0001445546-16-009325.txt : 20160701
0001445546-16-009325.hdr.sgml : 20160701
20160701141115
ACCESSION NUMBER: 0001445546-16-009325
CONFORMED SUBMISSION TYPE: N-CSRS
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 20160430
FILED AS OF DATE: 20160701
DATE AS OF CHANGE: 20160701
EFFECTIVENESS DATE: 20160701
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: FIRST TRUST STRATEGIC HIGH INCOME FUND II
CENTRAL INDEX KEY: 0001329388
IRS NUMBER: 000000000
STATE OF INCORPORATION: MA
FILING VALUES:
FORM TYPE: N-CSRS
SEC ACT: 1940 Act
SEC FILE NUMBER: 811-21842
FILM NUMBER: 161746142
BUSINESS ADDRESS:
STREET 1: 120 EAST LIBERTY DRIVE, SUITE 400
CITY: WHEATON
STATE: IL
ZIP: 60187
BUSINESS PHONE: 630-765-8000
MAIL ADDRESS:
STREET 1: 120 EAST LIBERTY DRIVE, SUITE 400
CITY: WHEATON
STATE: IL
ZIP: 60187
FORMER COMPANY:
FORMER CONFORMED NAME: First Trust Dow Select MicroCap Index Fund
DATE OF NAME CHANGE: 20050607
N-CSRS
1
fhy_ncsr.txt
SEMI-ANNUAL REPORT TO SHAREHOLDERS
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 811-21842
-----------
First Trust Strategic High Income Fund II
------------------------------------------------------------
(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
------------------------------------------------------------
(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
------------------------------------------------------------
(Name and address of agent for service)
registrant's telephone number, including area code: 630-765-8000
--------------
Date of fiscal year end: October 31
------------
Date of reporting period: April 30, 2016
------------------
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FIRST TRUST
STRATEGIC
HIGH INCOME
FUND II (FHY)
SEMI-ANNUAL REPORT
FOR THE SIX MONTHS ENDED
APRIL 30, 2016
FIRST TRUST BROOKFIELD
--------------------------------------------------------------------------------
TABLE OF CONTENTS
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
SEMI-ANNUAL REPORT
APRIL 30, 2016
Shareholder Letter.......................................................... 1
At a Glance................................................................. 2
Portfolio Commentary........................................................ 3
Portfolio of Investments.................................................... 6
Statement of Assets and Liabilities......................................... 14
Statement of Operations..................................................... 15
Statements of Changes in Net Assets......................................... 16
Statement of Cash Flows..................................................... 17
Financial Highlights........................................................ 18
Notes to Financial Statements............................................... 19
Additional Information...................................................... 26
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 Brookfield Investment Management Inc.
("Brookfield" or the "Sub-Advisor") and their respective representatives, taking
into account the information currently available to them. Forward-looking
statements include all statements that do not relate solely to current or
historical fact. For example, forward-looking statements include the use of
words such as "anticipate," "estimate," "intend," "expect," "believe," "plan,"
"may," "should," "would" or other words that convey uncertainty of future events
or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust Strategic High Income Fund II (the "Fund") to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. When evaluating the information
included in this report, you are cautioned not to place undue reliance on these
forward-looking statements, which reflect the judgment of the Advisor and/or
Sub-Advisor and their respective representatives only as of the date hereof. We
undertake no obligation to publicly revise or update these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Additional
Information 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
http://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 of http://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
Brookfield 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.
--------------------------------------------------------------------------------
SHAREHOLDER LETTER
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
APRIL 30, 2016
Dear Shareholders:
Thank you for your investment in First Trust Strategic High Income Fund II (the
"Fund").
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
semi-annual report which contains detailed information about your investment for
the six months ended April 30, 2016, including a market overview and a
performance analysis for the period. We encourage you to read this report and
discuss it with your financial advisor.
While markets were up and down during 2015, we believe there are three important
things to remember. First, the U.S. economy grew, despite the massive decline in
oil prices, and second, the tapering that began in 2014 by the Federal Reserve
(the "Fed") did not stop growth in the U.S. economy. Finally, the
long-anticipated rate hike by the Fed in December had little effect on the money
supply, and the stock market was not shocked by the hike. Early in 2016, many
investors were concerned that the volatility we saw in the market in 2015 would
continue, and it did. From December 31, 2015 through February 11, 2016, the S&P
500(R) Index declined by 10.27%. Since then, the market has made a steady
comeback, and as of April 30, 2016, the S&P 500(R) Index was up 13.39%.
