UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-Q
QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED
MANAGEMENT INVESTMENT COMPANY
Investment Company Act file number 811-22039
First Trust Specialty Finance and Financial Opportunities Fund
(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
(Name and address of agent for service)
Registrant's telephone number, including area code: 630-765-8000
Date of fiscal year end: November 30
Date of reporting period: August 31, 2010
Form N-Q is to be used by management investment companies, other than small
business investment companies registered on Form N-5 (Sections 239.24 and 274.5
of this chapter), to file reports with the Commission, not later than 60 days
after the close of the first and third fiscal quarters, pursuant to rule 30b1-5
under the Investment Company Act of 1940 (17 CFR 270.30b1-5). The Commission may
use the information provided on Form N-Q in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-Q, and
the Commission will make this information public. A registrant is not required
to respond to the collection of information contained in Form N-Q unless the
Form displays a currently valid Office of Management and Budget ("OMB") control
number. Please direct comments concerning the accuracy of the information
collection burden estimate and any suggestions for reducing the burden to the
Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC
20549. The OMB has reviewed this collection of information under the clearance
requirements of 44 U.S.C. Section 3507.
ITEM 1. SCHEDULE OF INVESTMENTS.
The Schedule(s) of Investments is attached herewith.
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
PORTFOLIO OF INVESTMENTS (a)
AUGUST 31, 2010 (UNAUDITED)
SHARES DESCRIPTION VALUE
------- ------------------------------------------------------- ------------
COMMON STOCKS -- 114.1%
CAPITAL MARKETS -- 84.0%
616,806 Apollo Investment Corp. (b) (c)........................ $ 5,902,833
911,233 Ares Capital Corp. (b) (c)............................. 13,613,821
619,320 BlackRock Kelso Capital Corp. (b) (c).................. 6,688,656
304,366 Fifth Street Finance Corp. (b) (c)..................... 3,001,049
420,716 Gladstone Capital Corp. (b) (c)........................ 4,388,068
183,333 Gladstone Investment Corp. (c)......................... 1,081,665
236,214 Golub Capital BDC, Inc. (c)............................ 3,396,757
544,556 Hercules Technology Growth Capital, Inc. (b) (c)....... 4,985,410
338,063 Kohlberg Capital Corp. (c)............................. 1,747,786
19,774 Main Street Capital Corp. (b) (c)...................... 293,248
233,600 MCG Capital Corp. (b) (c).............................. 1,233,408
603,700 MVC Capital, Inc. (b) (c).............................. 7,751,508
351,637 NGP Capital Resources Co. (b) (c)...................... 2,844,743
794,000 PennantPark Investment Corp. (b) (c)................... 7,844,720
212,176 Prospect Capital Corp. (b) (c)......................... 1,947,776
9,776 Saratoga Investment Corp. (c) (d)...................... 178,412
305,036 Solar Capital, Ltd. (b) (c)............................ 5,990,907
287,499 THL Credit, Inc. (c)................................... 3,332,113
206,477 TICC Capital Corp. (b) (c)............................. 1,891,329
218,601 Triangle Capital Corp. (b) (c)......................... 3,370,827
------------
81,485,036
------------
DIVERSIFIED FINANCIAL SERVICES -- 6.1%
187,500 Compass Diversified Holdings (b)....................... 2,658,750
459,504 Medallion Financial Corp. (b) (c)...................... 3,239,503
------------
5,898,253
------------
HEALTH CARE EQUIPMENT & SUPPLIES -- 0.5%
59,075 Medical Action Industries, Inc. (b) (d)................ 482,643
------------
INSURANCE -- 4.1%
3 Berkshire Hathaway, Inc., Class A (b) (d).............. 356,025
83,700 Fidelity National Financial, Inc., Class A (b)......... 1,214,487
3,250 Markel Corp. (b) (d)................................... 1,065,090
38,475 W.R. Berkley Corp. (b)................................. 1,013,816
1,000 Wesco Financial Corp. (b).............................. 362,540
------------
4,011,958
------------
REAL ESTATE INVESTMENT TRUSTS (REITS) -- 17.8%
339,500 Annaly Capital Management, Inc. (b).................... 5,900,510
206,305 Cypress Sharpridge Investments, Inc. (b)............... 2,778,928
192,307 Cypress Sharpridge Investments, Inc. (e)............... 2,590,375
46,282 Hatteras Financial Corp. (b)........................... 1,341,252
100,000 Hatteras Financial Corp. (b) (e)....................... 2,898,000
550,049 NorthStar Realty Finance Corp. (b)..................... 1,749,156
------------
17,258,221
------------
See Notes to Quarterly Portfolio of Investments
Page 1
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
PORTFOLIO OF INVESTMENTS (a) -- (CONTINUED)
AUGUST 31, 2010 (UNAUDITED)
SHARES/
UNITS DESCRIPTION VALUE
------- ------------------------------------------------------- ------------
COMMON STOCKS -- (CONTINUED)
THRIFTS & MORTGAGE FINANCE -- 1.6%
100,000 Northwest Bancshares, Inc. (b)......................... $ 1,075,000
35,584 People's United Financial, Inc. (b).................... 452,628
------------
1,527,628
------------
TOTAL COMMON STOCKS
(Cost $139,110,008)................................. 110,663,739
------------
EXCHANGE-TRADED FUNDS -- 2.2%
CAPITAL MARKETS -- 2.2%
55,000 SPDR Barclays Capital High Yield Bond ETF (b).......... 2,140,051
------------
TOTAL EXCHANGE-TRADED FUNDS
(Cost $1,864,609)................................... 2,140,051
------------
CANADIAN INCOME TRUSTS -- 0.0%
OIL, GAS & CONSUMABLE FUELS -- 0.0%
