of U.S. corporations and U.S. dollar-denominated
equity securities of foreign issuers. These securities are traded on U.S.
securities exchanges and on an ongoing and consistent basis, the Fund will write
(sell) covered call options on a portion of the Fund's managed assets. There can
be no assurance that the Fund's investment objective will be achieved.
Page 3
PORTFOLIO COMMENTARY - CONTINUED
MARKET RECAP
The stock market has experienced a very tumultuous and difficult time over the
past year. As we wrote in our Portfolio Commentary for the 2007 Annual Report,
the seizing of the credit markets in mid-to-late-summer 2007 was the beginning
of the end for the period of "easy money" that had fueled the stock market and
the economy. One of the significant reasons this occurred was the tremendous
decline in housing prices, which remains an ongoing issue. What started out as a
financial crisis of too much leverage has turned into a worldwide economic
recession as the value of leveraged financial assets eroded significantly. The
ensuing write down of asset values brought into question the solvency of
financial institutions worldwide and caused some venerable financial
institutions to either close their doors or to be effectively taken over by the
government. This has in turn had a substantial chilling effect on the
willingness of banks to lend and on economic activity everywhere. In an effort
to bring liquidity and order back to the system, both the former and current
Administrations, the Federal Reserve, the U.S. Treasury and the Congress have
responded with unprecedented measures not seen since Franklin Roosevelt's "New
Deal". In several months the U.S. has done what the Japanese took 10 years to
implement in the 1990s in the wake of their financial crisis.
The result so far can be described as mixed. The $700 Troubled Asset Relief
Program of 2008, known as TARP, has only been funded up to $350 Billion. That
amount has been quickly taken up by direct investment in banks, as opposed to
the original intent to purchase troubled assets. The effectiveness of this
program is doubted by the markets and it has not raised confidence levels. The
fight continues over the next round of funding for TARP and how it will be used.
Numerous other government programs have been initiated with mixed levels of
success. In mid-December, the Federal Reserve dropped the federal funds target
rate to an unprecedented range of 0.00% to 0.25%. In addition, it promised more
liquidity-providing tools would be forthcoming. On the positive side, these
moves have succeeded in that they have prevented a meltdown of the banking
system and several significant measures of liquidity have improved. The run on
banks and the decline in the normally constant $1.00 net asset value in money
market funds was stemmed by the aforementioned programs. Further, the high-grade
commercial paper market is now functioning close to normal.
PERFORMANCE ANALYSIS
The NAV performance of FFA for the year ended December 31, 2008 was -30.54% and
the total return on the common stock was -37.22%. Both these returns were
inclusive of distributions of $1.60 per share. During this same time period, the
S&P 500 Index returned -37.00%. During 2008 the income generation of the
portfolio was strengthened by purchasing stocks with higher-than-average
dividend yields. In addition, the Fund took full advantage of historically high
volatility in the market and sold call options on a high percentage of the
Fund's holdings, which supplemented the dividend stream and offset some of the
losses experienced by the underlying portfolio. While we believe this strategy
of combining high dividend-paying stocks and an option overwrite program is a
solid long-term strategy, the market for stocks that carry a higher-than-average
dividend yield was hit particularly hard by the aforementioned events as market
participants sold out of stocks with higher yields (such as Financials) while
flocking towards other stocks with lower yields (such as Health Care and
Consumer Staples). The main positive contributors to the Fund's portfolio
performance versus the S&P 500 Index during 2008 were in the Information
Technology, Energy and Health Care sectors. The outperformance in Information
Technology was driven by the Fund's underweight position and good stock
selection, while outperformance in the Energy sector was driven by strong stock
selection. The Fund's good relative results in Health Care came from strong
stock selection, as the Health Care stocks the Fund owned benefited from their
position of being less economically sensitive. Underperformance came mostly from
the Consumer Staples, Consumer Discretionary and Industrials sectors. The main
driver in each of these sectors was stock selection.
MARKET & FUND OUTLOOK
We expect continued volatility in the market during 2009. The unprecedented
series of events and cloudy outlook may keep investors on the sidelines for an
extended period. Adding to investor anxiety are major questions about the
economy, the financial system and what form additional government support for
both the economy and financial markets will take. As the market digests various
data points it will be receiving during 2009, it will be evaluating them to
determine if they contain signals that indicate a change in the outlook for
housing, the credit markets and the overall economy. Once the market begins to
sense that an economic bottom will be reached, we would expect it to begin to
move higher. However, the major question is how long this process will take.
While we do not know the answer, we will be watching and observing the various
signals and will position the Fund's portfolio accordingly. Under this clouded
outlook, we reduced the Fund's exposure to economically exposed groups
(Financials and Industrials) and added to some of the more defensive areas of
the market (Health Care and Utilities), while slowly adding to some early cycle
names which have solid yields and have been oversold in our opinion. As these
uncertain conditions continue, we are likely to maintain a fairly high level of
covered calls written on the Fund's holdings. We will continue to manage the
portfolio with the dual objectives of earning dividend income and options gains
while seeking capital appreciation opportunities over the market cycle.
Page 4
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a)
DECEMBER 31, 2008
SHARES DESCRIPTION VALUE
------- ----------------------------------------------------- ------------
COMMON STOCKS - 100.9%
AEROSPACE & DEFENSE - 3.7%
150,000 Honeywell International, Inc. ....................... $ 4,924,500
64,200 United Technologies Corp. ........................... 3,441,120
------------
8,365,620
------------
BEVERAGES - 5.6%
100,000 Coca-Cola (The), Company ............................ 4,527,000
78,000 Diageo PLC, SP ADR .................................. 4,425,720
66,025 PepsiCo, Inc. ....................................... 3,616,189
------------
12,568,909
------------
CAPITAL MARKETS - 3.7%
120,000 AllianceBernstein Holding, LP (b) ................... 2,494,800
15,000 Ameriprise Financial, Inc. .......................... 350,400
160,000 Bank of New York Mellon (The), Corp. ................ 4,532,800
80,000 Merrill Lynch & Co., Inc. ........................... 931,200
------------
8,309,200
------------
CHEMICALS - 3.2%
140,000 Dow Chemical (The), Company ......................... 2,112,600
120,000 PPG Industries, Inc. ................................ 5,091,600
------------
7,204,200
------------
COMMERCIAL BANKS - 1.1%
100,000 U.S. Bancorp ........................................ 2,501,000
------------
COMMERCIAL SERVICES & SUPPLIES - 0.6%
40,000 Waste Management, Inc. .............................. 1,325,600
------------
COMMUNICATIONS EQUIPMENT - 2.2%
295,200 Cisco Systems, Inc. (c) ............................. 4,811,760
------------
COMPUTERS & PERIPHERALS - 0.9%
24,000 International Business Machines Corp. ............... 2,019,840
------------
DIVERSIFIED FINANCIAL SERVICES - 4.5%
192,500 Bank of America Corp. ............................... 2,710,400
800,000 CIT Group, Inc. ..................................... 3,632,000
115,000 JPMorgan Chase & Company ............................ 3,625,950
------------
9,968,350
------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 8.1%
200,000 Alaska Communications Systems Group, Inc. ........... 1,876,000
172,000 AT&T, Inc. .......................................... 4,902,000
249,600 Consolidated Communications Holdings, Inc. .......... 2,965,248
100,000 Frontier Communications Corp. ....................... 874,000
221,620 Verizon Communications, Inc. ........................ 7,512,918
------------
18,130,166
------------
ELECTRIC UTILITIES - 3.2%
60,000 Exelon Corp. ........................................ 3,336,600
100,000 Southern Company .................................... 3,700,000
------------
7,036,600
------------
See Notes to Financial Statements
Page 5
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
DECEMBER 31, 2008
SHARES DESCRIPTION VALUE
------- ----------------------------------------------------- ------------
COMMON STOCKS - (CONTINUED)
ELECTRICAL EQUIPMENT - 3.0%
180,000 Emerson Electric Company ............................ $ 6,589,800
------------
HEALTHCARE PROVIDERS & SERVICES - 0.1%
60,000 Brookdale Senior Living, Inc. ....................... 334,800
------------
HOTELS, RESTAURANTS & LEISURE - 3.4%
200,000 Carnival Corp. ...................................... 4,864,000
50,000 Darden Restaurants, Inc. ............................ 1,409,000
20,000 McDonald's Corp. .................................... 1,243,800
------------
7,516,800
------------
HOUSEHOLD PRODUCTS - 1.4%
60,000 Kimberly-Clark Corp ................................. 3,164,400
INDUSTRIAL CONGLOMERATES - 1.9%
20,000 3M Company .......................................... 1,150,800
190,000 General Electric Company ............................ 3,078,000
------------
4,228,800
------------
INSURANCE - 2.0%
50,000 ACE Ltd. ............................................ 2,646,000
30,000 Hartford Financial Services Group, Inc. ............. 492,600
20,000 Lincoln National Corp. .............................. 376,800
15,000 MetLife, Inc ........................................ 522,900
15,000 Prudential Financial, Inc. .......................... 453,900
------------
4,492,200
------------
INTERNET SOFTWARE & SERVICES - 0.9%
145,700 eBay, Inc. (c) ...................................... 2,033,972
------------
IT SERVICES - 1.2%
100,000 Paychex, Inc ........................................ 2,628,000
------------
MACHINERY - 2.6%
131,000 Caterpillar, Inc. ................................... 5,851,770
------------
MARINE - 0.6%
140,000 Seaspan Corp. ...................................... 1,244,600
------------
MEDIA - 1.1%
175,000 Regal Entertainment Group, Class A .................. 1,786,750
30,000 Walt Disney (The), Company. ......................... 680,700
------------
2,467,450
------------
MULTILINE RETAIL - 1.9%
121,000 Target Corp. ........................................ 4,178,130
------------
OIL, GAS & CONSUMABLE FUELS - 19.2%
60,000 BP PLC, SP ADR ...................................... 2,804,400
79,400 Chevron Corp. ....................................... 5,873,218
100,000 ConocoPhillips ...................................... 5,180,000
175,000 Copano Energy, LLC .................................. 2,042,250
100,000 Energy Transfer Partners, L.P. (b) .................. 3,401,000
See Notes to Financial Statements
Page 6
