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 811-22039
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: November 30, 2021
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 20549-0609. The OMB has reviewed this collection
of information under the clearance requirements of 44 U.S.C. § 3507.
Item 1. Reports to Stockholders.
(a) The Report to Shareholders
is attached herewith.
First Trust
Specialty Finance
and Financial
Opportunities Fund (FGB)
Annual Report
For the
Year Ended
November
30, 2021
First Trust Specialty Finance and
Financial Opportunities Fund (FGB)
Annual Report
November 30, 2021
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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 Confluence Investment Management LLC (“Confluence” 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 Specialty Finance and Financial Opportunities 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’s shares may therefore be less than what you paid for them. Accordingly, you can lose money by investing in the Fund. See “Principal Risks” in the Investment Objectives, Policies, Risks and
Effects of Leverage section of this report for a discussion of certain other risks of investing in the Fund.
Performance data quoted
represents past performance, which is no guarantee of future results, and current performance may be lower or higher than the figures shown. For the most recent month-end performance figures, please visit www.ftportfolios.com or speak with your financial advisor. Investment returns, net asset value and common share price will fluctuate and Fund shares, when sold,
may be worth more or less than their original cost.
The Advisor may also
periodically provide additional information on Fund performance on the Fund’s web page at www.ftportfolios.com.
How to Read This
Report
This report contains
information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data and analysis that provide insight into the Fund’s performance and investment approach.
By reading the portfolio
commentary by the portfolio management team of the Fund, you may obtain an understanding of how the market environment affected the Fund’s performance. The statistical information that follows may help you
understand the Fund’s performance compared to that of relevant market benchmarks.
It is important to keep
in mind that the opinions expressed by personnel of First Trust and Confluence are just that: informed opinions. They should not be considered to be promises or advice. The opinions, like the statistics, cover the
period through the date on the cover of this report. The material risks of investing in the Fund are spelled out in the prospectus, the statement of additional information, this report and other Fund regulatory
filings.
First Trust Specialty Finance and
Financial Opportunities Fund (FGB)
Annual Letter from the Chairman and
CEO
November 30, 2021
First Trust is pleased
to provide you with the annual report for the First Trust Specialty Finance and Financial Opportunities Fund (the “Fund”), which contains detailed information about the Fund for the twelve months ended
November 30, 2021.
Inflation is not going
away anytime soon. Federal Reserve (the “Fed”) Chairman Jerome Powell has changed his expectations on inflation from characterizing it as transitory to it being more persistent in nature. In the hopes of
keeping inflation from becoming entrenched, the Fed announced it will expedite the tapering of its monthly bond buying program as of December 2021. This program has been successful at pushing down intermediate and
longer maturity bond yields and keeping them artificially low to help stimulate economic activity. The Fed will reduce its purchases of Treasuries and mortgage-backed securities by $30 billion per month, up from the
original target of $15 billion per month set in November 2021. At that pace, it should be done buying bonds in the open market by the end of March 2022. The Fed also foresees hiking short-term interest rates three
times in 2022. The Federal Funds target rate (upper bound) is currently at 0.25%. The trailing 12-month Consumer Price Index (“CPI”) rate stood at 6.8% in November 2021, according to the U.S. Bureau of
Labor Statistics. That is up significantly from 1.4% in December 2020 and well above its 2.3% average rate over the past 30 years.
The U.S. has not
experienced this type of inflationary pressure, as measured by the CPI, since the early 1980s. Industry pundits, including First Trust Portfolios L.P., have been talking about how artificially low bond yields have
been for at least the past decade. Until 2021, bond investors could rationalize accepting less return on their bonds because inflation was also artificially low, but that is no longer the case. As of mid-December
2021, the yield on the benchmark 10-Year Treasury Note (“T-Note”) was fluctuating between 1.40% to 1.50%. That puts the current real rate of return (bond yield minus inflation rate) on the 10-Year T-Note
at around -5.3%, according to data from Bloomberg. Suffice it to say, that is not an attractive investment. From November 30, 1971 through November 30, 2021, a period which captures the last 50 years, the average real
rate of return on the 10-Year T-Note was 2.2%. Something has got to give, and if inflation remains elevated, then bond yields are likely going higher, in my opinion.
For the record, we have
seen bond yields attempt to normalize on a couple of occasions over the past decade. In both 2013 and 2018, the yield on the 10-Year T-Note peaked at 3.03% and 3.24%, respectively, but was not able to hold the
3.00% mark for long. Over the past decade, the Fed has expanded its balance sheet of assets from $2.90 trillion to $8.76 trillion. The Fed’s quantitative easing (bond buying) has everything to do with why bond
yields have been so depressed for so long, and it is time to let investors and the markets determine where yields and prices should trade. Let the fundamentals drive the process. The low interest rate climate has been
a boon for equity investors. Corporate earnings have been strong even in the face of the coronavirus pandemic. If bond yields trend higher in the months ahead, investors should anticipate higher levels of volatility
in both the stock and bond markets. Considering the guidance that we have been given by the Fed, I believe that investors should use this time to assess their holdings and adjust accordingly, if necessary, to the new
higher-rate climate that is likely heading our way.