100 ARC Energy Trust....................................... 1,859
81 Progress Energy Resources Corp. ....................... 893
------------
TOTAL CANADIAN INCOME TRUSTS
(Cost $3,345)....................................... 2,752
------------
WARRANTS -- 0.2%
REAL ESTATE INVESTMENT TRUSTS (REITS) -- 0.2%
576,923 Cypress Sharpridge Investments, Inc., expires 04/30/11,
with an exercise price of $11 per share (d) (e)
(f)................................................. 143,365
------------
TOTAL WARRANTS
(Cost $0)........................................... 143,365
------------
TOTAL INVESTMENTS -- 116.5%
(Cost $140,977,962) (g)............................. 112,949,907
OUTSTANDING LOAN -- (17.5)%............................ (17,000,000)
NET OTHER ASSETS AND LIABILITIES -- 1.0%............... 1,014,552
------------
NET ASSETS -- 100.0%................................... $ 96,964,459
============
----------
(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) All or a portion of this security is available to serve as collateral on
the outstanding loan.
(c) Business Development Company.
(d) Non-income producing security.
(e) 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, and may be resold in transactions exempt from registration,
normally to qualified institutional buyers (see Note 1C - Restricted
Securities in the Notes to Quarterly Portfolio of Investments).
(f) Security is fair valued in accordance with procedures adopted by the Fund's
Board of Trustees.
(g) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of August 31, 2010, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $6,599,293 and the aggregate gross
unrealized depreciation for all securities in which there was an excess of
tax cost over value was $34,627,348.
See Notes to Quarterly Portfolio of Investments
Page 2
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
PORTFOLIO OF INVESTMENTS (a) -- (CONTINUED)
AUGUST 31, 2010 (UNAUDITED)
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of August 31,
2010 is as follows (see Note 1A -- Portfolio Valuation in the Notes to Quarterly
Portfolio of Investments):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
8/31/2010 PRICES INPUTS INPUTS
------------ ------------ ----------- ------------
Common Stocks*............ $110,663,739 $110,663,739 $ -- $--
Exchange-Traded Funds*.... 2,140,051 2,140,051 -- --
Canadian Income Trusts*... 2,752 2,752 -- --
Warrants*................. 143,365 -- 143,365 --
------------ ------------ -------- ---
TOTAL INVESTMENTS......... $112,949,907 $112,806,542 $143,365 $--
============ ============ ======== ===
* See Portfolio of Investments for industry breakout.
See Notes to Quarterly Portfolio of Investments
Page 3
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
AUGUST 31, 2010 (UNAUDITED)
1. VALUATION AND INVESTMENT PRACTICES
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of First Trust Specialty
Finance and Financial Opportunities Fund (the "Fund") is determined daily as of
the close of regular trading on the New York Stock Exchange ("NYSE"), normally
4:00 p.m. Eastern time, on each day the NYSE is open for trading. Domestic debt
securities and foreign securities are priced using data reflecting the earlier
closing of the principal markets for those securities. The NAV per Common Share
is calculated by dividing the value of all assets of the Fund (including accrued
interest and dividends), less all liabilities (including accrued expenses,
dividends declared but unpaid and any borrowings of the Fund), by the total
number of Common Shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value according
to procedures adopted by the Fund's Board of Trustees. A majority of the Fund's
assets are valued using market information supplied by third parties. In the
event that market quotations are not readily available, the pricing service does
not provide a valuation for a particular asset, or the valuations are deemed
unreliable, the Fund's Board of Trustees has designated First Trust Advisors
L.P. ("First Trust") to use a fair value method to value the Fund's securities
and other 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. The use of fair value pricing by the Fund is governed by
valuation procedures adopted by the Fund's Board of Trustees and in accordance
with the provisions of the Investment Company Act of 1940, as amended (the "1940
Act").
Portfolio securities listed on any exchange other than the NASDAQ National
Market ("NASDAQ") are valued at the last sale price on the business day as of
which such value is being determined. If there has been no sale on such day, the
securities are valued at the mean of the most recent bid and asked prices on
such day. Securities traded on the NASDAQ are valued at the NASDAQ Official
Closing Price as determined by NASDAQ. Portfolio securities traded on more than
one securities exchange are valued at the last sale price on the business day as
of which such value is being determined at the close of the exchange
representing the principal market for such securities. Portfolio securities
traded in the over-the-counter market, but excluding securities traded on the
NASDAQ, are valued at the closing bid prices. Short-term investments that mature
in less than 60 days when purchased are valued at amortized cost.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
- Level 1 -- Level 1 inputs are quoted prices in active markets for
identical securities. An active market is a market in which
transactions for the security occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
- Level 2 -- Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
- Quoted prices for similar securities in active markets.
