UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-Q
QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED
MANAGEMENT INVESTMENT COMPANY
Investment Company Act file number 811-22039
First Trust Specialty Finance and Financial Opportunities Fund
(Exact name of registrant as specified in charter)
120 East Liberty Drive
Suite 400
Wheaton, IL 60187
(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
(Name and address of agent for service)
Registrant's telephone number, including area code:
630-765-8000
Date of fiscal year end: NOVEMBER 30
Date of reporting period: AUGUST 31, 2009
Form N-Q is to be used by management investment companies, other than small
business investment companies registered on Form N-5 (ss.ss. 239.24 and 274.5 of
this chapter), to file reports with the Commission, not later than 60 days after
the close of the first and third fiscal quarters, pursuant to rule 30b1-5 under
the Investment Company Act of 1940 (17 CFR 270.30b1-5). The Commission may use
the information provided on Form N-Q in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-Q, and
the Commission will make this information public. A registrant is not required
to respond to the collection of information contained in Form N-Q unless the
Form displays a currently valid Office of Management and Budget ("OMB") control
number. Please direct comments concerning the accuracy of the information
collection burden estimate and any suggestions for reducing the burden to the
Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC
20549. The OMB has reviewed this collection of information under the clearance
requirements of 44 U.S.C. ss. 3507.
ITEM 1. SCHEDULE OF INVESTMENTS.
The Schedule(s) of Investments is attached herewith.
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
PORTFOLIO OF INVESTMENTS (A) (B)
AUGUST 31,2009 (UNAUDITED)
SHARES DESCRIPTION VALUE
--------- ----------------------------------------------------- ------------
COMMON STOCKS - 111.4%
CAPITAL MARKETS - 77.7%
616,806 Apollo Investment Corp .............................. $ 5,711,624
1,134,733 Ares Capital Corp ................................... 10,553,017
690,000 BlackRock Kelso Capital Corp ........................ 5,485,500
500,716 Gladstone Capital Corp .............................. 3,750,363
183,333 Gladstone Investment Corp ........................... 927,665
50,500 GSC Investment Corp ................................. 176,245
534,556 Hercules Technology Growth Capital, Inc ............. 4,955,334
607,367 Kohlberg Capital Corp ............................... 2,891,067
19,774 Main Street Capital Corp ............................ 259,435
279,800 MCG Capital Corp. (c) ............................... 847,794
603,700 MVC Capital, Inc .................................... 5,505,744
351,737 NGP Capital Resources Co ............................ 2,254,634
600,000 Patriot Capital Funding, Inc ........................ 2,322,000
610,000 PennantPark Investment Corp ......................... 5,093,500
700,827 Prospect Energy Corp ................................ 7,148,435
475,485 TICC Capital Corp ................................... 2,429,728
90,000 Triangle Capital Corp ............................... 981,900
------------
61,293,985
------------
DIVERSIFIED FINANCIAL SERVICES - 10.2%
177,500 Compass Diversified Holdings ........................ 1,798,075
237,366 Fifth Street Finance Corp ........................... 2,442,496
459,504 Medallion Financial Corp ............................ 3,836,858
------------
8,077,429
------------
INSURANCE - 1.4%
3 Berkshire Hathaway, Inc. - Class A (c) .............. 302,550
53,700 Fidelity National Financial, Inc. - Class A ......... 806,574
------------
1,109,124
------------
REAL ESTATE INVESTMENT TRUSTS (REITS) - 22.1%
204,500 Annaly Capital Management, Inc ...................... 3,546,030
105,000 Cypress Sharpridge Investments, Inc ................. 1,470,000
192,307 Cypress Sharpridge Investments, Inc. (d) ............ 2,692,298
133,195 Hatteras Financial Corp ............................. 3,981,199
420,000 MFA Financial, Inc .................................. 3,326,400
624,518 NorthStar Realty Finance Corp ....................... 2,373,168
------------
17,389,095
------------
TOTAL COMMON STOCKS ................................. 87,869,633
------------
(Cost $148,895,524)
EXCHANGE-TRADED FUND - 3.7%
CAPITAL MARKETS - 3.7%
80,000 SPDR Barclays Capital High Yield Bond ETF ........... 2,931,200
------------
TOTAL EXCHANGE-TRADED FUND .......................... 2,931,200
------------
(Cost $2,665,961)
See Notes to Quarterly Portfolio of Investments Page 1
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
PORTFOLIO OF INVESTMENTS (A) (B) - (CONTINUED)
AUGUST 31,2009 (UNAUDITED)
SHARES DESCRIPTION VALUE
--------- ----------------------------------------------------- ------------
CANADIAN INCOME TRUSTS - 0.0%
OIL,GAS & CONSUMABLE FUELS - 0.0%
100 ARC Energy Trust .................................... $ 1,588
81 Progress Energy Resources Corp ...................... 767
------------
TOTAL CANADIAN INCOME TRUSTS ........................ 2,355
------------
(Cost $3,343)
WARRANTS - 0.3%
REAL ESTATE INVESTMENT TRUST (REIT) - 0.3%
576,923 Cypress Sharpridge Investments, Inc.,
expires 04/30/11 (c) (e) (d) ..................... 198,404
------------
TOTAL WARRANTS ...................................... 198,404
------------
(Cost $0)
TOTAL INVESTMENTS - 115.4% .......................... 91,001,592
(Cost $151,564,828) (f)
LOAN OUTSTANDING - (18.2)% .......................... (14,350,000)
NET OTHER ASSETS AND LIABILITIES - 2.8% ............. 2,247,585
------------
NET ASSETS - 100.0% ................................. $ 78,899,177
============
----------
(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) All or a portion of the securities are available to serve as collateral on
loan outstanding.