Thank you for giving
First Trust the opportunity to play a role in your financial future. We value our relationship with you and will report on the Fund again in six months.
Sincerely,
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust
Advisors L.P.
First Trust Specialty Finance and
Financial Opportunities Fund (FGB)
“AT A GLANCE”
As of November 30, 2021
(Unaudited)
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Fund Statistics
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Symbol on New York Stock Exchange
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FGB
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Common Share Price
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$4.00
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Common Share Net Asset Value (“NAV”)
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$4.33
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Premium (Discount) to NAV
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(7.62)%
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Net Assets Applicable to Common Shares
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$62,197,145
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Current Quarterly Distribution per Common Share(1)
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$0.0825
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Current Annualized Distribution per Common Share
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$0.3300
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Current Distribution Rate on Common Share Price(2)
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8.25%
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Current Distribution Rate on NAV(2)
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7.62%
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Common Share Price & NAV (weekly closing price)
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Performance
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Average Annual Total Returns
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1 Year Ended
11/30/21
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5 Years Ended
11/30/21
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10 Years Ended
11/30/21
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Inception (5/25/07)
to 11/30/21
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Fund Performance(3)
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NAV
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36.49%
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1.49%
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5.26%
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0.35%
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Market Value
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32.23%
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-0.63%
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5.67%
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-0.51%
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Index Performance
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Blended Benchmark(4)
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33.57%
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8.67%
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10.09%
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N/A
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MSCI U.S. Investable Market Financials Index
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37.73%
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10.45%
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13.06%
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N/A
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Prior Blended Benchmark (4)(5)
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N/A
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N/A
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N/A
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N/A
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Asset Classification
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% of Total
Investments
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Common Stocks - Business Development Companies
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92.7%
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Real Estate Investment Trusts (REITs)
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3.7
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Common Stocks
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3.6
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Total
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100.0%
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Industry Classification
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% of Total
Investments
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Capital Markets
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92.7%
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Mortgage Real Estate Investment Trusts
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3.7
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Insurance
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1.8
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Diversified Financial Services
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1.8
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Total
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100.0%
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Top Ten Holdings
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% of Total
Investments
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Hercules Capital, Inc.
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8.2%
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Ares Capital Corp.
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7.2
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Main Street Capital Corp.
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6.9
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PennantPark Investment Corp.
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6.3
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BlackRock TCP Capital Corp.
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6.3
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New Mountain Finance Corp.
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6.3
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Golub Capital BDC, Inc.
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5.4
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Stellus Capital Investment Corp.
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5.4
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SLR Investment Corp.
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5.3
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Barings BDC, Inc.
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5.0
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Total
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62.3%
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(1)
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Most recent distribution paid or declared through November 30, 2021. Subject to change in the future.
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(2)
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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 November 30,
2021. Subject to change in the future.
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(3)
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Total return is based on the combination of reinvested dividend, capital gain, and return of capital distributions, if any, at prices obtained by the Dividend Reinvestment Plan and changes in NAV per
share for NAV returns and changes in Common Share Price for market value returns. Total returns do not reflect sales load and are not annualized for periods of less than one year. Past performance is not indicative of
future results.
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(4)
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On 7/1/2021, the Fund’s benchmark changed from the Prior Blended Benchmark to the Blended Benchmark, because the Wells Fargo BDC Index (one of the Prior Blended Benchmark’s components)
was discontinued on 7/30/2021. The Blended Benchmark consists of a 70/20/10 blend of the MVIS U.S. Business Development Companies Index, the FTSE NARIET Mortgage REIT Index and the S&P SmallCap Financials
Index. The Prior Blended Benchmark consists of a 70/20/10 blend of the Wells Fargo BDC Index, the FTSE NAREIT Mortgage REIT Index, and the S&P SmallCap Financials Index. The Blended Benchmark and Prior Blended
Benchmark returns are calculated by using the monthly return of the three indices during each period shown above. At the beginning of each month, the three indices are rebalanced, to account for divergence from that
ratio that occurred during the course of each month to the ratios noted above. The monthly returns are then compounded for each period shown above, giving the performance for the Blended Benchmark and the Prior
Blended Benchmark for each period shown above. Since the MVIS U.S. Business Development Companies Index had an inception date of August 4, 2011, the performance of the Blended Benchmark is not available for all of the
periods disclosed.
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(5)
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Because a component of the Prior Blended Benchmark was discontinued during the period, performance for the Prior Blended Benchmark is not available for the periods disclosed.
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Portfolio Commentary
First Trust Specialty
Finance and Financial Opportunities Fund (FGB)
Annual Report
November 30, 2021
(Unaudited)
Advisor
First Trust Advisors L.P.
(“First Trust” or the “Advisor”) serves as the investment advisor to the First Trust Specialty Finance and Financial Opportunities Fund (the “Fund”). First Trust is responsible for
the ongoing monitoring of the Fund’s investment portfolio, managing the Fund’s business affairs and providing certain administrative services necessary for the management of the Fund.
