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 811-21756
FIRST TRUST STRATEGIC HIGH INCOME FUND
(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
WHEATON, IL 60187
(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
WHEATON, IL 60187
(Name and address of agent for service)
registrant's telephone number, including area code: 630-765-8000
Date of fiscal year end: OCTOBER 31
Date of reporting period: APRIL 30, 2009
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 Stockholders is attached herewith.
FIRST TRUST
STRATEGIC
HIGH INCOME
FUND
SEMI-ANNUAL
REPORT
FOR THE SIX MONTHS ENDED
APRIL 30, 2009
(GRAPHIC)
(FIRST TRUST LOGO) (VALHALLA LOGO)
TABLE OF CONTENTS
FIRST TRUST STRATEGIC HIGH INCOME FUND (FHI)
SEMI-ANNUAL REPORT
APRIL 30, 2009
Shareholder Letter ....................................................... 1
At A Glance .............................................................. 2
Portfolio Commentary ..................................................... 3
Portfolio of Investments ................................................. 5
Statement of Assets and Liabilities ...................................... 10
Statement of Operations .................................................. 11
Statements of Changes in Net Assets ...................................... 12
Statement of Cash Flows .................................................. 13
Financial Highlights ..................................................... 14
Notes to Financial Statements ............................................ 15
Additional Information. .................................................. 22
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 Valhalla Capital Partners, LLC ("Valhalla" 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 Strategic High 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.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money investing in the Fund. See "Risk Considerations" in the Notes to
Financial Statements for a discussion of other risks of investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares
may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
Valhalla are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The risks of investing in the Fund are
spelled out in the prospectus, the statement of additional information, this
report and other regulatory filings.
SHAREHOLDER LETTER
FIRST TRUST STRATEGIC HIGH INCOME FUND (FHI)
SEMI-ANNUAL REPORT
APRIL 30, 2009
Dear Shareholders:
2008 brought all sorts of challenges to investors. Throughout the year, the
financial sector was plagued with failures in banking, insurance and brokerage
firms. By year's end, after a meltdown in the credit markets, historically high
levels of volatility in the stock market, and the resulting turmoil to the
overall economy, the Dow's total return was -31.92% (as of 12/31/08). In fact,
2008 was the Dow Jones Industrial Average's third worst calendar year since its
inception in 1896. For the year, the negative total return performance of the
Dow was surpassed only by 1931 and 1907, two years in which the U.S. was also
enduring a major banking crisis. Of the thirty stocks in the Dow, only two were
up in 2008. For the first four months of 2009, however, the market has shown
positive signs. In fact, many economists believe the recession that began in
December, 2007 ended in March, 2009.
Yet, regardless of the market, First Trust Advisors L.P. ("First Trust") has
always believed that in order to be successful in reaching your financial goals,
you should be invested for the long term. A long-term investor understands that
the market, from a historical perspective, has always experienced ups and downs.
But history has shown that the patient investor is typically rewarded over the
long term. While no one has the ability to predict when the markets will
recover, we believe that staying invested in quality products and having a
long-term perspective can help investors reach their financial goals.
The report you hold contains detailed information about your investment in First
Trust Strategic High Income Fund (the "Fund"). It contains a portfolio
commentary from the Fund's portfolio management team that provides a market
recap for the period, a performance analysis and a market and Fund outlook.
Additionally, the report provides the Fund's financial statements for the period
covered by the report. I encourage you to read this document and discuss it with
your financial advisor. In connection with the resignation of Valhalla Capital
Partners, LLC ("Valhalla"), after June 30, 2009, Valhalla will no longer serve
as investment sub-advisor to the Fund.
First Trust has been through many types of markets and remains committed to
bringing you quality investment solutions regardless of the inevitable ups and
downs experienced in the market. We offer a variety of products that may fit
many financial plans to help those investors seeking long-term investment
success. As well, we are committed to making available up-to-date information
about your investments so you and your financial advisor have current
information on your portfolio.
We continue to value our relationship with you, and we thank you for the
opportunity to assist you in achieving your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
President of First Trust Strategic
High Income Fund
Page 1
FIRST TRUST STRATEGIC HIGH INCOME FUND
"AT A GLANCE"
AS OF APRIL 30, 2009 (UNAUDITED)
FUND STATISTICS
Symbol on New York Stock Exchange FHI
Common Share Price $ 4.66
Common Share Net Asset Value ("NAV") $ 3.70
Premium (Discount) to NAV 25.95%
Net Assets Applicable to Common Shares $33,649,815
Current Monthly Distribution per Common Share (1) $ 0.090
Current Annualized Distribution per Common Share $ 1.080
Current Distribution Rate on Closing Common Share Price (2) 23.18%
Current Distribution Rate on NAV (2) 29.19%
COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
MKT NAV
----- -----
04/30/08 12.73 10.71
05/02/08 12.50 10.52
05/09/08 12.26 10.38
05/16/08 12.14 10.39
05/23/08 11.90 10.39
05/30/08 12.78 10.35
06/06/08 13.21 9.95
06/13/08 11.45 9.67
06/20/08 11.05 9.65
06/27/08 11.45 9.71
07/03/08 10.81 9.43
07/11/08 10.13 9.38
07/18/08 10.06 9.05
07/25/08 10.10 9.05
08/01/08 10.29 8.93
08/08/08 8.65 8.47
08/15/08 8.16 8.56
08/22/08 8.28 8.48
08/29/08 9.18 8.39
09/05/08 8.87 8.18
09/12/08 8.48 8.22
09/19/08 6.20 7.67
09/26/08 6.23 7.65
10/03/08 6.05 7.38
10/10/08 4.04 7.32
10/17/08 5.90 7.05
10/24/08 6.07 7.18
10/31/08 6.34 6.57
11/07/08 6.19 6.38
11/14/08 5.25 6.11
11/21/08 3.84 5.66
11/28/08 4.72 5.22
12/05/08 4.03 4.85
12/12/08 3.89 4.80
12/19/08 4.50 4.76
12/26/08 4.91 4.77
01/02/09 5.08 4.77
01/09/09 4.95 4.45
01/16/09 5.07 4.41
01/23/09 5.13 4.48
01/30/09 5.76 4.14
02/06/09 5.60 4.10
02/13/09 5.53 4.07
02/20/09 4.45 4.10
02/27/09 4.12 4.09
03/06/09 3.08 3.94
03/13/09 3.98 3.90
03/20/09 4.03 3.94
03/27/09 4.07 3.92
04/03/09 4.08 3.72
04/09/09 4.28 3.72
04/17/09 4.50 3.70
04/24/09 4.57 3.69
04/30/09 4.66 3.70
(PERFORMANCE GRAPH)
PERFORMANCE
Average Annual
Total Return
6 Months Ended 1 Year Ended Inception (7/19/2005)
4/30/2009 4/30/2009 to 4/30/2009
-------------- ------------ ---------------------
Fund Performance
NAV (3) -33.39% -54.15% -24.29%
Market Value (4) -13.06% -51.42% -20.48%
Index Performance
Barclays Capital Ba U.S. High Yield Index 18.58% -4.40% 8.27%
% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS
-------------------- -----------
Collateralized Debt Obligations 23.1%
Commercial Mortgage-Backed Securities 20.0
U.S. Government Agency Mortgage-Backed
Securities 19.2
Manufactured Housing Loans 14.5
Franchise Loans 12.2
Residential Mortgage-Backed Securities 5.8
Corporate Bonds 3.0
Equity 1.2
Equipment Lease Receivable 1.0
-----
Total 100.0%
=====
% OF TOTAL
CREDIT QUALITY (5) INVESTMENTS
------------------ -----------
AAA 19.8%
A 1.2
BBB 3.0
BB 8.4
B 14.1
CCC 9.7
CC 31.6
C 5.8
D 2.2
NR 4.2
-----
Total 100.0%
=====
(1) Most recent distribution paid or declared through 4/30/2009. 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 4/30/2009. Subject to
change in the future.
(3) Total return based on NAV is the combination of reinvested distributions
and reinvested capital gain distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share and does not
reflect sales load. Past performance is not indicative of future results.
(4) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share price. Past performance is not indicative of future results.
(5) The credit quality information represented reflects the ratings assigned by
one or more nationally recognized statistical rating organizations
(NRSROs). For situations in which a security is rated by more than one
NRSRO and ratings are not equivalent, the ratings are averaged.
Page 2
PORTFOLIO COMMENTARY
SUB-ADVISOR
Valhalla Capital Partners, LLC ("Valhalla" or the "Sub-Advisor"), the
Sub-Advisor to First Trust Strategic High Income Fund (New York Stock Exchange
("NYSE"): FHI) through June 30, 2009, was founded in 2005 and is currently
managed by its Managing Partners, Ken L. Mathis and Justin L. Ventura. Valhalla
submitted its notice of resignation as the investment sub-advisor to the Fund
effective June 30, 2009. First Trust Advisors L.P., ("First Trust") the Fund's
investment manager, is currently evaluating the impact of Valhalla's resignation
on the Fund and is assessing alternatives to ensure continuity of portfolio
management for the Fund. First Trust has served as the Fund's investment advisor
since inception and will continue to serve in such capacity following Valhalla's
resignation.
PORTFOLIO MANAGEMENT TEAM
RAMOND P. MECHERLE, CFA, PORTFOLIO MANAGER
Mr. Mecherle is a founding Managing Partner of Valhalla. He has over 10 years of
experience in the financial industry. Mr. Mecherle served as Co-Manager of First
Trust Strategic High Income Fund (NYSE: FHI), First Trust Strategic High Income
Fund II ("FHY") and First Trust Strategic High Income Fund III (NYSE: FHO)
through June 30, 2009. Mr. Mecherle was a dual employee of Hilliard Lyons Asset
Management and Valhalla from Valhalla's inception in 2005 through April 2006.
From October 2004 to April 2006, Mr. Mecherle was employed by Hilliard Lyons
Asset Management as Director of Fixed Income and Co-Manager of FHI. Prior to
that, Mr. Mecherle was employed by Morgan Keegan Asset Management for seven
years. There, Mr. Mecherle was an Assistant Portfolio Manager for three
high-yield funds, two investment-grade bond funds, and separate accounts. Mr.
Mecherle received a B.A. from the University of Virginia and an M.B.A. from the
Johnson Graduate School of Management, Cornell University.