First Trust believes that having a long-term investment horizon and being
invested in quality products can help you reach your goals, despite how the
market behaves. We have always maintained perspective about the markets and
believe investors should as well. We will continue to strive to provide quality
investments each and every day, which has been one of the hallmarks of our firm
since its inception 25 years ago.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value our relationship with you and will continue to focus on helping
investors like you reach your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
"AT A GLANCE"
AS OF APRIL 30, 2016 (UNAUDITED)
---------------------------------------------------------------------------
FUND STATISTICS
---------------------------------------------------------------------------
Symbol on New York Stock Exchange FHY
Common Share Price $11.80
Common Share Net Asset Value ("NAV") $13.51
Premium (Discount) to NAV (12.66)%
Net Assets Applicable to Common Shares $111,626,848
Current Monthly Distribution per Common Share (1) $0.10
Current Annualized Distribution per Common Share $1.20
Current Distribution Rate on Closing Common Share Price (2) 10.17%
Current Distribution Rate on NAV (2) 8.88%
---------------------------------------------------------------------------
COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
---------------------------------------------------------------------------
COMMON SHARE PRICE NAV
4/15 14.24 15.90
14.14 15.81
14.05 15.84
14.05 15.85
13.91 15.84
5/15 13.91 15.81
13.56 15.54
13.37 15.52
13.42 15.52
6/15 13.15 15.49
13.22 15.33
13.08 15.25
13.03 15.30
12.60 15.07
7/15 12.76 15.11
12.47 14.87
12.33 14.73
12.15 14.55
8/15 12.17 14.58
12.07 14.48
12.07 14.55
12.12 14.42
9/15 11.84 14.11
11.34 13.67
11.96 14.10
12.03 14.14
12.17 14.23
10/15 12.21 14.15
11.95 13.91
11.61 13.82
11.54 13.65
11/15 11.47 13.62
11.39 13.48
10.82 13.13
11.11 12.91
11.19 12.99
12/15 11.13 13.00
10.95 12.84
10.39 12.43
10.24 12.43
1/16 10.60 12.57
10.37 12.27
10.04 11.95
10.18 12.12
2/16 10.42 12.28
10.88 12.64
11.24 12.82
11.53 13.00
3/16 11.37 12.92
11.24 12.94
11.27 12.97
11.46 13.21
11.71 13.41
4/16 11.80 13.49
-----------------------------------------------------------------------------------------------------------------------------
PERFORMANCE
-----------------------------------------------------------------------------------------------------------------------------
Average Annual Total Return
----------------------------------------------------
6 Months Ended 1 Year Ended 5 Years Ended 10 Years Ended Inception (3/28/06)
4/30/16 4/30/16 4/30/16 4/30/16 to 4/30/16
FUND PERFORMANCE (3)
NAV 0.95% -5.46% 5.26% -2.23% -2.19%
Market Value 2.34% -7.41% 4.61% -3.96% -3.92%
INDEX PERFORMANCE
Barclays Capital Ba U.S. High Yield Index 2.96% 1.79% 6.38% 8.02% 7.94%
BofA Merrill Lynch U.S. High Yield
Master II Index 2.25% 1.20% 5.21% -0.96% 7.18%
-----------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------
% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS
--------------------------------------------------------
Corporate Bonds and Notes 77.2%
Foreign Corporate Bonds and Notes 8.0
Residential Mortgage-Backed Securities 5.0
Manufactured Housing Loans 4.0
Senior Floating-Rate Loan Interests 3.8
Equity 1.2
Commercial Mortgage-Backed Securities 0.8
Collateralized Debt Obligations 0.0*
--------------------------------------------------------
Total 100.0%
======
* Amount is less than 0.1%
--------------------------------------------------------
% OF TOTAL
FIXED-INCOME
CREDIT QUALITY (4) INVESTMENTS
--------------------------------------------------------
AAA 0.6%
BBB- 1.1
BBB- 5.0
BB+ 6.8
BB 19.0
BB- 18.1
B+ 10.2
B 11.9
B- 13.0
CCC+ 2.8
CCC 2.1
CCC- 0.7
CC 2.9
C 2.3
D 0.3
NR 3.2
--------------------------------------------------------
Total 100.0%
======
(1) Most recent distribution paid or declared through 4/30/2016. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV, as applicable, as of 4/30/2016. Subject to
change in the future.
(3) 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 less
than one year. Past performance is not indicative of future results.
(4) The credit quality and ratings information presented above reflects the
ratings assigned by one or more nationally recognized statistical rating
organizations (NRSROs), including Standard & Poor's Ratings Group, a
division of the McGraw Hill Companies, Inc., Moody's Investors Service,
Inc., Fitch Ratings or a comparably rated NRSRO. For situations in which a
security is rated by more than one NRSRO and the ratings are not
equivalent, the highest ratings are used. Sub-investment grade ratings are
those rated BB+/Ba1 or lower. Investment grade ratings are those rated
BBB-/Baa3 or higher. The credit ratings shown relate to the
creditworthiness of the issuers of the underlying securities in the Fund,
and not to the Fund or its shares. Credit ratings are subject to change.
NR Not rated.
Page 2
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
SEMI-ANNUAL REPORT
APRIL 30, 2016
SUB-ADVISOR
BROOKFIELD INVESTMENT MANAGEMENT INC.
Brookfield Investment Management Inc. (the "Sub-Advisor") is an SEC-registered
investment adviser providing public securities strategies including global
listed real estate and infrastructure equities as well as corporate credit and
securitized credit. With over $16 billion of assets under management as of March
31, 2016, the Sub-Advisor manages institutional separate accounts, registered
funds and other investment products for clients, including financial
institutions, public and private pension plans, insurance companies, endowments
and foundations, sovereign wealth funds and high net-worth investors.
Headquartered in New York, NY, the Sub-Advisor and its affiliates also maintain
offices in Boston, Chicago, London and Toronto. The Sub-Advisor is an indirect
wholly-owned subsidiary of Brookfield Asset Management Inc., a leading global
alternative asset manager with $240 billion of assets under management as of
March 31, 2016.