Sub-Advisor
Confluence Investment
Management LLC, a registered investment advisor (“Confluence” or the “Sub-Advisor”), located in St. Louis, Missouri, serves as the sub-advisor to the Fund. The investment professionals at
Confluence have an average of over 20 years of portfolio management experience each. Confluence professionals have invested in a wide range of specialty finance and other financial company securities during various
market cycles, working to provide attractive risk-adjusted returns to clients.
Confluence Portfolio
Management Team
Mark Keller, CFA
Chief Executive Officer
and Chief Investment Officer
David Miyazaki, CFA
Senior Vice President and
Portfolio Manager
Daniel Winter, CFA
Senior Vice President and
Chief Investment Officer - Value Equity
First Trust Specialty
Finance and Financial Opportunities Fund (FGB)
The primary investment
objective of the Fund is to seek a high level of current income. As a secondary objective, the Fund seeks an attractive total return. The Fund pursues its investment objectives by investing, under normal market
conditions, at least 80% of its Managed Assets in a portfolio of securities of specialty finance and other financial companies that the Fund’s Sub-Advisor believes offer attractive opportunities for income and
capital appreciation. Under normal market conditions, the Fund concentrates its investments in securities of companies within the industries in the financial sector. “Managed Assets” means the total asset
value of the Fund minus the sum of its liabilities, other than the principal amount of borrowings. 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 Fund is a financial
sector fund with a particular focus on a niche called business development companies (“BDCs”). BDCs lend to, and invest in, private companies, oftentimes working with those not large enough to efficiently
access the public markets. Each BDC has a unique profile, determined by its respective management team. Some specialize in particular industries, while others apply a more generalized approach and maintain a
diversified portfolio. Both approaches can work effectively and offer shareholders a unique and differentiated return opportunity derived from the private markets.
During the 12-month
period ended November 30, 2021, the Fund had approximately 98% of its assets invested in 23 BDCs. The balance of the Fund’s assets was invested in mortgage-backed real estate investment trusts (“MBS
REITs”) and other financial sector companies.
Portfolio Commentary (Continued)
First Trust Specialty
Finance and Financial Opportunities Fund (FGB)
Annual Report
November 30, 2021
(Unaudited)
Performance Analysis
|
|
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Average Annual Total Returns
|
|
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1 Year Ended
11/30/21
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5 Years Ended
11/30/21
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10 Years Ended
11/30/21
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Inception (5/25/07)
to 11/30/21
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Fund Performance*
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|
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NAV
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36.49%
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1.49%
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5.26%
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0.35%
|
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Market Value
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32.23%
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-0.63%
|
5.67%
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-0.51%
|
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Index Performance
|
|
|
|
|
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Blended Benchmark**
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33.57%
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8.67%
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10.09%
|
N/A
|
|
MSCI U.S. Investable Market Financials Index
|
37.73%
|
10.45%
|
13.06%
|
N/A
|
|
Prior Blended Benchmark***
|
N/A
|
N/A
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N/A
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N/A
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Performance figures assume reinvestment of all distributions and do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption or sale of Fund shares. An index is a
statistical composite that tracks a specified financial market or sector. Unlike the Fund, the indices do not actually hold a portfolio of securities and therefore do not incur the expenses incurred by the Fund.
These expenses negatively impact the performance of the Fund. The Fund’s past performance does not predict future performance.
For the 12-month period
ended November 30, 2021, the Fund’s net asset value (“NAV”) and market value total returns were 36.49% and 32.23%, respectively, on a total return basis. The Blended Benchmark returned 33.57% on a
total return basis over the same period. The high level of return was principally earned in the first six months of the period and came in the form of capital appreciation, as BDC valuations recovered from their big
decline caused by the coronavirus (“COVID-19”) pandemic in 2020. Nonetheless, BDC dividend income was significant and allowed the Fund to continue with its own distributions during the year.
The Fund has a practice
of seeking to maintain a relatively stable quarterly distribution, which may be changed at any time. The practice has no impact on the Fund’s investment strategy and may reduce the Fund’s NAV. However, the
Advisor believes the practice helps maintain the Fund’s competitiveness and may benefit the Fund’s market price and premium/discount to the Fund’s NAV. The quarterly distribution rate began the
period at $0.0825 per share and ended at $0.0825 per share. At the $0.0825 per share quarterly
* Total return is based on
the combination of reinvested dividend, capital gain and return of capital distributions, if any, at prices obtained by the Dividend Reinvestment Plan and changes in NAV per share for NAV returns and changes in Common
Share Price for market value returns. Total returns do not reflect sales load and are not annualized for periods of less than one year. Past performance is not indicative of future results.
**
On 7/1/2021, the Fund’s benchmark changed from the Prior Blended Benchmark to the Blended Benchmark, because the Wells Fargo BDC Index
(one of the Prior Blended Benchmark’s components) was discontinued on 7/30/2021. The Blended Benchmark consists of a 70/20/10 blend
of the MVIS U.S. Business Development Companies Index, the FTSE NARIET Mortgage REIT Index and the S&P SmallCap Financials Index.