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
DECEMBER 31, 2008
SHARES DESCRIPTION VALUE
------- ----------------------------------------------------- ------------
COMMON STOCKS - (CONTINUED)
OIL, GAS & CONSUMABLE FUELS - (CONTINUED)
135,000 Exxon Mobil Corp. ................................... $ 10,777,050
60,000 Magellan Midstream Partners, L.P. (b) ............... 1,812,600
115,000 Occidental Petroleum Corp. .......................... 6,898,850
60,000 Total SA, SP ADR .................................... 3,318,000
40,000 Williams Companies (The), Inc. ...................... 579,200
------------
42,686,568
------------
PHARMACEUTICALS - 12.1%
150,000 Abbott Laboratories ................................. 8,005,500
430,000 Bristol-Myers Squibb Company. ....................... 9,997,500
373,100 Pfizer, Inc. ........................................ 6,607,601
60,000 Wyeth ............................................... 2,250,600
------------
26,861,201
------------
REAL ESTATE INVESTMENT TRUSTS (REITS) - 4.1%
376,700 Annaly Capital Management, Inc. ..................... 5,978,229
550,000 MFA Mortgage Investments, Inc. ...................... 3,239,500
------------
9,217,729
------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 3.5%
399,800 Intel Corp. ......................................... 5,861,068
100,000 Microchip Technology, Inc. .......................... 1,953,000
------------
7,814,068
------------
SOFTWARE - 1.0%
110,000 Microsoft Corp. ..................................... 2,138,400
------------
SPECIALTY RETAIL - 0.9%
200,000 Limited Brands, Inc. ................................ 2,008,000
------------
TOBACCO - 3.2%
140,000 Altria Group, Inc. .................................. 2,108,400
30,000 Philip Morris International, Inc. ................... 1,305,300
90,000 Reynolds American, Inc. ............................. 3,627,900
------------
7,041,600
------------
TOTAL INVESTMENTS - 100.9% ......................... 224,739,533
(Cost $327,023,661) (d)
NUMBER OF
CONTRACTS DESCRIPTION VALUE
--------- ----------------------------------------------------- ------------
CALL OPTIONS WRITTEN - (3.2%)
3M Company Call
200 @ 60 due Jan 09 ..................................... (15,000)
------------
Abbott Laboratories Call
1,100 @ 55 due Jan 09 ..................................... (80,300)
------------
See Notes to Financial Statements
Page 7
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
DECEMBER 31, 2008
NUMBER OF
CONTRACTS DESCRIPTION VALUE
--------- ----------------------------------------------------- ------------
CALL OPTIONS WRITTEN - (CONTINUED)
ACE Ltd. Calls
300 @ 55 due Jan 09 ..................................... $ (30,000)
200 @ 60 due Feb 09 ..................................... (23,000)
------------
(53,000)
------------
Ameriprise Financial, Inc. Call
150 @ 22.5 due Jan 09 ................................... (25,500)
------------
Annaly Capital Management, Inc. Calls
67 @ 14 due Jan 09 ..................................... (13,400)
3,700 @ 16 due Jan 09 .................................... (255,300)
------------
(268,700)
------------
AT&T, Inc. Call
900 @ 29 due Jan 09 ..................................... (41,400)
------------
Bank of America Corp. Calls
925 @ 15 due Jan 09 ..................................... (45,325)
1,000 @ 17.5 due Jan 09 ................................... (8,000)
------------
(53,325)
------------
Bank of New York Mellon (The) Corp. Calls
200 @ 27.5 due Jan 09 ................................... (42,800)
400 @ 30 due Jan 09 ..................................... (32,000)
------------
(74,800)
------------
BP PLC, SP ADR Calls
450 @ 45 due Jan 09 ..................................... (123,300)
150 @ 50 due Jan 09 ..................................... (6,750)
------------
(130,050)
------------
Bristol-Myers Squibb Company Calls
1,926 @ 25 due Jan 09 ..................................... (42,372)
2,100 @ 22.5 due Jan 09 ................................... (262,500)
274 @ 25 due Feb 09 ..................................... (19,180)
------------
(324,052)
------------
Carnival Corp. Calls
1,611 @ 25 due Jan 09 ..................................... (161,100)
389 @ 22.5 due Jan 09 ................................... (97,250)
------------
(258,350)
------------
Caterpillar, Inc. Call
1,310 @ 42.5 due Jan 09 ................................... (390,380)
------------
Chevron Corp. Calls
644 @ 75 due Jan 09 ..................................... (132,020)
150 @ 80 due Jan 09 ..................................... (6,750)
------------
(138,770)
------------
Cisco Systems, Inc. Call
2,952 @ 17.5 due Jan 09 ................................... (53,136)
------------
CIT Group, Inc. Call
3,000 @ 5 due Jan 09 ...................................... (75,000)
------------
See Notes to Financial Statements
Page 8
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
DECEMBER 31, 2008
NUMBER OF
CONTRACTS DESCRIPTION VALUE
--------- ----------------------------------------------------- ------------
CALL OPTIONS WRITTEN - (CONTINUED)
Coca-Cola (The), Company Call
700 @ 45 due Jan 09 ..................................... $ (94,500)
------------
ConocoPhillips Calls
300 @ 50 due Jan 09 ..................................... (100,500)
700 @ 55 due Jan 09 ..................................... (62,300)
------------
(162,800)
------------
Darden Restaurants, Inc. Call
500 @ 25 due Jan 09 ..................................... (160,000)
------------
Diageo PLC, SP ADR Call
780 @ 60 due Jan 09 ..................................... (46,800)
------------
Dow Chemical (The), Company Calls
300 @ 15 due Jan 09 ..................................... (30,000)
400 @ 20 due Jan 09 ..................................... (2,800)
------------
(32,800)
------------
eBay, Inc. Call
450 @ 14 due Jan 09 ..................................... (28,350)
------------
Emerson Electric Company Call
800 @ 35 due Jan 09 ..................................... (192,000)
------------
Exelon Corp. Calls
300 @ 55 due Jan 09 ..................................... (67,500)
300 @ 60 due Feb 09 ..................................... (50,400)
------------
(117,900)
------------
Exxon Mobil Corp. Call
1,350 @ 80 due Jan 09 ..................................... (321,300)
------------
General Electric Company Calls
900 @ 17.5 due Jan 09 ................................... (17,100)
1,000 @ 16 due Jan 09 ..................................... (80,000)
------------
(97,100)
------------
Hartford Financial Services Group, Inc. Call
300 @ 17.5 due Jan 09 ................................... (25,500)
------------
Honeywell International, Inc. Call
1,500 @ 35 due Jan 09 ..................................... (75,000)
------------
Intel Corp. Call
2,000 @ 16 due Jan 09 ..................................... (44,000)
------------
International Business Machines Corp. Calls
100 @ 85 due Jan 09 ..................................... (22,500)
140 @ 90 due Jan 09 ..................................... (8,400)
------------
(30,900)
------------
See Notes to Financial Statements
Page 9
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
DECEMBER 31, 2008
NUMBER OF
CONTRACTS DESCRIPTION VALUE
--------- ----------------------------------------------------- ------------
CALL OPTIONS WRITTEN - (CONTINUED)
JPMorgan Chase & Company Calls
300 @ 35 due Jan 09 ..................................... $ (11,100)
300 @ 37.5 due Jan 09. .................................. (4,500)
550 @ 32.5 due Jan 09. .................................. (60,500)
------------
(76,100)
------------
Kimberly-Clark Corp. Call
600 @ 55 due Jan 09 ..................................... (36,000)
------------
Limited Brands, Inc. Call
2,000 @ 10 due Jan 09 ..................................... (120,000)
------------
Lincoln National Corp. Call
200 @ 20 due Jan 09 ..................................... (20,000)
------------
McDonald's Corp. Call
200 @ 62.5 due Jan 09 ................................... (28,000)
------------
Merrill Lynch & Company, Inc. Call
800 @ 12.5 due Jan 09 ................................... (44,000)
------------
MetLife, Inc. Call
150 @ 35 due Jan 09 ..................................... (37,500)
------------
Occidental Petroleum Corp. Calls
600 @ 55 due Jan 09 ..................................... (411,000)
550 @ 60 due Jan 09 ..................................... (165,000)
------------
(576,000)
------------
Paychex, Inc. Calls
200 @ 25 due Jan 09 ..................................... (30,500)
800 @ 27.5 due Jan 09. .................................. (24,000)
------------
(54,500)
------------
PepsiCo, Inc. Call
300 @ 57.5 due Jan 09 ................................... (10,800)
------------
Pfizer, Inc. Calls
1,500 @ 19 due Jan 09 ..................................... (22,500)
1,731 @ 17.5 due Jan 09. .................................. (121,170)
------------
(143,670)
------------
PPG Industries, Inc. Calls
350 @ 40 due Jan 09 ..................................... (122,500)
850 @ 45 due Jan 09 ..................................... (68,000)
------------
(190,500)
------------
Reynolds American, Inc. Call
900 @ 45 due Feb 09 ..................................... (53,100)
------------
See Notes to Financial Statements
Page 10
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
DECEMBER 31, 2008
NUMBER OF
CONTRACTS DESCRIPTION VALUE
--------- ----------------------------------------------------- ------------
CALL OPTIONS WRITTEN - (CONTINUED)
S&P 500 Index Calls
300 @ 905 due Jan 09 .................................... $ (627,000)
250 @ 895 due Jan 09 .................................... (800,000)
------------
(1,427,000)
------------
Southern Company Call
1,000 @ 40 due Feb 09 ..................................... (35,000)
------------
Target Corp. Calls
660 @ 35 due Jan 09 ..................................... (122,760)
150 @ 40 due Jan 09 ..................................... (7,650)
400 @ 37.5 due Jan 09. .................................. (39,600)
------------
(170,010)
------------
Total SA, SP ADR Calls
300 @ 50 due Jan 09 ..................................... (175,500)
300 @ 60 due Jan 09 ..................................... (13,500)
------------
(189,000)
------------
U.S. Bancorp Call
1,000 @ 25 due Jan 09 ..................................... (115,000)
------------
United Technologies Corp. Call
642 @ 55 due Jan 09 ..................................... (64,200)
------------
Verizon Communications, Inc. Calls
1,316 @ 35 due Jan 09 ..................................... (59,220)
900 @ 32.5 due Jan 09. .................................. (157,500)
------------
(216,720)
------------
Walt Disney (The), Company Call
300 @ 22.5 due Jan 09 ................................... (28,500)
------------
Waste Management, Inc. Call
400 @ 32.5 due Jan 09 ................................... (50,000)
------------
Williams Companies (The), Inc. Call
400 @ 15 due Jan 09 ..................................... (24,000)
------------
Wyeth Calls
300 @ 40 due Jan 09 ..................................... (13,800)
300 @ 37.5 due Jan 09. .................................. (42,000)
------------
(55,800)
------------
TOTAL CALL OPTIONS WRITTEN - (3.2)% ................. (7,176,113)
(Premiums received $8,449,321)
NET OTHER ASSETS AND LIABILITIES - 2.3% ............. 5,111,949
------------
NET ASSETS - 100.0% $222,675,369
============
See Notes to Financial Statements
Page 11
FIRST TRUST ENHANCED EQUITY INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
DECEMBER 31, 2008
----------
(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) Master Limited Partnership ("MLP")
(c) Non-income producing security.
