UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-21586
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First Trust Enhanced Equity Income Fund
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(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)
registrant's telephone number, including area code: (630) 765-8000
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Date of fiscal year end: December 31
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Date of reporting period: June 30, 2017
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FIRST TRUST
ENHANCED EQUITY INCOME FUND (FFA)
SEMI-ANNUAL REPORT
FOR THE SIX MONTHS ENDED
JUNE 30, 2017
CHARTWELL INVESTMENT PARTNERS
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Institutional and Private Asset Management
FIRST TRUST
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TABLE OF CONTENTS
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FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
SEMI-ANNUAL REPORT
JUNE 30, 2017
Shareholder Letter.......................................................... 1
At a Glance................................................................. 2
Portfolio Commentary........................................................ 3
Portfolio of Investments.................................................... 5
Statement of Assets and Liabilities......................................... 11
Statement of Operations..................................................... 12
Statements of Changes in Net Assets......................................... 13
Financial Highlights........................................................ 14
Notes to Financial Statements............................................... 15
Additional Information...................................................... 21
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Chartwell Investment Partners, LLC ("Chartwell"
or the "Sub-Advisor") and their respective representatives, taking into account
the information currently available to them. Forward-looking statements include
all statements that do not relate solely to current or historical fact. For
example, forward-looking statements include the use of words such as
"anticipate," "estimate," "intend," "expect," "believe," "plan," "may,"
"should," "would" or other words that convey uncertainty of future events or
outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust Enhanced Equity Income Fund (the "Fund") to be materially different
from any future results, performance or achievements expressed or implied by the
forward-looking statements. When evaluating the information included in this
report, you are cautioned not to place undue reliance on these forward-looking
statements, which reflect the judgment of the Advisor and/or Sub-Advisor and
their respective representatives only as of the date hereof. We undertake no
obligation to publicly revise or update these forward-looking statements to
reflect events and circumstances that arise after the date hereof
MANAGED DISTRIBUTION POLICY
The Board of Trustees of the Fund has approved a managed distribution policy for
the Fund (the "Plan") in reliance on exemptive relief received from the
Securities and Exchange Commission which permits the Fund to make periodic
distributions of long-term capital gains more frequently than otherwise
permitted with respect to its common shares subject to certain conditions. Under
the Plan, the Fund currently intends to pay a quarterly distribution in the
amount of $0.285 per share. A portion of this quarterly distribution may include
realized capital gains. This may result in a reduction of the long-term capital
gain distribution necessary at year end by distributing realized capital gains
throughout the year. The annual distribution rate is independent of the Fund's
performance during any particular period but is expected to correlate with the
Fund's performance over time. Accordingly, you should not draw any conclusions
about the Fund's investment performance from the amount of any distribution or
from the terms of the Plan. The Board of Trustees may amend or terminate the
Plan at any time without prior notice to shareholders.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
The Advisor may also periodically provide additional information on Fund
performance on the Fund's webpage at http://www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. It includes details about the Fund and presents data and analysis that
provide insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
Chartwell are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The material risks of investing in the
Fund are spelled out in the prospectus, the statement of additional information,
this report and other Fund regulatory filings.
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SHAREHOLDER LETTER
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FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
JUNE 30, 2017
Dear Shareholders:
First Trust Advisors L.P. ("First Trust") is pleased to provide you with this
semi-annual report which contains current information and the financial
statements for your investment in the First Trust Enhanced Equity Income Fund
(the "Fund"). We encourage you to read this report and discuss it with your
financial advisor.
Six months into the year, the bull market in stocks continues. President Donald
Trump's pro-growth, pro-U.S. policies, while slow in coming, have at least
created some optimism about the prospects for the U.S. economy, in our opinion.
From Donald Trump's election on November 8, 2016 through June 30, 2017, the S&P
500(R) Index (the "Index") posted a total return of 14.79%, according to
Bloomberg. The Index closed its June 19, 2017 trading session at an all-time
high of 2,453.46.
The current bull market (measuring from March 9, 2009 through June 30, 2017) is
the second longest in history. While we are optimistic about the U.S. economy,
we are also well aware that no one can predict the future or know how an
administration will affect markets and the economy in the future. Therefore, we
stress the importance of maintaining a long-term perspective, as we have done
since First Trust's inception over 25 years ago.
Thank you for giving First Trust the opportunity to be a part of your investment
plan through the Fund. We value our relationship with you and will continue our
relentless focus on bringing the types of investments that we believe could help
you reach your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
"AT A GLANCE"
AS OF JUNE 30, 2017 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FFA
Common Share Price $14.65
Common Share Net Asset Value ("NAV") $16.01
Premium (Discount) to NAV (8.49)%
Net Assets Applicable to Common Shares $319,770,333
Current Quarterly Distribution per Common Share (1) $0.285
Current Annualized Distribution per Common Share $1.140
Current Distribution Rate on Common Share Price (2) 7.78%
Current Distribution Rate on NAV (2) 7.12%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
6/16 $13.12 $14.77
13.01 14.79
13.06 14.97
13.22 15.11
13.39 15.13
7/16 13.40 15.11
13.39 15.21
13.43 15.21
13.55 15.30
8/16 13.81 15.22
14.04 15.30
13.58 14.90
13.55 15.01
13.49 14.96
9/16 13.36 15.02
13.45 14.93
13.43 14.81
13.55 14.88
10/16 13.31 14.76
12.61 14.46
13.18 14.97
13.30 15.07
11/16 13.55 15.21
13.30 15.08
13.55 15.43
13.84 15.51
13.55 15.35
12/16 13.51 15.23
13.62 15.46
13.65 15.46
13.77 15.49
1/17 13.89 15.67
14.00 15.74
14.03 15.83
14.18 16.05
2/17 14.28 16.14
14.48 16.21
14.45 16.17
14.45 16.23
14.02 15.78
3/17 14.44 15.89
14.49 15.84
14.41 15.67
14.53 15.79
4/17 14.73 15.99
14.74 16.05
14.69 16.05
14.64 15.96
5/17 14.77 16.16
14.93 16.29
14.78 16.26
15.00 16.30
14.74 16.03
6/17 14.65 16.01
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PERFORMANCE
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Average Annual Total Return
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6 Months Ended 1 Year Ended 5 Years Ended 10 Years Ended Inception (8/26/2004)
6/30/2017 6/30/2017 6/30/2017 6/30/2017 to 6/30/2017
FUND PERFORMANCE (3)
NAV 9.02% 16.44% 11.56% 6.76% 7.16%
Market Value 12.46% 19.95% 12.00% 6.21% 6.04%
INDEX PERFORMANCE
S&P 500(R) Index 9.34% 17.90% 14.63% 7.18% 8.55%
BXM Index 7.21% 12.06% 7.73% 4.62% 5.61%
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% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
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Apple, Inc. 5.6%
Microsoft Corp. 3.8
Pfizer, Inc. 2.5
Philip Morris International, Inc. 2.4
PepsiCo, Inc. 2.4
JPMorgan Chase & Co. 2.3
Carnival Corp. 2.3
Altria Group, Inc. 2.2
Merck & Co., Inc. 2.2
General Electric Co. 2.1
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Total 27.8%
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% OF TOTAL
SECTOR CLASSIFICATION INVESTMENTS
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Information Technology 21.1%
Financials 15.8
Health Care 14.1
Consumer Staples 13.7
Consumer Discretionary 11.8
Industrials 7.9
Energy 7.8
Utilities 2.6
Real Estate 2.2
Materials 2.1
Telecommunication Services 0.9
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Total 100.0%
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(1) Most recent distribution paid or declared through 6/30/2017. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV, as applicable, as of 6/30/2017. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain, and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for NAV
returns and changes in Common Share price for market value returns. Total
returns do not reflect sales load and are not annualized for periods of
less than one year. Past performance is not indicative of future results.
Page 2
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PORTFOLIO COMMENTARY
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FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
SEMI-ANNUAL REPORT
JUNE 30, 2017 (UNAUDITED)
ADVISOR
First Trust Advisors L.P. ("First Trust") is the investment advisor to the First
Trust Enhanced Equity Income Fund (the "Fund"). 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.
SUB-ADVISOR
Chartwell Investment Partners, LLC ("Chartwell"), a wholly-owned subsidiary of
TriState Capital Holdings, Inc., is a research-based equity and fixed-income
manager with a disciplined, team-oriented investment process. Chartwell is the
portfolio manager of the Fund.