The Prior Blended Benchmark consists of a 70/20/10 blend of the Wells Fargo BDC Index, the FTSE NAREIT Mortgage REIT Index, and the S&P
SmallCap Financials Index. The Blended Benchmark and Prior Blended Benchmark returns are calculated by using the monthly return of the
three indices during each period shown above. At the beginning of each month, the three indices are rebalanced, to account for divergence
from that ratio that occurred during the course of each month to the ratios noted above. The monthly returns are then compounded for
each period shown above, giving the performance for the Blended Benchmark and the Prior Blended Benchmark for each period shown above.
Since the MVIS U.S. Business Development Companies Index had an inception date of August 4, 2011, the performance of the Blended Benchmark
is not available for all of the periods disclosed.
***
Because a component of the Prior Blended Benchmark was discontinued during the period, performance for the Prior Blended Benchmark is
not available for the periods disclosed.
Notes to Financial Statements (Continued)
First Trust Specialty
Finance and Financial Opportunities Fund (FGB)
November 30, 2021
Certain losses realized
during the current fiscal year may be deferred and treated as occurring on the first day of the following fiscal year for federal income tax purposes. For the fiscal year ended November 30, 2021, the Fund did not
incur any net late year ordinary losses.
The Fund is subject to
accounting standards that establish a minimum threshold for recognizing, and a system for measuring, the benefits of a tax position taken or expected to be taken in a tax return. Taxable years ended 2018, 2019, 2020,
and 2021 remain open to federal and state audit. As of November 30, 2021, management has evaluated the application of these standards to the Fund, and has determined that no provision for income tax is required in the
Fund’s financial statements for uncertain tax positions.
E. Expenses
The Fund will pay all
expenses directly related to its operations.
3. Investment
Advisory Fee, Affiliated Transactions and Other Fee Arrangements
First Trust, the
investment advisor to the Fund, is a limited partnership with one limited partner, Grace Partners of DuPage L.P., and one general partner, The Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First Trust is responsible for the ongoing monitoring of the Fund’s investment portfolio, managing the Fund’s business affairs and
providing certain administrative services necessary for the management of the Fund. For these services, First Trust is entitled to a monthly fee calculated at an annual rate of 1.00% of the Fund’s Managed
Assets. First Trust also provides fund reporting services to the Fund for a flat annual fee in the amount of $9,250.
Confluence serves as the
Fund’s sub-advisor and manages the Fund’s portfolio subject to First Trust’s supervision. The Sub-Advisor receives a portfolio management fee at an annual rate of 0.50% of the Fund’s Managed
Assets that is paid by First Trust from its investment advisory fee.
BNY Mellon Investment
Servicing (US) Inc. (“BNYM IS”) serves as the Fund’s transfer agent in accordance with certain fee arrangements. As transfer agent, BNYM IS is responsible for maintaining shareholder records for the
Fund. The Bank of New York Mellon (“BNYM”) serves as the Fund’s administrator, fund accountant, and custodian in accordance with certain fee arrangements. As administrator and fund accountant, BNYM
is responsible for providing certain administrative and accounting services to the Fund, including maintaining the Fund’s books of account, records of the Fund’s securities transactions, and certain other
books and records. As custodian, BNYM is responsible for custody of the Fund’s assets. BNYM IS and BNYM are subsidiaries of The Bank of New York Mellon Corporation, a financial holding company.
Each Trustee who is not
an officer or employee of First Trust, any sub-advisor or any of their affiliates (“Independent Trustees”) is paid a fixed annual retainer that is allocated equally among each fund in the First Trust Fund
Complex. Each Independent Trustee is also paid an annual per fund fee that varies based on whether the fund is a closed-end or other actively managed fund, a defined-outcome fund or an index fund.
Additionally, the Lead
Independent Trustee and the Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee are paid annual fees to serve in such capacities, with such compensation allocated pro rata among
each fund in the First Trust Fund Complex based on net assets. Independent Trustees are reimbursed for travel and out-of-pocket expenses in connection with all meetings. The Lead Independent Trustee and Committee
Chairs rotate every three years. The officers and “Interested” Trustee receive no compensation from the Fund for acting in such capacities.
4. Purchases and
Sales of Securities
The cost of purchases and
proceeds from sales of securities, excluding short-term investments, for the fiscal year ended November 30, 2021, were $6,773,951 and $4,968,378, respectively.
5. Borrowings
The Fund has a committed
facility agreement (the “BNP Facility”) with BNP Paribas Prime Brokerage International, Ltd. (“PBL”), which currently has a maximum commitment amount of $25,000,000. Absent certain events of
default or failure to maintain certain collateral requirements, PBL may not terminate the BNP Facility except upon 179 calendar days’ prior notice. The interest rate under the BNP Facility is equal to the
1-month LIBOR plus 85 basis points. In addition, under the BNP Facility, the Fund pays a commitment fee of 0.55% on the undrawn amount.
The average amount
outstanding for the year ended November 30, 2021 was $7,189,315, with a weighted average interest rate of 0.95%. As of November 30, 2021, the Fund had outstanding borrowings of $8,600,000, which approximates fair
value, under the BNP Facility. The borrowings are categorized as Level 2 within the fair value hierarchy. The high and low annual interest rates for the
Item 4. Principal Accountant Fees and Services.