JUSTIN L. VENTURA, PORTFOLIO MANAGER
Mr. Ventura is a founding Managing Partner of Valhalla. He has over 15 years of
experience in the financial industry. Mr. Ventura served as Co-Manager of First
Trust Strategic High Income Fund (NYSE: FHI), FHY and First Trust Strategic High
Income Fund III (NYSE: FHO) through June 30, 2009. Mr. Ventura was a dual
employee of Hilliard Lyons Asset Management and Valhalla from Valhalla's
inception in 2005 through April 2006. From June 2005 to April 2006, Mr. Ventura
was employed by Hilliard Lyons Asset Management as Co-Manager of FHI. Prior to
that, Mr. Ventura was employed by State Street Bank for six years as Vice
President, Capital Markets Portfolio/ABS-MBS-CDO Sectors. Mr. Ventura began his
career with Fitch IBCA, Inc. where he worked for five years and was a Director
of Structured Finance/Mortgage and Asset-Backed Securities. Mr. Ventura received
a B.A. from the University of Massachusetts and a J.D. from George Mason School
of Law.
COMMENTARY
FIRST TRUST STRATEGIC HIGH INCOME FUND
The primary investment objective of the First Trust Strategic High Income Fund
("FHI" or the "Fund") is to seek a high level of current income. The Fund seeks
capital growth as a secondary objective. The Fund seeks to achieve its
investment objectives by investing at least 80% of its managed assets in a
diversified portfolio of high income producing securities the Sub-Advisor
believes offer attractive yield and/or capital appreciation potential. There can
be no assurance that the Fund will achieve its investment objectives. The Fund
may not be appropriate for all investors.
MARKET RECAP
The six months ended April 30, 2009 provided market participants a mix of
economic data and investment performance. In general, macroeconomic conditions
worsened as evidenced by a number of statistics. November manufacturing data
dropped at the fastest rate in twenty-six years, and the employment numbers
showed the largest payroll decline since 1974. In addition, fourth quarter 2008
GDP shrank at a -6.3% annualized pace, and the first quarter of 2009 followed
closely behind at a -6.1% annualized rate. The Federal Reserve's cut in rates
from 1.00% to a range of 0% to .25% at the December 2008 meeting fell in line
with these difficult economic conditions.
The stock and bond markets reacted differently to the economy over the
semi-annual period covered by this report. In general, equity markets fell over
the six months. The broader Standard & Poor's 500 and the Russell 2000 indices
both produced negative total returns of -8.52% and -8.39%, respectively, and the
New York Stock Exchange Financial Index
Page 3
PORTFOLIO COMMENTARY (CONTINUED)
returned -18.77%. The U.S. Treasury Index and the U.S. Credit Index, in
contrast, were broadly positive as measured by the Barclays Capital Indices,
generating price moves of 3.54% and 7.99%, respectively. The Barclays Capital
U.S. Corporate High Yield Index moved up in price as well, at 9.47%, despite the
increase in corporate default rates from the previous year.
The real story of the last six months, however, is the large-scale Federal
efforts to steady the financial system, improve liquidity conditions, and halt
the decline in home prices and escalating foreclosures. In all, as of April 30,
2009, the government had pledged roughly $12 trillion through more than a dozen
programs and aid packages to both the capital markets and specific companies.
Notable among these programs is the Troubled Asset Relief Program ("TARP") which
began in late October, 2008 and has injected hundreds of billions of dollars
into various financial entities to keep them solvent. In March of 2009, the
government introduced two new programs. First, the Term Asset-Backed Securities
Loan Facility ("TALF") was designed to stimulate lending to consumers and small
businesses by providing leverage to investors willing to buy certain new issue
asset-backed securities. Second, the Public-Private Investment Fund was set up
as a partnership between the public and private sectors to purchase illiquid
assets from bank balance sheets, thereby allowing them to begin lending again.
The ultimate impact of these programs will be evident only over time as their
scale grows. If enough investors participate, they may produce the effect public
officials are hoping to see.
PERFORMANCE ANALYSIS
For the six months ended April 30, 2009, FHI produced a net asset value ("NAV")
total return(1) of -33.39% and market value total return(2) of -13.06%. The
Barclays Capital Ba U.S. High Yield Index returned 18.58% over the same time
period. The difference between the Fund and its index arises from the fact that
the latter contains predominantly corporate high-yield debt; a majority of FHI's
holdings, in contrast, were structured finance securities.
The Fund's performance was reflective of the generally poor credit conditions in
the structured markets and the full-blown recession hanging over the broader
capital markets. Accordingly, pricing trends continued to place negative
pressure on almost every asset class in the Fund. In the residential
mortgage-backed sector ("RMBS"), the vast majority of the holdings fell sharply
in price. Home-price declines and rising default and foreclosure rates offered
investors little room for optimism in their approach to this space. That same
negative outlook was reflected in the price movements of the Fund's commercial
mortgage-backed securities and collateralized debt obligations ("CDOs"), the
latter of which are predominantly exposed to corporate loans and debentures.
Both of these sectors continued to suffer from the combined effects of the
credit squeeze, the recession, and rising defaults. Refinancing opportunities
for corporate debt and commercial mortgages were extremely limited and credit
fundamentals remained vulnerable to the impact of rising unemployment and
decreased consumer spending. The remaining categories of franchise loans and
manufactured housing contracts, as well as other structured asset classes, also
suffered from investors' dour outlooks, as buyers continued to bid at levels in
the secondary markets that built in room for credit erosion in these securities.
MARKET & FUND OUTLOOK
The economic data of the last six months and the ongoing concerns surrounding
the health of the financial sector continue to limit the capacity of the
structured markets to make a sustained recovery. Lending remains thin, both to
consumers and commercial entities; the new issue structured finance markets are
at a virtual standstill; and so-called toxic assets continue to weigh down
financial institutions' balance sheets. This credit squeeze and the fundamental
effects of the recession are likely to continue to have a negative impact on
bond performance in the months to come. In addition, the government initiatives
designed to strengthen both the capital markets and the real estate market have
yet to produce any broad, positive impact. Investors may continue to demand high
risk premiums from any potential investment prior to the housing market
stabilizing and the global financial sector conclusively demonstrating it has
returned to full health. Until that occurs, the markets are likely to remain
unstable.
----------
(1) Total returns based on NAV is the combination of reinvested dividend
distributions and reinvested capital gain distributions, if any, at prices
obtained by the Dividend Reinvestment Plan and changes in NAV per share and
does not reflect sales load. Past performance is not indicative of future
results.
(2) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share price. Past performance is not indicative of future results.
Page 4
FIRST TRUST STRATEGIC HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS(a)
APRIL 30, 2009 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
----------- ------------------------------------------------ ------ -------- -----------
ASSET-BACKED SECURITIES - 48.1%
ABCLO, Ltd.
$ 1,750,000 Series 2007-1A, Class D (b) (c) ............. 5.03% 04/15/21 $ 109,813
ACE Securities Corp., Home Equity Loan Trust
483,923 Series 2003-OP1, Class B .................... 6.00% 12/25/33 89,713
Aircraft Finance Trust
769,199 Series 1999-1A, Class A2 (b) (d) ............ 0.95% 05/15/24 307,680
Atherton Franchisee Loan Funding
379,065 Series 1999-A, Class A2 (c) ................. 7.23% 03/15/21 354,066
Bear Stearns Asset Backed Security Trust
4,000,000 Series 2007-HE3, Class M9 (b) ............... 2.69% 04/25/37 28,800
BNC Mortgage Loan Trust
5,750,000 Series 2007-2, Class B1 (b) (c) ............. 2.94% 05/25/37 133,285
751,450 Series 2007-2, Class B2 (b) (c) ............. 2.94% 05/25/37 7,680
1,766,000 Series 2007-3, Class B2 (b) (c) ............. 2.94% 07/25/37 21,139
Bombardier Capital Mortgage Securitization Corp.
331,867 Series 1999-B, Class A1B .................... 6.61% 09/15/10 147,658
849,669 Series 1999-B, Class A3 ..................... 7.18% 12/15/15 410,454
Conseco Finance Securitizations Corp.
3,595,456 Series 2000-6, Class M1 ..................... 7.72% 09/01/31 659,881
EMAC Owner Trust, LLC
1,157,759 Series 1998-1, Class A3 (d) ................. 6.63% 01/15/25 694,656
978,934 Series 2000-1, Class A1 (d) ................. 6.95% 01/15/27 289,627
1,254,010 Series 2000-1, Class A2 (d) ................. 6.95% 01/15/27 371,011
Falcon Franchise Loan Trust
4,905,000 Series 2000-1, Class E (d) .................. 6.50% 04/05/16 988,112
4,231,000 Series 2003-1, Class E (d) .................. 6.00% 01/05/25 42,310
FFCA Secured Lending Corp.
5,000,000 Series 1999-2, Class B1 (d) ................. 8.27% 05/18/26 501,079
FMAC Loan Receivables Trust
755,607 Series 1997-B, Class A (d) .................. 6.85% 09/15/19 642,266
Green Tree Financial Corp.
341,414 Series 1997-4, Class B1 ..................... 7.23% 02/15/29 70,984
970,371 Series 1998-4, Class M1 ..................... 6.83% 04/01/30 321,686
3,000,000 Series 1998-8, Class M1 ..................... 6.98% 09/01/30 1,111,601
5,903,825 Series 1999-3, Class M1 ..................... 6.96% 02/01/31 1,072,641
GSAMP Trust
600,475 Series 2004-AR2, Class B4 (d) ............... 5.00% 08/25/34 991
988,478 Series 2006-S3, Class A2 .................... 5.77% 05/25/36 90,240
864,695 Series 2006-S5, Class A1 (b) ................ 0.53% 09/25/36 24,085
Halyard Multi Asset CBO I, Ltd. ................
1,641,391 Series 1A, Class B (b) (d) .................. 3.20% 03/24/10 279,037
Helios Series I Multi Asset CBO, Ltd.
3,000,000 Series 1A, Class B (b) (d) .................. 3.17% 12/13/36 81,720
Independence lll CDO, Ltd.
5,098,836 Series 3A, Class C1 (b) (d) ................. 3.68% 10/03/37 362,731
Indymac Residential Asset Backed Trust
2,375,000 Series 2005-B, Class M10 (b) ................ 3.94% 08/25/35 41,322
Long Beach Mortgage Loan Trust
1,943,526 Series 2006-A, Class A2 ..................... 5.55% 05/25/36 155,482
See Notes to Financial Statements
Page 5
FIRST TRUST STRATEGIC HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
APRIL 30, 2009 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
----------- ------------------------------------------------ ------ -------- -----------
ASSET-BACKED SECURITIES - (CONTINUED)
Longhorn CDO, Ltd.
$ 2,867,183 Series 1, Class C (b) (d) ................... 7.49% 05/10/12 $ 3,211
Merit Securities Corp.