PORTFOLIO MANAGEMENT TEAM
DOUGLAS W. KUGLER, CFA
PRINCIPAL, SENIOR PORTFOLIO MANAGER
PETER M. SCHOFIELD, CFA
PRINCIPAL, SENIOR PORTFOLIO MANAGER
COMMENTARY
FIRST TRUST ENHANCED EQUITY INCOME FUND
The investment objective of 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 non-U.S. issuers. These securities are
traded on U.S. securities exchanges. In addition, on an ongoing and consistent
basis, the Fund will write (sell) covered call options on a portion of the
Fund's managed assets. There can be no assurance that the Fund's investment
objective will be achieved.
MARKET RECAP
The S&P 500(R) Index (the "Index") returned 9.34% (inclusive of dividends) for
the six-month period ended June 30, 2017 as the "animal spirits" that we believe
were stirred by President Trump's election continued to push the market higher.
The market grappled with a number of macro-related items but seemed to be buoyed
by apparent economic strength that was reflected in survey data released during
the period, two 0.25% hikes in the Federal Funds rate announced by the Federal
Open Market Committee ("FOMC"), and the promise of significant tax reform. The
Index reached a new all-time high on June 19, 2017 at 2,453,46 and closed on
June 30, 2017 only 1.2% beneath that record level. Later in the period, there
were signs of possible rotation among the groups that have led the market
higher. The technology group gave back a portion of its year-to-date performance
in June and the financials group took over the leadership of the market for a
brief spell. While technology was the best performing group for the period,
healthcare was quietly strong and was the second best performing group for the
first half of 2017 (both up more than 15%). Meanwhile, the energy and
telecommunications groups both saw double-digit declines. An almost complete
lack of downward volatility was a hallmark of the six-month period. The largest
drawdown (change from high to low) in the Index during the period was -2.8%. In
fact, that drawdown was the largest since "Brexit" (the vote in the UK to leave
the European Union) on June 23, 2016. That means the farthest the Index fell
from a near-term peak in the more than one year period from June 23, 2016
through June 30, 2017 was 2.8%. The volatility in the 10-year U.S. Treasury
market was more balanced with the yield starting the year at 2.48%, trading up
to 2.60% before falling to a low of 2.13% and closing on June 30, 2017 at 2.27%.
The FOMC did increase the Fed Funds rate by a total of 0.50% in the period and
with the 10-year Treasury yield declining during the six months, the heavily
watched 10-year over 2-year spread declined significantly. A significant decline
in this measure is believed to signal that economic weakness appears to have
either started, or, in our view, is coming, but we believe this signal is not
foolproof. Meanwhile, the price of oil was fairly volatile. The price of a
barrel of West Texas Intermediate ("WTI"), the domestic benchmark price, started
the year at $53.72 per barrel, rose slightly to $54.45 per barrel shortly after
the start of the year but then traded in a series of lower highs and lower lows
bottoming at $42.53 per barrel in late June before closing the period at $46.04
per barrel as of June 30, 2017. The oil price declined as the benefits of the
Organization of the Petroleum Exporting Countries ("OPEC") maintaining their
production cut were out-weighed by the negative forces of growing U.S. oil
production and inventories.
Page 3
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
SEMI-ANNUAL REPORT
JUNE 30, 2017 (UNAUDITED)
PERFORMANCE SUMMARY
For the six months ended June 30, 2017 the Fund's net asset value ("NAV") and
market value total returns(1) were 9.02% and 12.46%, respectively. The Index
returned 9.34% on a total return basis over the same period. The covered call
options program had a slight negative influence on the Fund's return during the
period, which we believe was a solid performance given the strong positive
return of the Index. Certain broad themes in the market proved to be headwinds
for the relative performance of the Fund's portfolio during the six-month
period. As occurred in the second half of 2016, higher beta (beta is a measure
of price volatility compared to the Index) stocks outperformed the Index. While
the Fund will hold some higher beta stocks, in general, the overall
weighted-average beta of the Fund has been fairly close to the market's. In
addition, the Fund's portfolio will generally carry a higher yield than the
Index and for the first half of 2017, lower-yielding stocks handily outperformed
higher yielding stocks. Overall, the stock portfolio performed essentially
in-line with the Index. Within the stock portfolio, the largest detractors to
relative performance were the portfolio's slight overweight of the energy group
as well as poor stock selection within the energy, healthcare and industrials
groups. These detractors essentially offset the mostly positive stock selection
throughout the rest of the portfolio. Among the weaker stocks, Helmerich &
Payne, Inc. (-28.2%), Hess Corp. (-28.8%) and Occidental Petroleum Corp.
(-13.8%) were in the energy group; not owning Johnson & Johnson (+16.3%) or
Abbott Laboratories (+28.2%) was harmful in the healthcare group, and having an
overweight in General Electric Co. (-13.1%) and not owning Boeing Co. (+29.1%)
detracted from performance in the industrials group. On the positive side,
Phillip Morris International, Inc. (+30.7%) and Constellation Brands, Inc.
(+27.1%) helped relative performance in the consumer staples group; Apple, Inc.
(+25.4%), Oracle Corp. (+31.5%), Applied Materials, Inc. (+28.7%) and Broadcom
Ltd. (+33.0%) provided strong relative performance in the information technology
group.
MARKET OUTLOOK
The Index attained an all-time closing high of 2,453.46 on June 19, 2017, and it
closed the first half of 2017 down 1.2% from that record level. With both
quarters in the first half of this year, producing positive returns for the
Index, the second quarter marked the 17th out of the last 18 quarters where the
Index (inclusive of dividends) was positive. 2016 was the eighth positive year
in a row (inclusive of dividends) for the Index and barring a strong reversal in
the second half of this year, 2017 could be the ninth! For those eight and
one-half years, the market has risen 222% cumulatively which represents a 14.7%
compound annual growth rate. And since the market's low point on March 9, 2009,
the market is up approximately 19.1% per year through June 30, 2017. We have
said that given valuations in the equity markets are above longer-term averages
and higher interest rates (which are typically viewed as a headwind to equity
valuations) appear to be coming, we believe that earnings growth will have to
improve in order for the equity market to move substantially higher. That has
been happening. First quarter 2017 earnings were strongly higher year over year
marking the third straight quarter of growth and those earnings were better than
expected. Expectations for the second quarter earnings season are for the
positive growth trend to continue. We believe that companies have learned how to
operate well in the low (GDP) growth environment and that some of the bigger
restraints to total earnings growth (e.g. lower oil prices, stronger dollar) may
be less of a restraint on growth. In addition, we believe that the uptick in
mergers and acquisitions will continue as will strong stock repurchases which
should help corporations in their search for earnings growth. Despite slightly
higher and increasing interest rates, interest rates are still lower than normal
and should continue to facilitate these corporate actions. Absent a global
recession, revenues should move higher and we believe companies will continue to
be vigilant on controlling costs thereby keeping margins at or near current high
levels.
Our position is essentially unchanged. Despite the uncertainties, we believe the
economy should continue to grow at a reasonable, but not overly strong rate, and
corporate profits should continue to grow as well. This could provide a solid
backdrop for the market going forward. However, with the valuation of the stock
market above long-term averages, and with earnings growth and its magnitude not
assured, moves higher in the Index will likely be more muted going forward. And
despite recent history, we believe there is an increased likelihood of periods
of price declines. No matter the outcome of these issues, we will manage the
Fund with the dual objectives of generating a high level of current income while
seeking capital appreciation over the market cycle.
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(1) Total return is based on the combination of reinvested dividends, capital
gains and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for net asset
value returns and changes in Common Share price for market value returns.
Total returns do not reflect sales loads and are not annualized for
periods less than one year. Past performance is not indicative of future
results.
