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 811-21756
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: January 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 of Investments is attached herewith.
FIRST TRUST STRATEGIC HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (a)
JANUARY 31, 2010 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
----------- ---------------------------------------------------- ------ ---------- -----------
ASSET-BACKED SECURITIES -- 21.8%
ACE Securities Corp., Home Equity Loan Trust
$ 21,468 Series 2003-OP1, Class B ........................ 6.00% 12/25/33 $ 6,624
Atherton Franchisee Loan Funding
237,926 Series 1999-A, Class A2 (b) ..................... 7.23% 03/15/21 210,184
Bombardier Capital Mortgage Securitization Corp.
320,413 Series 1999-B, Class A1B ........................ 6.61% 09/15/10 208,345
820,342 Series 1999-B, Class A3 ......................... 7.18% 12/15/15 566,586
3,151,985 Conseco Finance Securitizations Corp.
Series 2000-6, Class M1 ......................... 7.72% 09/01/31 998,897
Falcon Franchise Loan Trust
4,905,000 Series 2000-1, Class E (b) (d) .................. 6.50% 04/05/16 24,525
4,231,000 Series 2003-1, Class E (c) (d) .................. 6.00% 01/05/25 21,155
Green Tree Financial Corp.
276,624 Series 1997-4, Class B1 ......................... 7.23% 02/15/29 28,603
921,849 Series 1998-4, Class M1 ......................... 6.83% 04/01/30 398,532
3,000,000 Series 1998-8, Class M1 ......................... 6.98% 09/01/30 1,487,984
4,833,020 Series 1999-3, Class M1 ......................... 6.96% 02/01/31 696,721
GSAMP Trust
440,199 Series 2004-AR2, Class B4 (c) ................... 5.00% 08/25/34 1,880
978,915 Series 2006-S3, Class A2 (e) .................... 5.77% 05/25/36 58,772
856,192 Series 2006-S5, Class A1 (f) .................... 0.32% 09/25/36 31,504
Independence lll CDO, Ltd.
5,000,000 Series 3A, Class C1 (c) (d) (f) ................. 2.75% 10/03/37 50
Indymac Residential Asset Backed Trust
743,354 Series 2005-B, Class M10 (f) .................... 3.73% 08/25/35 2,823
Long Beach Mortgage Loan Trust
1,923,875 Series 2006-A, Class A2 ......................... 5.55% 05/25/36 101,538
Longhorn CDO, Ltd.
3,025,118 Series 1, Class C (c) (d) (f) ................... 6.52% 05/10/12 15,126
Merit Securities Corp.
1,077,375 Series 13, Class B1 (c) ......................... 7.08% 12/28/33 14,801
2,602,000 Series 13, Class M2 ............................. 7.96% 12/28/33 812,907
Park Place Securities, Inc.
2,147,693 Series 2004-WCW1, Class M8 (f) .................. 3.73% 09/25/34 57,631
1,301,976 Series 2004-WCW2, Class M10 (c) (f) ............. 2.98% 10/25/34 44,760
208,511 Series 2005-WCW3, Class M11 (c) (f) ............. 2.73% 08/25/35 813
Rosedale CLO, Ltd.
3,620,454 Series I-A, Class II (c) ........................ (g) 07/24/21 36,205
Structured Asset Securities Corp.
977,629 Series 2006-GEL1, Class A1 (f) .................. 0.37% 11/25/35 969,153
Summit CBO I, Ltd.