PORTFOLIO MANAGEMENT TEAM
DANA E. ERIKSON, CFA - MANAGING DIRECTOR
ANTHONY BREAKS, CFA - SENIOR DIRECTOR
COMMENTARY
FIRST TRUST STRATEGIC HIGH INCOME FUND II
The primary investment objective of the First Trust Strategic High Income Fund
II (the "Fund") is to seek a high level of current income. The Fund seeks
capital growth as a secondary objective. The Fund seeks to achieve its
investment objectives by investing in a diversified portfolio of
below-investment-grade and investment-grade debt securities and equity
securities that the Sub-Advisor believes offer attractive yield and/or capital
appreciation potential. There can be no assurance that the Fund will achieve its
investment objectives. The Fund may not be appropriate for all investors.
MARKET RECAP AND OUTLOOK
High Yield
CREDIT MARKET CHALLENGES LEAD TO SIGNS OF RELIEF.
Over the six months ended April 30, 2016, the high-yield market trod a different
path from most others. While the S&P 500(R) Index returned 0.43%, and Treasury
yields declined from 2.14% to 1.83%, the high-yield market rose 2.27% as
measured by the BofA Merrill Lynch U.S. High Yield Index. Investors grew
increasingly concerned toward the end of calendar year 2015 about Federal
Reserve interest rate increases and plunging crude oil prices. In November, OPEC
(Organization of the Petroleum Exporting Countries) decided against cutting
production which resulted in prices moving sharply lower. In the last two months
of the calendar year, concerns rose about trading liquidity in the high-yield
bond market when a credit-oriented hedge fund froze redemptions claiming
liquidity problems. Investors mistakenly extrapolated this particular fund's
challenges to the market in general and redeemed high-yield mutual funds
heavily.
Credit markets entered calendar year 2016 on a heavy note suffering from further
oil price declines. In mid-February, however, oil appeared to reach a bottom and
credit markets moved sharply higher, with March 2016 turning out to be the best
gain for the market since October 2011 and April close behind. Investors
expressed their renewed confidence by heavily purchasing high-yield bond mutual
funds in the first quarter of the 2016 calendar year. The new issue calendar
opened up toward the end of the calendar quarter demonstrating what we believe
to be a return to normality for the market mechanisms.
CREDIT CONDITIONS CONTINUE TO DETERIORATE
Corporate bond defaults increased over the six months with April 2016 marking
the highest monthly default volume since the last default cycle. The first four
months of 2016 saw defaults total $37.6 billion making year-to-date 2016 the
seventh highest annual default total on record. At the end of April 2016, the
12-month high-yield default rate rose to 3.68% concentrated heavily in energy
and mining. Aside from the commodity sectors, corporate credit default was a
modest 0.42%. Currently, the 12-month default rate remains near the long-term
average of 3.6%. (Source: JPMorgan, Default Monitor, May 2, 2016)
Page 3
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
SEMI-ANNUAL REPORT
APRIL 30, 2016
Credit conditions have deteriorated over the period as measured by the rating
agency upgrade to downgrade ratio which ended the period at 0.49:1. This means
that rating agencies are upgrading less than half as many companies as they are
downgrading. Fallen Angel volume has significantly accelerated. A fallen angel
is an investment-grade company that gets downgraded to high-yield. In the first
four months of 2016, $139 billion of bonds were so downgraded compared to a
total of $143.1 billion for all of 2015.
OUTLOOK
We remain cautiously optimistic toward credit even though we believe defaults
are likely to continue increasing in the energy sector, given continued
relatively low prices for crude oil despite recent rallies. Oil-producing
companies are seeing their high-price hedges run off, thereby exposing their
income statement to today's lower product prices. Credit distress has been
concentrated in the energy and mining sectors for reasons that are well
understood; namely, sharp reduction in end-product prices. Absent these sectors,
the default rate remains extremely low and we believe non-commodity companies
are unlikely to experience credit contagion from today's troubled sectors.
Coupled with very manageable maturity schedules, adequate corporate liquidity,
and modest capital spending plans, we believe current spreads adequately
compensate investors for today's risks.
Securitized Products
Currently, we see value across many varieties of non-Agency securities, although
we have become more selective as this market has rallied from February lows.
Non-Agency securities have comparative advantages currently because they
typically benefit from indicators of a stronger consumer, such as improvements
in employment, increasing home prices, and greater consumer spending owing to
historically low gasoline prices. Non-Agency securities also have more
differentiated characteristics in terms of structure and collateral. This
differentiation creates more market inefficiencies of which we believe we can
take advantage for outperformance and income improvement. Market volatility
remained high through the fourth quarter and first quarter of the new 2016
calendar year. Subprime and Option Adjustable-Rate Mortgage ("ARM") securities
were most sensitive to the risk-off sentiment. Commercial Mortgage-Backed
Securities ("CMBS") also showed particular sensitivity due to more supply from
new issuance and expanded credit terms that we might compare with leveraged
corporate securities. Leveraged corporate securities staged an impressive rally
in March of 2016 to close the first quarter with a gain and that rally continued
through April. Securitized products lagged this broader rally in risk markets,
however we did see robust recovery in April and expect that to continue in May.
For the consumer, gas prices remain low, and at the lower end of the labor
market there appears to be some signs of wage inflation. These are positive
fundamental indicators for consumer and mortgage- related securities, in our
opinion.