Page 4
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
PORTFOLIO OF INVESTMENTS
JUNE 30, 2017 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------ ---------------------------------------------------------------------------------------- --------------
COMMON STOCKS - 93.9%
AEROSPACE & DEFENSE - 1.7%
33,000 Raytheon Co. (a)........................................................................ $ 5,328,840
--------------
AIR FREIGHT & LOGISTICS - 1.7%
24,500 FedEx Corp. (a)......................................................................... 5,324,585
--------------
AUTOMOBILES - 1.1%
105,000 General Motors Co....................................................................... 3,667,650
--------------
BANKS - 8.2%
225,000 Bank of America Corp.................................................................... 5,458,500
52,500 First Republic Bank (a)................................................................. 5,255,250
80,000 JPMorgan Chase & Co. (a)................................................................ 7,312,000
15,000 SVB Financial Group (b)................................................................. 2,636,850
100,000 Wells Fargo & Co........................................................................ 5,541,000
--------------
26,203,600
--------------
BEVERAGES - 4.9%
37,500 Anheuser-Busch InBev S.A./N.V., ADR..................................................... 4,138,500
20,000 Constellation Brands, Inc., Class A (a)................................................. 3,874,600
65,000 PepsiCo, Inc. (a)....................................................................... 7,506,850
--------------
15,519,950
--------------
BIOTECHNOLOGY - 2.8%
37,500 Celgene Corp. (b)....................................................................... 4,870,125
58,000 Gilead Sciences, Inc.................................................................... 4,105,240
--------------
8,975,365
--------------
CAPITAL MARKETS - 1.6%
120,000 Charles Schwab (The) Corp. (a).......................................................... 5,155,200
--------------
CHEMICALS - 2.1%
70,000 Dow Chemical (The) Co. (a).............................................................. 4,414,900
20,000 PPG Industries, Inc..................................................................... 2,199,200
--------------
6,614,100
--------------
COMMUNICATIONS EQUIPMENT - 2.6%
170,000 Cisco Systems, Inc. (a)................................................................. 5,321,000
22,500 Palo Alto Networks, Inc. (b)............................................................ 3,010,725
--------------
8,331,725
--------------
CONSUMER FINANCE - 1.1%
41,500 American Express Co..................................................................... 3,495,960
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.9%
80,000 AT&T, Inc............................................................................... 3,018,400
--------------
ELECTRIC UTILITIES - 1.3%
110,000 PPL Corp. (a)........................................................................... 4,252,600
--------------
ENERGY EQUIPMENT & SERVICES - 1.9%
55,000 Helmerich & Payne, Inc.................................................................. 2,988,700
46,000 Schlumberger, Ltd. (a).................................................................. 3,028,640
--------------
6,017,340
--------------
See Notes to Financial Statements Page 5
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2017 (UNAUDITED)
SHARES DESCRIPTION VALUE
------------ ---------------------------------------------------------------------------------------- --------------
COMMON STOCKS (CONTINUED)
FOOD & STAPLES RETAILING - 3.0%
29,000 Costco Wholesale Corp. (a).............................................................. $ 4,637,970
60,000 CVS Health Corp. (a).................................................................... 4,827,600
--------------
9,465,570
--------------
FOOD PRODUCTS - 1.2%
45,000 Kraft Heinz (The) Co. (a)............................................................... 3,853,800
--------------
HEALTH CARE EQUIPMENT & SUPPLIES - 1.4%
50,000 Medtronic PLC........................................................................... 4,437,500
--------------
HEALTH CARE PROVIDERS & SERVICES - 1.8%
31,600 UnitedHealth Group, Inc. (a)............................................................ 5,859,272
--------------
HOTELS, RESTAURANTS & LEISURE - 2.3%
110,000 Carnival Corp. (a)...................................................................... 7,212,700
--------------
HOUSEHOLD DURABLES - 1.8%
110,000 Newell Brands, Inc. (a)................................................................. 5,898,200
--------------
INDUSTRIAL CONGLOMERATES - 3.7%
245,000 General Electric Co..................................................................... 6,617,450
40,000 Honeywell International, Inc............................................................ 5,331,600
--------------
11,949,050
--------------
INSURANCE - 3.8%
75,000 Arthur J. Gallagher & Co. (a)........................................................... 4,293,750
40,000 Chubb, Ltd.............................................................................. 5,815,200
40,000 MetLife, Inc............................................................................ 2,197,600
--------------
12,306,550
--------------
LIFE SCIENCES TOOLS & SERVICES - 1.9%
35,000 Thermo Fisher Scientific, Inc. (a)...................................................... 6,106,450
--------------
MEDIA - 4.0%
80,000 CBS Corp., Class B (a).................................................................. 5,102,400
95,000 Cinemark Holdings, Inc. (a)............................................................. 3,690,750
105,000 Comcast Corp., Class A (a).............................................................. 4,086,600
--------------
12,879,750
--------------
OIL, GAS & CONSUMABLE FUELS - 3.8%
42,000 Chevron Corp. (a)....................................................................... 4,381,860
50,000 Hess Corp. (a).......................................................................... 2,193,500
65,000 HollyFrontier Corp. (a)................................................................. 1,785,550
63,000 Occidental Petroleum Corp. (a).......................................................... 3,771,810
--------------
12,132,720
--------------
PHARMACEUTICALS - 5.7%
14,000 Allergan PLC............................................................................ 3,403,260
110,000 Merck & Co., Inc. (a)................................................................... 7,049,900
235,000 Pfizer, Inc............................................................................. 7,893,650
--------------
18,346,810
--------------
ROAD & RAIL - 0.8%
28,000 JB Hunt Transport Services, Inc......................................................... 2,558,640
--------------
Page 6 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2017 (UNAUDITED)
SHARES/UNITS DESCRIPTION VALUE
------------ ---------------------------------------------------------------------------------------- --------------
COMMON STOCKS (CONTINUED)
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 5.7%
115,000 Applied Materials, Inc. (a)............................................................. $ 4,750,650
19,000 Broadcom Ltd. (a)....................................................................... 4,427,950
150,000 Intel Corp.............................................................................. 5,061,000
130,000 Micron Technology, Inc. (b)............................................................. 3,881,800
--------------
18,121,400
--------------
SOFTWARE - 7.2%
15,000 Adobe Systems, Inc. (a) (b)............................................................. 2,121,600
175,000 Microsoft Corp. (a)..................................................................... 12,062,750
130,000 Oracle Corp. (a)........................................................................ 6,518,200
30,000 Take-Two Interactive Software, Inc. (a) (b)............................................. 2,201,400
--------------
22,903,950
--------------
SPECIALTY RETAIL - 2.5%
70,000 Foot Locker, Inc. (a)................................................................... 3,449,600
29,000 Home Depot (The), Inc................................................................... 4,448,600
--------------
7,898,200
--------------
TECHNOLOGY HARDWARE, STORAGE & PERIPHERALS - 5.6%
123,500 Apple, Inc. (a)......................................................................... 17,786,470
--------------
TOBACCO - 4.6%
95,000 Altria Group, Inc....................................................................... 7,074,650
66,000 Philip Morris International, Inc. (a)................................................... 7,751,700
--------------
14,826,350
--------------
WATER UTILITIES - 1.2%
50,000 American Water Works Co., Inc........................................................... 3,897,500
--------------
TOTAL COMMON STOCKS..................................................................... 300,346,197
(Cost $241,009,704) --------------
REAL ESTATE INVESTMENT TRUSTS - 2.2%
EQUITY REAL ESTATE INVESTMENT TRUSTS - 2.2%
40,000 Lamar Advertising Co., Class A (a)...................................................... 2,942,800
42,000 Crown Castle International Corp. (a).................................................... 4,207,560
--------------
TOTAL REAL ESTATE INVESTMENT TRUSTS..................................................... 7,150,360
(Cost $6,119,091) --------------
MASTER LIMITED PARTNERSHIPS - 1.4%
OIL, GAS & CONSUMABLE FUELS - 1.4%
82,500 Energy Transfer Partners L.P............................................................ 1,682,175
100,000 Enterprise Products Partners, L.P. (a).................................................. 2,708,000
--------------
TOTAL MASTER LIMITED PARTNERSHIPS....................................................... 4,390,175
(Cost $2,461,490) --------------
COMMON STOCKS - BUSINESS DEVELOPMENT COMPANIES - 0.9%
CAPITAL MARKETS - 0.9%
180,000 Ares Capital Corp....................................................................... 2,948,400
(Cost $3,116,652) --------------
See Notes to Financial Statements Page 7
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2017 (UNAUDITED)
STATED STATED
SHARES DESCRIPTION RATE MATURITY (c) VALUE
------------ ------------------------------------------------------------- --------- -------------- --------------
CONVERTIBLE PREFERRED SECURITIES - 1.1%
HEALTH CARE EQUIPMENT & SUPPLIES - 0.4%
20,000 Becton Dickinson and Co., Series A........................... 6.13% 05/01/20 $ 1,095,600
--------------
OIL, GAS & CONSUMABLE FUELS - 0.7%
40,000 Hess Corp., Series A......................................... 8.00% 02/01/19 2,224,800
--------------
TOTAL CONVERTIBLE PREFERRED SECURITIES.................................................. 3,320,400
(Cost $3,497,797) --------------
TOTAL INVESTMENTS - 99.5%............................................................... 318,155,532
(Cost $256,204,734) (d) --------------
NUMBER OF
CONTRACTS DESCRIPTION VALUE
------------ ---------------------------------------------------------------------------------------- --------------
CALL OPTIONS WRITTEN - (0.2%)
Adobe Systems, Inc. Call
75 @ $150.00 due July 2017................................................................. (3,450)
--------------
Altria Group, Inc. Call
250 @ 80.00 due July 2017.................................................................. (250)
--------------
Applied Materials, Inc. Call
250 @ 46.00 due July 2017.................................................................. (2,750)
--------------
Bank of America Corp. Call
500 @ 25.00 due July 2017.................................................................. (14,000)
--------------
Carnival Corp. Calls
150 @ 65.00 due July 2017.................................................................. (24,000)
300 @ 67.50 due July 2017.................................................................. (15,900)
--------------
(39,900)
--------------
Celgene Corp. Call
125 @ 140.00 due July 2017................................................................. (3,250)
--------------
Charles Schwab (The) Corp. Call
300 @ 44.00 due July 2017.................................................................. (19,500)
--------------
Chubb Ltd. Call
125 @ 150.00 due July 2017................................................................. (1,875)
--------------
Constellation Brands, Inc. Call
75 @ 200.00 due July 2017................................................................. (12,000)
--------------
Costco Wholesale Corp. Call
100 @ 185.00 due July 2017................................................................. (200)
--------------
FedEx Corp. Call
75 @ 220.00 due July 2017................................................................. (19,425)