(d) Aggregate cost for federal income tax purposes is $328,500,042. As of
December 31, 2008, the aggregate unrealized appreciation for all securities
in which there was an excess of value over tax cost was $1,914,283 and the
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $105,674,792.
ADR American Depositary Receipt
SP ADR Sponsored American Depositary Receipt
SECURITY VALUATION INPUTS
A summary of inputs used to value the Fund's total investments as of December
31, 2008 is as follows (See Note 2A - Portfolio Valuation in the Notes to
Financial Statements):
VALUATION INPUTS INVESTMENTS
---------------- ------------
Level 1 - Quoted Prices $224,739,533
Level 1 - Quoted Prices - Written Options (7,176,113)
Level 2 - Other Significant Observable Inputs --
Level 3 - Significant Unobservable Inputs --
------------
TOTAL $217,563,420
============
See Notes to Financial Statements
Page 12
FIRST TRUST ENHANCED EQUITY INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2008
ASSETS:
Investments, at value
(Cost $327,023,661) .................................... $ 224,739,533
Cash ...................................................... 4,539,141
Prepaid expenses .......................................... 6,449
Receivables:
Dividends .............................................. 881,457
-------------
Total Assets ........................................ 230,166,580
-------------
LIABILITIES:
Options written, at value (Premiums received $8,449,321) .. 7,176,113
Payables:
Investment advisory fees ............................... 184,680
Audit and tax fees ..................................... 44,200
Printing fees .......................................... 34,157
Custodian fees ......................................... 20,889
Administrative fees .................................... 17,239
Legal fees ............................................. 8,799
Transfer agent fees .................................... 2,608
Trustees' fees and expenses ............................ 75
Accrued expenses and other liabilities .................... 2,451
-------------
Total Liabilities ................................... 7,491,211
-------------
NET ASSETS ................................................ $ 222,675,369
=============
NET ASSETS CONSIST OF:
Paid-in capital ........................................... $ 359,083,801
Par value ................................................. 199,732
Accumulated net realized gain (loss) on investments sold
and written options transactions ....................... (35,597,244)
Net unrealized appreciation (depreciation) on investments
held and options written ............................... (101,010,920)
-------------
NET ASSETS ................................................ $ 222,675,369
=============
NET ASSET VALUE, per Common Share (par value $0.01 per
Common Share) .......................................... $ 11.15
=============
Number of Common Shares outstanding (unlimited number of
Common Shares has been authorized) ..................... 19,973,164
=============
See Notes to Financial Statements
Page 13
FIRST TRUST ENHANCED EQUITY INCOME FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2008
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $27,930) ..... $ 12,245,661
-------------
Total investment income ................................ 12,245,661
-------------
EXPENSES:
Investment advisory fees .................................. 2,984,307
Administrative fees ....................................... 270,870
Legal fees ................................................ 140,994
Custodian fees ............................................ 126,224
Printing fees ............................................. 101,381
Excise tax ................................................ 59,938
Audit and tax fees ........................................ 43,770
Trustees' fees and expenses ............................... 38,538
Transfer agent fees ....................................... 37,676
Other ..................................................... 100,103
-------------
Total expenses ......................................... 3,903,801
-------------
NET INVESTMENT INCOME ..................................... 8,341,860
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments ............................................ (70,820,030)
Written options transactions ........................... 37,556,994
-------------
Net realized gain (loss) .................................. (33,263,036)
-------------
Net change in unrealized appreciation (depreciation) on:
Investments ............................................ (86,946,272)
Written options held ................................... (509,614)
-------------
Net change in unrealized appreciation (depreciation) ...... (87,455,886)
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ................... (120,718,922)
-------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS ............................................. $(112,377,062)
=============
See Notes to Financial Statements
Page 14
FIRST TRUST ENHANCED EQUITY INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
12/31/2008 12/31/2007
------------- ------------
OPERATIONS:
Net investment income (loss)................................... $ 8,341,860 $ 2,884,989
Net realized gain (loss)....................................... (33,263,036) 30,931,417
Net change in unrealized appreciation (depreciation)........... (87,455,886) (6,282,958)
------------- ------------
Net increase (decrease) in net assets resulting from
operations.................................................. (112,377,062) 27,533,448
------------- ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.......................................... (8,517,786) (2,884,989)
Net realized gains............................................. (2,088,601) (30,214,538)
Return of capital.............................................. (21,350,675) --
------------- ------------
Total distributions to shareholders............................ (31,957,062) (33,099,527)
------------- ------------
Total increase (decrease) in net assets........................ (144,334,124) (5,566,079)
NET ASSETS:
Beginning of year.............................................. 367,009,493 372,575,572
------------- ------------
End of year.................................................... $ 222,675,369 $367,009,493
============= ============
Accumulated net investment income (loss) at end of year........ $ -- $ --
============= ============
See Notes to Financial Statements
Page 15
FIRST TRUST ENHANCED EQUITY INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
12/31/2008 12/31/2007 (a) 12/31/2006 12/31/2005 12/31/2004 (b)
---------- -------------- ---------- ---------- --------------
Net asset value, beginning of period ........... $ 18.38 $ 18.65 $ 18.99 $ 19.97 $ 19.10 (c)
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ................... 0.42 0.14 0.02 0.01 (0.01)
Net realized and unrealized gain (loss) ........ (6.05) 1.24 1.24 0.61 1.46
-------- -------- -------- -------- --------
Total from investment operations ............... (5.63) 1.38 1.26 0.62 1.45
-------- -------- -------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income .......................... (0.43) (0.14) (0.02) (0.01) --
Net realized gain .............................. (0.10) (1.51) (1.58) (1.59) (0.54)
Return of capital .............................. (1.07) -- -- -- --
-------- -------- -------- -------- --------
Total distributions ............................ (1.60) (1.65) (1.60) (1.60) (0.54)
-------- -------- -------- -------- --------
Common Shares offering costs charged to paid-in
capital ..................................... -- -- -- -- (0.04)
-------- -------- -------- -------- --------
Net asset value, end of period ................. $ 11.15 $ 18.38 $ 18.65 $ 18.99 $ 19.97
======== ======== ======== ======== ========
Market value, end of period .................... $ 8.85 $ 16.14 $ 18.41 $ 17.12 $ 20.00
======== ======== ======== ======== ========
TOTAL RETURN BASED ON NET ASSET VALUE (d) (e) .. (30.54)% 8.19% 7.09% 3.48% 7.29%
======== ======== ======== ======== ========
TOTAL RETURN BASED ON MARKET VALUE (e) (f) ..... (37.22)% (3.76)% 17.26% (6.85)% 2.62%
======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ........... $222,675 $367,009 $372,576 $379,245 $395,024
Ratio of total expenses to average net assets .. 1.31% 1.21% 1.24% 1.23% 1.26% (g)
Ratio of net investment income (loss) to average
net assets .................................. 2.80% 0.76% 0.13% 0.04% (0.09)% (g)
Portfolio turnover rate ........................ 121% 174% 131% 266% 73%
----------
(a) On September 14, 2007, Chartwell Investment Partners, L.P. became the
sub-advisor to the Fund.
(b) Initial seed date of August 17, 2004. The Fund commenced operations on
August 26, 2004.
(c) Net of sales load of $0.90 per Common Share on initial offering.
(d) Total return based on net asset value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan, and changes in net
asset value per share and does not reflect sales load.
(e) Total return is not annualized for periods less than one year.
(f) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan, and changes in Common
Share price.