4,159,437 Series 1A, Class B (c) (f) ...................... 1.49% 05/23/11 41,594
-----------
TOTAL ASSET-BACKED SECURITIES ........................................... 6,837,713
(Cost $6,747,912) -----------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 3.2%
Bear Stearns Alt-A Trust
1,199,599 Series 2006-8, Class 2A2 ........................ 5.18% 08/25/46 50,985
|
See Notes to Quarterly Portfolio of Investments
Page 1
FIRST TRUST STRATEGIC HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (a) -- (CONTINUED)
JANUARY 31, 2010 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
----------- ---------------------------------------------------- ------ ---------- -----------
COLLATERALIZED MORTGAGE OBLIGATIONS -- (CONTINUED)
Countrywide Alternative Loan Trust
$ 3,179,217 Series 2005-56, Class M4 (f) .................... 1.15% 11/25/35 $ 88,001
Deutsche Alt-A Securities, Inc. Mortgage Loan Trust
3,691,244 Series 2007-OA4, Class M10 (f) .................. 3.23% 08/25/47 46,879
HarborView Mortgage Loan Trust
3,810,628 Series 2005-9, Class B10 (f) .................... 1.98% 06/20/35 811,130
-----------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS ................................ 996,995
(Cost $1,623,147) -----------
COMMERCIAL MORTGAGE-BACKED SECURITIES -- 7.4%
Banc of America Commercial Mortgage Inc.
1,171,422 Series 2000-1, Class M (c) (d) .................. 6.00% 11/15/31 469
Banc of America Large Loan, Inc.
2,000,000 Series 2005-MIB1, Class L (c) (e) (f) ........... 3.23% 03/15/22 227,802
Bear Stearns Commercial Mortgage Securities
1,776,400 Series 2000-WF1, Class K (d) .................... 6.50% 02/15/32 430,383
GE Capital Commercial Mortgage Corp.
700,000 Series 2000-1, Class G (c) ...................... 6.13% 01/15/33 305,851
GS Mortgage Securities Corp. II
6,886,020 Series 1998-C1, Class H (c) (e) ................. 6.00% 10/18/30 393,789
LB-UBS Commercial Mortgage Trust
3,025,000 Series 2001-C7, Class Q (c) ..................... 5.87% 11/15/33 151,375
2,083,703 Series 2001-C7, Class S (c) (e) ................. 5.87% 11/15/33 15,149
Morgan Stanley Capital I, Inc.
968,400 Series 1999-WF1, Class M (c) .................... 5.91% 11/15/31 607,336
2,787,919 Series 2003-IQ5, Class O (c) (e) ................ 5.24% 04/15/38 198,389
-----------
TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES .............................. 2,330,543
(Cost $11,594,400) -----------
CORPORATE BONDS AND NOTES -- 57.7%
AUTO COMPONENTS -- 1.2%
400,000 TRW Automotive, Inc. (b) ........................... 7.25% 03/15/17 389,000
-----------
AUTOMOBILES -- 1.1%
400,000 Ford Motor Co. ..................................... 6.50% 08/01/18 358,000
-----------
CHEMICALS -- 2.2%
305,000 Hexion Finance Escrow LLC/ Hexion Escrow
Corp. (b) ....................................... 8.88% 02/01/18 295,469
400,000 Westlake Chemical Corp. ............................ 6.63% 01/15/16 383,000
-----------
678,469
-----------
COMMERCIAL SERVICES & SUPPLIES -- 2.7%
400,000 Iron Mountain, Inc. ................................ 8.75% 07/15/18 418,000
400,000 KAR Holdings, Inc. ................................. 10.00% 05/01/15 426,000
-----------
844,000
-----------
CONTAINERS & PACKAGING -- 1.3%
400,000 Owens-Illinois, Inc. ............................... 7.80% 05/15/18 413,000
-----------
DIVERSIFIED FINANCIAL SERVICES -- 1.3%
400,000 Ford Motor Credit Co., LLC ......................... 7.00% 10/01/13 400,604
-----------
|
See Notes to Quarterly Portfolio of Investments
Page 2
FIRST TRUST STRATEGIC HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (a) -- (CONTINUED)
JANUARY 31, 2010 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
----------- ---------------------------------------------------- ------ ---------- -----------
CORPORATE BONDS AND NOTES -- (CONTINUED)