(a) Audit Fees (Registrant) --
The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the
audit of the registrant’s annual financial statements or services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements for those fiscal years were $42,000 for the fiscal year ended November 30, 2020 and $42,000
for the fiscal year ended November 30, 2021.
(b) Audit-Related Fees (Registrant)
-- The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that
are reasonably related to the performance of the audit of the registrant’s financial statements and are not reported under paragraph
(a) of this Item were $0 for the fiscal year ended November 30, 2020 and $0 for the fiscal year ended November 30, 2021.
Audit-Related Fees (Investment
Advisor) -- The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant
that are reasonably related to the performance of the audit of the registrant’s financial statements and are not reported under
paragraph (a) of this Item were $0 for the fiscal year ended November 30, 2020 and $0 for the fiscal year ended November 30, 2021.
(c) Tax Fees (Registrant) -- The
aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance,
tax advice, and tax planning to the registrant were $5,200 for the fiscal year ended November 30, 2020 and $5,200 for the fiscal year
ended November 30, 2021. These fees were for tax consultation and/or tax preparation.
Tax Fees (Investment Advisor)
-- The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax
compliance, tax advice, and tax planning to the registrant’s advisor were $0 for the fiscal year ended November 30, 2020 and $0
for the fiscal year ended November 30, 2021.
(d) All Other Fees (Registrant)
-- The aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant to the
registrant, other than the services reported in paragraphs (a) through (c) of this Item were $0 for the fiscal year ended November 30,
2020 and $0 for the fiscal year ended November 30, 2021.
All Other Fees (Investment Advisor)
-- The aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant to the
registrant’s investment advisor, other than the services reported in paragraphs (a) through (c) of this Item were $0 for the fiscal
year ended November 30, 2020 and $0 for the fiscal year ended November 30, 2021.
(e)(1) Disclose the audit committee’s
pre-approval policies and procedures described in paragraph (c) (7) of Rule 2-01 of Regulation S-X.
Pursuant to its charter and its
Audit and Non-Audit Services Pre-Approval Policy, the Audit Committee (the “Committee”) is responsible for the pre-approval
of all audit services and permitted non-audit services (including the fees and terms thereof) to be performed for the registrant by its
independent auditors. The Chairman of the Committee is authorized to give such pre-approvals on behalf of the Committee up to $25,000
and report any such pre-approval to the full Committee.
The Committee is also responsible
for the pre-approval of the independent auditor’s engagements for non-audit services with the registrant’s advisor (not including
a sub-advisor whose role is primarily portfolio management and is sub-contracted or overseen by another investment advisor) and any entity
controlling, controlled by or under common control with the investment advisor that provides ongoing services to the registrant, if the
engagement relates directly to the operations and financial reporting of the registrant, subject to the de minimis exceptions for
non-audit services described in Rule 2-01 of Regulation S-X. If the independent auditor has provided non-audit services to the registrant’s
advisor (other than any sub-advisor whose role is primarily portfolio management and is sub-contracted with or overseen by another investment
advisor) and any entity controlling, controlled by or under common control with the investment advisor that provides ongoing services
to the registrant that were not pre-approved pursuant to its policies, the Committee will consider whether the provision of such non-audit
services is compatible with the auditor’s independence.
(e)(2) The
percentage of services described in each of paragraphs (b) through (d) for the registrant and the registrant’s investment advisor
of this Item that were approved by the audit committee pursuant to the pre-approval exceptions included in paragraph (c)(7)(i)(c) or paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X are as follows:
(b) 0%
(c) 0%
(d) 0%
(f) The percentage of hours expended
on the principal accountant’s engagement to audit the registrant’s financial statements for the most recent fiscal year that
were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees was less than
fifty
percent.
(g) The aggregate non-audit fees
billed by the registrant’s accountant for services rendered to the registrant, and rendered to the registrant’s investment
advisor (not including any sub-advisor whose role is primarily portfolio management and is subcontracted with or overseen by another investment
advisor), and any entity controlling, controlled by, or under common control with the advisor that provides ongoing services to the registrant
for the fiscal year ended November 30, 2020, were $5,200 for the registrant and $23,200 for the registrant’s investment advisor;
and for the fiscal year ended November 30, 2021, were $5,200 for the registrant and $16,500 for the registrant’s investment advisor.
(h) The registrant’s audit
committee of its Board of Trustees has considered whether the provision of non-audit services that were rendered to the registrant’s
investment advisor (not including any sub-advisor whose role is primarily portfolio management and is subcontracted with or overseen by
another investment advisor), and any entity controlling, controlled by, or under common control with the investment advisor that provides
ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible
with maintaining the principal accountant’s independence.
(i) Not applicable.
(j) Not applicable.
Item 7. Disclosure of Proxy Voting
Policies and Procedures for Closed-End Management Investment Companies.
The Proxy Voting Policies are attached herewith.