2,365,765 Series 13, Class B1 (c) ..................... 7.98% 12/28/33 88,053
2,602,000 Series 13, Class M2 ......................... 7.98% 12/28/33 700,452
North Street Referenced Linked Notes
4,500,000 Series 2000-1A, Class C (b) (d) ............. 2.79% 04/28/11 2,340,000
6,100,110 Series 2000-1A, Class D1 (b) (d) ............ 3.64% 04/28/11 2,867,052
Park Place Securities, Inc.
3,357,781 Series 2004-WCW1, Class M8 (b) .............. 3.94% 09/25/34 41,052
1,301,976 Series 2004-WCW2, Class M10 (b) (d) ......... 3.19% 10/25/34 23,027
3,142,111 Series 2005-WCW3, Class M11 (b) (c) ......... 2.94% 08/25/35 11,312
Rosedale CLO, Ltd.
3,500,000 Series I-A, Class II (d) .................... (f) 07/24/21 105,000
Signature 5, Ltd.
1,129,120 Series 5A, Class C (c) ...................... 12.56% 10/27/12 148,208
Soundview Home Equity Loan Trust
1,634,000 Series 2007-OPT3, Class M10 (b) (c) ......... 2.94% 08/25/37 45,147
Structured Asset Securities Corp.
2,625,713 Series 2007-BC3, Class B1 (b) (c) ........... 2.94% 05/25/47 38,467
1,603,336 Series 2007-OSI, Class M10 (b) .............. 2.94% 06/25/37 7,375
Summit CBO I, Ltd.
4,705,734 Series 1A, Class B (b) (c) .................. 3.54% 05/23/11 361,636
-----------
TOTAL ASSET-BACKED SECURITIES
(Cost $55,168,821) ............................. 16,191,742
-----------
COLLATERALIZED MORTGAGE OBLIGATIONS - 3.2%
Bear Stearns Alt-A Trust
2,053,856 Series 2006-8, Class 2A2 .................... 5.34% 08/25/46 402,130
Countrywide Alternative Loan Trust
3,304,153 Series 2005-56, Class M4 (b) ................ 1.36% 11/25/35 190,617
Credit Suisse Mortgage Capital Certificates
632,715 Series 2006-1, Class DB5 (d) ................ 5.70% 02/25/36 51
584,042 Series 2006-2, Class DB5 (d) ................ 5.84% 03/25/36 4,567
Deutsche Alt-A Securities, Inc. Mortgage Loan
Trust
3,691,244 Series 2007-OA4, Class M10 (b) .............. 3.44% 08/25/47 123,804
HarborView Mortgage Loan Trust
3,928,392 Series 2005-9, Class B10 (b) ................ 2.20% 06/20/35 350,648
-----------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $9,490,333)............................... 1,071,817
-----------
See Notes to Financial Statements
Page 6
FIRST TRUST STRATEGIC HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
APRIL 30, 2009 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
----------- ------------------------------------------------ ------ -------- -----------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 18.9%
Banc of America Commercial Mortgage Inc.
$ 1,171,422 Series 2000-1, Class M (d) .................. 6.00% 11/15/31 $ 90,237
Banc of America Large Loan, Inc.
2,000,000 Series 2005-MIB1, Class L (b) (d) ........... 3.45% 03/15/22 549,283
Banc of America Structural Securities Trust
2,878,166 Series 2002-X1, Class O (c) ................. 7.00% 10/11/33 2,001,059
2,878,166 Series 2002-X1, Class P (c) ................. 7.00% 10/11/33 1,242,853
Bear Stearns Commercial Mortgage Securities
1,776,400 Series 2000-WF1, Class K .................... 6.50% 02/15/32 166,341
GE Capital Commercial Mortgage Corp.
700,000 Series 2000-1, Class G (c) .................. 6.13% 01/15/33 185,567
GMAC Commercial Mortgage Securities, Inc.
1,000,000 Series 1999-C3, Class G (c) ................. 6.97% 08/15/36 925,581
GS Mortgage Securities Corp. II
7,000,000 Series 1998-C1, Class H (d) ................. 6.00% 10/18/30 332,319
LB-UBS Commercial Mortgage Trust
3,025,000 Series 2001-C7, Class Q (c) ................. 5.87% 11/15/33 415,087
2,083,703 Series 2001-C7, Class S (d) ................. 5.87% 11/15/33 14,648
Morgan Stanley Capital I, Inc. .................
968,400 Series 1999-WF1, Class M (d) ................ 5.91% 11/15/31 214,147
2,787,919 Series 2003-IQ5, Class O (c) ................ 5.24% 04/15/38 216,594
-----------
TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES
(Cost $21,983,186).............................. 6,353,716
-----------
CORPORATE BONDS - 2.9%
1,500,000 Lexington Precision Corp., Units (e) (h) ....... (f) 08/01/09 964,950
-----------
TOTAL CORPORATE BONDS .......................... 964,950
-----------
(Cost $1,200,000)
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 18.0%
FannieMae-ACES
7,054,299 Series 1998-M7, Class N, IO ................. 0.57% 05/25/36 126,429
Government National Mortgage Association
91,742,375 Series 2003-47, Class XA, IO ................ 1.26% 06/16/43 4,671,008
23,256,811 Series 2003-59, Class XA, IO ................ 1.94% 06/16/34 1,271,327
-----------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED
SECURITIES
(Cost $6,594,854)............................... 6,068,764
-----------
STRUCTURED NOTES - 2.0%
Bacchus Ltd.
1,225,000 Series 2006-1I, Subordinated Bond (d) ....... (f) 01/20/19 465,500
InCaps Funding II Ltd./InCaps Funding II Corp.
2,000,000 Subordinated Note (d) ....................... (f) 01/15/34 200,000
3,750,000 Preferred Term Securities XXV, Ltd. (d) ........ (f) 06/22/37 375
-----------
TOTAL STRUCTURED NOTES
(Cost $3,290,880)............................... 665,875
-----------
See Notes to Financial Statements
Page 7
FIRST TRUST STRATEGIC HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
APRIL 30, 2009 (UNAUDITED)
SHARES DESCRIPTION VALUE
----------- ------------------------------------------------ -----------
PREFERRED SECURITIES - 1.1%
1,450 Ajax Two Ltd., Series 2A (d) (f) ............... $ 101,500
2,000 Ajax Two Ltd., Series 2X (d) (f) ............... 80,000
4,000 Pro Rata Funding, Ltd., Inc. (d) (f) ........... 160,000
2,000 Soloso CDO, Ltd., Series 2005-1 (d) (f) ........ 20,000
3,000 White Marlin CDO, Ltd., Series AI (d) (e) (f) .. 15,000
-----------
TOTAL PREFERRED SECURITIES
(Cost $3,457,295)............................... 376,500
-----------
TOTAL INVESTMENTS - 94.2%
(Cost $101,185,369) (g) ......................... 31,693,364
NET OTHER ASSETS AND LIABILITIES - 5.8% ...................... 1,956,451
-----------
NET ASSETS - 100.0% .......................................... $33,649,815
===========
----------
(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) Floating rate security. The interest rate shown reflects the rate in effect
at April 30, 2009.
(c) 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 2C -
Restricted Securities in the Notes to Financial Statements).
(d) This security, sold within the terms of a private placement memorandum, is
exempt from registration under Rule 144A under the 1933 Act and may be
resold in transactions exempt from registration, normally to qualified
institutional buyers. Pursuant to procedures adopted by the Fund's Board of
Trustees, this security has been determined to be liquid by Valhalla
Capital Partners, LLC, the Fund's investment sub-advisor. Although
instability in the markets has resulted in periods of increased overall
market illiquidity, liquidity for each security is determined based on
security specific factors and assumptions, which require subjective
judgement. At April 30, 2009, securities noted as such amounted to
$12,147,137 or 36.1% of net assets.
(e) The issuer is in default. Income is not being accrued.
(f) Zero coupon.
(g) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2009, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $320,270 and the aggregate gross
unrealized depreciation for all securities in which there was an excess of
tax cost over value was $69,812,275.
(h) Security is fair valued in accordance with procedures adopted by the Fund's
Board of Trustees.
ACES Alternative Credit Enhancement Securities
CBO Collateralized Bond Obligation
CDO Collateralized Debt Obligation
CLO Collateralized Loan Obligation
IO Interest Only Security
See Notes to Financial Statements
Page 8
FIRST TRUST STRATEGIC HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
APRIL 30, 2009 (UNAUDITED)
VALUATION INPUTS
A summary of the inputs used to value the Fund's total investments as of April
30, 2009 is as follows (see Note 2A - Portfolio Valuation in the Notes to
Financial Statements):
VALUATION INPUTS INVESTMENTS
---------------- -----------
Level 1 - Quoted Prices .......................................... $ --
Level 2 - Other Significant Observable Inputs .................... 22,252,931
Level 3 - Significant Unobservable Inputs ........................ 9,440,433
-----------
Total ............................................................ $31,693,364
===========
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 October 31, 2008 .................................. $ 23,044,686
Transfers in (out) of Level 3 ................................... (1,113,236)
Net realized gains (losses) ..................................... (1,480,960)
Net unrealized appreciation (depreciation) ...................... (10,993,785)
Net purchases (sales) ........................................... (16,272)
------------
Balance as of April 30, 2009 .................................... $ 9,440,433
============
Net unrealized depreciation from Level 3 investments held as of April 30, 2009
was $15,827,238 and is included in "Net change in unrealized appreciation
(depreciation) on investments" on the Statement of Operations.
See Notes to Financial Statements
Page 9
FIRST TRUST STRATEGIC HIGH INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2009 (UNAUDITED)
ASSETS:
Investments, at value
Cost ($101,185,369) .................................... $ 31,693,364
Cash ......................................................... 1,330,632
Prepaid expenses ............................................. 20,196
Interest receivable .......................................... 714,195
------------
Total Assets ........................................... 33,758,387
------------
LIABILITIES:
Payables:
Audit and tax fees ........................................ 33,590
Investment advisory fees .................................. 24,939
Printing fees ............................................. 17,630
Legal fees ................................................ 9,642
Administrative fees ....................................... 8,333
Transfer agent fees ....................................... 3,197
Trustees' fees and expenses ............................... 2,969
Custodian fees ............................................ 1,586
Accrued expenses and other liabilities .................... 6,686
------------
Total Liabilities ...................................... 108,572
------------
NET ASSETS ................................................... $ 33,649,815
============
NET ASSETS CONSIST OF:
Paid-in capital .............................................. $151,586,200
Par value .................................................... 90,985
Accumulated net investment income (loss) ..................... 8,273,193
Accumulated net realized gain (loss) on investments .......... (56,808,558)
Net unrealized appreciation (depreciation) on investments .... (69,492,005)
------------
NET ASSETS ................................................... $ 33,649,815
============
NET ASSET VALUE, per Common Share (par value $0.01
per Common Share) ......................................... $ 3.70
============
Number of Common Shares outstanding (unlimited number
of Common Shares has been authorized) ..................... 9,098,473
============
See Notes to Financial Statements
Page 10
FIRST TRUST STRATEGIC HIGH INCOME FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2009 (UNAUDITED)
INVESTMENT INCOME:
Interest ..................................................... $ 6,888,961
------------
Total investment income ................................ 6,888,961
------------
EXPENSES:
Investment advisory fees ..................................... 185,359
Administrative fees .......................................... 49,999
Printing fees ................................................ 33,778
Legal fees ................................................... 23,766
Audit and tax fees ........................................... 20,390
Interest and fees on outstanding loan ........................ 20,222
Trustees' fees and expenses .................................. 19,545
Transfer agent fees .......................................... 15,209
Custodian fees ............................................... 4,754
Excise tax expense ........................................... (176,081)(a)
Other ........................................................ 44,076
------------
Total expenses ......................................... 241,017
------------
NET INVESTMENT INCOME ........................................ 6,647,944
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments ................... (19,510,477)
Net change in unrealized appreciation (depreciation)
of investments ......................................... (6,276,811)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ...................... (25,787,288)
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS ................................................ $(19,139,344)
============
----------
(a) Refund of prior year excise tax payment/expense.