DIVERSIFIED TELECOMMUNICATION SERVICES -- 7.6%
$ 425,000 Cincinnati Bell, Inc. .............................. 8.38% 01/15/14 $ 430,313
400,000 Citizens Communications ............................ 7.13% 03/15/19 380,000
400,000 Global Crossing Ltd. (b) ........................... 12.00% 09/15/15 438,000
400,000 PAETEC Holding Corp. ............................... 9.50% 07/15/15 389,000
800,000 Qwest Corp. ........................................ 6.88% 09/15/33 740,000
-----------
2,377,313
-----------
ELECTRICAL EQUIPMENT -- 0.8%
245,000 Coleman Cable, Inc. (b) ............................ 9.00% 02/15/18 243,162
-----------
ENERGY EQUIPMENT & SERVICES -- 3.9%
425,000 Edgen Murray Corp. (b) ............................. 12.25% 01/15/15 408,000
400,000 Hercules Offshore LLC (b) .......................... 10.50% 10/15/17 414,000
400,000 McJunkin Red Man Corp. (b) ......................... 9.50% 12/15/16 401,000
-----------
1,223,000
-----------
FOOD & STAPLES RETAILING -- 2.3%
400,000 ARAMARK Corp. ...................................... 8.50% 02/01/15 403,000
400,000 Rite Aid Corp. ..................................... 8.63% 03/01/15 334,000
-----------
737,000
-----------
HEALTH CARE PROVIDERS & SERVICES -- 1.3%
400,000 HCA, Inc. .......................................... 9.25% 11/15/16 423,000
-----------
HOTELS, RESTAURANTS & LEISURE -- 5.3%
400,000 AMC Entertainment, Inc. ............................ 8.75% 06/01/19 416,000
400,000 Harrah's Operating Co., Inc. ....................... 11.25% 06/01/17 427,000
400,000 MGM MIRAGE (b) ..................................... 10.38% 05/15/14 441,000
400,000 MTR Gaming Group, Inc. (b) ......................... 12.63% 07/15/14 395,000
-----------
1,679,000
-----------
HOUSEHOLD DURABLES -- 1.3%
400,000 Jarden Corp. ....................................... 7.50% 05/01/17 404,000
-----------
IT SERVICES -- 2.5%
400,000 First Data Corp. ................................... 9.88% 09/24/15 359,000
400,000 SunGard Data Systems, Inc. ......................... 10.25% 08/15/15 417,000
-----------
776,000
-----------
MACHINERY -- 4.9%
400,000 CNH America LLC .................................... 7.25% 01/15/16 401,000
400,000 Mueller Water Products, Inc. ....................... 7.38% 06/01/17 362,000
400,000 Terex Corp. ........................................ 8.00% 11/15/17 384,000
400,000 Trimas Corp. (b) ................................... 9.75% 12/15/17 401,000
-----------
1,548,000
-----------
MEDIA -- 3.8%
400,000 Charter Communications Operating LLC/Charter
Communications Operating Capital (b) (j) . ...... 8.38% 04/30/14 409,000
400,000 Lamar Media Corp. .................................. 6.63% 08/15/15 387,000
400,000 Mediacom Broadband LLC/ Mediacom Broadband Corp. ... 8.50% 10/15/15 399,000
-----------
1,195,000
-----------
|
See Notes to Quarterly Portfolio of Investments
Page 3
FIRST TRUST STRATEGIC HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (a) -- (CONTINUED)
JANUARY 31, 2010 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
----------- ---------------------------------------------------- ------ ---------- -----------
CORPORATE BONDS AND NOTES -- (CONTINUED)
METALS & MINING -- 1.3%
$ 400,000 Arch Western Finance LLC ........................... 6.75% 07/01/13 $ 398,000
-----------
MULTILINE RETAIL -- 1.3%
400,000 Neiman Marcus Group, Inc. .......................... 10.38% 10/15/15 394,000
-----------
OIL, GAS & CONSUMABLE FUELS -- 2.2%
400,000 Chesapeake Energy Corp. ............................ 6.88% 01/15/16 396,000
300,000 El Paso Corp. ...................................... 6.88% 06/15/14 309,597
-----------
705,597
-----------
PAPER & FOREST PRODUCTS -- 4.0%
215,000 Appleton Papers, Inc. (b) .......................... 10.50% 06/15/15 210,775