CONFLUENCE INVESTMENT MANAGEMENT LLC
PROXY VOTING POLICY
1. Introduction
As a registered investment adviser, Confluence Investment
Management LLC (“Confluence”) has a fiduciary duty to act solely in the best interests of its clients. If the client is a
registered investment company under the Investment Company Act of 1940 or the client requests Confluence to do so in writing, Confluence
will vote proxy materials for its clients.
In cases where the discretionary client has delegated
proxy voting responsibility and authority to Confluence, Confluence has adopted and implemented the following policies and procedures,
which it believes are reasonably designed to ensure that proxies are voted in the best interests of its clients. In pursuing this policy,
proxies should be voted in a manner that is intended to maximize value to the client. In situations where Confluence accepts such delegation
and agrees to vote proxies, Confluence will do so in accordance with these Policies and Procedures. Confluence may delegate its responsibilities
under these Policies and Procedures to a third party, provided that no such delegation shall relieve Confluence of its responsibilities
hereunder and Confluence shall retain final authority and fiduciary responsibility for such proxy voting.
Investment advisers registered with the SEC, and which
exercise voting authority with respect to client securities, are required by Rule 206(4)-6 of the Advisers Act to (a) adopt and implement
written policies and procedures that are reasonably designed to ensure that client securities are voted in the best interests of clients,
which must include how an adviser addresses material conflicts that may arise between an adviser’s interests and those of its clients;
(b) disclose to clients how they may obtain information from the adviser with respect to the voting of proxies for their securities; (c)
describe to clients a summary of its proxy voting policies and procedures and, upon request, furnish a copy to its clients; and (d) maintain
certain records relating to the adviser’s proxy voting activities when the adviser does have proxy voting authority.
2. Voting Guidelines
Confluence has adopted the Broadridge Proxy Policies
and Insights Shareholder Value (“Proxy Policies and Insights”) to determine how each issue on proxy ballots is to be voted.
The Proxy Policies and Insights is incorporated herein by this reference, and a copy of the Proxy Policies and Insights, as may be revised
from time to time, is maintained with Confluence’s proxy voting policy.
The Proxy Policies and Insights seeks to maximize
shareholder value in proxy voting. While the Proxy Policies and Insights is created using voting trends of the top 10 fund families that
also seek to maximize shareholder value, Confluence seeks to review the template no less frequently than annually (and make revisions
when necessary) to better enhance the shareholder’s value maximization objective. Proxy statements will be voted in accordance with
this template unless:
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·
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Confluence determines it has a conflict,
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·
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Confluence investment team determines there is a valid reason not to follow the Proxy Policies and Insights
recommendation, or
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·
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No recommendation is provided by Proxy Policies and Insights, in which case Confluence will independently
determine how a particular issue is to be voted and will document that determination for the record.
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In the event proxy ballots are received with respect
to debt securities, Confluence will vote on a case by case basis in a manner it believes to be in the best economic interest of clients.
Any decision to override the PPI on a particular ballot
issue must receive approval by the relevant CIO or his/her delegate (typically a Director of Research). The reason for not following the
Proxy Policies and Insights must be documented for recordkeeping purposes.
Confluence may determine not to vote a particular
proxy, if the costs and burdens exceed the benefits of voting (e.g., when securities are subject to loan or to share blocking restrictions)
or if a determination is made that not voting is in the best interest of the client.
3. Responsibility
Confluence utilizes Broadridge Financial Solutions,
Inc. (“Broadridge”), an outsourcing provider to the global financial services industry, to coordinate, process, manage and
maintain electronic records of Confluence proxy votes.
Confluence has adopted the Broadridge Proxy Policy
and Insights. It is the responsibility of the Proxy Committee to at least annually, review the Proxy Policies and Insights for continued
relevancy. Confluence is responsible for responding to any corporate actions as well as address any proxy ballot issues for which a recommendation
is not provided by Proxy Policy and Insights.
Confluence compliance is responsible for maintaining
this policy, reviewing it at least annually, and updating it as required.
All client accounts are to be directed to Broadridge
in order for proxy ballots to be listed and voted on Broadridge’s Proxy Edge system. Occasionally, however, proxy ballots are forwarded
directly to Confluence, which must then vote the proxy ballots independent of the Proxy Edge system. Confluence is not responsible for
voting proxies it does not receive but will make reasonable efforts to obtain missing proxies.
4. Registered Investment Companies
In cases in which the client is a registered investment
company under the Investment Company Act of 1940 and the client delegates proxy voting, Confluence will vote proxies pursuant to this
policy. Where Confluence acts as a sub-adviser of a closed-end fund that invests in other investment company securities, Confluence (as
required) will vote such proxies in the same proportion as the vote of all other shareholders of the fund (i.e. “echo vote”
or ‘mirror vote”), unless otherwise required by law. When required by law, Confluence will also echo vote proxies of securities
in unaffiliated investment vehicles. For example, section 12(d)(1)(F) of the Investment Company Act of 1940 requires echo voting of registered
investment companies that sub-advise or manage securities of other registered investment companies.