Residential delinquency rates have also continued to decline. According to the
Mortgage Bankers Association, the total delinquency rate as of the fourth
quarter of 2015 was 4.77%. The delinquency rate reached the lowest level since
the third quarter of 2006, down more than 50% from the peak of 2010. CMBS
delinquency rates at the end of 2015 were 5.2%, according to Trepp, which is
half of the 10.6% peak seen in 2012.
Home prices, as measured by CoreLogic, have continued to increase. CoreLogic's
index, including distressed sales, increased 5.4% in 2015 and 2.72% during the
first quarter of 2016. Notably, this was ahead of most expectations. Even with
more of the new housing entrants as renters, and with more limited income growth
and tight credit, the influx of foreign buyers for stable U.S. Dollar ("USD")
assets, has been a benefit to many housing markets. An increase in home prices
results in lower loan-to-value ratios, which equates to a borrower regaining
lost equity, bringing them closer to meeting today's tighter lending standards.
Higher leverage has been an impediment to both refinancing and to relocation so
lower loan-to-value ratios can result in higher prepayment speed. Given current
conditions, we anticipate home prices will continue to improve, albeit at the
more stable 4% to 5% per annum rate.
The commercial real estate market is quite different to the residential market.
While residential real estate and the U.S. consumer are now stabilizing after
deleveraging, commercial real estate is in a releveraging cycle. The RCA
Commercial Property Price Index tracking major markets across the United States
Page 4
--------------------------------------------------------------------------------
PORTFOLIO COMMENTARY (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
SEMI-ANNUAL REPORT
APRIL 30, 2016
shows a significant 12% increase for 2015. The influx of foreign money for
commercial real-estate in top-tier markets has been significant, pushing these
markets well above the pre-crisis peak in prices. We are concerned that more
recent real-estate performance is likely to be much more tempered, and in light
of the more curbed financing availability, that problems may become more
observable.
We believe the pricing for risk may not be adequate for more recently issued
subordinated securities from multi-borrower CMBS deals, particularly given a
market that is well into a releveraging phase. In fact, many of these post 2010
vintage subordinated securities have widened 300-400 basis points in early 2016.
That said, the Fund's seasoned CMBS holdings, have benefitted from the
appreciation in the real-estate markets and we continue to see selected
opportunity in the legacy market.
PERFORMANCE ANALYSIS
For the six-month period ended April 30, 2016, the Fund had a total return(1) of
0.95% based on net asset value ("NAV"). For the period, the Fund traded from a
discount to NAV of -13.71% to a discount to NAV of -12.66%, resulting in a total
return of 2.34%, based on market price.
The total return for the Fund's benchmark, the Barclays Capital Ba U.S. High
Yield Index, was 2.96% for the six-month period ended April 30, 2016. While the
benchmark contains mostly corporate debt, it is important to note that the Fund
maintained exposure to structured finance and mortgage-related securities during
the period.
An important factor impacting the return of the Fund relative to its benchmark
was the Fund's use of financial leverage through the use of bank borrowings. As
of April 30, 2016, the Fund's leverage was approximately 28.0% of managed
assets. The use of leverage contributed to performance during the period. The
Fund may utilize leverage in an amount up to 33.33% of managed assets. The Fund
uses leverage because its managers believe that, over time, leverage provides
opportunities for additional income and capital growth for common shareholders.
However, the use of leverage also can expose common shareholders to additional
volatility. For example, as the prices of securities held by the Fund decline,
the negative impact of the valuation changes on common share net asset value and
common shareholder total return is magnified by the use of leverage. Conversely,
leverage may enhance common share returns during periods when the prices of
securities held by the Fund are rising generally. The benefit of the Fund's
allocation to equities was offset by the performance drag of the securitized
position.
Contributors to relative performance over the last 6 months included the Fund's
allocation to the retail sector, particularly supermarkets, utilities, and the
underweight in banking bonds. The Fund's underweight in small issues and
overweight in B-rated bonds contributed to performance as well.
Detractors from performance included the Fund's overweight in the energy sector,
despite the underweight to commodity-sensitive exploration and production
subsector. Additionally, the Fund's holdings in the basic industry sector,
especially the forest products subsector, and overweight in the communications,
particularly satellite detracted from performance.
The Fund's portfolio holdings are subject to change without notice. The mention
of specific securities is not a recommendation or solicitation for any person to
buy, sell or hold any particular security. There is no assurance that the Fund
currently holds these securities. These views represent the opinions of
Brookfield Investment Management Inc. and are not intended to predict or depict
the performance of any investment. These views are as of the close of business
on April 30, 2016 and subject to change based on subsequent developments.
-----------------------------
(1) 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 and
does not reflect sales load. Past performance is not indicative of future
results.