- Quoted prices for identical or similar securities in markets that
are non-active. A non-active market is a market where there are
few transactions for the security, the prices are not current, or
price quotations vary substantially either over time or among
market makers, or in which little information is released
publicly.
- Inputs other than quoted prices that are observable for the
security (for example, interest rates and yield curves observable
at commonly quoted intervals, volatilities, prepayment speeds,
loss severities, credit risks, and default rates).
- Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
- Level 3 -- Level 3 inputs are unobservable inputs. Unobservable inputs
reflect the reporting entity's own assumptions about the assumptions
that market participants would use in pricing the security.
The inputs or methodology used for valuing securities are not necessarily an
indication of the risk associated with investing in those securities. A summary
of the inputs used to value the Fund's investments as of August 31, 2010, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Page 4
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS - (CONTINUED)
FIRST TRUST SPECIALTY FINANCE AND FINANCIAL OPPORTUNITIES FUND
AUGUST 31, 2010 (UNAUDITED)
C. RESTRICTED SECURITIES:
The Fund invests in restricted securities, which are securities that cannot be
offered for public sale without first being registered under the Securities Act
of 1933, as amended (the "1933 Act"). Prior to registration, restricted
securities may only be resold in transactions exempt from registration under
Rule 144A of the 1933 Act. As of August 31, 2010, the Fund held restricted
securities as shown in the table below. The Fund does not have the right to
demand that such securities be registered. These securities are valued according
to the valuation procedures as stated in the Portfolio Valuation footnote (Note
1A) and are not expressed as a discount to the carrying value of comparable
unrestricted securities.
ACQUISITION CARRYING % OF
SECURITY DATE SHARES PRICE COST VALUE NET ASSETS
-------- ----------- ------- ------ ---------- ---------- ----------
Cypress Sharpridge Investments, Inc. 5/19/08 192,307 $13.47 $2,999,989 $2,590,375 2.67%
Cypress Sharpridge Investments, Inc., Warrants 5/19/08 576,923 0.25 -- 143,365 0.15
Hatteras Financial Corp. 1/29/08 100,000 28.98 2,400,000 2,898,000 2.99
---------- ---------- ----
$5,399,989 $5,631,740 5.81%
========== ========== ====
2. SUBSEQUENT EVENTS
On October 12, 2010, First Trust announced that James A. Bowen, its President,
acquired 100% of the voting stock of The Charger Corporation, the general
partner of First Trust (the "Transaction"). First Trust is a limited partnership
with one limited partner and one general partner (The Charger Corporation). The
Transaction is not expected to impact the day-to-day operations of the Fund. The
consummation of the Transaction is deemed to be an "assignment" (as defined in
the 1940 Act) of the Fund's investment management agreement and investment
sub-advisory agreement and resulted in the automatic termination of the
agreements.
The Board of Trustees of the Fund has approved an interim investment management
agreement with First Trust and an interim investment sub-advisory agreement,
which were entered into effective upon the closing of the Transaction and will
be in effect for a maximum period of 150 days. A new investment management
agreement with First Trust and a new investment sub-advisory agreement have been
approved by the Board of Trustees of the Fund and will be submitted to
shareholders of the Fund as of the record date (September 30, 2010) for approval
and will take effect upon such shareholder approval. A special shareholder
meeting of the Fund to vote on a proposal to approve the new investment
management and the new investment sub-advisory agreement is expected to be held
on December 6, 2010.
Page 5
ITEM 2. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers,
or persons performing similar functions, have concluded that the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the
"1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within
90 days of the filing date of the report that includes the disclosure
required by this paragraph, based on their evaluation of these
controls and procedures required by Rule 30a-3(b) under the 1940 Act
(17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the
Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or
240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act
(17 CFR 270.30a-3(d)) that occurred during the registrant's last
fiscal quarter that have materially affected, or are reasonably likely
to materially affect, the registrant's internal control over financial
reporting.
ITEM 3. EXHIBITS.
Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of
the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) First Trust Specialty Finance and Financial Opportunities Fund
By (Signature and Title)* /s/ James A. Bowen
---------------------------------------
James A. Bowen, Chairman of the Board,
President and Chief Executive Officer
(principal executive officer)
Date October 20, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ James A. Bowen
----------------------------------------
James A. Bowen, Chairman of the Board,
President and Chief Executive Officer
(principal executive officer)
Date October 20, 2010
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, Treasurer, Controller,
Chief Financial Officer
and Chief Accounting Officer
(principal financial officer)
Date October 20, 2010
* Print the name and title of each signing officer under his or her
signature.