(g) Annualized.
See Notes to Financial Statements
Page 16
NOTES TO FINANCIAL STATEMENTS
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2008
1. FUND DESCRIPTION
First Trust Enhanced Equity Income Fund (the "Fund") is a diversified,
closed-end management investment company organized as a Massachusetts business
trust on May 20, 2004 and is registered with the Securities and Exchange
Commission ("SEC") under the Investment Company Act of 1940, as amended (the
"1940 Act"). The Fund trades under the ticker symbol FFA on the New York Stock
Exchange ("NYSE"). The Fund's name was changed to its current name effective
September 30, 2007, after the appointment of Chartwell Investment Partners, L.P.
("Sub-Advisor" or "Chartwell") as Sub-Advisor of the Fund.
The Fund's investment objective is to provide a high level of current income and
gains and, to a lesser extent, capital appreciation. The Fund seeks to achieve
its investment objective by investing in a diversified portfolio of equity
securities. There can be no assurance that the Fund's investment objective will
be achieved.
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 requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of the Fund is determined daily
as of the close of regular trading on the NYSE, normally 4:00 p.m. Eastern time,
on each day the NYSE is open for trading. 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 at market value or, in the absence of market
value with respect to any portfolio securities, at fair value in accordance with
valuation procedures adopted by the Fund's Board of Trustees. Portfolio
securities listed on any exchange other than the NASDAQ National Market
("NASDAQ") and the London Stock Exchange Alternative Investment Market ("AIM")
are valued at the last sale price on the business day as of which such value is
being determined. If there has been no sale on such day or no official closing
price in the case of securities traded on the NASDAQ or the AIM, the securities
are valued at the mean of the most recent bid and asked prices on such day.
Portfolio securities traded on more than one securities exchange are valued at
the last sale price or official closing price, as applicable, on the business
day as of which such value is being determined at the close of the exchange
representing the principal market for such securities. Portfolio securities
traded in the over-the-counter market, but excluding securities trading on the
NASDAQ and the AIM, are valued at the closing bid prices. Short-term investments
that mature in less than 60 days when purchased are valued at amortized cost.
The Fund values exchange-traded options and other derivative contracts at the
closing price on the exchange on which they are principally traded, or if not
traded, or no closing price is available, at the mean between the last bid and
asked price.
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 157, Fair Value Measurements
("FAS 157"), effective for fiscal years beginning after November 15, 2007. This
standard clarifies the definition of fair value for financial reporting,
establishes a framework for measuring fair value and requires additional
disclosures about the use of fair value measurements. FAS 157 became effective
for the Fund as of January 1, 2008, the beginning of its current fiscal year.
The three levels of the fair value hierarchy under FAS 157 are described below:
- Level 1 - quoted prices in active markets for identical securities
- Level 2 - other significant observable inputs (including quoted prices
for similar securities, interest rates, prepayment speeds, credit
risk, etc.)
- Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
Page 17
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2008
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 December 31, 2008 is
included with the Fund's Portfolio of Investments.
B. OPTION CONTRACTS:
COVERED OPTIONS. The Fund may write (sell) covered call options ("options") on
all or a portion of the equity securities held in the Fund's portfolio and on
securities indices as determined to be appropriate by Chartwell, 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 exercise price. In this case, the
option premium received by the Fund will be added to the amount realized on the
sale of the underlying equity security for purposes of determining gain or loss.
If the price of the underlying equity security is less than the option's
exercise 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.
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 Fund's covered call investment strategy depends on the ability of Chartwell
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 forgoes, 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.
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.
C. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
on the accrual basis, including amortization of premiums and accretion of
discounts.
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.
Page 18
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2008
Distributions from income and realized capital gains are determined in
accordance with income tax regulations, which may differ from accounting
principles generally accepted in the United States of America. These differences
are primarily due to differing treatments of income and gains on various
investment securities held by the Fund, timing differences and differing
characterization of distributions made by the Fund. Permanent differences
incurred during the tax year ended December 31, 2008, resulting in book and tax
accounting differences, have been reclassified at year end to reflect an
increase in accumulated net investment income (loss) of $175,926, a decrease in
accumulated net realized gain (loss) on investments of $115,987 and a decrease
to paid-in capital of $59,939. Net assets were not affected by this
reclassification.
The tax character of distributions paid during the years ended December 31, 2008
and December 31, 2007 is as follows:
Distributions paid from: December 31, 2008 December 31, 2007
------------------------ ----------------- -----------------
Ordinary Income............. $10,606,387 $31,958,437
Long-Term Capital Gains..... -- 1,141,090
Return of Capital........... 21,350,675 --
As of December 31, 2008, the components of distributable earnings on a tax basis
were as follows:
Undistributed Net Investment Income........... $ --
Net Unrealized Appreciation (Depreciation).... (104,641,107)
Accumulated Capital and Other Losses.......... (31,967,057)
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.
The Fund intends to utilize provisions of the federal income tax laws, which
allows it to carry a realized capital loss forward for eight years following the
year of the loss and offset such loss against any future realized capital gains.
At December 31, 2008, the Fund had available realized capital losses of
$15,798,407 to offset future net capital gains through the fiscal year ending
2016.
POST-OCTOBER LOSSES. Under current laws, certain capital 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 December 31, 2008, the Fund
intends to elect to defer net realized capital losses of $16,168,650 incurred
from November 1, 2008 through December 31, 2008.
In June 2006, the FASB issued Interpretation No. 48 ("FIN 48"), "Accounting for
Uncertainty in Income Taxes". FIN 48 establishes the minimum threshold for
recognizing, and a system for measuring, the benefits of a tax position taken or
expected to be taken on a tax-return, and is effective for the Fund's current
fiscal year. As of December 31, 2008, management has evaluated the application
of FIN 48 to the Fund, and has determined that no provision for income tax is
required in the Fund's financial statements for uncertain tax positions.
F. EXPENSES:
The Fund pays all expenses directly related to its operations.
G. ACCOUNTING PRONOUNCEMENT:
In March 2008, FASB released Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("FAS
161"). FAS 161 requires qualitative disclosures about objectives and strategies
for using derivatives, quantitative disclosures about fair value amounts of and
gains and losses on derivative instruments, and disclosures about credit
risk-related contingent features in derivative agreements. The application of
FAS 161 is required for fiscal years beginning after November 15, 2008 and
interim periods within those fiscal years. Management is currently evaluating
the impact the adoption of FAS 161 will have on the Fund's financial statement
disclosures, if any.
Page 19
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2008
3. INVESTMENT ADVISORY FEE AND OTHER AFFILIATED TRANSACTIONS
First Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, The Charger Corporation. First Trust
serves as investment advisor to the Fund pursuant to an Investment Management
Agreement. 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
services, First Trust is entitled to a monthly fee calculated at an annual rate
of 1.00% of the Fund's Managed Assets, which means the average daily gross
assets of the Fund minus the sum of the Fund's accrued and unpaid dividends on
any outstanding Common Shares and accrued liabilities, including the value of
call options written (sold).
Chartwell Investment Partners, L.P. ("Chartwell") manages the Fund's portfolio
subject to First Trust's supervision. Chartwell receives a monthly portfolio
management fee calculated at an annual rate of 0.50% of the Fund's Managed
Assets that is paid monthly by First Trust out of its investment advisory fee.
PNC Global Investment Servicing (U.S.) Inc., formerly known as PFPC Inc., an
indirect, majority-owned subsidiary of The PNC Financial Services Group, Inc.,
serves as the Fund's Administrator and Transfer Agent in accordance with certain
fee arrangements. PFPC Trust Company, also an indirect, majority-owned
subsidiary of The PNC Financial Services Group, Inc., serves as the Fund's
Custodian in accordance with certain fee arrangements.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor,
or any of their affiliates ("Independent Trustees"), is paid an annual retainer
of $10,000 per trust for the first 14 trusts of the First Trust Fund Complex and
an annual retainer of $7,500 per trust for each subsequent trust added to the
First Trust Fund Complex. The annual retainer is allocated equally among each of
the trusts. No additional meeting fees are paid in connection with board or
committee meetings.
Additionally, the Lead Independent Trustee is paid $10,000 annually and the
Audit Committee Chairman is paid $5,000 annually, with such compensation paid by
the trusts in the First Trust Fund Complex and divided among those trusts.
Trustees are also reimbursed by the trusts in the First Trust Fund Complex for
travel and out-of-pocket expenses in connection with all meetings. Effective
January 1, 2008, each of the chairmen of the Nominating and Governance Committee
and Valuation Committee are paid $2,500 annually to serve in such capacities
with such compensation paid by the trusts in the First Trust Fund Complex and
divided among those trusts. Also, effective January 1, 2008, the Lead
Independent Trustee and each Committee chairman will serve two-year terms. The
officers and "Interested" Trustee receive no compensation from the trusts for
serving in such capacities.
4. PURCHASES AND SALES OF SECURITIES AND OPTIONS ACTIVITY
Cost of purchases and proceeds from sales of investment securities, excluding
short-term investments and options, for the year ended December 31, 2008, were
$384,033,664 and $366,439,547, respectively.
Written option activity for the year ended December 31, 2008 was as follows:
NUMBER
OF
CONTRACTS PREMIUMS
---------- -------------
WRITTEN OPTIONS
Options outstanding at December 31, 2007 .. 68,218 $ 5,622,371
Options written ........................... 1,027,789 113,271,534
Options expired ........................... (268,134) (20,352,539)
Options exercised ......................... (37,785) (3,874,426)
Options cancelled ......................... (731,371) (86,217,619)
--------- ------------
Options outstanding at December 31, 2008 .. 58,717 $ 8,449,321
========= ============
Page 20
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2008
5. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
6. CHANGES IN INVESTMENT STRATEGY AND CONCENTRATION POLICY
On December 10, 2007, the Board of Trustees approved a change in the Fund's
investment strategy, effective on or about April 30, 2008, whereby the Fund
intends to invest substantially all, but in no event less than 90%, of its
Managed Assets in common stocks and other equity securities such as Real Estate
Investment Trusts, Master Limited Partnerships and Investment Companies
(including exchange-traded funds and business development companies).