(c) Non-income producing security.
(d) This security, sold within the terms of a private placement memorandum, is
exempt from registration under Rule 144A under the Securities Act of 1933
as amended (the "1933 Act"), and may be resold in transactions exempt from
registration, normally to qualified institutional buyers. (See Note
1C-Restricted Securities in the Notes to Quarterly Portfolio of
Investments).
(e) Security is fair valued in accordance with procedures adopted by the Fund's
Board of Trustees.
(f) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of August 31, 2009, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $4,492,811 and the aggregate gross
unrealized depreciation for all securities in which there was an excess of
tax cost over value was $65,056,047.
Page 2 See Notes to Quarterly Portfolio of Investments
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
PORTFOLIO OF INVESTMENTS (A) (B) - (CONTINUED)
AUGUST 31,2009 (UNAUDITED)
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of August 31,
2009 is as follows (see Note 1A - Portfolio Valuation in the Notes to Quarterly
Portfolio of Investments):
LEVEL 2 LEVEL 3
TOTAL MARKET LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
08/31/2009 PRICES INPUTS INPUTS
------------ ----------- ----------- ------------
Common Stocks* ........... $87,869,633 $87,869,633 $-- $ --
Exchange-Traded Fund* .... 2,931,200 2,931,200 -- --
Canadian Income Trusts* .. 2,355 2,355 -- --
Warrants* ................ 198,404 -- -- 198,404
----------- ----------- --- --------
Total Investments ........ $91,001,592 $90,803,188 $-- $198,404
=========== =========== === ========
* See Portfolio of Investments for industry breakout.
The following table presents the Fund's investments measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for the period
presented.
INVESTMENTS AT FAIR VALUE USING SIGNIFICANT
UNOBSERVABLE INPUTS (LEVEL 3) INVESTMENTS
------------------------------------------- -----------
Balance as of November 30, 2008 .............. $ 2,419,222
Net unrealized appreciation (depreciation) ... 471,480
Transfer in and/or out of Level 3 ............ (2,692,298)
-----------
Balance as of August 31, 2009 ................ $ 198,404
===========
See Notes to Quarterly Portfolio of Investments Page 3
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
AUGUST 31,2009 (UNAUDITED)
1.VALUATION AND INVESTMENT PRACTICES
A.PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of First Trust Specialty
Finance and Financial Opportunities Fund (the "Fund") is determined daily as of
the close of regular trading on the New York Stock Exchange ("NYSE"), normally
4:00 p.m. Eastern time, on each day the NYSE is open for trading. Domestic debt
securities and foreign securities are priced using data reflecting the earlier
closing of the principal markets for those securities. The NAV per Common Share
is calculated by dividing the value of all assets of the Fund (including accrued
interest and dividends), less all liabilities (including accrued expenses,
dividends declared but unpaid and any borrowings of the Fund) by the total
number of Common Shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value according
to procedures adopted by the Fund's Board of Trustees. A majority of the Fund's
assets are valued using market information supplied by third parties. In the
event that market quotations are not readily available, the pricing service does
not provide a valuation for a particular asset, or the valuations are deemed
unreliable, the Fund's Board of Trustees has designated First Trust Advisors
L.P. ("First Trust") to use a fair value method to value the Fund's securities
and investments. Additionally, if events occur after the close of the principal
markets for particular securities (e.g., domestic debt and foreign securities),
but before the Fund values its assets, that could materially affect NAV, First
Trust may use a fair value method to value the Fund's securities and
investments. The use of fair value pricing by the Fund is governed by valuation
procedures adopted by the Fund's Board of Trustees and in accordance with the
provisions of the Investment Company Act of 1940, as amended.