--------------
First Republic Bank Call
125 @ 105.00 due July 2017................................................................. (7,500)
--------------
General Electric Co. Call
500 @ 30.00 due July 2017.................................................................. (1,000)
--------------
Honeywell International, Inc. Call
200 @ 140.00 due July 2017................................................................. (4,800)
--------------
Micron Technology, Inc. Calls
400 @ 34.00 due July 2017.................................................................. (7,600)
250 @ 36.00 due July 2017.................................................................. (2,250)
--------------
(9,850)
--------------
Page 8 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2017 (UNAUDITED)
NUMBER OF
CONTRACTS DESCRIPTION VALUE
------------ ---------------------------------------------------------------------------------------- --------------
CALL OPTIONS WRITTEN (CONTINUED)
Microsoft Corp. Call
500 @ $72.50 due July 2017.................................................................. $ (18,500)
--------------
Newell Brands, Inc. Call
225 @ 55.00 due July 2017.................................................................. (8,438)
--------------
Oracle Corp. Call
400 @ 48.00 due July 2017.................................................................. (91,600)
--------------
Palo Alto Networks, Inc. Call
150 @ 145.00 due July 2017................................................................. (10,800)
--------------
PepsiCo, Inc. Call
150 @ 120.00 due July 2017................................................................. (4,350)
--------------
Philip Morris International, Inc. Call
200 @ 125.00 due July 2017................................................................. (3,600)
--------------
S&P 500(R) Index Calls (e)
100 @ 2,445.00 due July 2017............................................................... (87,000)
350 @ 2,455.00 due July 2017............................................................... (185,500)
100 @ 2,475.00 due July 2017............................................................... (16,000)
--------------
(288,500)
--------------
Take-Two Interactive Software, Inc. Call
100 @ 80.00 due July 2017.................................................................. (3,100)
--------------
UnitedHealth Group, Inc. Calls
75 @ 185.00 due July 2017................................................................. (28,800)
100 @ 190.00 due July 2017................................................................. (16,700)
--------------
(45,500)
--------------
TOTAL CALL OPTIONS WRITTEN.............................................................. (614,138)
(Premiums received $855,197) --------------
NET OTHER ASSETS AND LIABILITIES - 0.7%................................................. 2,228,939
--------------
NET ASSETS - 100.0%..................................................................... $ 319,770,333
==============
-----------------------------
(a) All or a portion of this security is pledged to cover index call options
written.
(b) Non-income producing security.
(c) Stated maturity represents the mandatory conversion date.
(d) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of June 30, 2017, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $70,650,559 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $8,699,761.
(e) Call options on securities indices were written on a portion of the common
stock positions that were not used to cover call options written on
individual equity securities held in the Fund's portfolio.
ADR American Depositary Receipt
See Notes to Financial Statements Page 9
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2017 (UNAUDITED)
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of June 30, 2017
is as follows (see Note 3A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
6/30/2017 PRICES INPUTS INPUTS
------------- ------------- ------------- -------------
Common Stocks*.................................... $ 300,346,197 $ 300,346,197 $ -- $ --
Real Estate Investment Trusts*.................... 7,150,360 7,150,360 -- --
Master Limited Partnerships*...................... 4,390,175 4,390,175 -- --
Common Stocks - Business Development
Companies*..................................... 2,948,400 2,948,400 -- --
Convertible Preferred Securities*................. 3,320,400 3,320,400 -- --
------------- ------------- ------------- -------------
Total Investments................................. $ 318,155,532 $ 318,155,532 $ -- $ --
============= ============= ============= =============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
6/30/2017 PRICES INPUTS INPUTS
------------- ------------- ------------- -------------
Call Options Written.............................. $ (614,138) $ (603,825) $ (10,313) $ --
============= ============= ============= =============
* See the Portfolio of Investments for industry breakdown.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at June 30, 2017.
Page 10 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2017 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $256,204,734)............................................................................ $318,155,532
Cash.............................................................................................. 2,092,953
Dividends receivable.............................................................................. 519,873
Prepaid expenses.................................................................................. 16,346
------------
Total Assets................................................................................... 320,784,704
------------
LIABILITIES:
Options written, at value (Premiums received $855,197)............................................ 614,138
Payables:
Investment advisory fees....................................................................... 265,967
Investment securities purchased................................................................ 60,900
Audit and tax fees............................................................................. 26,483
Transfer agent fees............................................................................ 19,853
Administrative fees............................................................................ 14,123
Custodian fees................................................................................. 6,287
Printing fees.................................................................................. 5,632
Financial reporting fees....................................................................... 771
Trustees' fees and expenses.................................................................... 217
------------
Total Liabilities.............................................................................. 1,014,371
------------
NET ASSETS........................................................................................ $319,770,333
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................... $263,631,234
Par value......................................................................................... 199,732
Accumulated net investment income (loss).......................................................... (7,381,475)
Accumulated net realized gain (loss) on investments and written options........................... 1,128,985
Net unrealized appreciation (depreciation) on investments and written options..................... 62,191,857
------------
NET ASSETS........................................................................................ $319,770,333
============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share).............................. $ 16.01
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized)....... 19,973,164
============
See Notes to Financial Statements Page 11
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2017 (UNAUDITED)
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $24,668)............................................. $ 3,745,419
Interest.......................................................................................... 102
------------
Total investment income........................................................................ 3,745,521
------------
EXPENSES:
Investment advisory fees.......................................................................... 1,576,746
Administrative fees............................................................................... 77,042
Printing fees..................................................................................... 36,779
Audit and tax fees................................................................................ 21,487
Transfer agent fees............................................................................... 17,565
Custodian fees.................................................................................... 13,273
Trustees' fees and expenses....................................................................... 8,750
Legal fees........................................................................................ 4,891
Financial reporting fees.......................................................................... 4,625
Other............................................................................................. 14,077
------------
Total expenses................................................................................. 1,775,235
------------
NET INVESTMENT INCOME (LOSS)...................................................................... 1,970,286
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments.................................................................................... 7,023,788
Written options................................................................................ 397,934
------------
Net realized gain (loss).......................................................................... 7,421,722
------------
Net change in unrealized appreciation (depreciation) on:
Investments.................................................................................... 17,392,794
Written options................................................................................ (443,075)
------------
Net change in unrealized appreciation (depreciation).............................................. 16,949,719
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................... 24,371,441
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.................................. $ 26,341,727
============
Page 12 See Notes to Financial Statements
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
6/30/2017 ENDED
(UNAUDITED) 12/31/2016
------------ ------------
OPERATIONS:
Net investment income (loss)....................................................... $ 1,970,286 $ 3,744,905
Net realized gain (loss)........................................................... 7,421,722 11,586,388
Net change in unrealized appreciation (depreciation)............................... 16,949,719 8,568,630
------------ ------------
Net increase (decrease) in net assets resulting from operations.................... 26,341,727 23,899,923
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................................................. (10,685,643) (3,566,425)
Net realized gain.................................................................. -- (9,587,119)
Return of capital.................................................................. -- (6,020,694)
------------ ------------
Total distributions to shareholders................................................ (10,685,643) (19,174,238)
------------ ------------
Total increase (decrease) in net assets............................................ 15,656,084 4,725,685
NET ASSETS:
Beginning of period................................................................ 304,114,249 299,388,564
------------ ------------
End of period...................................................................... $319,770,333 $304,114,249
============ ============
Accumulated net investment income (loss) at end of period.......................... $ (7,381,475) $ 1,333,882
============ ============
COMMON SHARES:
Common Shares at end of period*.................................................... 19,973,164 19,973,164
============ ============
-----------------------------
* On September 15, 2016, the Fund commenced a share repurchase program. The
program originally expired on March 15, 2017, but the Board of Trustees of
the Fund has subsequently authorized the continuation of the Fund's share
repurchase program until September 15, 2017. From September 15, 2016
through June 30, 2017, the Fund has not repurchased any common shares. The
Fund expects to continue the share repurchase program until the earlier of
(i) the repurchase of 998,658 common shares or (ii) September 15, 2017.