185,000 Georgia-Pacific LLC ................................ 7.25% 06/01/28 179,450
215,000 Georgia-Pacific LLC ................................ 7.38% 12/01/25 216,075
225,000 Verso Paper Holdings LLC/ Verso Paper, Inc. ........ 9.13% 08/01/14 213,469
400,000 Verso Paper Holdings LLC/ Verso Paper, Inc. (b) .... 11.50% 07/01/14 432,000
-----------
1,251,769
-----------
SPECIALTY RETAIL -- 1.4%
400,000 Limited Brands, Inc. (b) ........................... 8.50% 06/15/19 438,000
-----------
TEXTILES, APPAREL & LUXURY GOODS -- 1.3%
400,000 Easton-Bell Sports, Inc. (b) ....................... 9.75% 12/01/16 419,000
-----------
TRADING COMPANIES & DISTRIBUTORS -- 2.7%
425,000 RSC Equipment Rental, Inc. ......................... 9.50% 12/01/14 432,438
400,000 United Rentals North America, Inc. ................. 9.25% 12/15/19 415,000
-----------
847,438
-----------
TOTAL CORPORATE BONDS AND NOTES .......................................... 18,142,352
(Cost $17,686,364) -----------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES -- 38.9%
3,875,000 FannieMae, March (h) ............................... 5.50% 30 yr. TBA 4,090,547
2,250,000 FannieMae, March (h) ............................... 6.00% 30 yr. TBA 2,399,767
5,812,368 FannieMae-ACES
Series 1998-M7, Class N, IO (f) ................. 0.43% 05/25/36 84,688
3,875,000 Government National Mortgage
Association, March (h) .......................... 5.00% 30 yr. TBA 4,017,313
22,684,755 Government National Mortgage Association
Series 2003-59, Class XA, IO (f) ................ 2.05% 06/16/34 1,631,404
-----------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED ............................. 12,223,719
SECURITIES ------------
(Cost $12,084,260)
STRUCTURED NOTES -- 1.0%
2,000,000 InCaps Funding II Ltd./InCaps Funding II Corp.
Subordinated Note (c) ........................... (g) 01/15/34 300,000
3,750,000 Preferred Term Securities XXV, Ltd. (c) ............ (g) 06/22/37 375
-----------
TOTAL STRUCTURED NOTES ................................................... 300,375
(Cost $399,896) -----------
|
See Notes to Quarterly Portfolio of Investments
Page 4
FIRST TRUST STRATEGIC HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (a) -- (CONTINUED)
JANUARY 31, 2010 (UNAUDITED)
SHARES DESCRIPTION VALUE
---------- -------------------------------------------------------------------------- -----------
PREFERRED SECURITIES -- 0.2%
1,450 Ajax Two Ltd., Series 2A (c) (g) ......................................... $ 14,500
2,000 Ajax Two Ltd., Series 2X (c) (g) ......................................... 20,000
2,000 Soloso CDO, Ltd., Series 2005-1 (c) (g) .................................. 20,000
3,000 White Marlin CDO, Ltd., Series AI (c) (g) (i) ............................ 15,000
-----------
TOTAL PREFERRED SECURITIES ............................................... 69,500
(Cost $605,851) -----------
TOTAL INVESTMENTS -- 130.2% .............................................. 40,901,197
(Cost $50,741,830) (k)
NET OTHER ASSETS AND LIABILITIES -- (30.2%) .............................. (9,479,084)
-----------
NET ASSETS -- 100.0% ..................................................... $31,422,113
===========
|
----------
(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) This security, sold within the terms of a private placement memorandum, is
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended (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 Brookfield Investment Management Inc., the
Fund's investment sub-advisor. Although market instability can result in
periods of increased overall market illiquidity, liquidity for each
security is determined based on security specific factors and assumptions,
which require subjective judgment. At January 31, 2010, securities noted as
such amounted to $5,969,115 or 19.0% of net assets.