Page 5
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
PORTFOLIO OF INVESTMENTS
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------- --------- ------------ ------------
CORPORATE BONDS AND NOTES - 104.2%
AUTOMOTIVE - 3.7%
$ 1,275,000 American Axle & Manufacturing, Inc. (a)....... 6.25% 03/15/21 $ 1,330,781
1,050,000 American Axle & Manufacturing, Inc. (a)....... 6.63% 10/15/22 1,115,625
1,500,000 Ford Motor Co. (a)............................ 6.50% 08/01/18 1,643,990
------------
4,090,396
------------
BASIC INDUSTRY - 6.1%
3,275,000 Arch Coal, Inc. (a) (b)....................... 7.25% 06/15/21 30,703
775,000 Hexion, Inc................................... 8.88% 02/01/18 604,500
2,450,000 Hexion, Inc. (a).............................. 9.00% 11/15/20 1,127,000
500,000 Ply Gem Industries, Inc....................... 6.50% 02/01/22 498,125
2,100,000 Pulte Group, Inc. (a)......................... 6.38% 05/15/33 2,142,000
2,100,000 USG Corp. (a) (c)............................. 9.75% 01/15/18 2,367,750
------------
6,770,078
------------
CAPITAL GOODS - 5.9%
1,700,000 Crown Cork & Seal Co., Inc. (a)............... 7.38% 12/15/26 1,878,500
2,375,000 H&E Equipment Services, Inc. (a).............. 7.00% 09/01/22 2,410,625
650,000 Terex Corp.................................... 6.50% 04/01/20 653,575
1,625,000 Terex Corp. (a)............................... 6.00% 05/15/21 1,616,875
------------
6,559,575
------------
CONSUMER GOODS - 7.0%
2,000,000 ACCO Brands Corp. (a)......................... 6.75% 04/30/20 2,130,000
1,775,000 L Brands, Inc. (a)............................ 7.60% 07/15/37 1,921,437
1,800,000 New Albertsons, Inc. (a)...................... 7.75% 06/15/26 1,773,000
1,850,000 Post Holdings, Inc. (a)....................... 7.38% 02/15/22 1,956,375
------------
7,780,812
------------
ENERGY - 21.6%
2,100,000 Atlas Pipeline Partners LP/Atlas Pipeline
Finance Corp. (a) (d)...................... 5.88% 08/01/23 1,817,813
2,325,000 Blue Racer Midstream LLC/Blue Racer Finance
Corp. (e).................................. 6.13% 11/15/22 2,069,250
1,075,000 Crestwood Midstream Partners LP / Crestwood
Midstream Finance Corp..................... 6.00% 12/15/20 1,023,938
2,075,000 EP Energy LLC / Everest Acquisition
Finance, Inc............................... 6.38% 06/15/23 1,203,500
1,850,000 Ferrellgas Partners LP/Ferrellgas Partners
Finance Corp. (a).......................... 8.63% 06/15/20 1,817,625
2,625,000 Global Partners LP/GLP Finance Corp. (a) (d).. 6.25% 07/15/22 2,165,625
1,650,000 Holly Energy Partners LP/ Holly Energy Finance
Corp....................................... 6.50% 03/01/20 1,666,500
1,000,000 ION Geophysical Corp. (f)..................... 9.13% 12/15/21 558,750
2,200,000 MPLX LP (e)................................... 4.88% 12/01/24 2,147,983
2,200,000 NRG Energy, Inc. (a).......................... 6.25% 07/15/22 2,167,704
2,250,000 NRG Yield Operating, LLC (a).................. 5.38% 08/15/24 2,126,250
1,275,000 Pioneer Natural Resources Co. (a)............. 6.65% 03/15/17 1,326,125
1,550,000 Suburban Propane Partners LP/Suburban Energy
Finance Corp............................... 7.38% 08/01/21 1,604,250
2,375,000 Tesoro Logistics LP/Tesoro Logistics Finance
Corp. (a).................................. 6.13% 10/15/21 2,440,312
------------
24,135,625
------------
Page 6 See Notes to Financial Statements
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------- --------- ------------ ------------
CORPORATE BONDS AND NOTES (CONTINUED)
HEALTHCARE - 7.6%
$ 1,925,000 CHS/Community Health Systems, Inc. (a)........ 7.13% 07/15/20 $ 1,867,789
675,000 CHS/Community Health Systems, Inc............. 6.88% 02/01/22 614,250
1,750,000 HCA, Inc. (a)................................. 8.00% 10/01/18 1,986,250
1,000,000 HCA, Inc. (a)................................. 5.88% 05/01/23 1,056,875
438,000 inVentiv Health, Inc.......................... 10.00% 08/15/18 432,525
722,946 inVentiv Health, Inc. (e) (g)................. 10.00% 08/15/18 742,827
2,000,000 Kindred Healthcare, Inc. (a).................. 6.38% 04/15/22 1,837,500
------------
8,538,016
------------
LEISURE - 9.2%
2,000,000 Boyd Gaming Corp. (a)......................... 9.00% 07/01/20 2,111,496
2,375,000 Cedar Fair LP/Canada's Wonderland Co./Magnum
Management Corp. (a)....................... 5.25% 03/15/21 2,476,417
2,450,000 GLP Capital LP/GLP Financing II, Inc. (a)..... 5.38% 11/01/23 2,563,313
1,300,000 MGM Resorts International (a)................. 7.63% 01/15/17 1,352,000
1,725,000 Palace Entertainment Holdings LLC/Palace
Entertainment Holdings Corp. (a) (e)....... 8.88% 04/15/17 1,725,000