5. Conflicts of Interest
In the event an employee determines that Confluence
has a conflict of interest due to, for example, a relationship with a company or an affiliate of a company, or for any other reason which
could influence the advice given, the employee will advise the Chief Compliance Officer and the Proxy Committee, and the Proxy Committee
will decide whether Confluence should either (1) disclose to the client the conflict to enable the client to evaluate the advice in light
of the conflict or (2) disclose to the client the conflict and decline to provide the advice.
Confluence shall use commercially reasonable efforts
to determine whether a potential conflict may exist, and a potential conflict shall be deemed to exist only if one or more members of
the Confluence Investment Committee (on which the Chief Investment Officer is a member) knows or should have known of the conflict. Confluence
is sensitive to conflicts of interest that may arise in the proxy decision-making process and has identified the following potential conflicts
of interest:
• A principal
of Confluence or any person involved in the proxy decision-making process currently serves on the Board of the portfolio company.
• An immediate
family member of a principal of Confluence or any person involved in the proxy decision-making process currently serves as a director
or executive officer of the portfolio company.
• Confluence or
any affiliate holds a material ownership interest in the portfolio company.
This list is not intended to be exclusive. All employees
are obligated to disclose any potential conflict to Confluence’s Chief Compliance Officer.
If a material conflict is identified, Confluence management
may (i) disclose the potential conflict to the client and obtain consent; or (ii) establish an ethical wall or other informational barriers
between the person(s) that are involved in the conflict and the persons making the voting decisions.
Confluence will resolve identified conflicts of interest
in the best interest of the client.
6. Oversight of Third Parties
Annually, the Proxy Policies and Insights will be
reviewed by the Proxy Committee. Annually, Confluence compliance will request documents necessary to evaluate Broadridge’s continuing
ability to adequately provide services to Confluence and its clients (e.g. SOC-1 report).
Confluence will perform periodic review of Broadridge
through reports available on the Broadridge Proxy Edge site.
7. Client Requests for Information
All client requests for information regarding proxy
votes, or policies and procedures, received by any employee should be forwarded to Confluence compliance. Confluence compliance will prepare
a written response to the client with the information requested.
8. Disclosure
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Confluence will provide required disclosures in response to Item 17 of Form ADV Part 2A summarizing this
proxy voting policy and procedures, including a statement that clients may request information regarding how Confluence voted client’s
proxies;
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Confluence will also disclose how clients may obtain a copy of the firm’s proxy voting policies
and procedures, however Confluence will not disclose how proxies were voted to third-party non-clients, and;
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Confluence shall make known its proxy voting policy in its advisory agreement or along with its advisory
agreement.
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9. Recordkeeping
The Chief Compliance Officer or his/her designate is responsible for maintaining
the following records, however Confluence may rely on its third-party service provider to retain certain records:
• proxy voting policies and procedures;
• proxy statements (provided, however,
that Confluence may rely on the Securities and Exchange Commission’s EDGAR system if the issuer filed its proxy statements via EDGAR
or may rely on a third party as long as the third party has provided Confluence with a copy of the proxy statement promptly upon request);
• records of electronic votes cast
and abstentions; and
• any records prepared by Confluence
that were material to a proxy voting decision or that memorialized a decision.
Item 8. Portfolio Managers of Closed-End Management Investment
Companies.
(a)(1) Identification of Portfolio Manager(s) or Management
Team Members and Description of Role of Portfolio Manager(s) or Management Team Members
Investment decisions for the registrant are
made by the Portfolio Management Team of Confluence Investment Management LLC (“Confluence”). The members of the Confluence
Portfolio Management Team are responsible for portfolio management including security research and selection, leverage management, guidance
compliance and position review, communication with and reporting to Advisor to the Fund.
Information provided as of November 30, 2021
Mark A. Keller, CFA – Chief Executive Officer and Chief Investment
Officer
Mr. Keller has over 30 years of investment
experience with a focus on value-oriented equity analysis and management. From 1994 to May 2008, he was the Chief Investment Officer of
Gallatin Asset Management, Inc., and its predecessor organization, A.G. Edwards Asset Management, the investment management arm of A.G.
Edwards, Inc. From 1999 to 2008, Mr. Keller was Chairman of A.G. Edwards’ Investment Strategy Committee, which set investment policy
and established asset allocation models for the entire organization. Mr. Keller was a founding member of the A.G. Edwards Investment Strategy
Committee, on which he served for over 20 years, the last ten of which as Chairman of the Committee. Mr. Keller began his career with
A.G. Edwards in 1978, serving as an equity analyst for the firm’s Securities Research Department from 1979 to 1994. During his last
five years in Securities Research, Mr. Keller was Equity Strategist and manager of the firm’s Focus List. Mr. Keller was a Senior
Vice President of A.G. Edwards & Sons, Inc. and of Gallatin Asset Management, Inc., and was a member of the Board of Directors of
both companies. Mr. Keller received a Bachelor of Arts from Wheaton College (Illinois) and is a CFA charterholder.
David B. Miyazaki, CFA – Senior Vice President and Portfolio Manager
Prior to joining Confluence in May 2008, Mr.