See Notes to Financial Statements Page 13
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
6/30/2017 ------------------------------------------------------------------
(UNAUDITED) 2016 2015 2014 (a) 2013 2012
---------- ---------- ---------- ---------- ---------- ----------
Net asset value, beginning of period......... $ 15.23 $ 14.99 $ 15.95 $ 15.24 $ 13.27 $ 12.51
-------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)................. 0.10 0.19 0.20 0.24 0.21 0.26
Net realized and unrealized gain (loss) 1.22 1.01 (0.22) 1.39 2.66 1.40
-------- -------- -------- -------- -------- --------
Total from investment operations............. 1.32 1.20 (0.02) 1.63 2.87 1.66
-------- -------- -------- -------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income........................ (0.54) (0.18) (0.60) (0.92) (0.90) (0.72)
Net realized gain............................ -- (0.48) (0.34) -- -- --
Return of capital............................ -- (0.30) -- -- -- (0.18)
-------- -------- -------- -------- -------- --------
Total distributions to Common
Shareholders.............................. (0.54) (0.96) (0.94) (0.92) (0.90) (0.90)
-------- -------- -------- -------- -------- --------
Net asset value, end of period............... $ 16.01 $ 15.23 $ 14.99 $ 15.95 $ 15.24 $ 13.27
======== ======== ======== ======== ======== ========
Market value, end of period.................. $ 14.65 $ 13.51 $ 13.20 $ 14.34 $ 13.32 $ 11.84
======== ======== ======== ======== ======== ========
TOTAL RETURN BASED ON NET ASSET VALUE (b).... 9.02% 9.18% 0.72% 11.63% 23.11% 14.18% (c)
======== ======== ======== ======== ======== ========
TOTAL RETURN BASED ON MARKET VALUE (b)....... 12.46% 9.98% (1.35)% 14.83% 20.60% 17.68%
======== ======== ======== ======== ======== ========
-----------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)......... $319,770 $304,114 $299,389 $318,640 $304,297 $265,009
Ratio of total expenses to average net
assets.................................... 1.13% (d) 1.13% 1.12% 1.18% 1.19% 1.21%
Ratio of net investment income (loss) to
average net assets........................ 1.25% (d) 1.27% 1.33% 1.54% 1.45% 1.90%
Portfolio turnover rate...................... 13% 32% 45% 44% 40% 66%
-----------------------------
(a) On February 20, 2014, the Fund's Board of Trustees approved an interim and
new sub-advisory agreement with Chartwell Investment Partners, Inc.
("Chartwell"), which became the Fund's sub-advisor on March 5, 2014, under
the interim sub-advisory agreement. On July 2, 2014, the Fund's
shareholders voted to approve the new sub-advisory agreement.
(b) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, and changes in net asset value per share
for net asset value returns and changes in Common Share Price for market
value returns. Total returns do not reflect sales load and are not
annualized for periods of less than one year. Past performance is not
indicative of future results.
(c) The Fund received reimbursements from Chartwell Investment Partners, L.P.
(the predecessor to Chartwell) in the amount of $77,318, which represents
less than $0.01 per share. Since the Fund was reimbursed, there was no
effect on the Fund's total return.
(d) Annualized.
Page 14 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
JUNE 30, 2017 (UNAUDITED)
1. ORGANIZATION
First Trust Enhanced Equity Income Fund (the "Fund") is a diversified,
closed-end management investment company organized as a Massachusetts business
trust on May 20, 2004, and is registered with the Securities and Exchange
Commission ("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 investment objective is to provide a high level of current income and
gains and, to a lesser extent, capital appreciation. The Fund pursues its
investment objective by investing in a diversified portfolio of equity
securities. Under normal market conditions, the Fund pursues an integrated
investment strategy in which the Fund invests substantially all of its Managed
Assets in a diversified portfolio of common stocks of U.S. corporations and U.S.
dollar-denominated equity securities of non-U.S. issuers, in each case that are
traded on U.S. securities exchanges, and on an ongoing and consistent basis
writes (sells) covered call options on a portion of the Fund's Managed Assets.
"Managed Assets" means the total asset value of the Fund minus the sum of the
Fund's liabilities, including the value of call options written (sold). There
can be no assurance that the Fund will achieve its investment objective. The
Fund may not be appropriate for all investors.
2. MANAGED DISTRIBUTION POLICY
The Board of Trustees of the Fund has approved a managed distribution policy for
the Fund (the "Plan") in reliance on exemptive relief received from the SEC
which permits the Fund to make periodic distributions of long-term capital gains
more frequently than otherwise permitted with respect to its common shares
subject to certain conditions. Under the Plan, the Fund currently intends to pay
a quarterly distribution in the amount of $0.285 per share. A portion of this
quarterly distribution may include realized capital gains. This may result in a
reduction of the long-term capital gain distribution necessary at year end by
distributing realized capital gains throughout the year. The annual distribution
rate is independent of the Fund's performance during any particular period but
is expected to correlate with the Fund's performance over time. Accordingly, you
should not draw any conclusions about the Fund's investment performance from the
amount of any distribution or from the terms of the Plan. The Board of Trustees
may amend or terminate the Plan at any time without prior notice to
shareholders.
3. SIGNIFICANT ACCOUNTING POLICIES
The Fund is considered an investment company and follows accounting and
reporting guidance under Financial Accounting Standards Board Accounting
Standards Codification Topic 946, "Financial Services-Investment Companies." The
following is a summary of significant accounting policies consistently followed
by the Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with accounting principles generally accepted
in the United States of America ("U.S. GAAP") requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION
The net asset value ("NAV") of the Common Shares of the Fund is determined daily
as of the close of regular trading on the NYSE, normally 4:00 p.m. Eastern time,
on each day the NYSE is open for trading. If the NYSE closes early on a
valuation day, the NAV is determined as of that time. The Fund's NAV per Common
Share is calculated by dividing the value of all assets of the Fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses, the value of call options written (sold) and dividends declared but
unpaid), by the total number of Common Shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Pricing Committee of the Fund's
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"),
in accordance with valuation procedures adopted by the Fund's Board of Trustees,
and in accordance with provisions of the 1940 Act. Investments valued by the
Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to
the Portfolio of Investments. The Fund's investments are valued as follows:
Common stocks, real estate investment trusts ("REITs"), master limited
partnerships ("MLPs"), exchange-traded funds, convertible preferred
stocks, and other equity securities listed on any national or foreign
exchange (excluding The Nasdaq Stock Market LLC ("Nasdaq") and the London
Stock Exchange Alternative Investment Market ("AIM")) are valued at the
last sale price on the exchange on which they are principally traded or,
for Nasdaq and AIM securities, the official closing price. Securities
traded on more than one securities exchange are valued at the last sale
price or official closing price, as applicable, at the close of the
securities exchange representing the principal market for such securities.
Page 15
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
JUNE 30, 2017 (UNAUDITED)
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Exchange-traded options contracts are valued at the closing price in the
market where such contracts are principally traded. If no closing price is
available, exchange-traded options contracts are fair valued at the mean
of their most recent bid and asked price, if available, and otherwise at
their closing bid price. Over-the-counter options contracts are fair
valued at the mean of their most recent bid and asked price, if available,
and otherwise at their closing bid price.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Fund's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a third-party pricing service is unable to provide a
market price; securities whose trading has been formally suspended; a security
whose market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the third-party pricing service, does not reflect the security's fair value. As
a general principle, the current fair value of a security would appear to be the
amount which the owner might reasonably expect to receive for the security upon
its current sale. When fair value prices are used, generally they will differ
from market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to, the following:
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or third-party pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or the
appropriate stock exchange;
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might affect
the value of the security.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of June 30, 2017, is
included with the Fund's Portfolio of Investments.