------------
10,228,226
------------
MEDIA - 10.6%
3,125,000 CCO Holdings LLC/CCO Holdings Capital
Corp. (a).................................. 5.75% 01/15/24 3,285,156
1,345,000 Cumulus Media Holdings, Inc. (a).............. 7.75% 05/01/19 564,900
1,700,000 iHeartCommunications, Inc. (a)................ 9.00% 03/01/21 1,209,125
2,325,000 Lamar Media Corp. (a)......................... 5.38% 01/15/24 2,464,500
1,750,000 Mediacom Broadband LLC/Mediacom Broadband
Corp. (a).................................. 6.38% 04/01/23 1,824,375
2,275,000 Neptune Finco Corp. (e)....................... 10.88% 10/15/25 2,536,625
------------
11,884,681
------------
SERVICES - 6.4%
1,000,000 Avis Budget Car Rental LLC/Avis Budget
Finance, Inc. (a).......................... 5.50% 04/01/23 959,550
1,850,000 Casella Waste Systems, Inc. (a)............... 7.75% 02/15/19 1,888,251
1,000,000 Sotheby's (e)................................. 5.25% 10/01/22 947,500
369,000 United Rentals North America, Inc............. 8.25% 02/01/21 386,527
900,000 United Rentals North America, Inc. (a)........ 7.63% 04/15/22 965,250
1,925,000 United Rentals North America, Inc............. 5.75% 11/15/24 1,961,094
------------
7,108,172
------------
TECHNOLOGY & ELECTRONICS - 2.3%
2,450,000 CyrusOne LP/CyrusOne Finance Corp............. 6.38% 11/15/22 2,598,519
------------
TELECOMMUNICATIONS - 18.4%
2,000,000 Centurylink, Inc. (a)......................... 7.65% 03/15/42 1,710,000
2,375,000 FairPoint Communications, Inc. (a) (e)........ 8.75% 08/15/19 2,253,281
3,350,000 Frontier Communications Corp. (a) (e)......... 11.00% 09/15/25 3,396,062
3,250,000 Level 3 Financing, Inc........................ 5.38% 05/01/25 3,319,062
500,000 Qwest Capital Funding, Inc.................... 6.88% 07/15/28 422,500
2,750,000 SBA Communications Corp. (a).................. 4.88% 07/15/22 2,779,233
1,875,000 T-Mobile USA, Inc. (a)........................ 6.63% 04/01/23 2,010,938
3,175,000 Windstream Corp. (a).......................... 7.50% 06/01/22 2,619,375
1,950,000 Zayo Group LLC/Zayo Capital, Inc. (a)......... 6.00% 04/01/23 2,013,375
------------
20,523,826
------------
See Notes to Financial Statements Page 7
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------- --------- ------------ ------------
CORPORATE BONDS AND NOTES (CONTINUED)
TRANSPORTATION - 1.6%
$ 1,800,000 Watco Cos. LLC/Watco Finance Corp. (a) (f).... 6.38% 04/01/23 $ 1,800,000
------------
UTILITY - 3.8%
2,350,000 AES Corp. (a)................................. 4.88% 05/15/23 2,326,500
2,225,000 TerraForm Power Operating LLC (e)............. 5.88% 02/01/23 1,952,438
------------
4,278,938
------------
TOTAL CORPORATE BONDS AND NOTES............................................ 116,296,864
(Cost $122,068,422) ------------
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
---------------- ---------------------------------------------- --------- ------------ ------------
FOREIGN CORPORATE BONDS AND NOTES - 10.8%
BASIC INDUSTRY - 1.3%
1,000,000 Cascades, Inc. (USD) (a) (e).................. 5.50% 07/15/22 970,000
875,000 Millar Western Forest Products Ltd.
(USD) (d).................................. 8.50% 04/01/21 428,750
------------
1,398,750
------------
CAPITAL GOODS - 1.8%
2,000,000 Ardagh Packaging Finance PLC/Ardagh Holdings
USA, Inc. (USD) (a) (e).................... 6.75% 01/31/21 2,015,000
------------
ENERGY - 3.6%
1,800,000 LBC Tank Terminals Holding Netherlands BV
(USD) (f).................................. 6.88% 05/15/23 1,737,000
645,000 Precision Drilling Corp. (USD)................ 6.63% 11/15/20 578,081
1,750,000 Puma International Financing S.A. (USD) (e)... 6.75% 02/01/21 1,732,500
------------
4,047,581
------------
TELECOMMUNICATIONS - 1.6%
3,600,000 Intelsat Luxembourg S.A. (USD) (a)............ 7.75% 06/01/21 1,206,000
700,000 Wind Acquisition Finance S.A. (USD) (e)....... 7.38% 04/23/21 626,500
------------
1,832,500
------------
TRANSPORTATION - 2.5%
1,550,000 Dynagas LNG Partners LP/Dynagas Finance, Inc.
(USD) (a) (d)............................. 6.25% 10/30/19 1,263,250
2,000,000 Teekay Offshore Partners LP/Teekay Offshore
Finance Corp. (USD) (a) (d)................ 6.00% 07/30/19 1,500,000
------------
2,763,250
------------
TOTAL FOREIGN CORPORATE BONDS AND NOTES.................................... 12,057,081
(Cost $15,517,802) ------------
Page 8 See Notes to Financial Statements
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------- --------- ------------ ------------
MORTGAGE-BACKED SECURITIES - 7.8%
COLLATERALIZED MORTGAGE OBLIGATIONS - 6.7%
Citicorp Mortgage Securities, Inc.