Portfolio securities listed on any exchange other than the NASDAQ National
Market ("NASDAQ") are valued at the last sale price on the business day as of
which such value is being determined. If there has been no sale on such day, the
securities are valued at the mean of the most recent bid and asked prices on
such day. Securities traded on the NASDAQ are valued at the NASDAQ Official
Closing Price as determined by NASDAQ. Portfolio securities traded on more than
one securities exchange are valued at the last sale price on the business day as
of which such value is being determined at the close of the exchange
representing the principal market for such securities. Portfolio securities
traded in the over-the-counter market, but excluding securities traded on the
NASDAQ, are valued at the closing bid prices. Short-term investments that mature
in less than 60 days when purchased are valued at amortized cost.
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 157, Fair Value Measurements
("FAS 157"), effective for fiscal years beginning after November 15, 2007. This
standard clarifies the definition of fair value for financial reporting,
establishes a framework for measuring fair value and requires additional
disclosures about the use of fair value measurements.The three levels of the
fair value hierarchy under FAS 157 are described as follows:
- Level 1 - quoted prices in active markets for identical securities
- Level 2 - other significant observable inputs (including quoted prices
for similar securities, interest rates, prepayment speeds, credit
risk, etc.)
- Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not necessarily an
indication of the risk associated with investing in those securities. A summary
of the inputs used to value the Fund's investments as of August 31, 2009 is
included in the Fund's Portfolio of Investments.
In April 2009, FASB issued FASB Staff Position No. 157-4, "Determining Fair
Value when the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly" ("FSP
157-4"). FSP 157-4 is effective for fiscal years and interim periods ending
after June 15, 2009. FSP 157-4 provides additional guidance for estimating fair
value in accordance with FAS 157, when the volume and level of activity for the
asset or liability have significantly decreased. FSP 157-4 also includes
guidance on identifying circumstances that indicate a transaction is not
orderly. FSP 157-4 requires entities to describe the inputs used in valuation
techniques used to measure fair value and changes in inputs over the period. FSP
157-4 expands the three-level hierarchy disclosure and the Level 3 roll-forward
disclosure for each major security type.
B.SECURITIES TRANSACTIONS:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Page 4
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS - (CONTINUED)
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
AUGUST 31,2009 (UNAUDITED)
C.RESTRICTED SECURITIES:
The Fund invests in restricted securities, which are securities that cannot be
offered for public sale without first being registered under the 1933 Act. Prior
to registration, restricted securities may only be resold in transactions exempt
from registration under Rule 144A of the 1933 Act. As of August 31, 2009, the
Fund held restricted securities as shown in the table below. The Fund does not
have the right to demand that such securities be registered. These securities
are valued according to the valuation procedures as stated in the Portfolio
Valuation footnote (Note 1A) and are not expressed as a discount to the carrying
value of comparable unrestricted securities.
CARRYING
ACQUISITION VALUE PER % OF
SECURITY DATE SHARES SHARE CARRYING COST VALUE NET ASSETS
-------- ----------- ------- --------- ------------- ---------- ----------
Cypress Sharpridge Investments, Inc. 5/19/08 192,307 $14.00 $2,999,989 $2,692,298 3.41%
Cypress Sharpridge Investments, Inc.
Warrants 5/19/08 576,923 0.34 -- 198,404 0.25
-------- ---------- ---------- -----
769,230 $2,999,989 $2,890,702 3.66%
======== ========== ========== =====
Page 5
ITEM 2. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers,
or persons performing similar functions, have concluded that the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the
"1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within
90 days of the filing date of the report that includes the disclosure
required by this paragraph, based on their evaluation of these
controls and procedures required by Rule 30a-3(b) under the 1940 Act
(17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the
Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or
240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act
(17 CFR 270.30a-3(d)) that occurred during the registrant's last
fiscal quarter that have materially affected, or are reasonably likely
to materially affect, the registrant's internal control over financial
reporting.
ITEM 3. EXHIBITS.
Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of
the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
By (Signature and Title)* /S/ JAMES A. BOWEN
-----------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date OCTOBER 21, 2009
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Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /S/ JAMES A. BOWEN
-------------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date OCTOBER 21, 2009
----------------------------------------------------------------------------
By (Signature and Title)* /S/ MARK R. BRADLEY
-----------------------------------------------------
Mark R. Bradley, Treasurer, Controller,
Chief Financial Officer and Chief Accounting Officer
(principal financial officer)
Date OCTOBER 21, 2009
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.