At a Special Meeting of Shareholders of the Fund held on January 8, 2008,
shareholders approved a change in the Fund's fundamental investment policy to
provide that the Fund may not invest 25% or more of its total assets in
securities of issuers in any single industry, provided there shall be no
limitation on the purchase of obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. The policy became effective on
January 8, 2008.
7. RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some of the risks
that should be considered for the Fund. For additional information about the
risks associated with investing in the Fund, please see the Fund's prospectus
and statement of additional information, as well as other Fund regulatory
filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund dividends
and distributions. Security prices can fluctuate for several reasons including
the general condition of the securities markets, or when political or economic
events affecting the issuers occur. When the Advisor or Sub-Advisor determines
that it is temporarily unable to follow the Fund's investment strategy or that
it is impractical to do so (such as when a market disruption event has occurred
and trading in the securities is extremely limited or absent), the Fund may take
temporary defensive positions.
In 2008, securities markets have been significantly negatively affected by the
financial crisis that initially resulted from the downturn in the subprime
mortgage market in the United States. The potential impact of the financial
crisis on securities markets may prove to be significant and long-lasting and
may have a substantial impact on the value of the Fund.
EQUITY SECURITIES RISK: The Fund invests in equity securities. An adverse event
affecting an issuer, such as an unfavorable earnings report, may depress the
value of a particular equity security held by the Fund. Also, the prices of
equity securities are sensitive to general movements in the stock market and a
drop in the stock market may depress the prices of equity securities to which
the Fund has exposure. Equity securities prices fluctuate for several reasons,
including changes in investors' perceptions of the financial condition of an
issuer or the general condition of the relevant stock market, or when political
or economic events affecting the issuers or their industries occur.
OPTION RISK: The Fund may write (sell) covered call options on all or a portion
of the equity securities held in the Fund's portfolio as determined to be
appropriate by the Fund's Sub-Advisor, consistent with the Fund's investment
objective. The ability to successfully implement the Fund's investment strategy
depends on the Sub-Advisor's ability to predict pertinent market movements,
which can not be assured. Thus, the use of options may require the Fund to sell
portfolio securities at inopportune times or for prices other than current
market values, may limit the amount of appreciation the Fund can realize on an
investment, or may cause the Fund to hold an equity security that it might
otherwise sell. There can be no assurance that a liquid market for the options
will exist when the Fund seeks to close out an option position. Additionally, to
the extent that the Fund purchases options pursuant to a hedging strategy, the
Fund will be subject to additional risks.
Page 21
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2008
INDUSTRY RISK: The Fund may not invest 25% or more of its total assets in
securities of issuers in any single industry. If the Fund is focused in an
industry, it may present more risks than if it were broadly diversified over
numerous industries of the economy. Individual industries may be subject to
unique risks which may include, among others, governmental regulation,
inflation, technological innovations that may render existing products and
equipment obsolete, competition from new entrants, high research and development
costs, and rising interest rates.
INCOME RISK: Net investment income paid by the Fund to its Common Shareholders
is derived from the premiums it receives from writing (selling) call options and
from the dividends and interest it receives from the equity securities and other
investments held in the Fund's portfolio and short-term gains thereon. Premiums
from writing (selling) call options and dividends and interest payments made by
the securities in the Fund's portfolio can vary widely over time. Dividends on
equity securities are not fixed but are declared at the discretion of an
issuer's board of directors. There is no guarantee that the issuers of the
equity securities in which the Fund invests will declare dividends in the future
or that if declared they will remain at current levels. The Fund cannot assure
as to what percentage of the distributions paid on the Common Shares, if any,
will consist of qualified dividend income or long-term capital gains, both of
which are taxed at lower rates for individuals than are ordinary income and
short-term capital gains.
NON-U.S. RISK: The Fund may invest a portion of its assets in the equity
securities of issuers domiciled in jurisdictions other than the U.S. Investments
in the securities and instruments of non-U.S. issuers involve certain
considerations and risks not ordinarily associated with investments in
securities and instruments of U.S. issuers. Non-U.S. companies are not generally
subject to uniform accounting, auditing and financial standards and requirements
comparable to those applicable to U.S. companies. Non-U.S. securities exchanges,
brokers and listed companies may be subject to less government supervision and
regulation than exists in the United States. Dividend and interest income may be
subject to withholding and other non-U.S. taxes, which may adversely affect the
net return on such investments. There may be difficulty in obtaining or
enforcing a court judgment abroad.
Page 22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST ENHANCED EQUITY INCOME
FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust Enhanced Equity Income Fund (the "Fund"), including the portfolio of
investments, as of December 31, 2008, the related statement of operations for
the year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
The Fund is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of December 31, 2008, by correspondence with the Fund's
custodian and brokers. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Trust Enhanced Equity Income Fund as of December 31, 2008, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for the
periods presented, in conformity with accounting principles generally accepted
in the United States of America.
(DELOITTE & TOUCHE LLP)
Chicago, Illinois
February 24, 2009
Page 23
ADDITIONAL INFORMATION
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2008 (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 PNC
Global Investment Servicing (U.S.) 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 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 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 New York Stock
Exchange 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 (800) 331-1710, 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 PNC Global Investment
Servicing (U.S.) 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 securities 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 website at http://www.sec.gov.
Page 24
ADDITIONAL INFORMATION - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2008 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("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.
NYSE CERTIFICATION INFORMATION
In accordance with Section 303A-12 of the NYSE Listed Company Manual, the Fund's
President has certified to the NYSE that, as of May 14, 2008, he was not aware
of any violation by the Fund of NYSE corporate governance listing standards. In
addition, the Fund's reports to the SEC on Form N-CSR and N-Q contain
certifications by the Fund's principal executive officer and principal financial
officer to the Fund's public disclosure in such reports and that are required by
Rule 30a-2 under the 1940 Act.
TAX INFORMATION
Of the ordinary income (including short-term capital gain) distributions made by
the Fund during the year ended December 31, 2008, 21.91% qualifies for the
corporate dividend received deduction available to corporate shareholders.
The Fund hereby designates as qualified dividend income 23.24% of its ordinary
income distributions (including short-term capital gain), for the year ended
December 31, 2008.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, Energy Income and
Growth Fund, First Trust Enhanced Equity Income Fund, First Trust/Aberdeen
Global Opportunity Income Fund, First Trust/FIDAC Mortgage Income Fund, First
Trust Strategic High Income Fund, First Trust Strategic High Income Fund II,
First Trust/Aberdeen Emerging Opportunity Fund, First Trust Specialty Finance
and Financial Opportunities Fund (formerly known as First Trust/Gallatin
Specialty Finance and Financial Opportunities Fund) and First Trust Active
Dividend Income Fund and Shareholders of the Preferred Shares of First Trust
Tax-Advantaged Preferred Income Fund, was held on April 14, 2008. At the Annual
Meeting, Trustee Robert F. Keith was elected for a three-year term. The number
of votes cast in favor of Mr. Keith was 15,520,554, the number of votes against
was 284,506 and the number of abstentions was 4,168,104. James A. Bowen, Richard
E. Erickson, Thomas R. Kadlec and Niel B. Nielson are the current and continuing
Trustees.
Page 25
BOARD OF TRUSTEES AND OFFICERS
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2008 (UNAUDITED)
NUMBER OF
PORTFOLIOS IN OTHER
THE FIRST TRUST TRUSTEESHIPS OR
NAME, ADDRESS, DATE OF BIRTH TERM OF OFFICE AND PRINCIPAL OCCUPATIONS FUND COMPLEX DIRECTORSHIPS
AND POSITION WITH THE FUND LENGTH OF SERVICE(1) DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
---------------------------- -------------------- ----------------------------- ------------------- ---------------------
INDEPENDENT TRUSTEES
Richard E. Erickson, Trustee - Two Year Term Physician; President, Wheaton 60 None
c/o First Trust Advisors L.P. Orthopedics; Co-owner and Co-
120 E. Liberty Drive, - Since Fund Director (January 1996 to May
Suite 400 Wheaton, IL 60187 Inception 2007), Sports Med Center for
D.O.B.: 04/51 Fitness; Limited Partner,
Gundersen Real Estate Limited
Partnership Member, Sportsmed
LLC
Thomas R. Kadlec, Trustee - Three Year Term Senior Vice President and 60 Director of ADM
c/o First Trust Advisors L.P. Chief Financial Officer (May Investor Services,
120 E. Liberty Drive, - Since Fund 2007 to Present), Vice Inc. and Director
Suite 400 Wheaton, IL 60187 Inception President and Chief Financial of Archer Financial
D.O.B.: 11/57 Officer (1990 to May 2007), Services, Inc.
ADM Investor Services, Inc.