Miyazaki served as a Portfolio Manager and Analyst with Gallatin Asset Management, Inc., the investment management arm of A.G. Edwards,
Inc. Mr. Miyazaki was responsible for equity investments in value-oriented separately managed accounts. He also co-managed the A.G. Edwards’
ETF-based asset allocation program. In addition to portfolio management, Mr. Miyazaki served as a member of the A.G. Edwards’ Investment
Strategy Committee. As a strategist, he was responsible for the firm’s quantitative asset allocation models, including its Cyclical
Asset Allocation program. Prior to joining A.G. Edwards in 1999, Mr. Miyazaki was a Portfolio Manager at Koch Industries in Wichita, Kansas.
His previous experience includes working as an Investment Analyst at Prudential Capital Group in Dallas, Texas, and as a Bond Trader at
Barre & Company, also in Dallas. Mr. Miyazaki received a Bachelor of Business Administration from Texas Christian University and is
a CFA charterholder.
Daniel T. Winter, CFA – Senior Vice President and Chief Investment
Officer – Value Equity
Prior to joining Confluence in May 2008, Mr.
Winter served as a Portfolio Manager and Analyst with Gallatin Asset Management, Inc., the investment arm of A.G. Edwards, Inc. While
at Gallatin, Mr. Winter chaired the portfolio management team responsible for the firm’s six value-oriented equity strategies. His
responsibilities also included directing the strategy implementation and trading execution for the equity portfolios. Mr. Winter also
served as a portfolio manager for the Cyclical Growth ETF Portfolio and the Cyclical Growth and Income ETF Portfolio which were offered
through variable annuities. He was also a member of the firm’s Allocation Advisor Committee which oversaw the A.G. Edwards exchange-traded
fund focused strategies. Prior to joining the firm’s Asset Management division in 1996, Mr. Winter served as a portfolio manager
for A.G. Edwards Trust Company. Mr. Winter earned a Bachelor of Arts in business management from Eckerd College and a Master of Business
Administration from Saint Louis University. Mr. Winter is a CFA charterholder.
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(a)(2)
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Other Accounts Managed by Portfolio Manager(s) or Management Team Member and Potential Conflicts of Interest
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Information provided as of November 30, 2021
Other Accounts Managed by Portfolio Manager(s)
or Management Team Member
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Name of Portfolio Manager or
Team Member
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Type of Accounts
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Total
No. of Accounts
Managed
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Total Assets
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No. of Accounts where Advisory Fee is Based on
Performance
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Total Assets in Accounts where Advisory Fee is Based
on Performance
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1. Mark Keller
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Registered Investment Companies:
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1
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$43,992,473
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0
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$0
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Other Pooled Investment Vehicles:
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0
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$0
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0
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$0
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Other Accounts:
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17,653
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$7,743,155,743
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0
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$0
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2. Daniel Winter
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Registered Investment Companies:
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1
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$43,992,473
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0
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$0
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Other Pooled Investment Vehicles:
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0
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$0
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0
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$0
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Other Accounts:
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16,759
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$7,311,946,216
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0
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$0
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3. David Miyazaki
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Registered Investment Companies:
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0
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$0
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0
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$0
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Other Pooled Investment Vehicles:
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0
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$0
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0
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$0
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Other Accounts:
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823
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$248,793,581
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0
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$0
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Potential Conflicts of Interests
As disclosed in the Confluence Form ADV Part
2A, from time to time, Confluence is presented, in connection with its discretionary portfolio management and investment advisory services,
with an opportunity to participate in public offerings of securities. Certain of our clients, including those in certain Wrap Account
Programs, may be prohibited from participating in such offerings by their respective Financial Institution. Certain of our other clients
may be unable to participate in such offerings if their respective Financial Institution did not participate in the initial distribution
of securities in such offering, depending on their particular Financial Institution or Custodian. Accordingly, Confluence’s policy
is to not purchase shares in such public offerings for its clients. In contrast, the First Trust Specialty Finance and Financial Opportunities
Fund and the First Trust Confluence Small Cap Value Fund, the open-end mutual fund and the closed-end fund for which we act as sub-advisor,
and our institutional clients are not similarly restricted, and are therefore allowed to participate in public offerings.
(a)(3) Compensation Structure of Portfolio Manager(s) or Management
Team Members
Information provided as of November 30, 2021
The Fund’s portfolio managers are compensated
with an annual base salary and a discretionary bonus based on Confluence’s overall firm profits. The firm provides a 401k contribution
and may make a discretionary additional contribution. In addition, the Firm’s portfolio managers are equity owners in the Firm,
aligning their long-term interests with the Fund holder to strive to achieve superior investment performance over an appropriate time
period. This ensures that the portfolio managers are incented to implement a consistent investment strategy for the Fund without incurring
undue risk.
(a)(4) Disclosure of Securities Ownership
Information provided as of November 30, 2021
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Name
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Dollar Range of Registrant Shares Beneficially Owned
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Mark Keller
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$10,001 - $50,000
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Daniel Winter
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None
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David Miyazaki
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$10,001 - $50,000
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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.