See Notes to Financial Statements
Page 11
FIRST TRUST STRATEGIC HIGH INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
4/30/2009 ENDED
(UNAUDITED) 10/31/2008
------------- ------------
OPERATIONS:
Net investment income (loss) .................... $ 6,647,944 $ 18,458,401
Net realized gain (loss) ........................ (19,510,477) (54,237,722)
Net change in unrealized appreciation
(depreciation) ............................... (6,276,811) (24,267,712)
------------- ------------
Net increase (decrease) in net assets
resulting from operations .................... (19,139,344) (60,047,033)
------------- ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ........................... (6,878,320) (7,286,555)
Return of capital ............................... -- (9,998,690)
------------- ------------
Total distributions to shareholders ............. (6,878,320) (17,285,245)
------------- ------------
CAPITAL TRANSACTIONS:
Proceeds from Common Shares reinvested .......... 286,305 568,471
------------- ------------
Net increase (decrease) in net assets
resulting from capital transactions .......... 286,305 568,471
------------- ------------
Total increase (decrease) in net assets ......... (25,731,359) (76,763,807)
NET ASSETS:
Beginning of period ............................. 59,381,174 136,144,981
------------- ------------
End of period ................................... $ 33,649,815 $ 59,381,174
============= ============
Accumulated net investment income (loss)
at end of period ............................. $ 8,273,193 $ 8,503,569
============= ============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period ............ 9,035,801 8,983,394
Common Shares issued as reinvestment under the
Dividend Reinvestment Plan ................... 62,672 52,407
------------- ------------
Common Shares at end of period .................. 9,098,473 9,035,801
============= ============
See Notes to Financial Statements
Page 12
FIRST TRUST STRATEGIC HIGH INCOME FUND
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 2009 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting
from operations .............................. $ (19,139,344)
Adjustments to reconcile net increase (decrease)
in net assets resulting from operations to net
cash provided by operating activities:
Purchases of investments ..................... --
Sales, maturities and paydowns of
investments ............................... 2,450,337
Net amortization/accretion of
premiums/discount on investments .......... (1,837,371)
Net realized gain/loss on investments ........ 19,510,477
Net change in unrealized appreciation
(depreciation) on investments ............. 6,276,811
CHANGES IN ASSETS AND LIABILITIES:
Decrease in interest receivable .............. 136,937
Decrease in receivable for investment
securities sold ........................... 5,622,548
Increase in prepaid expenses ................. (12,045)
Decrease in interest and fees due on loan .... (87,966)
Decrease in investment advisory fees
payable ................................... (43,260)
Decrease in audit and tax fees payable ....... (29,660)
Decrease in legal fees payable ............... (2,962)
Decrease in printing fees payable ............ (5,881)
Decrease in transfer agent fees payable ...... (2,851)
Increase in administrative fees payable ...... 1
Decrease in custodian fees payable ........... (722)
Increase in Trustees' fees and expenses
payable ................................... 40
Increase in accrued expenses and other
liabilities ............................... 1,147
-------------
CASH PROVIDED BY OPERATING ACTIVITIES ........... $ 12,836,236
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Common Shares reinvested ....... 286,305
Distributions to Common Shareholders from net
investment income ......................... (6,878,320)
Repayment of loan ............................ (15,000,000)
-------------
CASH USED BY FINANCING ACTIVITIES ............... (21,592,015)
Decrease in cash ................................ (8,755,779)
Cash at beginning of period ..................... 10,086,411
------------
CASH AT END OF PERIOD ........................... $ 1,330,632
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for
interest and fees ............................ $ 108,188
============
See Notes to Financial Statements
Page 13
FIRST TRUST STRATEGIC HIGH INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR YEAR YEAR PERIOD
4/30/2009 ENDED ENDED ENDED ENDED
(UNAUDITED) 10/31/2008 10/31/2007 10/31/2006 10/31/2005(a)
----------- ---------- ---------- ---------- -------------
Net asset value, beginning of period... $ 6.57 $ 15.16 $ 19.82 $ 19.13 $ 19.10(b)
------- ------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................. 0.73 2.05 2.17 2.08 0.39
Net realized and unrealized gain
(loss).............................. (2.84) (8.72) (4.84) 0.76 (0.17)
------- ------- -------- -------- --------
Total from investment operations....... (2.11) (6.67) (2.67) 2.84 0.22
------- ------- -------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS
FROM:
Net investment income.................. (0.76) (0.81) (1.97) (2.15) (0.15)
Net realized gain...................... -- -- (0.02) -- --
Return of capital...................... -- (1.11) -- -- --
------- ------- -------- -------- --------
Total distributions.................... (0.76) (1.92) (1.99) (2.15) (0.15)
------- ------- -------- -------- --------
Common Shares offering costs charged
to paid-in capital.................. -- -- -- -- (0.04)
------- ------- -------- -------- --------
Net asset value, end of period......... $ 3.70 $ 6.57 $ 15.16 $ 19.82 $ 19.13
======= ======= ======== ======== ========
Market value, end of period............ $ 4.66 $ 6.34 $ 14.19 $ 21.19 $ 18.79
======= ======= ======== ======== ========
Total return based on net asset
value (c) (d)....................... (33.39)% (47.16)% (14.65)% 15.73% 1.03%
======= ======= ======== ======== ========
Total return based on market value
(d) (e)............................. (13.06)% (45.56)% (25.30)% 26.16% (5.28)%
======= ======= ======== ======== ========
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)... $33,650 $59,381 $136,145 $176,375 $168,413
Ratio of total expenses to average 4.32%
net assets.......................... 1.19%(f) 3.70% 1.20% 1.33%(f)
Ratio of total expenses to average
net assets excluding interest
expense and fees.................... 1.09%(f) 2.21% 1.68% 1.20% 1.33%(f)
Ratio of net investment income to
average net assets.................. 32.73%(f) 19.21% 11.78% 10.84% 7.82%(f)
Portfolio turnover rate................ 0% 4% 19% 78% 19%
INDEBTEDNESS:
Loan outstanding (in 000's)............ N/A $15,000 $ 61,200 N/A N/A
Asset coverage per $1,000 of
indebtedness (g).................... N/A $ 4,959 $ 3,225 N/A N/A
(a) Initial seed date of July 19, 2005. The Fund commenced operations on July
26, 2005.
(b) Net of sales load of $0.90 per share on initial offering.
(c) Total return based on net asset value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in net
asset value per share and does not reflect sales load.
(d) Total return is not annualized for periods less than one year.
(e) Total return based on market value is the combination of reinvested
dividend distributions and reinvested capital gains distributions, if any,
at prices obtained by the Dividend Reinvestment Plan and changes in Common
Share price.
(f) Annualized.
(g) Calculated by subtracting the Fund's total liabilities (not including the
loan outstanding) from the Fund's total assets, and dividing by the
outstanding loan balance in 000's.
N/A Not Applicable.
See Notes to Financial Statements
Page 14
NOTES TO FINANCIAL STATEMENTS
FIRST TRUST STRATEGIC HIGH INCOME FUND
APRIL 30, 2009 (UNAUDITED)
1. FUND DESCRIPTION
First Trust Strategic High Income Fund (the "Fund") is a diversified, closed-end
management investment company organized as a Massachusetts business trust on
April 15, 2005 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 FHI on the New York Stock Exchange
("NYSE").
The Fund's primary investment objective is to seek a high level of current
income. The Fund seeks capital growth as a secondary objective. The Fund seeks
to achieve its investment objectives by investing at least 80% of its managed
assets in a diversified portfolio of high income producing securities that
Valhalla Capital Partners, LLC ("Valhalla" or the "Sub-Advisor") believes offer
attractive yield and/or capital appreciation potential. There can be no
assurance that the Fund will achieve its investment objectives. The Fund may not
be appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America 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. 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. Securities for which
market quotations are readily available are valued at market value, which is
currently determined using the last reported sale price on the business day as
of which such value is being determined or, if no sales are reported on such day
(as in the case of some securities traded over-the-counter), the last reported
bid price, except that certain U.S. Government securities are valued at the mean
between the last reported bid and asked prices. The Fund values mortgage-backed
securities and other debt securities not traded in an organized market on the
basis of valuations provided by dealers who make markets in such securities or
by independent pricing services approved by the Board of Trustees which use
information with respect to transactions in such securities, quotations from
dealers, market transactions for comparable securities, various relationships
between securities and yield to maturity in determining value. In the Fund's
financial statements, the Statement of Assets and Liabilities includes
investments with a value of $9,440,433 (29.8% of total investments) as of April
30, 2009 whose values have been determined based on prices supplied by dealers
and investments with a value of $22,252,931 (70.2% of total investments) whose
values have been determined based on prices supplied by independent pricing
services. These values may differ from the values that would have been used had
a ready market price for these investments existed, and the differences could be
material.
Debt securities having a remaining maturity of less than sixty days when
purchased are valued at cost adjusted for amortization of premiums and accretion
of discounts.
In the event that market quotations are not readily available, the pricing
service or dealer 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 other investments. As a general principle, the fair value
of a security is the amount which the Fund might reasonably expect to receive
for the security upon its current sale. A variety of factors may be considered
in determining the fair value of such securities including 1) the fundamental
business data relating to the issuer; 2) an evaluation of the forces which
influence the market in which these securities are purchased and sold; 3) type
of holding; 4) financial statements of the issuer; 5) cost at date of purchase;
6) credit quality and cash flow of the issuer based on external analysis; 7)
information as to any transactions in or offers for the holding; 8) price and
extent of public trading in similar securities of the issuer/borrower, or
comparable companies; and 9) other relevant factors. 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 1940 Act. When
fair value pricing of securities is employed, the prices of securities used by
the Fund to calculate its NAV may differ from market quotations or official
closing prices. In light of the judgment involved in fair valuations, there can
be no assurance that a fair value assigned to a particular security will be the
amount which the Fund might be able to receive upon its current sale.