(c) 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 (see Note C - Restricted Securities in the Notes to
Quarterly Portfolio of Investments).
(d) Security missed its last interest payment.
(e) Security is receiving less than the stated coupon.
(f) Floating rate security. The interest rate shown reflects the rate in effect
at January 31, 2010.
(g) Zero coupon investment.
(h) Security purchased on a forward commitment basis.
(i) The issuer is in default. Income is not being accrued.
(j) This issuer is in default but interest is still being accrued by the Fund
and paid by the issuer.
(k) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of January 31, 2010, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $1,622,599 and the aggregate gross
unrealized depreciation for all securities in which there was an excess of
tax cost over value was $11,463,232.
ACES Alternative Credit Enhancement Securities
CBO Collateralized Bond Obligation
CDO Collateralized Debt Obligation
CLO Collateralized Loan Obligation
IO Interest Only Security
TBA To be announced; maturity date has not yet been established. Upon
settlement and delivery of the mortgage pools, maturity dates will be
assigned.
|
See Notes to Quarterly Portfolio of Investments
Page 5
FIRST TRUST STRATEGIC HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (a) -- (CONTINUED)
JANUARY 31, 2010 (UNAUDITED)
VALUATION INPUTS
A summary of the inputs used to value the Fund's total investments as of January
31, 2010 is as follows (see Note A - Portfolio Valuation in the Notes to
Quarterly Portfolio of Investments):
LEVEL 2
TOTAL LEVEL 1 SIGNIFICANT LEVEL 3
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
1/31/10 PRICES INPUTS INPUTS
----------- ------- ----------- ------------
Asset-Backed Securities ..................... $ 6,837,713 $-- $ 6,699,108 $138,605
Collateralized Mortgage Obligations ......... 996,995 -- 996,995 --
Commercial Mortgage-Backed Securities ....... 2,330,543 -- 2,330,543 --
Corporate Bonds and Notes ................... 12,223,719 -- 12,223,719 --
U.S. Government Agency Mortgage-Backed
Securities ............................... 18,142,352 -- 18,142,352 --
Structured Notes ............................ 300,375 -- 375 300,000
Preferred Securities ........................ 69,500 -- -- 69,500
----------- --- ----------- --------
Total Investments ........................... $40,901,197 $-- $40,393,092 $508,105
=========== === =========== ========
|
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.
BALANCE CHANGE IN BALANCE
AS OF TRANSFERS NET UNREALIZED NET AS OF
INVESTMENTS AT FAIR VALUE USING OCTOBER 31, IN (OUT) NET REALIZED APPRECIATION PURCHASES JANUARY 31,
SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3) 2009 OF LEVEL 3 GAINS (LOSSES) (DEPRECIATION) (SALES) 2010
----------------------------------------- ----------- ---------- -------------- -------------- ----------- -----------
Asset-Backed Securities .................. $1,648,255 $(101,538) $(639,357) $ 386,730 $(1,155,485) $138,605
Corporate Bonds and Notes ................ 482,400 -- (225,000) 717,600 (975,000) --
Structured Notes ......................... 92,250 -- 65,844 207,750 (65,844) 300,000
Preferred Securities ..................... 84,500 -- -- (15,000) -- 69,500
---------- --------- --------- ---------- ----------- --------
Total Investments ........................ $2,307,405 $(101,538) $(798,513) $1,297,080 $(2,196,329) $508,105
========== ========= ========= ========== =========== ========
|
See Notes to Quarterly Portfolio of Investments
Page 6
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS
FIRST TRUST STRATEGIC HIGH INCOME FUND
JANUARY 31, 2010 (UNAUDITED)
VALUATION AND INVESTMENT PRACTICES
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of First Trust Strategic High
Income 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. 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 Fund's 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. The Fund's
Portfolio of Investments includes investments with a value of $508,105 (1.2% of
total investments) as of January 31, 2010, whose values have been determined
based on prices supplied by dealers and investments with a value of $40,393,092
(98.8% of total investments), whose values have been determined based on prices
supplied by independent pricing services. A ready market does not exist for some
of these investments. As such, these values may differ from the values that
would have been used had a ready market 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 security, 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 Investment
Company Act of 1940, as amended. 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.