$ 1,308,578 Series 2007-2, Class 1A3................... 6.00% 02/25/37 $ 1,198,861
Countrywide Alternative Loan Trust
128,054 Series 2007-11T1, Class A37 (d) (h)........ 37.39% 05/25/37 295,489
885,977 Series 2007-OA3, Class 1A1 (h)............. 0.58% 04/25/47 742,767
Countrywide Home Loan Mortgage Pass-Through
Trust
146,575 Series 2006-21, Class A8................... 5.75% 02/25/37 134,741
Home Equity Asset Trust
1,190,000 Series 2006-4, Class 2A4 (h)............... 0.72% 08/25/36 1,026,076
1,257,483 Series 2006-7, Class 2A3 (h)............... 0.59% 01/25/37 891,030
Nomura Resecuritization Trust
2,672,435 Series 2014-1R, Class 2A11 (e) (h)......... 0.70% 02/26/37 1,416,680
Residential Accredit Loans, Inc.
130,963 Series 2007-Q56, Class A2 (h).............. 51.93% 04/25/37 319,019
Securitized Asset Backed Receivables LLC Trust
1,191,559 Series 2007, Class BR4 (h)................. 0.64% 05/25/37 709,441
Washington Mutual Alternative Mortgage
Pass-Through Certificates
40,219 Series 2007-5, Class A11 (d) (h)........... 36.85% 06/25/37 98,256
Wells Fargo Mortgage Backed Securities Trust
467,325 Series 2006-8, Class A15................... 6.00% 07/25/36 472,750
192,609 Series 2007-8, Class 2A2................... 6.00% 07/25/37 190,144
------------
7,495,254
------------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 1.0%
Greenwich Capital Commercial Funding Corp.
1,180,000 Series 2007-GG11, Class AJ (h)............. 6.03% 12/10/49 1,165,136
------------
TOTAL MORTGAGE-BACKED SECURITIES........................................... 8,660,390
(Cost $8,197,740) ------------
ASSET-BACKED SECURITIES - 5.3%
Ace Securities Corp.
808,868 Series 2003-MH1, Class A4 (e).............. 6.50% 08/15/30 890,827
BankAmerica Manufactured Housing Contract
Trust II
2,300,000 Series 1997-1, Class B1.................... 6.94% 06/10/21 2,954,392
Bombardier Capital Mortgage Securitization
Corp.
264,521 Series 1999-B, Class A1B (d)............... 6.61% 12/15/29 114,630
Citigroup Mortgage Loan Trust, Inc.
2,301,000 Series 2003-HE3, Class M4 (h).............. 3.44% 12/25/33 1,148,443
Green Tree Financial Corp.
58,679 Series 1997-4, Class B1(d)................. 7.23% 02/15/29 4,023
653,056 Series 1998-4, Class M1.................... 6.83% 04/01/30 440,895
855,922 Series 1999-3, Class M1(d)................. 6.96% 02/01/31 76,132
GSAMP Trust
2,871,641 Series 2006-S5, Class A1 (d) (h)........... 0.62% 09/25/36 110,698
Oakwood Mortgage Investors, Inc.
657,226 Series 1999-B, Class M1 (d)................ 7.18% 12/15/26 237,155
------------
TOTAL ASSET-BACKED SECURITIES.............................................. 5,977,195
(Cost $4,557,358) ------------
See Notes to Financial Statements Page 9
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------- --------- ------------ ------------
SENIOR FLOATING-RATE LOAN INTERESTS - 5.1%
BASIC INDUSTRY - 1.6%
$ 1,940,051 FMG Resources (August 2006) Pty Ltd., Term
Loan B (h)................................. 4.25% 06/30/19 $ 1,825,530
------------
ENERGY - 0.8%
997,397 MEG Energy Corp., Incremental Term Loan (h)... 3.75% 03/31/20 891,005
------------
LEISURE - 1.6%
1,825,000 Four Seasons Holdings Inc. Term Loan, Second
Lien (d) (h)............................... 6.25% 12/28/20 1,812,462
------------
SERVICES - 0.8%
982,500 Caesars Growth Properties, LLC, Term
Loan B (h)................................. 6.25% 04/15/21 874,425
------------
UTILITY - 0.3%
843,312 TXU (Texas Competitive Electric Holdings Co.
LLC) 2017 Term Loan (Extending) (h)........ 4.91% 10/10/17 285,149
------------
TOTAL SENIOR FLOATING-RATE LOAN INTERESTS.................................. 5,688,571
(Cost $6,116,922) ------------
SHARES/UNITS DESCRIPTION VALUE
---------------- --------------------------------------------------------------------------- ------------
COMMON STOCKS - 1.7%
AUTOMOTIVE - 0.4%
33,500 Ford Motor Co.............................................................. 454,260
------------
CAPITAL GOODS - 0.6%
20,275 General Electric Co........................................................ 623,456
------------
ENERGY - 0.3%
10,000 ION Geophysical Corp....................................................... 91,600
7 Thunderbird Resources Equity, Inc. (d) (i) (j)............................. 281,907
------------
373,507
------------
UTILITY - 0.4%
36,000 AES Corp................................................................... 401,760
------------
TOTAL COMMON STOCKS........................................................ 1,852,983
(Cost $2,392,182) ------------
MASTER LIMITED PARTNERSHIPS - 0.0%
ENERGY - 0.0%
4,411 EV Energy Partners, L.P.................................................... 12,969
(Cost $141,651) ------------
PREFERRED SECURITIES - 0.0%
4,000 Soloso CDO, Ltd., Series 2005-1 (f) (j) (k)................................ 1,250
(Cost $0) ------------
Page 10 See Notes to Financial Statements
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------- --------- ------------ ------------
STRUCTURED NOTES - 0.0%
$ 5,750,000 Preferred Term Securities XXV, Ltd. (f) (j)... (k) 06/22/37 $ 1,797
Preferred Term Securities XXVI, Ltd.