Page 15
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST STRATEGIC HIGH INCOME FUND
APRIL 30, 2009 (UNAUDITED)
The Fund invests a significant portion of its assets in below-investment grade
debt securities, including mortgage-backed securities, asset-backed securities,
corporate bonds and collateralized debt obligations. The value and related
income of these securities is sensitive to changes in economic conditions,
including delinquencies and/or defaults. Instability in the markets for fixed
income securities, particularly mortgage-backed and asset-backed securities, has
resulted in increased volatility and periods of illiquidity that have adversely
impacted the valuation of certain securities held by the Fund.
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 157, "Fair Value Measurements"
("FAS 157"), effective for fiscal years beginning after November 15, 2007. This
standard clarifies the definition of fair value for financial reporting,
establishes a framework for measuring fair value and requires additional
disclosures about the use of fair value measurements. FAS 157 became effective
for the Fund as of November 1, 2008, the beginning of its current fiscal year.
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 April 30, 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. Management is currently evaluating the impact the implementation of
FSP 157-4 will have on the Fund's financial statement disclosures, if any.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
on the accrual basis. Amortization of premiums and accretion of discounts are
recorded using the effective interest method.
The Fund invests in certain lower credit quality securitized assets that have
contractual cash flows (for example, asset-backed securities, collateralized
mortgage obligations and commercial mortgage-backed securities). For these
securities, if there is a change in the estimated cash flows for any of these
securities, based on an evaluation of current information, then the estimated
yield is adjusted on a prospective basis over the remaining life of the
security. Investment income is recorded net of foreign taxes withheld where
recovery of such taxes is uncertain. Debt obligations may be placed on
non-accrual status and related interest income may be reduced by ceasing current
accruals and amortization/accretion and writing off interest receivables when
the collection of all or a portion of interest has become doubtful based on
consistently applied procedures. A debt obligation is removed from non-accrual
status when the issuer resumes interest payments or when collectability of
interest is reasonably assured.
Securities purchased or sold on a when-issued or delayed-delivery basis may be
settled a month or more after the trade date; interest income on such securities
is not accrued until settlement date. The Fund maintains liquid assets with a
current value at least equal to the amount of its when-issued or
delayed-delivery purchase commitments. At April 30, 2009, the Fund had no
when-issued or delayed-delivery purchase commitments.
C. RESTRICTED SECURITIES:
The Fund invests in restricted securities, which are securities that may not 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 under the 1933 Act, normally to qualified
institutional buyers. As of April 30, 2009, the Fund held restricted securities
as shown in the following table that the Sub-Advisor has deemed illiquid
pursuant to procedures adopted by the Fund's Board of Trustees. Although
instability in the markets has resulted in periods of increased overall market
illiquidity, liquidity for each security is determined based on security
specific factors and assumptions, which require subjective judgment. 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 2A) and are not expressed as a discount to
the carrying value of a comparable unrestricted security. There are no
unrestricted securities with the same maturity dates and yields for these
issuers.
Page 16
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST STRATEGIC HIGH INCOME FUND
APRIL 30, 2009 (UNAUDITED)
CARRYING % OF
ACQUISITION PRINCIPAL VALUE CARRYING NET
SECURITY DATE VALUE PER SHARE COST VALUE ASSETS
-------- ----------------- ---------- ----------- ----------- ---------- ------
ABCLO, Ltd.
Series 2007-1A, Class D, 5.03%,
04/15/21 04/25/07 $1,750,000 $ 6.28 $ 1,746,840 $ 109,813 0.33%
Atherton Franchisee Loan Funding
Series 1999-A, Class A2, 7.23%,
03/15/21 06/08/06 379,065 93.41 390,230 354,066 1.05
Banc of America Structural
Securities Trust
Series 2002-X1, Class O, 7.00%,
10/11/33 08/04/05 2,878,166 69.53 2,750,037 2,001,059 5.95
Series 2002-X1, Class P, 7.00%,
10/11/33 08/04/05 2,878,166 43.18 2,469,987 1,242,853 3.69
BNC Mortgage Loan Trust
Series 2007-2, Class B1, 2.94%,
05/25/37 07/12/07-11/15/07 5,750,000 2.32 3,094,061 133,285 0.40
Series 2007-2, Class B2, 2.94%,
05/25/37 11/21/07 751,450 1.02 36,710 7,680 0.02
Series 2007-3, Class B2, 2.94%,
05/25/37 06/27/37 1,766,000 1.20 1,423,617 21,139 0.06
GE Capital Commercial Mortgage Corp.
Series 2000-1, Class G, 6.13%,
01/15/33 06/27/07 700,000 26.51 687,808 185,567 0.55
GMAC Commercial Mortgage Securities, Inc.
Series 1999-C3, Class G, 6.97%,
08/15/36 08/24/05 1,000,000 92.56 991,033 925,581 2.75
LB-UBS Commercial Mortgage Trust
Series 2001-C7, Class Q, 5.87%,
11/15/33 09/19/05 3,025,000 13.72 2,651,708 415,087 1.23
Merit Securities Corp.
Series 13, Class B1, 7.98%, 12/28/33 02/20/07 2,365,765 3.72 90,916 88,053 0.26
Morgan Stanley Capital I, Inc.
Series 2003-IQ5, Class O, 5.24%,
04/15/38 10/19/06 2,787,919 7.77 1,613,015 216,594 0.64
Park Place Securities, Inc.
Series 2005-WCW3, Class M11, 2.94%,
08/25/35 12/26/07 3,142,111 0.36 216,619 11,312 0.03
Signature 5, Ltd.
Series 5A, Class C, 12.56%, 10/27/12 05/21/07 1,129,120 13.13 1,127,241 148,208 0.44
Soundview Home Equity Loan Trust
Series 2007-OPT3. Class M10, 2.94%,
08/25/37 06/21/07 1,634,000 2.76 1,460,147 45,147 0.14
Structured Asset Securities Corp.
Series 2007-BC3, Class B1, 2.94%,
05/25/47 06/08/07 2,625,713 1.47 596,386 38,467 0.12
Summit CBO I, Ltd
Series 1A, Class B, 3.54%, 05/23/11 08/03/05 4,705,734 7.69 616,923 361,636 1.08
----------- ----------- ---------- -----
$39,268,209 $21,963,278 $6,305,547 18.74%
=========== =========== ========== =====
D. INTEREST ONLY SECURITIES:
An interest only security is the interest only portion of a mortgage-backed
security ("MBS") that receives some or all of the interest portion of the
underlying MBS and little or no principal. A reference principal value called a
notional value is used to calculate the amount of interest due to the IO
security. IOs are sold at a deep discount to their notional principal amount.
Generally speaking, when interest rates are falling and prepayment rates are
increasing, the value of an IO security will fall. Conversely, when interest
rates are rising and prepayment rates are decreasing, generally the value of an
IO security will rise. These investments are identified on the Portfolio of
Investments.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
The Fund will distribute to holders of its Common Shares monthly dividends of
all or a portion of its net income after the payment of interest and dividends
in connection with leverage, if any. Distributions will automatically be
reinvested into additional Common Shares pursuant to the Fund's Dividend
Reinvestment Plan unless cash distributions are elected by the shareholder.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from accounting principles generally
accepted in the United States of America. These differences are primarily due to
differing treatments of income and gains on various investment securities held
by the Fund, timing differences and differing characterization of distributions
made by the Fund. The character of distributions for tax reporting purposes will
depend on the Fund's investment experience during the remainder of its fiscal
year, however, based on information for the fiscal year through April 30, 2009
it is likely that the Fund's distributions will include of a return of capital
component for the fiscal year ending on October 31, 2009.
Page 17
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST STRATEGIC HIGH INCOME FUND
APRIL 30, 2009 (UNAUDITED)
The tax character of distributions paid during the fiscal year ended October 31,
2008 was as follows:
Distributions paid from:
Ordinary Income ....................................... $ 7,286,555
Long-Term Capital Gains ............................... --
Return of Capital ..................................... 9,998,690
As of October 31, 2008, the components of distributable earnings on a tax basis
were as follows:
Undistributed Ordinary Income ......................... --
Net Unrealized Appreciation (Depreciation) ............ $(77,786,232)
F. INCOME TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes.
The Fund intends to utilize provisions of the federal income tax laws, which
allows it to carry realized capital loss forward for eight years following the
year of the loss and offset such loss against any future realized capital gains.
At October 31, 2008, the Fund had available realized capital losses of
$2,534,309 and $11,689,165 to offset future net capital gains through the fiscal
years 2015 and 2016, respectively.
In June 2006, FASB issued Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes" ("FIN 48"). FIN 48 establishes the minimum threshold for
recognizing, and a system for measuring, the benefits of a tax position taken or
expected to be taken in a tax return, and is effective for the Fund's current
fiscal year. As of April 30, 2009, management has evaluated the application of
FIN 48 to the Fund, and has determined that no provision for income tax is
required in the Fund's financial statements.
G. EXPENSES:
The Fund pays all expenses directly related to its operations.
H. ACCOUNTING PRONOUNCEMENT:
In March 2008, FASB released Statement of Financial Accounting Standards No.
161, "Disclosures about Derivative Instruments and Hedging Activities" ("FAS
161"). FAS 161 requires qualitative disclosures about objectives and strategies
for using derivatives, quantitative disclosures about fair value amounts of and
gains and losses on derivative instruments, and disclosures about credit
risk-related contingent features in derivative agreements. The application of
FAS 161 is required for fiscal years beginning after November 15, 2008 and
interim periods within those fiscal years. Management is currently evaluating
the impact the adoption of FAS 161 will have on the Fund's financial statement
disclosures, if any.
3. INVESTMENT ADVISORY FEE AND OTHER AFFILIATED TRANSACTIONS
First Trust is a limited partnership with one limited partner, Grace Partners of
DuPage L.P., and one general partner, The Charger Corporation. First Trust
serves as investment advisor to the Fund pursuant to an Investment Management
Agreement. First Trust is responsible for the ongoing monitoring of the Fund's
investment portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
investment management services, First Trust is entitled to a monthly fee
calculated at an annual rate of 0.90% of the Fund's Managed Assets (the value of
the securities and other investments the Fund holds plus cash or other assets,
including interest accrued but not yet received minus accrued liabilities other
than the principal amount of any borrowings).