(Futures Commission
Merchant); President (May
2005 to Present), ADM
Derivatives, Inc.; Registered
Representative (2000 to
Present), Segerdahl &
Company, Inc., a FINRA member
(Broker-Dealer)
Robert F. Keith, Trustee - Three Year Term President (2003 to Present) 60 None
c/o First Trust Advisors L.P. Hibs Enterprises (Financial
120 E. Liberty Drive, Suite - Since June 2006 and Management Consulting);
400 Wheaton, IL 60187 D.O.B.: President (2001 to 2003),
11/56 Aramark Management Services
LP; President and Chief
Operating Officer (1998 to
2003), ServiceMaster
Management Services LP
----------
(1) Currently, Robert F. Keith, as a Class I Trustee, is serving as a trustee
until the Fund's 2011 annual meeting of shareholders. Richard E. Erickson
and Thomas R. Kadlec, as Class II Trustees, are each serving as trustees
until the Fund's 2009 annual meeting of shareholders. James A. Bowen and
Niel B. Nielson, as Class III Trustees, are each serving as trustees until
the Fund's 2010 annual meeting. Officers of the Fund have an indefinite
term.
Page 26
BOARD OF TRUSTEES AND OFFICERS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2008 (UNAUDITED)
NUMBER OF
PORTFOLIOS IN OTHER
THE FIRST TRUST TRUSTEESHIPS OR
NAME, ADDRESS, DATE OF BIRTH TERM OF OFFICE AND PRINCIPAL OCCUPATIONS FUND COMPLEX DIRECTORSHIPS
AND POSITION WITH THE FUND LENGTH OF SERVICE(1) DURING PAST 5 YEARS OVERSEEN BY TRUSTEE HELD BY TRUSTEE
---------------------------- -------------------- ----------------------------- ------------------- ---------------------
INDEPENDENT TRUSTEES- (CONTINUED)
Niel B. Nielson, Trustee - Three Year Term President (June 2002 to Director of Covenant
c/o First Trust Advisors L.P. Present), Covenant College 60 Transport Inc.
120 E. Liberty Drive, Suite - Since Fund
400 Wheaton, IL 60187 Inception
D.O.B.: 03/54
INTERESTED TRUSTEE
James A. Bowen(2), Trustee, - Three Year President, First Trust 60 Trustee of Wheaton
President, Chairman of the Trustee Term Advisors L.P. and First Trust College
Board and CEO and Indefinite Portfolios L.P.; Chairman of
120 E. Liberty Drive, Suite Officer Term the Board of Directors,
400 Wheaton, IL 60187 BondWave LLC (Software
D.O.B.: 09/55 - Since Fund Development Company/Broker-
Inception Dealer/Investment Advisor)
and Stonebridge Advisors LLC
(Investment Advisor)
NAME, ADDRESS AND DATE POSITION AND OFFICES TERM OF OFFICE AND LENGTH PRINCIPAL OCCUPATIONS
OF BIRTH WITH FUND OF SERVICE DURING PAST 5 YEARS
---------------------- -------------------- ----------------------------- ---------------------
OFFICERS WHO ARE NOT TRUSTEES(3)
Mark R. Bradley 120 E. Treasurer, - Indefinite Term Chief Financial
Liberty Drive, Suite 400 Controller, Chief Officer, First Trust
Wheaton, IL 60187 D.O.B.: Financial Officer - Since Fund Inception Advisors L.P. and
11/57 and Chief Accounting First Trust
Officer Portfolios L.P.;
Chief Financial
Officer, BondWave LLC
(Software Development
Company/Broker-
Dealer/Investment
Advisor) and
Stonebridge Advisors
LLC (Investment
Advisor)
----------
(1) Currently, Robert F. Keith, as a Class I Trustee, is serving as a trustee
until the Fund's 2011 annual meeting of shareholders. Richard E. Erickson
and Thomas R. Kadlec, as Class II Trustees, are each serving as trustees
until the Fund's 2009 annual meeting of shareholders. James A. Bowen and
Niel B. Nielson, as Class III Trustees, are each serving as trustees until
the Fund's 2010 annual meeting. Officers of the Fund have an indefinite
term.
(2) Mr Bowen is deemed an "interested person" of the Fund due to his position
as President of First Trust Advisors L.P., investment advisor of the Fund.
(3) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 27
BOARD OF TRUSTEES AND OFFICERS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2008 (UNAUDITED)
NAME, ADDRESS AND DATE POSITION AND OFFICES TERM OF OFFICE AND LENGTH PRINCIPAL OCCUPATIONS
OF BIRTH WITH FUND OF SERVICE DURING PAST 5 YEARS
---------------------- -------------------- ----------------------------- ---------------------
OFFICERS WHO ARE NOT TRUSTEES(3) - (CONTINUED)
James M. Dykas Assistant Treasurer - Indefinite Term Senior Vice President
120 E. Liberty Drive, (April 2007 to
Suite 400 Wheaton, IL 60187 - Since December 2005 Present), Vice
D.O.B.: 01/66 President (January
2005 to April 2007),
First Trust Advisors
L.P. and First Trust
Portfolios L.P.;
Executive Director
(December 2002 to
January 2005), Vice
President (December
2000 to December
2002), Van Kampen
Asset Management and
Morgan Stanley
Investment Management
Christopher R. Fallow Assistant Vice - Indefinite Term Assistant Vice
120 E. Liberty Drive, President President (August
Suite 400 Wheaton, IL 60187 - Since December 2006 2006 to Present),
D.O.B.: 04/79 Associate (January
2005 to August 2006),
First Trust Advisors
L.P. and First Trust
Portfolios L.P.;
Municipal Bond Trader
(July 2001 to January
2005), BondWave LLC
(Software Development
Company/Broker-
Dealer/Investment
Advisor)
W. Scott Jardine Secretary and Chief - Indefinite Term General Counsel,
120 E. Liberty Drive, Compliance Officer First Trust Advisors
Suite 400 Wheaton, IL 60187 - Since Fund Inception L.P. and First Trust
D.O.B.: 05/60 Portfolios L.P.;
Secretary, BondWave
LLC (Software
Development
Company/Broker-
Dealer/Investment
Advisor) and
Stonebridge Advisors
LLC (Investment
Advisor)
----------
(3) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 28
BOARD OF TRUSTEES AND OFFICERS - (CONTINUED)
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2008 (UNAUDITED)
NAME, ADDRESS AND DATE POSITION AND OFFICES TERM OF OFFICE AND LENGTH PRINCIPAL OCCUPATIONS
OF BIRTH WITH FUND OF SERVICE DURING PAST 5 YEARS
---------------------- -------------------- ----------------------------- ---------------------
OFFICERS WHO ARE NOT TRUSTEES(3) - (CONTINUED)
Daniel J. Lindquist Vice President - Indefinite Term Senior Vice President
120 E. Liberty Drive, (September 2005 to
Suite 400 Wheaton, IL 60187 - Since December 2005 Present), Vice
D.O.B.: 02/70 President (April 2004
to September 005),
First Trust Advisors
L.P. and First Trust
Portfolios L.P.;
Chief Operating
Officer (January 2004
to April 2004), Mina
Capital Management,
LLC; Chief Operating
Officer (April 2000
to January 2004),
Samaritan Asset
Management Services,
Inc.
Coleen D. Lynch Assistant Vice - Indefinite Term Assistant Vice
120 E. Liberty Drive, President President (January
Suite 400 Wheaton, IL 60187 - Since July 2008 2008 to Present),
D.O.B.: 07/58 First Trust Advisors
L.P. and First Trust
Portfolios L.P.; Vice
President (May 1998
to January 2008), Van
Kampen Asset
Management and Morgan
Stanley Investment
Management
Kristi A. Maher Assistant Secretary - Indefinite Term Deputy General
120 E. Liberty Drive, Suite Counsel (May 2007 to
400 Wheaton, IL 60187 - Since Fund Inception Present), Assistant
D.O.B.: 12/66 General Counsel
(March 2004 to May
2007), First Trust
Advisors L.P. and
First Trust
Portfolios L.P.;
Associate (December
1995 to March 2004),
Chapman and Cutler
LLP
----------
(3) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 29
PRIVACY POLICY
FIRST TRUST ENHANCED EQUITY INCOME FUND
DECEMBER 31, 2008 (UNAUDITED)
PRIVACY POLICY
The open-end and closed-end funds advised by First Trust Advisors L.P. (each a
"Fund") consider your privacy an important priority in maintaining our
relationship. We are committed to protecting the security and confidentiality of
your personal information.
SOURCES OF INFORMATION
We may collect nonpublic personal information about you from the following
sources:
- Information we receive from you or your broker-dealer, investment adviser
or financial representative through interviews, applications, agreements or
other forms;
- Information about your transactions with us, our affiliates or others;
- Information we receive from your inquiries by mail, e-mail or telephone;
and
- Information we collect on our website through the use of "cookies." For
example, we may identify the pages on our website that your browser
requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. The permitted uses
include the disclosure of such information to unaffiliated companies for the
following reasons:
- In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your personal
information as described above to unaffiliated financial service providers
and other companies that perform administrative or other services on our
behalf, such as transfer agents, custodians and trustees, or that assist us
in the distribution of investor materials such as trustees, banks,
financial representatives and printers.
- We may release information we have about you if you direct us to do so, if
we are compelled by law to do so, or in other legally limited circumstances
(for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information with affiliates of the Fund. Please note,
however, that the California Financial Information Privacy Act contains an "opt
out" mechanism that California consumers may use to prevent us from sharing
nonpublic personal information with affiliates.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, the Fund restricts access to
your nonpublic personal information to those individuals who need to know that
information to provide products or services to you. We maintain physical,
electronic and procedural safeguards to protect your nonpublic personal
information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time; however, if we do change
it, we will tell you promptly.
For questions about our policy, or for additional copies of this notice, please
contact us at (800) 621-1675.
Page 30
This Page Left Blank Intentionally.
This Page Left Blank Intentionally.
[FIRST TRUST LOGO]
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Chartwell Investment Partners, L.P.