B. OPTION CONTRACTS
The Fund is subject to equity price risk in the normal course of pursuing its
investment objective and may write (sell) options to hedge against changes in
the value of equities. Also, the Fund seeks to generate additional income, in
the form of premiums received, from writing (selling) the options. The Fund may
write (sell) covered call options ("options") on all or a portion of the equity
securities held in the Fund's portfolio and on securities indices as determined
to be appropriate by Chartwell Investment Partners, LLC ("Chartwell" or the
"Sub-Advisor"), consistent with the Fund's investment objective. The number of
options the Fund can write (sell) is limited by the amount of equity securities
the Fund holds in its portfolio. Options on securities indices are designed to
Page 16
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
JUNE 30, 2017 (UNAUDITED)
reflect price fluctuations in a group of securities or segment of the securities
market rather than price fluctuations in a single security and are similar to
options on single securities, except that the exercise of securities index
options requires cash settlement payments and does not involve the actual
purchase or sale of securities. The Fund will not write (sell) "naked" or
uncovered options. If certain equity securities held in the Fund's portfolio are
not covered by a related call option on the individual equity security,
securities index options may be written on all or a portion of such uncovered
securities. When the Fund writes (sells) an option, an amount equal to the
premium received by the Fund is included in "Options written, at value" on the
Fund's Statement of Assets and Liabilities. Options are marked-to-market daily
and their value will be affected by changes in the value and dividend rates of
the underlying equity securities, changes in interest rates, changes in the
actual or perceived volatility of the securities markets and the underlying
equity securities and the remaining time to the options' expiration. The value
of options may also be adversely affected if the market for the options becomes
less liquid or trading volume diminishes.
Options the Fund writes (sells) will either be exercised, expire or be cancelled
pursuant to a closing transaction. If the price of the underlying equity
security exceeds the option's exercise price, it is likely that the option
holder will exercise the option. If an option written (sold) by the Fund is
exercised, the Fund would be obligated to deliver the underlying equity security
to the option holder upon payment of the strike price. In this case, the option
premium received by the Fund will be added to the amount realized on the sale of
the underlying security for purposes of determining gain or loss and is included
in "Net realized gain (loss) on investments" on the Statement of Operations. If
the price of the underlying equity security is less than the option's strike
price, the option will likely expire without being exercised. The option premium
received by the Fund will, in this case, be treated as short-term capital gain
on the expiration date of the option. The Fund may also elect to close out its
position in an option prior to its expiration by purchasing an option of the
same series as the option written (sold) by the Fund. Gain or loss on options is
presented separately as "Net realized gain (loss) on written options" on the
Statement of Operations.
The options that the Fund writes (sells) give the option holder the right, but
not the obligation, to purchase a security from the Fund at the strike price on
or prior to the option's expiration date. The ability to successfully implement
the writing (selling) of covered call options depends on the ability of the
Sub-Advisor to predict pertinent market movements, which cannot be assured.
Thus, the use of options may require the Fund to sell portfolio securities at
inopportune times or for prices other than current market value, which may limit
the amount of appreciation the Fund can realize on an investment, or may cause
the Fund to hold a security that it might otherwise sell. As the writer (seller)
of a covered option, the Fund foregoes, during the option's life, the
opportunity to profit from increases in the market value of the security
covering the option above the sum of the premium and the strike price of the
option, but has retained the risk of loss should the price of the underlying
security decline. The writer (seller) of an option has no control over the time
when it may be required to fulfill its obligation as a writer (seller) of the
option. Once an option writer (seller) has received an exercise notice, it
cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver the underlying security to the
option holder at the exercise price.
Over-the-counter options have the risk of the potential inability of
counterparties to meet the terms of their contracts. The Fund's maximum equity
price risk for purchased options is limited to the premium initially paid. In
addition, certain risks may arise upon entering into option contracts including
the risk that an illiquid secondary market will limit the Fund's ability to
close out an option contract prior to the expiration date and that a change in
the value of the option contract may not correlate exactly with changes in the
value of the securities hedged.
C. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income, if any, is
recorded daily on the accrual basis, including amortization of premiums and
accretion of discounts.
The Fund may hold securities of publicly-traded REITs. Distributions from such
investments may be comprised of return of capital, capital gains, and income.
The actual character of amounts received during the year is not known until
after the REITs' fiscal year end. The Fund records the character of
distributions received from REITs during the year based on estimates available.
The characterization of distributions received by the Fund may be subsequently
revised based on information received from the REITs after their tax reporting
periods conclude.
For the six months ended June 30, 2017, distributions of $184,663 received from
MLPs have been reclassified as return of capital. The cost basis of the
applicable MLPs has been reduced accordingly.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income of the Fund are declared and paid quarterly
or as the Board of Trustees may determine from time to time. Distributions of
any net realized capital gains earned by the Fund are distributed at least
annually. Distributions will automatically be reinvested into additional Common
Shares pursuant to the Fund's Dividend Reinvestment Plan unless cash
distributions are elected by the shareholder.
Page 17
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
JUNE 30, 2017 (UNAUDITED)
Distributions from income and realized capital gains are determined in
accordance with income tax regulations, which may differ from U.S. GAAP. Certain
capital accounts in the financial statements are periodically adjusted for
permanent differences in order to reflect their tax character. These permanent
differences are primarily due to the varying treatment of income and gain/loss
on portfolio securities held by the Fund and have no impact on net assets or NAV
per share. Temporary differences, which arise from recognizing certain items of
income, expense and gain/loss in different periods for financial statement and
tax purposes, will reverse at some point in the future. The character of
distributions for tax reporting purposes will depend on the Fund's investment
experience during the remainder of its fiscal year. Based on information for the
period through June 30, 2017, it is likely that the Fund's distributions will
include a return of capital component for the fiscal year ending December 31,
2017.
The tax character of distributions paid during the fiscal year ended December
31, 2016 was as follows:
Distributions paid from:
Ordinary income................................. $ 3,415,478
Long-term capital gain.......................... 9,738,066
Return of capital............................... 6,020,694
As of December 31, 2016, the distributable earnings and net assets on a tax
basis were as follows:
Undistributed ordinary income................... $ --
Undistributed capital gains..................... --
--------------
Total undistributed earnings.................... --
Accumulated capital and other losses............ --
Net unrealized appreciation (depreciation)...... 44,875,547
--------------
Total accumulated earnings (losses)............. 44,875,547
Other........................................... (4,592,264)
Paid-in capital................................. 263,830,966
--------------
Net assets...................................... $ 304,114,249
==============
E. INCOME TAXES
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal and state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
Under the Regulated Investment Company Modernization Act of 2010 (the "Act"),
net capital losses arising in taxable years beginning after December 22, 2010,
may be carried forward indefinitely, and their character is retained as
short-term and/or long-term losses. Previously, net capital losses were carried
forward up to eight years and treated as short-term losses. As a transition
rule, the Act requires that post-enactment net capital losses be used before
pre-enactment net capital losses. At December 31, 2016, the Fund had no pre- or
post-enactment capital loss carryforwards for federal income tax purposes.
The Fund is subject to certain limitations under the U.S. tax rules on the use
of capital loss carryforwards and net unrealized built-in losses. These
limitations apply when there has been a 50% change in ownership.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ending 2013, 2014,
2015 and 2016 remain open to federal and state audit. As of June 30, 2017,
management has evaluated the application of these standards to the Fund and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax positions.
F. EXPENSES
The Fund will pay all expenses directly related to its operations.
Page 18
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
JUNE 30, 2017 (UNAUDITED)
G. NEW AND AMENDED FINANCIAL REPORTING RULES AND FORMS
On October 13, 2016, the SEC adopted new rules and forms, and amended existing
rules and forms. The new and amended rules and forms are intended to modernize
the reporting of information provided by funds and to improve the quality and
type of information that funds provide to the SEC and investors. The new and
amended rules and forms will be effective for the First Trust funds, including
the Fund, for reporting periods beginning on and after June 1, 2018. Management
is evaluating the new and amended rules and forms to determine the impact to the
Fund.
4. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
investment management services, First Trust is entitled to a monthly fee
calculated at an annual rate of 1.00% of the Fund's Managed Assets. First Trust
also provides fund reporting services to the Fund for a flat annual fee in the
amount of $9,250.
Chartwell manages the Fund's portfolio subject to First Trust's supervision.
Chartwell receives a monthly portfolio management fee calculated at an annual
rate of 0.50% of the Fund's Managed Assets that is paid monthly by First Trust
out of its investment advisory fee.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
transfer agent in accordance with certain fee arrangements. As transfer agent,
BNYM IS is responsible for maintaining shareholder records for the Fund. The
Bank of New York Mellon ("BNYM") serves as the Fund's administrator, fund
accountant, and custodian in accordance with certain fee arrangements. As
administrator and fund accountant, BNYM is responsible for providing certain
administrative and accounting services to the Fund, including maintaining the
Fund's books of account, records of the Fund's securities transactions, and
certain other books and records. As custodian, BNYM is responsible for custody
of the Fund's assets. BNYM IS and BNYM are subsidiaries of The Bank of New York
Mellon Corporation, a financial holding company.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated equally among each fund in the First Trust Fund
Complex. Each Independent Trustee is also paid an annual per fund fee that
varies based on whether the fund is a closed-end or other actively managed fund,
or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Independent Trustees are reimbursed for travel and out-of-pocket expenses in
connection with all meetings. The Lead Independent Trustee and Committee
Chairmen rotate every three years. The officers and "Interested" Trustee receive
no compensation from the Fund for acting in such capacities.
5. PURCHASES AND SALES OF SECURITIES
The cost of purchases and proceeds from sales of investments, excluding
short-term investments, for the six months ended June 30, 2017, were $41,921,068
and $51,098,444, respectively.
6. DERIVATIVE TRANSACTIONS
Written option activity for the Fund was as follows:
NUMBER OF
WRITTEN OPTIONS CONTRACTS PREMIUMS
-------------------------------------------------------------------------------------------
Options outstanding at December 31, 2016........... 5,105 $ 1,214,184
Options Written.................................... 31,660 7,179,252
Options Expired.................................... (14,725) (1,151,850)
Options Exercised.................................. (1,303) (121,977)
Options Closed..................................... (14,487) (6,264,412)
--------- --------------
Options outstanding at June 30, 2017............... 6,250 $ 855,197
========= ==============
Page 19
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
JUNE 30, 2017 (UNAUDITED)
The following table presents the types of derivatives held by the Fund at June
30, 2017, the primary underlying risk exposure and the location of these
instruments as presented on the Statement of Assets and Liabilities.
ASSET DERIVATIVES LIABILITY DERIVATIVES
--------------------------------------- ---------------------------------------
DERIVATIVE RISK STATEMENTS OF ASSETS AND STATEMENT OF ASSETS AND
INSTRUMENT EXPOSURE LIABILITIES LOCATION VALUE LIABILITIES LOCATION VALUE
--------------- ------------- -------------------------- ----------- -------------------------- -----------
Written Options Equity Risk -- -- Options written, at value $ 614,138
The following table presents the amount of net realized gain (loss) and change
in net unrealized appreciation (depreciation) recognized for the six months
ended June 30, 2017, on derivative instruments, as well as the primary
underlying risk exposure associated with each instrument.
STATEMENT OF OPERATIONS LOCATION
--------------------------------------------------------------------------------
EQUITY RISK
Net realized gain (loss) on written options $ 397,934
Net change in unrealized appreciation (depreciation) on written
options (443,075)
The Fund does not have the right to offset financial assets and financial
liabilities related to option contracts on the Statement of Assets and
Liabilities.
7. 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.
8. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined that there
were no subsequent events requiring recognition or disclosure in the financial
statements that have not already been disclosed.
Page 20
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
JUNE 30, 2017 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) NAV per Common Share on that date or
(ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the NYSE or
elsewhere, for the participants' accounts. It is possible that the
market price for the Common Shares may increase before the Plan
Agent has completed its purchases. Therefore, the average purchase
price per share paid by the Plan Agent may exceed the market price
at the time of valuation, resulting in the purchase of fewer shares
than if the dividend or distribution had been paid in Common Shares
issued by the Fund. The Plan Agent will use all dividends and
distributions received in cash to purchase Common Shares in the open
market within 30 days of the valuation date except where temporary
curtailment or suspension of purchases is necessary to comply with
federal securities laws. Interest will not be paid on any uninvested
cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
--------------------------------------------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio investments during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
Page 21
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
JUNE 30, 2017 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Form N-Qs
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR") in
Washington, DC. Information regarding the operation of the PRR may be obtained
by calling (800) SEC-0330.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Fund held its Annual Meeting of Shareholders ("Annual Meeting") on April 24,
2017. At the Annual Meeting, Robert F. Keith was elected by the Common
Shareholders of the First Trust Enhanced Equity Income Fund as a Class I Trustee
for a three-year term expiring at the Fund's Annual Meeting of Shareholders in
2020. The number of votes cast for Mr. Keith was 16,684,870, the number of votes
against was 1,797,325 and the number of broker non-votes was 1,490,969. James A.
Bowen, Richard E. Erickson, Thomas R. Kadlec, and Niel B. Nielson are the other
current and continuing Trustees.
RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some, but not all,
of the risks that should be considered for the Fund. For additional information
about the risks associated with investing in the Fund, please see the Fund's
prospectus and statement of additional information, as well as other Fund
regulatory filings.
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.
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.
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.
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.
NON-U.S. RISK: The Fund may invest a portion of its assets in the equity
securities of issuers domiciled in jurisdictions other than the U.S. Investments
in the securities and instruments of non-U.S. issuers involve certain
considerations and risks not ordinarily associated with investments in
securities and instruments of U.S. issuers. Non-U.S. companies are not generally
subject to uniform accounting, auditing and financial standards and requirements
comparable to those applicable to U.S. companies. Non-U.S. securities exchanges,
brokers and listed companies may be subject to less government supervision and
regulation than exists in the United States. Dividend and interest income may be
subject to withholding and other non-U.S. taxes, which may adversely affect the
net return on such investments. A related risk is that there may be difficulty
in obtaining or enforcing a court judgment abroad.
Page 22
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
JUNE 30, 2017 (UNAUDITED)
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 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 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.
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING CONTINUATION OF INVESTMENT MANAGEMENT AND
SUB-ADVISORY AGREEMENTS
The Board of Trustees of First Trust Enhanced Equity Income Fund (the "Fund"),
including the Independent Trustees, unanimously approved the continuation of the
Investment Management Agreement (the "Advisory Agreement") between the Fund and
First Trust Advisors L.P. (the "Advisor") and the Investment Sub-Advisory
Agreement (the "Sub-Advisory Agreement" and together with the Advisory
Agreement, the "Agreements") among the Fund, the Advisor and Chartwell
Investment Partners, Inc. (the "Sub-Advisor") for a one-year period ending June
30, 2018 at a meeting held on June 12, 2017. The Board determined that the
continuation of the Agreements is in the best interests of the Fund in light of
the extent and quality of the services provided and such other matters as the
Board considered to be relevant in the exercise of its reasonable business
judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. At meetings held on April 24, 2017 and June 12, 2017, the
Board, including the Independent Trustees, reviewed materials provided by the
Advisor and the Sub-Advisor responding to requests for information from counsel
to the Independent Trustees that, among other things, outlined the services
provided by the Advisor and the Sub-Advisor to the Fund (including the relevant
personnel responsible for these services and their experience); the advisory fee
rate payable by the Fund and the sub-advisory fee rate as compared to fees
charged to a peer group of funds compiled by Management Practice, Inc. ("MPI"),
an independent source (the "MPI Peer Group"), and as compared to fees charged to
other clients of the Advisor and the Sub-Advisor; expenses of the Fund as
compared to expense ratios of the funds in the MPI Peer Group; performance
information for the Fund; the nature of expenses incurred in providing services
to the Fund and the potential for economies of scale, if any; financial data on
the Advisor and the Sub-Advisor; any fall-out benefits to the Advisor and the
Sub-Advisor; and information on the Advisor's and the Sub-Advisor's compliance
programs. The Board reviewed initial materials with the Advisor at the meeting
held on April 24, 2017, prior to which the Independent Trustees and their
counsel met separately to discuss the information provided by the Advisor and
the Sub-Advisor. Following the April meeting, independent legal counsel on
behalf of the Independent Trustees requested certain clarifications and
supplements to the materials provided, and the information provided in response
to those requests was considered at an executive session of the Independent
Trustees and independent legal counsel held prior to the June 12, 2017 meeting,
as well as at the meeting held that day. The Board applied its business judgment
to determine whether the arrangements between the Fund and the Advisor and among
the Fund, the Advisor and the Sub-Advisor continue to be reasonable business
arrangements from the Fund's perspective as well as from the perspective of
shareholders. The Board determined that, given the totality of the information
provided with respect to the Agreements, the Board had received sufficient
information to renew the Agreements. The Board considered that shareholders
chose to invest or remain invested in the Fund knowing that the Advisor and the
Sub-Advisor manage the Fund.