Valhalla serves as the Fund's sub-advisor and manages the Fund's portfolio
subject to First Trust's supervision. The Sub-Advisor receives a monthly
portfolio management fee calculated at an annual rate of 0.40% of Managed Assets
that is paid by First Trust from its investment advisory fee. First Trust
Portfolios L.P., an affiliate of First Trust, owns a minority interest in
Valhalla. Effective June 30, 2009, Valhalla will no longer serve as the Fund's
sub-advisor. See Note 9 Subsequent Events.
PNC Global Investment Servicing (U.S.) Inc., an indirect, majority-owned
subsidiary of The PNC Financial Services Group, Inc., serves as the Fund's
Administrator, Fund Accountant, Transfer Agent and Board Administrator in
accordance with certain fee arrangements. PFPC Trust Company, also an indirect,
majority-owned subsidiary of The PNC Financial Services Group, Inc., serves as
the Fund's Custodian in accordance with certain fee arrangements.
Page 18
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST STRATEGIC HIGH INCOME FUND
APRIL 30, 2009 (UNAUDITED)
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid an annual retainer
of $10,000 per trust for the first 14 trusts of the First Trust Fund Complex and
an annual retainer of $7,500 per trust for each subsequent trust in the First
Trust Fund Complex. The annual retainer is allocated equally among each of the
trusts. No additional meeting fees are paid in connection with board or
committee meetings.
Additionally, the Lead Independent Trustee is paid $10,000 annually, the
Chairman of the Audit Committee is paid $5,000 annually, and each of the
chairmen of the Nominating and Governance Committee and the Valuation Committee
are paid $2,500 annually to serve in such capacities, with such compensation
paid by the trusts in the First Trust Fund Complex and divided among those
trusts. Trustees are also reimbursed by the trusts in the First Trust Fund
Complex for travel and out-of-pocket expenses in connection with all meetings.
The Lead Independent Trustee and each committee chairman will serve two-year
terms ending December 31, 2009, before rotating to serve as a chairman of
another committee or as Lead Independent Trustee. The officers and "Interested"
Trustee received no compensation from the Fund for serving in such capacities.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales, maturities and paydowns of investment
securities, excluding U.S. government and short-term investments, for the six
months ended April 30, 2009, were $0 and $2,450,337, respectively.
5. REVOLVING LOAN AGREEMENT
The Fund's Revolving Credit and Security Agreement with Liberty Street Funding
Corp., as conduit lender, and The Bank of Nova Scotia, as secondary lender,
expired on November 12, 2008. This facility provided for a revolving credit
facility to be used as leverage for the Fund. The credit facility provided for a
secured line of credit for the Fund, where Fund assets were pledged against
advances made to the Fund. Under the requirements of the 1940 Act, the Fund,
immediately after any such borrowings, must have an "asset coverage" of at least
300% (33-1/3% of the Fund's total assets after borrowings). In addition, the
Fund agreed to pay facility commitment fees on the unutilized line of credit,
which are included in "Interest and fees on outstanding loan" on the Statement
of Operations. The total commitment under the Revolving Credit and Security
Agreement was $87,000,000. For the period November 1, 2008 through the
termination date of November 7, 2008, the average amount outstanding was
$12,333,333; the high and low annual interest rates were 3.49% and 3.49%,
respectively, and the weighted average interest rate was 3.49%.
6. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
7. LITIGATION
Two class action lawsuits were filed in the United States District Court for the
Northern District of Illinois on behalf of purchasers of shares of First Trust
Strategic High Income Fund, First Trust Strategic High Income Fund II and First
Trust Strategic High Income Fund III. These lawsuits, Gosselin vs. First Trust
Advisors L.P., et al. (filed September 12, 2008) and Evans vs. First Trust
Advisors L.P., et al. (filed September 19, 2008), were consolidated into one
class action complaint Gosselin vs. First Trust Advisors L.P. et al. (filed
April 30, 2009) that names the following entities as defendants: First Trust
Advisors L.P., First Trust Portfolios L.P., and the three closed-end funds (the
"Funds") named above. The consolidated complaint also names certain officers of
the Funds as defendants. The plaintiffs purport to bring the action on behalf of
a putative class consisting of all persons or entities who acquired shares of
the Funds between July 26, 2005 and July 7, 2008 inclusive.
The plaintiffs assert, among other things, that the registration statements and
prospectuses for the Funds failed to disclose that (a) the Funds lacked
effective controls and hedges to minimize the risk of loss from mortgage
delinquencies, (b) the Funds lacked effective internal controls, (c) the extent
of the Funds' liquidity risk was omitted, and (d) the extent of the Funds' risk
exposure to mortgage-backed assets was misstated. The defendants believe the
lawsuit is without merit and intend to contest it vigorously.
8. RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some of the risks
that should be considered for the Fund. For additional information about the
risks associated with investing in the Fund, please see the Fund's prospectus
and statement of additional information, as well as other Fund regulatory
filings.
Page 19
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST STRATEGIC HIGH INCOME FUND
APRIL 30, 2009 (UNAUDITED)
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund dividends
and distributions. Security prices can fluctuate for several reasons including
the general condition of the securities markets, or when political or economic
events affecting the issuers occur. When the Advisor or Sub-Advisor determines
that it is temporarily unable to follow the Fund's investment strategy or that
it is impractical to do so (such as when a market disruption event has occurred
and trading in the securities is extremely limited or absent), the Fund may take
temporary defensive positions.
In 2008, and continuing into 2009, securities markets have been significantly
negatively affected by the financial crisis that initially resulted from the
downturn in the subprime mortgage market in the United States. The potential
impact of the financial crisis on securities markets may prove to be significant
and long-lasting and may have a substantial impact on the value of the Fund.
RESIDENTIAL MORTGAGE-BACKED SECURITIES CONCENTRATION RISK: The Fund will invest
at least 25% of its total Managed Assets in residential mortgage-backed
securities under normal market conditions. The Fund may deviate from its
investment strategies, including its concentration policy, when engaging in
temporary defensive positions. A fund concentrated in a single industry is
likely to present more risks than a fund that is broadly diversified over
several industries. Mortgage-backed securities may have less potential for
capital appreciation than comparable fixed-income securities, due to the
likelihood of increased prepayments of mortgages as interest rates decline. If
the Fund buys mortgage-backed securities at a premium, mortgage foreclosures and
prepayments of principal by mortgagors (which usually may be made at any time
without penalty) may result in some loss of the Fund's principal investment to
the extent of the premium paid. Alternatively, in a rising interest rate
environment, the value of mortgage-backed securities may be adversely affected
when payments on underlying mortgages do not occur as anticipated, resulting in
the extension of the security's effective maturity and the related increase in
interest rate sensitivity of a longer-term instrument. The value of
mortgage-backed securities may also change due to shifts in the market's
perception of issuers and regulatory or tax changes adversely affecting the
markets as a whole. In addition, mortgage-backed securities are subject to the
credit risk associated with the performance of the underlying mortgage
properties. In certain instances, third-party guarantees or other forms of
credit support can reduce the credit risk. The Fund may also invest in
mortgage-backed securities which are interest-only ("IO") securities and
principal-only ("PO") securities. Generally speaking, when interest rates are
falling and prepayment rates are increasing, the value of a PO security will
rise and the value of an IO security will fall. Conversely, when interest rates
are rising and prepayment rates are decreasing, generally the value of a PO
security will fall and the value of an IO security will rise. In addition to the
foregoing, residential mortgage-backed securities are subject to additional
risks, including: (i) the United States residential mortgage market has recently
encountered various difficulties and changed economic conditions. In addition,
recently, residential property values in various states have declined or
remained stable, after extended periods of appreciation. A continued decline or
an extended flattening in those values may result in additional increases in
delinquencies and losses on residential mortgage loans generally; (ii) if a
residential mortgage obligation is secured by a junior lien it will be
subordinate to the rights of the mortgagees or beneficiaries under the related
senior mortgages or deeds of trust; and (iii) depending on the length of a
residential mortgage obligation underlying a residential mortgage-backed
security, unscheduled or early payments of principal and interest may shorten
the security's effective maturity and the prevailing interest rates may be
higher or lower than the current yield of the Fund's portfolio at the time the
Fund receives the payments for reinvestment.
VALUE INVESTING RISK: The Fund focuses its investments on securities that the
Sub-Advisor believes are undervalued or inexpensive relative to other
investments. Such securities are subject to the risk of misestimating certain
fundamental factors. Disciplined adherence to a "value" investment mandate
during periods in which that style is "out of favor" can result in significant
underperformance relative to overall market indices and other managed investment
vehicles that pursue growth style investments and/or flexible style mandates.
BELOW-INVESTMENT GRADE SECURITIES RISK: The Fund invests in below-investment
grade securities. The market values for high-yield securities tend to be very
volatile, and these securities are less liquid than investment grade debt
securities. For these reasons, your investment in the Fund is subject to the
following specific risks: (a) increased price sensitivity to changing interest
rates and to a deteriorating economic environment; (b) greater risk of loss due
to default or declining credit quality; (c) adverse issuer specific events are
more likely to render the issuer unable to make interest and/or principal
payments; and (d) a negative perception of the high-yield market may depress the
price and liquidity of high-yield securities.
DISTRESSED SECURITIES RISK: The Fund may invest in securities issued by
companies in a bankruptcy reorganization proceeding, subject to some other form
of a public or private debt restructuring or otherwise in default or in
significant risk of default in the payment of interest or repayment of principal
or trading at prices substantially below other below-investment grade debt
securities of companies in similar industries. Distressed securities frequently
do not produce income while they are outstanding. The Fund may be required to
incur certain extraordinary expenses in order to protect and recover its
investment. Therefore, to the extent the Fund seeks capital appreciation through
investment in distressed securities, its ability to achieve current income may
be diminished.
Page 20
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST STRATEGIC HIGH INCOME FUND
APRIL 30, 2009 (UNAUDITED)
ECONOMIC CONDITIONS RISK: Adverse changes in economic conditions are more likely
to lead to a weakened capacity of a high-yield issuer to make principal payments
and interest payments than an investment grade issuer. An economic downturn
could severely affect the ability of highly leveraged issuers to service their
debt obligations or to repay their obligations upon maturity. Under adverse
market or economic conditions, the secondary market for high-yield securities
could contract further, independent of any specific adverse changes in the
condition of a particular issuer and these securities may become illiquid. As a
result, the Fund could find it more difficult to sell these securities or may be
able to sell the securities only at prices lower than if such securities were
widely traded.