1235 Westlakes Drive, Suite 400
Berwyn, PA 19312
ADMINISTRATOR,
FUND ACCOUNTANT,
TRANSFER AGENT &
BOARD ADMINISTRATOR
PNC Global Investment Servicing (U.S.) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
PFPC Trust Company
8800 Tinicum Boulevard
Philadelphia, PA 19153
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
ITEM 2. CODE OF ETHICS.
(a) The registrant, as of the end of the period covered by this report, has
adopted a code of ethics that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant
or a third party.
(c) There have been no amendments, during the period covered by this
report, to a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing
similar functions, regardless of whether these individuals are employed
by the registrant or a third party, and that relates to any element of
the code of ethics definition enumerated in paragraph (b) of this
item's instructions.
(d) The registrant has not, during the period covered by this report,
granted any waivers, including an implicit waiver, from a provision of
the code of ethics that applies to the registrant's principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions, regardless of
whether these individuals are employed by the registrant or a third
party, that relates to one or more of the items set forth in paragraph
(b) of this item's instructions.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the Registrant's board of
trustees has determined that Thomas R. Kadlec and Robert F. Keith are qualified
to serve as audit committee financial experts serving on its audit committee and
that each of them is "independent," as defined by Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) AUDIT FEES (REGISTRANT) -- The aggregate fees billed for each of
the last two fiscal years for professional services rendered by the principal
accountant for the audit of the Registrant's annual financial statements or
services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements were $35,500 for 2007 and
$37,000 for 2008.
(b) AUDIT-RELATED FEES (REGISTRANT) -- The aggregate fees billed in
each of the last two fiscal years, for assurance and related services by the
principal accountant that are reasonably related to the performance of the audit
of the Registrant's financial statements and are not reported under paragraph
(a) of this Item were $2,300 for 2007 and $0 for 2008. These fees were for
additional audit work.
AUDIT-RELATED FEES (INVESTMENT ADVISER) -- The aggregate fees
billed in each of the last two fiscal years of the Registrant for assurance and
related services by the principal accountant that are reasonably related to the
performance of the audit of the Registrant's financial statements and are not
reported under paragraph (a) of this Item were $2,300 for 2007 and $0 for 2008.
These fees were for additional audit work.
(c) TAX FEES (REGISTRANT) -- The aggregate fees billed in each of the
last two fiscal years for professional services rendered by the principal
accountant for tax compliance, tax advice, and tax planning to the Registrant
were $4,850 for 2007 and $5,000 for 2008. These fees were for tax preparation.
TAX FEES (INVESTMENT ADVISER) -- The aggregate fees billed in each
of the last two fiscal years of the Registrant for professional services
rendered by the principal accountant for tax compliance, tax advice, and tax
planning to the Registrant's adviser were $0 for 2007 and $0 for 2008.
(d) ALL OTHER FEES (REGISTRANT) -- The aggregate fees billed in each of
the last two fiscal years for products and services provided by the principal
accountant to the Registrant, other than the services reported in paragraphs (a)
through (c) of this Item were $0 for 2007 and $0 for 2008.
ALL OTHER FEES (INVESTMENT ADVISER) -- The aggregate fees billed in
each of the last two fiscal years for products and services provided by the
principal accountant to the Registrant's investment adviser, other than services
reported in paragraphs (a) through (c) of this Item were $0 for 2007 and $0 for
2008.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
Pursuant to its charter and its Audit and Non-Audit Services
Pre-Approval Policy, the Audit Committee (the "COMMITTEE") is responsible for
the pre-approval of all audit services and permitted non-audit services
(including the fees and terms thereof) to be performed for the Registrant by its
independent auditors. The Chairman of the Committee is authorized to give such
pre-approvals on behalf of the Committee up to $25,000 and report any such
pre-approval to the full Committee.
The Committee is also responsible for the pre-approval of the
independent auditor's engagements for non-audit services with the Registrant's
adviser (not including a sub-adviser whose role is primarily portfolio
management and is sub-contracted or overseen by another investment adviser) and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the Registrant, if the
engagement relates directly to the operations and financial reporting of the
Registrant, subject to the DE MINIMIS exceptions for non-audit services
described in Rule 2-01 of Regulation S-X. If the independent auditor has
provided non-audit services to the Registrant's adviser (other than any
sub-adviser whose role is primarily portfolio management and is sub-contracted
with or overseen by another investment adviser) and any entity controlling,
controlled by or under common control with the investment adviser that provides
ongoing services to the Registrant that were not pre-approved pursuant to its
policies, the Committee will consider whether the provision of such non-audit
services is compatible with the auditor's independence.
(e)(2) The percentage of services described in each of paragraphs (b) through
(d) for the Registrant and the Registrant's investment adviser of this
Item that were approved by the audit committee pursuant to the
pre-approval exceptions included in paragraph (c)(7)(i)(c) or paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X are as follows:
(b) 0%
(c) 0%
(d) 0%
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most
recent fiscal year that were attributed to work performed by persons
other than the principal accountant's full-time, permanent employees
was less than fifty percent.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's
investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by
another investment adviser), and any entity controlling, controlled by,
or under common control with the adviser that provides ongoing services
to the Registrant for 2007 were $4,850 and $7,000 for the Registrant
and the Registrant's investment adviser, respectively, and for 2008
were $5,000 and $12,143, for the Registrant and the Registrant's
investment adviser, respectively.
(h) The Registrant's audit committee of its Board of Trustees determined
that the provision of non-audit services that were rendered to the
Registrant's investment adviser (not including any sub-adviser whose
role is primarily portfolio management and is subcontracted with or
overseen by another investment adviser), and any entity controlling,
controlled by, or under common control with the investment adviser that
provides ongoing services to the Registrant that were not pre-approved
pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is
compatible with maintaining the principal accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(a) The Registrant has a separately designated audit committee consisting
of all the independent trustees of the Registrant. The members of the
audit committee are: Thomas R. Kadlec, Niel B. Nielson, Richard E.
Erickson and Robert F. Keith.
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.
The Proxy Voting Policies are attached herewith.
PURPOSE. Chartwell Investment Partners ("Chartwell") has adopted these Proxy
Voting Policies and Procedures ("Policies") to seek to ensure that it exercises
voting authority on behalf of Chartwell clients in a manner consistent with the
best interests of each client and its agreement with the client.
SCOPE. These Policies apply where clients have delegated the authority and
responsibility to Chartwell to decide how to vote proxies. Chartwell does not
accept or retain authority to vote proxies in accordance with individual client
guidelines. Clients that wish to arrange to vote proxies in accordance with
their own guidelines may elect to do so at any time by notifying Chartwell.
Chartwell generally will follow these Policies if asked to make recommendations
about proxy voting to clients who request that advice but have not delegated
proxy voting responsibility to Chartwell.
GUIDING PRINCIPLES. Chartwell believes that voting proxies in the best interests
of each client means making a judgment as to what voting decision is most likely
to maximize total return to the client as an investor in the securities being
voted, and casting the vote accordingly. For this reason, Chartwell's evaluation
of the possible impact of a proxy vote on the economic interests of company
shareholders similarly situated to Chartwell's clients will be the primary
factor governing Chartwell's proxy voting decisions.
USE OF INDEPENDENT PROXY VOTING SERVICE. Chartwell has retained Institutional
Shareholder Services, Inc., ("ISS") an independent proxy voting service, to
assist it in analyzing specific proxy votes with respect to securities held by
Chartwell clients and to handle the mechanical aspects of casting votes.
Historically, Chartwell has placed substantial reliance on ISS' analyses and
recommendations and generally gives instructions to ISS to vote proxies in
accordance with ISS' recommendations, unless Chartwell reaches a different
conclusion than ISS about how a particular matter should be voted. ISS proxy
voting recommendations typically are made available to Chartwell about a week
before the proxy must be voted, and are reviewed and monitored by members of the
Proxy Voting Committee (and, in certain cases, by Chartwell portfolio managers),
with a view to determining whether it is in the best interests of Chartwell's
clients to vote proxies as recommended by ISS, or whether client proxies should
be voted on a particular proposal in another manner.
ADMINISTRATION OF POLICIES. Chartwell has established a Proxy Voting Committee
to oversee and administer the voting of proxies on behalf of clients, comprised
of approximately five representatives of the firm's compliance and operations
departments. The Committee's responsibilities include reviewing and updating
these Policies as may be appropriate from time to time; identifying and
resolving any material conflicts of interest on the part of Chartwell or its
personnel that may affect particular proxy votes; evaluating and monitoring, on
an ongoing basis, the analyses, recommendations and other services provided by
ISS or another third party retained to assist Chartwell in carrying out its
proxy voting responsibilities; when deemed appropriate by the Committee,
consulting with Chartwell portfolio managers and investment professionals on
particular proposals or categories of proposals presented for vote; and
determining when and how client proxies should be voted other than in accordance
with the general rules and criteria set forth in Chartwell's Proxy Voting
Guidelines or with the recommendations of ISS or another independent proxy
voting service retained by Chartwell. Chartwell maintains a copy of the AFL-CIO
Key Votes Survey which is a list of proposals and meetings based on the AFL-CIO
Proxy Voting Guidelines. This list includes the company, item number, proposal,
recommendation and date of the meeting. Chartwell votes in accordance with these
recommendations. In situations where ISS does not vote a proxy (as on behalf of
LP's or LLC's), Chartwell generally votes with company management.
CONFLICTS OF INTEREST. It is Chartwell's policy not to exercise its authority to
decide how to vote a proxy if there is a material conflict of interest between
Chartwell's interests and the interests of the client that owns the shares to be
voted that could affect the vote on that matter. To seek to identify any such
material conflicts, a representative of the Proxy Voting Committee screens all
proxies and presents any potential conflicts identified to the Committee for
determination of whether the conflict exists and if so, whether it is material.