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.
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.
Page 7
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS - (CONTINUED)
FIRST TRUST STRATEGIC HIGH INCOME FUND
JANUARY 31, 2010 (UNAUDITED)
- 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 January 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.
The Fund may purchase and sell securities on a "when-issued", "delayed delivery"
or "forward commitment" basis, with settlement to occur at a later date. The
price of the underlying securities and the date when the securities will be
delivered and paid for are fixed at the time the transaction is negotiated. The
value of the security so purchased is subject to market fluctuations during this
period. Purchasing securities on this basis involves a risk that the market
value at the time of delivery may be lower than the agreed upon purchase price
resulting in an unrealized loss. The Fund maintains liquid assets with a current
value at least equal to the amount of the when-issued, delayed delivery or
forward purchase commitments until payment is made. At January 31, 2010, the
Fund had when-issued, delayed delivery or forward purchase commitments with a
cost of $10,490,122 and a value of $10,507,627.
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 January 31, 2010, the Fund held restricted
securities as shown in the following table that Brookfield Investment Management
Inc. has deemed illiquid pursuant to procedures adopted by the Fund's Board of
Trustees. Although market instability can result 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 A) 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.
% OF
ACQUISITION PRINCIPAL CARRYING NET
SECURITY DATE VALUE/SHARES PRICE COST VALUE ASSETS
-------- ----------- ------------ ------ ----------- ---------- ------
Ajax Two Ltd., Series 2A 11/30/05 1,450 $10.00 $ 496,824 $ 14,500 0.05%
Ajax Two Ltd., Series 2X 11/30/05 2,000 10.00 109,028 20,000 0.06
Banc of America Commercial Mortgage, Inc.
Series 2000-1, Class M, 6.00%, 11/15/31 08/22/05 $1,171,422 0.04 -- 469 0.00*
Banc of America Large Loan, Inc.
Series 2005-MIB1, Class L, 3.23%, 03/15/22 08/26/06 $2,000,000 $11.39 2,021,761 227,802 0.73
Falcon Franchise Loan Trust
Series 2003-1, Class E, 6.00%, 01/05/25 08/09/05 $4,231,000 0.50 -- 21,155 0.07
GE Capital Commercial Mortgage Corp.
Series 2000-1, Class G, 6.13%, 01/15/33 06/27/07 $ 700,000 43.69 691,147 305,851 0.97
GS Mortgage Securities Corp. II
Series 1998-C1, Class H, 6.00%, 10/18/30 08/02/05 $6,886,020 5.72 4,021,072 393,789 1.25
GSAMP Trust
Series 2004-AR2, Class B4, 5.00%, 08/25/34 08/17/05 $ 440,199 0.43 -- 1,880 0.01
InCaps Funding II Ltd./InCaps Funding II Corp.
Subordinated Note, Zero Coupon, 01/15/34 05/01/07 $2,000,000 0.15 399,896 300,000 0.96
|
Page 8
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS - (CONTINUED)
FIRST TRUST STRATEGIC HIGH INCOME FUND
JANUARY 31, 2010 (UNAUDITED)
% OF
ACQUISITION PRINCIPAL CARRYING NET
SECURITY DATE VALUE/SHARES PRICE COST VALUE ASSETS
-------- ----------- ------------ ------ ----------- ---------- ------
Independence III CDO, Ltd.
Series 3A, Class C1, 2.75%, 10/03/37 12/27/06 $5,000,000 $ 0.00** $ -- $ 50 0.00%*
LB-UBS Commercial Mortgage Trust
Series 2001-C7, Class Q, 5.87%, 11/15/33 09/19/05 $3,025,000 5.00 2,719,046 151,375 0.48
Series 2001-C7, Class S, 5.87%, 11/15/33 09/29/05 $2,083,703 0.73 611,215 15,149 0.05
Longhorn CDO, Ltd.