FIXED-INCOME SECURITIES RISK: Debt securities, including high yield securities,
are subject to certain risks, including: (i) issuer risk, which is the risk that
the value of fixed-income securities may decline for a number of reasons which
directly relate to the issuer, such as management performance, financial
leverage and reduced demand for the issuer's goods and services or, in the case
of asset-backed issuers, a decline in the value and/or cash flows of the
underlying assets; (ii) reinvestment risk, which is the risk that income from
the Fund's portfolio will decline if the Fund invests the proceeds from matured,
traded or called bonds at market interest rates that are below the Fund
portfolio's current earnings rate; (iii) prepayment risk, which is the risk that
during periods of declining interest rates, the issuer of a security may
exercise its option to prepay principal earlier than scheduled, forcing the Fund
to reinvest in lower yielding securities; and (iv) credit risk, which is the
risk that a security in the Fund's portfolio will decline in price or the issuer
fails to make interest payments when due because the issuer of the security
experiences a decline in its financial status.
INTEREST RATE RISK: The Fund is also subject to interest rate risk. Interest
rate risk is the risk that fixed-income securities will decline in value because
of changes in market interest rates. Investments in debt securities with
long-term maturities may experience significant price declines if long-term
interest rates increase.
LEVERAGE RISK: The use of leverage results in additional risks and can magnify
the effect of any losses. The funds borrowed pursuant to a leverage borrowing
program constitute a substantial lien and burden by reason of their prior claim
against the income of the Fund and against the net assets of the Fund in
liquidation. The rights of lenders to receive payments of interest on and
repayments of principal on any borrowings made by the Fund under a leverage
borrowing program are senior to the rights of holders of Common Shares with
respect to the payment of dividends or upon liquidation. If the Fund is not in
compliance with certain credit facility provisions, the Fund may not be
permitted to declare dividends or other distributions or purchase Common Shares.
9. SUBSEQUENT EVENTS
On April 20, 2009, the Fund declared a dividend of $0.0900 per share to Common
Shareholders of record May 5, 2009, payable May 15, 2009.
On May 20, 2009, the Fund declared a dividend of $0.0900 per share to Common
Shareholders of record June 3, 2009, payable June 15, 2009.
Valhalla resigned as sub-advisor to the Fund effective June 30, 2009. First
Trust, the Fund's investment advisor, is currently evaluating the impact of
Valhalla's resignation on the Fund, and is assessing long-term alternatives to
ensure continuity of portfolio management for the Fund.
Page 21
ADDITIONAL INFORMATION
FIRST TRUST STRATEGIC HIGH INCOME FUND
APRIL 30, 2009 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by PNC
Global Investment Servicing (U.S.) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
1) If Common Shares are trading at or above NAV at the time of valuation, the
Fund will issue new shares at a price equal to the greater of (i) NAV per
Common Share on that date or (ii) 95% of the market price on that date.
2) If Common Shares are trading below NAV at the time of valuation, the Plan
Agent will receive the dividend or distribution in cash and will purchase
Common Shares in the open market, on the 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 (800) 334-1710, in
accordance with such reasonable requirements as the Plan Agent and Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized, although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing PNC Global Investment
Servicing (U.S.) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio securities during the most recent 12 month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's website at http://www.sec.gov.
Page 22
ADDITIONAL INFORMATION - (CONTINUED)
FIRST TRUST STRATEGIC HIGH INCOME FUND
APRIL 30, 2009 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available (1) by calling (800)
988-5891; (2) on the Fund's website located at http://www.ftportfolios.com; (3)
on the SEC's website at http://www.sec.gov; and (4) for review and copying at
the SEC's Public Reference Room ("PRR") in Washington, DC. Information regarding
the operation of the PRR may be obtained by calling (800) SEC-0330.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, Energy Income and
Growth Fund, First Trust Enhanced Equity Income Fund, First Trust/Aberdeen
Global Opportunity Income Fund, First Trust/FIDAC Mortgage Income Fund, First
Trust Strategic High Income Fund, First Trust Strategic High Income Fund II,
First Trust Tax-Advantaged Preferred Income Fund, First Trust Specialty Finance
and Financial Opportunities Fund and First Trust Active Dividend Income Fund was
held on April 16, 2009. At the Annual Meeting, Independent Trustees Richard E.
Erickson and Thomas R. Kadlec were elected by the holders of Common Shares of
the Fund as Class II Trustees for three-year terms expiring at the Fund's annual
meeting of shareholders in 2012. The number of votes cast in favor of Dr.
Erickson was 8,030,619, the number of votes against was 256,146 and the number
of abstentions was 770,254. The number of votes cast in favor of Mr. Kadlec was
8,026,260, the number of votes against was 260,505 and the number of abstentions
was 770,254. James A. Bowen, Robert F. Keith and Niel B. Nielson are the current
and continuing Trustees.
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING APPROVAL OF INVESTMENT MANAGEMENT AND
SUB-ADVISORY AGREEMENTS
The Board of Trustees of First Trust Strategic High 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 Valhalla Capital
Partners, LLC (the "Sub-Advisor"), at a meeting held on March 1-2, 2009. The
Board determined that the terms of the Agreements are fair and reasonable and
that the Agreements continue to be in the best interests of the Fund.
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. To assist the Board in its evaluation of the Agreements, the
Independent Trustees received a separate report from each of the Advisor and the
Sub-Advisor in advance of the Board meeting responding to a request for
information from counsel to the Independent Trustees. The reports, among other
things, outlined the services provided by the Advisor and the Sub-Advisor
(including the relevant personnel responsible for these services and their
experience); the advisory and sub-advisory fees for the Fund as compared to fees
charged to other clients of the Advisor and the Sub-Advisor and as compared to
fees charged by investment advisors and sub-advisors to comparable funds;
expenses of the Fund as compared to expense ratios of comparable funds; 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
Independent Trustees also met separately with their independent legal counsel to
discuss the information provided by the Advisor and the Sub-Advisor. 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 are
reasonable business arrangements from the Fund's perspective as well as from the
perspective of shareholders.
In reviewing the Agreements, the Board considered the nature, quality and extent
of services provided by the Advisor and the Sub-Advisor under the Agreements.
The Board considered the Advisor's statements regarding the incremental benefits
associated with the Fund's advisor/sub-advisor management structure. With
respect to the Advisory Agreement, the Board considered that the Advisor is
responsible for the overall management and administration of the Fund, including
the oversight of the Sub-Advisor. The Board noted the compliance program that
had been developed by the Advisor and considered that the compliance program
includes policies and procedures for monitoring the Sub-Advisor's compliance
with the 1940 Act and the Fund's investment objectives and policies. The Board
also noted the enhancements made by the Advisor to the compliance program in
2008. With respect to the Sub-Advisory Agreement, the Board received a
presentation from representatives of the Sub-Advisor discussing the services
that the Sub-Advisor provides to the Fund and how the Sub-Advisor manages the
Fund's investments. In light of the information presented and the considerations
made, the Board concluded that the nature, quality and extent of 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 objectives and policies.
Page 23
ADDITIONAL INFORMATION - (CONTINUED)
FIRST TRUST STRATEGIC HIGH INCOME FUND
APRIL 30, 2009 (UNAUDITED)
The Board considered the advisory and sub-advisory fees paid under the
Agreements. The Board considered the advisory fees paid to the Advisor by
similar funds, and noted that the Advisor does not provide advisory services to
clients with investment objectives and policies similar to the Fund's other than
to two other closed-end funds (for which the fee rate is identical). The Board
also considered information provided by the Sub-Advisor as to the fees it
charges to other similar clients, noting that the Sub-Advisor provides
sub-advisory services to the same two other similar closed-end funds (for which
the fee rate is identical). In addition, the Board received data prepared by
Lipper Inc. ("Lipper"), an independent source, showing the management fees and
expense ratios of the Fund as compared to the management fees and expense ratios
of a combined peer group selected by Lipper and the Advisor. The Board discussed
with representatives of the Advisor the limitations in creating a relevant peer
group for the Fund, including that (i) the peer funds may use different types of
leverage which have different costs associated with them; (ii) most peer funds
do not employ an advisor/sub-advisor management structure; (iii) the peer funds
may not have the same fiscal year as the Fund, which may cause the expense data
used by Lipper to be measured over different time periods; (iv) many of the peer
funds are larger than the Fund; and (v) many of the peer funds have an inception
date prior to the Fund's inception date and their fee and expense structures may
not reflect newer pricing practices in the market. The Board reviewed the Lipper
materials, but based on its discussions with the Advisor, the Board determined
that the Lipper data was of limited value for purposes of its consideration of
the renewal of the Agreements.
The Board also considered performance information for the Fund, noting that,
similar to almost all other funds, the Fund's performance was impacted by the
severe market downturn in 2008. The Board noted that the performance information
included the Fund's quarterly performance report, which is part of the process
that the Board has established for monitoring the Fund's performance on an
ongoing basis. The Board determined that this process continues to be effective
for reviewing the Fund's performance. In addition to the Board's ongoing review
of performance, the Board also received data prepared by Lipper comparing the
Fund's performance to the combined peer group selected by Lipper and the
Advisor, as well as to a larger group and to a benchmark. The Board reviewed the
Lipper materials, but for similar reasons to those described above, the Board
determined that the performance data provided by Lipper was of limited value.
The Board considered changes made to the Fund's leverage arrangements in 2008 as
a result of market events, noting that the Fund had terminated its leverage
arrangements. In addition, the Board considered the market price and net asset
value performance of the Fund since inception, and compared the Fund's
premium/discount to the average and median premium/discount of the combined peer
group, noting that the Fund's premium/discount was generally indicative of the
asset class and market events. Based on the information provided and the Board's
ongoing review of the Fund's performance, and taking into account the historic
market events of 2008, the Board concluded that the Fund's performance was
reasonable.
On the basis of all the information provided on the fees, expenses and
performance of the Fund, the Board concluded that the advisory and sub-advisory
fees were reasonable and appropriate in light of the nature, quality and extent
of services provided by the Advisor and Sub-Advisor under the Agreements.
The Board noted that the Advisor has continued to invest in personnel and
infrastructure and had noted that the advisory fee is not structured to pass the
benefits of any economies of scale on to the shareholders as the Fund's assets
grow. The Board concluded that the management fee reflects an appropriate level
of sharing of any economies of scale. The Board also considered the costs of the
services provided and profits realized by the Advisor from serving as investment
manager to closed-end funds for the twelve months ended December 31, 2008, as
set forth in the materials provided to the Board. The Board noted the inherent
limitations in the profitability analysis, and concluded that the Advisor's
profitability appeared to be not excessive in light of the services provided to
the Fund. In addition, the Board considered and discussed any ancillary benefits
derived by the Advisor from its relationship with the Fund and noted that the
typical fall out benefits to the Advisor such as soft dollars are not present.