In reviewing the Agreements, the Board considered the nature, extent and quality
of the services provided by the Advisor and the Sub-Advisor under the
Agreements. With respect to the Advisory Agreement, the Board considered that
the Advisor is responsible for the overall management and administration of the
Fund and reviewed all of the services provided by the Advisor to the Fund,
including the oversight of the Sub-Advisor, as well as the background and
experience of the persons responsible for such services. The Board noted that
the Advisor oversees the Sub-Advisor's day-to-day management of the Fund's
investments, including portfolio risk monitoring and performance review. In
reviewing the services provided, the Board noted the compliance program that had
been developed by the Advisor and considered that it includes a robust program
for monitoring the Advisor's, the Sub-Advisor's and the Fund's compliance with
the 1940 Act, as well as the Fund's compliance with its investment objective and
policies. The Board also considered a report from the Advisor with respect to
its risk management functions related to the operation of the Fund. Finally, as
part of the Board's consideration of the Advisor's services, the Advisor, in its
written materials and at the April 24, 2017 meeting, described to the Board the
scope of its ongoing investment in additional infrastructure and personnel to
maintain and improve the quality of services provided to the Fund and the other
funds in the First Trust Fund Complex. With respect to the Sub-Advisory
Agreement, the Board reviewed the materials provided by the Sub-Advisor and
considered the services that the Sub-Advisor provides to the Fund, including the
Sub-Advisor's day-to-day management of the Fund's investments. In considering
the Sub-Advisor's management of the Fund, the Board noted the background and
experience of the Sub-Advisor's portfolio management team and the Board's prior
Page 23
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST ENHANCED EQUITY INCOME FUND (FFA)
JUNE 30, 2017 (UNAUDITED)
meetings with members of the portfolio management team. In light of the
information presented and the considerations made, the Board concluded that the
nature, extent and quality of the services provided to the Fund by the Advisor
and the Sub-Advisor under the Agreements have been and are expected to remain
satisfactory and that the Sub-Advisor, under the oversight of the Advisor, has
managed the Fund consistent with its investment objective and policies.
The Board considered the advisory and sub-advisory fee rates payable under the
Agreements for the services provided. The Board noted that the sub-advisory fee
is paid by the Advisor from its advisory fee. The Board received and reviewed
information showing the advisory fee rates and expense ratios of the peer funds
in the MPI Peer Group, as well as advisory fee rates charged by the Advisor and
the Sub-Advisor to other fund and non-fund clients, as applicable. With respect
to the MPI Peer Group, the Board discussed with representatives of the Advisor
how the MPI Peer Group was assembled and the limitations in creating a relevant
peer group for the Fund, including that (i) the Fund is unique in its
composition, which makes assembling peers with similar strategies and asset mix
difficult; (ii) half of the peer funds do not employ an advisor/sub-advisor
management structure, and only one peer fund employs an unaffiliated
sub-advisor; and (iii) some of the peer funds are part of a larger fund complex
that may allow for additional economies of scale. The Board took these
limitations into account in considering the peer data, and noted that the
advisory fee rate payable by the Fund, based on average net assets, was above
the median of the MPI Peer Group. With respect to fees charged to other clients,
the Board considered differences between the Fund and other clients that limited
their comparability. In considering the advisory fee rate overall, the Board
also considered the Advisor's statement that it seeks to meet investor needs
through innovative and value-added investment solutions and the Advisor's
description of its long-term commitment to the Fund.
The Board considered performance information for the Fund. The Board noted the
process it has established for monitoring the Fund's performance and portfolio
risk on an ongoing basis, which includes quarterly performance reporting from
the Advisor and Sub-Advisor for the Fund. The Board determined that this process
continues to be effective for reviewing the Fund's performance. The Board
received and reviewed information comparing the Fund's performance for periods
ended December 31, 2016 to the performance of the MPI Peer Group and to that of
two benchmark indexes. In reviewing the Fund's performance as compared to the
performance of the MPI Peer Group, the Board took into account the limitations
described above with respect to creating a relevant peer group for the Fund.
Based on the information provided on net asset value performance, the Board
noted that the Fund outperformed the MPI Peer Group average for the one- three-
and five-year periods ended December 31, 2016. The Board also noted that the
Fund underperformed the S&P 500 Index in each period and outperformed the CBOE
S&P 500(R) BuyWrite Monthly 1x Index in each period. The Board also received
information on the Fund's annual distribution rate as of December 31, 2016 and
the Fund's average trading discount during 2016 and comparable information for
the peer group.
On the basis of all the information provided on the fees, expenses and
performance of the Fund and the ongoing oversight by the Board, the Board
concluded that the advisory and sub-advisory fees continued to be reasonable and
appropriate in light of the nature, extent and quality of the services provided
by the Advisor and the Sub-Advisor under the Agreements.
The Board considered information and discussed with the Advisor whether there
were any economies of scale in connection with providing advisory services to
the Fund and noted the Advisor's statement that it expects its expenses to
increase over the next twelve months as the Advisor continues to make
investments in personnel and infrastructure. The Board determined that due to
the Fund's closed-end structure, the potential for realization of economies of
scale as Fund assets grow was not a material factor to be considered. The Board
considered the revenues and allocated costs (including the allocation
methodology) of the Advisor in serving as investment advisor to the Fund for the
twelve months ended December 31, 2016 and the estimated profitability level for
the Fund calculated by the Advisor based on such data, as well as complex-wide
and product-line profitability data for the same period. The Board noted the
inherent limitations in the profitability analysis and concluded that, based on
the information provided, the Advisor's profitability level for the Fund was not
unreasonable. In addition, the Board considered fall-out benefits described by
the Advisor that may be realized from its relationship with the Fund, including
the Advisor's compensation for fund reporting services pursuant to a separate
Fund Reporting Services Agreement. The Board concluded that the character and
amount of potential fall-out benefits to the Advisor were not unreasonable.
The Board considered the Sub-Advisor's representation that assets in the Fund
have not grown considerably, so further economies of scale have not been
achieved and the sub-advisory rate continues to be appropriate. The Board did
not review the profitability of the Sub-Advisor with respect to the Fund. The
Board noted that the Advisor pays the Sub-Advisor from its advisory fee and its
understanding that the Fund's sub-advisory fee rate was the product of an arm's
length negotiation. The Board concluded that the profitability analysis for the
Advisor was more relevant. The Board considered fall-out benefits that may be
realized by the Sub-Advisor from its relationship with the Fund, including that
the Sub-Advisor may enter into soft-dollar arrangements, and considered a
summary of such arrangements. The Board concluded that the character and amount
of potential fall-out benefits to the Sub-Advisor were not unreasonable.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, unanimously determined that the terms
of the Agreements continue to be fair and reasonable and that the continuation
of the Agreements is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
Page 24
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Chartwell Investment Partners, LLC
1205 Westlakes Drive, Suite 100
Berwyn, PA 19312
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
ADMINISTRATOR,
FUND ACCOUNTANT,
AND CUSTODIAN
The Bank of New York Mellon
101 Barclay Street, 20th Floor
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(a) Not applicable.
(b) There have been no changes, as of the date of filing, in any of the
Portfolio Managers identified in response to paragraph (a)(1) of this item
in the Registrant's most recent annual report on Form N-CSR.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the registrant's
disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR
270.30a-3(c))) are effective, as of a date within 90 days of the filing
date of the report that includes the disclosure required by this
paragraph, based on their evaluation of these controls and procedures
required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and
Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as
amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the registrant's second fiscal quarter
of the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Not applicable.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section
302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section
906 of the Sarbanes- Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) First Trust Enhanced Equity Income Fund
---------------------------------------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: August 21, 2017
------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: August 21, 2017
------------------
By (Signature and Title)* /s/ Donald P. Swade
----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: August 21, 2017
------------------
* Print the name and title of each signing officer under his or her signature.