Series 1, Class C, 6.52%, 05/10/12 03/24/06 $3,025,118 0.50 53,566 15,126 0.05
Merit Securities Corp.
Series 13, Class B1, 7.96%, 12/28/33 02/20/07 $1,077,375 1.37 8,092 14,801 0.05
Morgan Stanley Capital I, Inc.
Series 1999-WF1, Class M, 5.91%, 11/15/31 08/03/05 $ 968,400 62.72 687,773 607,336 1.93
Series 2003-IQ5, Class O, 5.24%, 04/15/38 10/19/06 $2,787,919 7.12 120,919 198,389 0.63
Park Place Securities, Inc.
Series 2004-WCW2, Class M10, 2.98%, 10/25/34 03/24/06 $1,301,976 3.44 93,101 44,760 0.14
Series 2005-WCW3, Class M11, 2.73%, 08/25/35 12/26/07 $ 208,511 0.39 -- 813 0.00*
Preferred Term Securities XXV, Ltd.
Zero Coupon, 06/22/37 03/22/07 $3,750,000 0.00** -- 375 0.00*
Rosedale CLO, Ltd.
Series I-A, Class II, Zero Coupon, 07/24/21 01/12/07 $3,620,454 1.00 165,830 36,205 0.12
Soloso CDO, Ltd., Series 2005-1 11/30/05 2,000 10.00 -- 20,000 0.06
Summit CBO I, Ltd
Series 1A, Class B, 1.49%, 05/23/11 08/03/05 $4,159,437 1.00 59,837 41,594 0.13
White Marlin CDO, Ltd., Series AI 06/01/07 3,000 10.00 -- 15,000 0.05
----------- ---------- ----
$12,259,107 $2,446,419 7.79%
=========== ========== ====
|
* Amount is less than 0.01%.
** Amount is less than $0.01.
D. INTEREST ONLY SECURITIES:
An interest only security ("IO 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. IO Securities 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. TBA SALES COMMITMENTS:
The Fund may enter into To Be Announced ("TBA") sale commitments, such as dollar
roll agreements, to hedge its portfolio position or to sell mortgage-backed
securities it owns under delayed delivery arrangements. Proceeds from TBA sale
commitments are not received until the contractual settlement date. During the
time a TBA sale commitment is outstanding, equivalent deliverable securities, or
an offsetting TBA purchase commitment deliverable on or before the sale
commitment date, are held as "cover" for the transaction. Unsettled TBA sale
commitments are valued at approximately the current value of the underlying
securities. The contract is "marked-to market" daily and the change in the value
is recorded by the Fund as an unrealized gain or loss. If the TBA sale
commitment is closed through the acquisition of an offsetting purchase
commitment, the Fund realizes a gain or loss from the sale of the securities
based upon the unit price established at the date the Fund entered the
commitment.
F. COLLATERALIZED DEBT OBLIGATIONS:
A collateralized debt obligation ("CDO") is an asset-backed security whose
underlying collateral is typically a portfolio of bonds or bank loans. Where the
underlying collateral is a portfolio of bonds, a CDO is referred to as a
collateralized bond obligation ("CBO"). Where the underlying collateral is a
portfolio of bank loans, a CDO is referred to as a collateralized loan
obligation ("CLO"). Investors in CDOs bear the credit risk of the underlying
collateral. Multiple tranches of securities are issued by the CDO, offering
investors various maturity and credit risk characteristics. Tranches are
categorized as senior, mezzanine, and subordinated/equity, according to their
degree of risk. If there are defaults or the CDO's collateral otherwise
underperforms, scheduled payments to senior tranches take precedence over those
of mezzanine tranches, and scheduled payments to mezzanine tranches take
precedence over those to subordinated/equity tranches. CDOs, similar to other
asset-backed securities, are subject to prepayment risk.
Page 9
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 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 March 22, 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 March 22, 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 March 22, 2010
* Print the name and title of each signing officer under his or her
signature.
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