The Board concluded that any other fall out benefits received by the Advisor or
its affiliates would appear to be limited.
The Board considered the Sub-Advisor's representation that because of the amount
of evaluation and administration necessary for maintaining the securities in the
portfolio, there are only very limited economies of scale available in
connection with its sub-advisory services. The Board considered that the
sub-advisory fee rate was negotiated at arm's length between the Advisor and the
Sub-Advisor. The Board considered the Sub-Advisor's representation that its
profitability, if any, is based solely on the advisory fees it receives from the
Fund and two other closed-end funds in the First Trust Fund Complex. The Board
considered the Advisor's representation that First Trust Portfolios L.P., an
affiliate of the Advisor, had committed to provide any necessary financing for
the Sub-Advisor. The Board noted that the Sub-Advisor does not maintain any
soft-dollar arrangements and that the Sub-Advisor did not identify any material
fall out benefits from its relationship to the Fund.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, 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 LOGO)
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Valhalla Capital Partners, LLC
13011 W. Hwy 42, Suite 201
Prospect, KY 40059
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
PNC Global Investment Servicing (U.S.) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
PFPC Trust Company
8800 Tinicum Boulevard
Philadelphia, PA 19153
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
ITEM 2. CODE OF ETHICS.
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)(1) IDENTIFICATION OF PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBERS
On May 1, 2009, Valhalla Capital Partners, LLC ("Valhalla") submitted
its notice of resignation as the investment sub-advisor to the Registrant,
effective June 30, 2009. On June 29, 2009, the Board of Trustees of the
Registrant voted to approve Hyperion Brookfield Asset Management, Inc.
("Hyperion") as investment sub-advisor to the Registrant, replacing the
Registrant's investment sub-advisory agreement with Valhalla which was
terminated. Hyperion is a registered investment advisor headquartered in New
York City and was founded in 1989 to provide relative value driven fixed income
investment strategies, such as core fixed income, high yield, and specialized
MBS. From Hyperion, Dana Erikson and Anthony Breaks are Portfolio Managers for
the Registrant.
DANA E. ERIKSON, CFA, MANAGING DIRECTOR
Mr. Erikson, Senior Portfolio Manager and the co-Head of the Hyperion
Brookfield High Yield Team, is responsible for Hyperion Brookfield's corporate
high yield and leveraged loan exposures, the establishment of portfolio
objectives and strategies. Mr. Erikson is a member of Hyperion's Investment
Committee.
Mr. Erikson has over 21 years of investment experience. Prior to
joining Hyperion in September 2006, he was with Evergreen Investments or one of
its predecessor firms since 1996. He was a senior portfolio manager and the Head
of the High Yield team. Prior to that, he was the Head of High Yield Research.
Prior to Evergreen, Mr. Erikson was an Associate Portfolio Manager for Prospect
Street Investment Management Company. Additionally, he was an Analyst with the
Kellett Group and a Research Assistant with Robert R. Nathan Associates.
Mr. Erikson received a BA in Economics from Brown University and an
MBA, with honors, from Northeastern University. He is a member of the Boston
Security Analysts Society.
ANTHONY BREAKS, CFA, DIRECTOR
Mr. Breaks is responsible for portfolio management of structured
products and for executing structured product financings for Hyperion and its
partners. Mr. Breaks is also head of Hyperion's Short Term Investments and
Financing business.
Mr. Breaks joined Hyperion in September 2005 from Brookfield Asset
Management (formerly known as Brascan), where he worked since 2002. At Brascan
he was responsible for portfolio investments and credit analysis for a
reinsurance affiliate, execution and management of a synthetic CDO, and
development of insurance related investment products. Prior to joining Brascan,
Mr. Breaks was a Director at Liberty Hampshire since 2000 and was responsible
for structuring, restructuring and executing several CDOs, as well as ongoing
monitoring and credit analysis for the CDO assets. Mr. Breaks began his career
at Merrill Lynch where he worked in trading and structuring capacities in CDOs,
adjustable rate mortgages and medium-term notes.
Mr. Breaks earned a BS in Electrical Engineering from the Massachusetts
Institute of Technology.
(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBER AND
POTENTIAL CONFLICTS OF INTEREST
Total # of Accounts Total Assets
Managed for which for which
# of Advisory Fee is Advisory Fee
Name of Portfolio Manager or ACCOUNTS Total Based on is Based on
TEAM MEMBER TYPE OF ACCOUNTS MANAGED ASSETS PERFORMANCE PERFORMANCE
----------- ---------------- ------- ------- ----------- -----------
1. Dana Erikson Registered Investment Companies: 6 $187M 0 $0
Other Pooled Investment Vehicles: 0 $0 0 $0
Other Accounts: 1 $17M 0 $0
2 . Anthony Breaks Registered Investment Companies: 5 $159M 0 $0
Other Pooled Investment Vehicles: 0 $0 0 $0
Other Accounts: 5 $526M 0 $0
Information provided as of May 31, 2009
POTENTIAL CONFLICTS OF INTERESTS
Potential conflicts of interest may arise when a portfolio manager of
the Registrant has day-to-day management responsibilities with respect to one or
more other funds or other accounts, as is the case for the portfolio managers of
the Registrant.
These potential conflicts include:
ALLOCATION OF LIMITED TIME AND ATTENTION. A portfolio manager who is
responsible for managing multiple funds and/or accounts may devote unequal time
and attention to the management of those funds and/or accounts. As a result, the
portfolio manager may not be able to formulate as complete a strategy or
identify equally attractive investment opportunities for each of those accounts
as the case may be if he or she were to devote substantially more attention to
the management of a single fund. The effects of this potential conflict may be
more pronounced where funds and/or accounts overseen by a particular portfolio
manager have different investment strategies.
ALLOCATION OF LIMITED INVESTMENT OPPORTUNITIES. If a portfolio manager
identifies a limited investment opportunity that may be suitable for multiple
funds and/or accounts, the opportunity may be allocated among these several
funds or accounts, which may limit a fund's ability to take full advantage of
the investment opportunity.
PURSUIT OF DIFFERING STRATEGIES. At times, a portfolio manager may
determine that an investment opportunity may be appropriate for only some of the
funds and/or accounts for which he or she exercises investment responsibility,
or may decide that certain of the funds and/or accounts should take differing
positions with respect to a particular security. In these cases, the portfolio
manager may place separate transactions for one or more funds or accounts which
may affect the market price of the security or the execution of the transaction,
or both, to the detriment or benefit of one or more other funds and/or accounts.
VARIATION IN COMPENSATION. A conflict of interest may arise where the
financial or other benefits available to the portfolio manager differ among the
funds and/or accounts that he or she manages. If the structure of Hyperion's
management fee and/or the portfolio manager's compensation differs among funds
and/or accounts (such as where certain funds or accounts pay higher management
fees or performance-based management fees), the portfolio manager might be
motivated to help certain funds and/or accounts over others. The portfolio
manager might be motivated to favor funds and/or accounts in which he or she has
an interest or in which Hyperion and/or its affiliates have interests.
Similarly, the desire to maintain or raise assets under management or to enhance
the portfolio manager's performance record or to derive other rewards, financial
or otherwise, could influence the portfolio manager to lend preferential
treatment to those funds and/or accounts that could most significantly benefit
the portfolio manager.
RELATED BUSINESS OPPORTUNITIES. Hyperion or its affiliates may provide
more services (such as distribution or recordkeeping) for some types of funds or
accounts than for others. In such cases, a portfolio manager may benefit, either
directly or indirectly, by devoting disproportionate attention to the management
of fund and/or accounts that provide greater overall returns to the investment
manager and its affiliates.
Hyperion has adopted compliance policies and procedures that are
designed to address the various conflicts of interest that may arise for
Hyperion and the individuals that it employs. For example, Hyperion seeks to
minimize the effects of competing interests for the time and attention of
portfolio managers by assigning portfolio managers to manage funds and accounts
that share a similar investment style. Hyperion has also adopted trade
allocation procedures that are designed to facilitate the fair allocation of
limited investment opportunities among multiple funds and accounts. There is,
however, no guarantee that such policies and procedures will be able to detect
and prevent every situation in which an actual or potential conflict may appear.
(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGERS OR MANAGEMENT TEAM MEMBERS
PORTFOLIO MANAGER COMPENSATION
The Registrant's portfolio managers are compensated by Hyperion. The
compensation structure of Hyperion's portfolio managers and other investment
professionals has three primary components: (1) a base salary, (2) an annual
cash bonus, and (3) if applicable, long-term stock-based compensation consisting
generally of restricted stock units of Hyperion's indirect parent company,
Brookfield Asset Management, Inc. The portfolio managers also receive certain
retirement, insurance and other benefits that are broadly available to all of
Hyperion's employees. Compensation of the portfolio managers is reviewed on an
annual basis by senior management.
Hyperion compensates its portfolio managers based primarily on the scale and
complexity of their portfolio responsibilities, the total return performance of
funds and accounts managed by the portfolio manager on an absolute basis and
versus appropriate peer groups of similar size and strategy, as well as the
management skills displayed in managing their subordinates and the teamwork
displayed in working with other members of the firm. Since the portfolio
managers are responsible for multiple funds and accounts, investment performance
is evaluated on an aggregate basis almost equally weighted among performance,
management and teamwork. Base compensation for Hyperion's portfolio managers
varies in line with the portfolio manager's seniority and position. The
compensation of portfolio managers with other job responsibilities (such as
acting as an executive officer of Hyperion and supervising various departments)
will include consideration of the scope of such responsibilities and the
portfolio manager's performance in meeting them. Hyperion seeks to compensate
portfolio managers commensurate with their responsibilities and performance, and
competitive with other firms within the investment management industry.
Salaries, bonuses and stock-based compensation are also influenced by the
operating performance of Hyperion and its indirect parent. While the salaries of
Hyperion's portfolio managers are comparatively fixed, cash bonuses and
stock-based compensation may fluctuate significantly from year to year, based on
changes in the portfolio manager's performance and other factors as described
herein.
(4) DISCLOSURE OF SECURITIES OWNERSHIP
Information provided as of May 31, 2009
Dollar Range of Fund Shares
Name Beneficially Owned
Dana Erikson $0
Anthony Breaks $0
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 STRATEGIC HIGH INCOME FUND
By (Signature and Title)* /S/ JAMES A. BOWEN
-------------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date 6/18/09
----------------------------------------------------------------------------
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 6/18/09
----------------------------------------------------------------------------
By (Signature and Title)* /S/ MARK R. BRADLEY
-------------------------------------------------------
Mark R. Bradley, Treasurer, Controller, Chief
Financial Officer and Chief Accounting Officer
(principal financial officer)
Date 6/18/09
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.