Conflicts of interest could result from a variety of circumstances, including,
but not limited to, significant personal relationships between executive
officers of an issuer and Chartwell personnel, a current or prospective
investment adviser-client relationship between an issuer or a pension plan
sponsored by an issuer and Chartwell, a significant ownership interest by
Chartwell or its personnel in the issuer and various other business, personal or
investment relationships. Generally, a current or prospective adviser-client
relationship will not be considered material for these purposes if the net
advisory revenues to Chartwell have not in the most recent fiscal year and are
not expected in the current fiscal year to exceed 1/2 of 1 percent of
Chartwell's annual advisory revenue.
In the event the Committee determines that there is a material conflict of
interest that may affect a particular proxy vote, Chartwell will NOT make the
decision how to vote the proxy in accordance with these Policies unless the
Policies specify how votes shall be cast on that particular type of matter,
i.e., "for" or "against" the proposal. Where the Policies provide that the
voting decision will be made on a "case-by-case" basis, Chartwell will either
request the client to make the voting decision, or the vote will be cast in
accordance with the recommendations of ISS or another independent proxy voting
service retained by Chartwell for that purpose. Chartwell also will not provide
advice to clients on proxy votes without first disclosing any material conflicts
to the client requesting such advice.
WHEN CHARTWELL DOES NOT VOTE PROXIES. Chartwell may not vote proxies respecting
client securities in certain circumstances, including, but not limited to,
situations where (a) the securities are no longer held in a client's account;
(b) the proxy and other relevant materials are not received in sufficient time
to allow analysis or an informed vote by the voting deadline; (c) Chartwell
concludes that the cost of voting the proxy will exceed the expected potential
benefit to the client; or (d) the securities have been loaned out pursuant to a
client's securities lending program and are unavailable to vote.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(A)(1) IDENTIFICATION OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
Chartwell Investment Partners, L.P. ("Chartwell" or the "Sub-Adviser"), founded
in 1997, is an employee-owned investment firm focusing on institutional,
sub-advisory and private client relationships. The firm is a research-based
equity and fixed-income manager with a disciplined, team-oriented investment
process. The Portfolio Management Team consists of the following:
PORTFOLIO MANAGEMENT TEAM
BERNARD P. SCHAFFER
MANAGING PARTNER, SENIOR PORTFOLIO MANAGER
Mr. Schaffer is a founding partner of Chartwell and has 37 years of investment
industry experience. He serves as senior portfolio manager for Chartwell's
closed-end fund and hedged large-cap equity strategies. As the lead portfolio
manager for the Fund, he focuses on securities in the Energy, Financials and
Staples industries. He was employed as a Senior Portfolio Manager at Delaware
Investment Advisers from 1990 to 1997, managing two closed-end equity income
funds. These funds utilize option strategies to generate portfolio gains. Mr.
Schaffer earned a Bachelor's degree in Economics from Villanova University and
an MBA from the University of Pennsylvania's Wharton School.
DOUGLAS W. KUGLER, CFA
PRINCIPAL, PORTFOLIO MANAGER
Mr. Kugler is a portfolio manager on Chartwell's large-cap equity portfolio
management team and has 11 years of investment industry experience. His areas of
focus include the Transportation and Consumer Discretionary segments of the
market. From 1993 to 2003, he held several positions at Morgan Stanley
Investment Management (Miller Anderson & Sherrerd) including Head of Mutual Fund
Administration and Vice President and Treasurer of the MAS Funds, Junior
Associate in the Equity Department and his last position held prior to joining
Chartwell was Senior Associate and Analyst for the Large Cap Value team. Prior
to joining Morgan Stanley, he was an Assistant Vice President and Senior
Accounting Officer at Provident Financial Processing Corporation. Mr. Kugler
holds the CFA designation and is a member of the CFA Institute and the CFA
Society of Philadelphia, and earned a Bachelor's degree in Accounting from the
University of Delaware.
KEVIN A. MELICH, CFA
MANAGING PARTNER, SENIOR PORTFOLIO MANAGER
Mr. Melich is a founding partner of Chartwell and has 44 years of investment
industry experience. He is a member of Chartwell's large-cap equity portfolio
management team and implements portfolio management decisions for high yield
equity institutional portfolios. His areas of focus are in the Automotive,
Machinery, Office Electronics and REIT industries. He was employed as a Senior
Portfolio Manager at Delaware Investment Advisers from 1983 to 1997. There he
managed over $1.6 billion for institutional accounts in the value style. From
1979 to 1983, Mr. Melich was a Partner with the economics consulting firm, A.B.
Laffer Associates. From 1964 to 1979, he was the Senior Investment Officer and
Manager of the Trust and Investment Division of Security Trust Company. Mr.
Melich holds the CFA designation and is a member of the CFA Institute and the
CFA Society of Philadelphia, and earned a Bachelor of Science degree in
economics from St. John Fisher College.
(A)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM
MEMBER AND POTENTIAL CONFLICTS OF INTEREST
OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBER
The information in the table below is as of December 31, 2008
(assets in millions).
TOTAL
ASSETS FOR
# OF ACCOUNTS WHICH
MANAGED FOR ADVISORY
TOTAL # OF WHICH ADVISORY FEE IS
NAME OF PORTFOLIO MANAGER OR ACCOUNTS TOTAL FEE IS BASED ON BASED ON
TEAM MEMBER TYPE OF ACCOUNTS* MANAGED ASSETS PERFORMANCE PERFORMANCE
1. Bernard P. Schaffer Registered Investment Companies: 1 $41.2 0 $0
Other Pooled Investment 0 $0 0 $0
Vehicles:
Other Accounts: 26 $356.8 0 $0
2. Kevin A. Melich Registered Investment Companies: 1 $41.2 0 $0
Other Pooled Investment 0 $0 0 $0
Vehicles:
Other Accounts: 26 $356.8 0 $0
3. Douglas W. Kugler Registered Investment Companies: 1 $41.2 0 $0
Other Pooled Investment 0 $0 0 $0
Vehicles:
Other Accounts: 26 $356.8 0 $0
POTENTIAL CONFLICTS OF INTERESTS
The portfolio managers manage other accounts for Chartwell including the
Chartwell Dividend and Income Fund, (CWF) and institutional portfolios of
similar investment styles. None of these portfolio managers manage any hedge
funds nor any accounts with performance-based fees.
When registered funds and investment accounts are managed side-by-side, firm
personnel must strictly follow the policies and procedures outlined in our Trade
Allocation Policy to ensure that accounts are treated in a fair and equitable
manner, and that no client or account is favored over another. When registered
funds and investment accounts are trading under the same investment product, and
thus trading the same securities, shares are allocated on a pro-rata basis based
on market value, and all portfolios obtain the same average price.
On a monthly basis, a member of Chartwell's Compliance Group, oversees the
performance calculation process handled in Operations, and completes a
spreadsheet of monthly portfolio returns by client. This person provides this
spreadsheet to the CEO, CCO and various investment personnel for their review.
Any performance dispersion noted by anyone on the distribution list is
investigated by a member of Chartwell's Compliance Group by reviewing the
underlying transactional detail, holdings & security weightings by portfolio.
This monthly process ensures that all portfolios that are managed under the same
investment product are treated fairly, and traded in accordance with firm
policy.
(A)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
The compensation paid to a Chartwell portfolio manager and analyst consists of
base salary, annual bonus, ownership distribution, and an annual profit-sharing
contribution to the firm's retirement plan.
A portfolio manager's and analyst's base salary is determined by Chartwell's
Compensation Committee and is reviewed at least annually. A portfolio manager's
and analyst's experience, historical performance, and role in firm or product
team management are the primary considerations in determining the base salary.
Industry benchmarking is utilized by the Compensation Committee on an annual
basis.
Annual bonuses are determined by the Compensation Committee based on a number of
factors. The primary factor is a performance-based compensation schedule that is
applied to all accounts managed by a portfolio manager within a particular
investment product, and is not specific to any one account. The bonus is
calibrated based on the gross composite performance of such accounts versus the
appropriate benchmark and peer group rankings. Portfolio construction, sector
and security weighting, and performance are reviewed by the Compliance Committee
and Compensation Committee to prevent a manager from taking undue risks.
Additional factors used to determine the annual bonus include the portfolio
manager's contribution as an analyst, product team management, and contribution
to the strategic planning and development of the investment group as well as the
firm.
Ownership distributions are paid to a portfolio manager and analyst based on the
portfolio manager's and analyst's ownership interest, or percentage limited
partnership interest, in Chartwell multiplied by total net cash distributions
paid during the year.
(A)(4) DISCLOSURE OF SECURITIES OWNERSHIP
The information below is as of December 31, 2008:
NAME OF PORTFOLIO MANAGER OR DOLLAR RANGE OF FUND SHARES
TEAM MEMBER BENEFICIALLY OWNED
Bernard P. Schaffer $0
Kevin A. Melich $0
Douglas W. Kugler $0
(B) Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers,
or persons performing similar functions, have concluded that the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the
"1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within
90 days of the filing date of the report that includes the disclosure
required by this paragraph, based on their evaluation of these controls
and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR
270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities
Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or
240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17
CFR 270.30a-3(d)) that occurred during the registrant's second fiscal
quarter of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) FIRST TRUST ENHANCED EQUITY INCOME FUND
By (Signature and Title)* /S/ JAMES A. BOWEN
-------------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date 2/26/09
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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 2/26/09
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By (Signature and Title)* /S/ MARK R. BRADLEY
-------------------------------------------------------
Mark R. Bradley, Treasurer, Controller, Chief
Financial Officer and Chief Accounting Officer
(principal financial officer)
Date 2/26/09
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* Print the name and title of each signing officer under his or her signature.