2,500,000 Subordinated Note (f) (j).................. (k) 09/22/37 3,906
------------
TOTAL STRUCTURED NOTES..................................................... 5,703
(Cost $0) ------------
TOTAL INVESTMENTS - 134.8%................................................. 150,553,006
(Cost $158,992,077) (l)
OUTSTANDING LOAN - (38.8%)................................................. (43,350,000)
NET OTHER ASSETS AND LIABILITIES - 4.0%.................................... 4,423,842
------------
NET ASSETS - 100.0%........................................................ $111,626,848
============
-----------------------------
(a) All or a portion of this security serves as collateral on the outstanding
loan.
(b) The issuer is in default and has filed for protection in federal
bankruptcy court. Interest is not being accrued.
(c) Multi-Step Coupon Bond - Coupon steps up or down based upon ratings
changes by Standard & Poor's Ratings Group or Moody's Investors Service,
Inc. The interest rate shown reflects the rate in effect at April 30,
2016.
(d) Pursuant to procedures adopted by the Fund's Board of Trustees, this
security has been determined to be illiquid by Brookfield Investment
Management Inc. ("Brookfield"), the Fund's sub-advisor.
(e) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under the Securities
Act of 1933, as amended (the "1933 Act"), and may be resold in
transactions exempt from registration, normally to qualified institutional
buyers. 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 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 April 30, 2016,
securities noted as such amounted to $25,422,473 or 22.8% of net assets.
(f) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under 1933 Act, and
may be resold in transactions exempt from registration, normally to
qualified institutional buyers (see Note 2C - Restricted Securities in the
Notes to Financial Statements).
(g) This security is a Payment-in-Kind ("PIK") Toggle Note whereby interest
will be paid either in cash at the stated coupon or at the rate of 12.00%.
For the six months ended April 30, 2016, the Fund received $40,921 in PIK
interest.
(h) Floating rate security. The interest rate shown reflects the rate in
effect at April 30, 2016.
(i) Non-income producing security.
(j) This security is fair valued by the Advisor's Pricing Committee in
accordance with procedures adopted by the Fund's Board of Trustees, and in
accordance with the provisions of the Investment Company Act of 1940, as
amended. At April 30, 2016, securities noted as such are valued at
$288,860 or 0.3% of net assets.
(k) Zero coupon security.
(l) Aggregate cost for financial reporting purposes which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2016, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $6,420,808 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $14,859,879.
CAD Canadian Dollar
CDO Collateralized Debt Obligation
USD United States Dollar
See Notes to Financial Statements Page 11
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2016 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
4/30/2016 PRICES INPUTS INPUTS
------------- ------------- ------------- -------------
Corporate Bonds and Notes*......................... $ 116,296,864 $ -- $ 116,296,864 $ --
Foreign Corporate Bonds and Notes*................. 12,057,081 -- 12,057,081 --
Mortgage-Backed Securities:
Collateralized Mortgage Obligations............. 7,495,254 -- 7,495,254 --
Commercial Mortgage-Backed Securities........... 1,165,136 -- 1,165,136 --
Asset-Backed Securities............................ 5,977,195 -- 5,977,195 --
Senior Floating-Rate Loan Interests*............... 5,688,571 -- 5,688,571 --
Common Stocks:
Energy.......................................... 281,907 -- -- 281,907
Other Industry Categories*...................... 1,571,076 1,571,076 -- --
Master Limited Partnerships*....................... 12,969 12,969 -- --
Preferred Securities............................... 1,250 -- -- 1,250
Structured Notes................................... 5,703 -- -- 5,703
------------- ------------- ------------- -------------
Total Investments.................................. 150,553,006 1,584,045 148,680,101 288,860
Forward Foreign Currency Contracts**............... 66,932 -- 66,932 --
------------- ------------- ------------- -------------
Total.............................................. $ 150,619,938 $ 1,584,045 $ 148,747,033 $ 288,860
============= ============= ============= =============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
4/30/2016 PRICES INPUTS INPUTS
------------- ------------- ------------- -------------
Forward Foreign Currency Contracts**............... $ (20,424) $ -- $ (20,424) $ --
============= ============= ============= =============
* See Portfolio of Investments for industry breakout.
** See the table of Forward Foreign Currency Contracts for contract and currency
detail.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at April 30, 2016.
The following provides information on the Level 3 equity held by the Fund that
was valued at April 30, 2016 based on unobservable inputs.
IMPACT TO
VALUATION FROM
FAIR VALUE AT VALUATION UNOBSERVABLE AN INCREASE
ASSET TYPE 4/30/16 TECHNIQUE INPUTS AMOUNT IN INPUT
---------- ------------- --------------- ------------- -------- ---------------
Equity $ 281,907 Income Approach Expected Life 20 years Decrease
Discount Rate 10% Decrease
Level 3 Structured Notes and Preferred Securities are valued using broker
quotes. These values are based on unobservable and non-quantitative inputs. The
Fund's Board of Trustees has adopted valuation procedures that are utilized by
the Advisor's Pricing Committee to oversee the day-to-day valuation of the
Fund's investments. The Advisor's Pricing Committee, through the Fund's fund
accounting agent, monitors daily pricing via tolerance checks and stale and
unchanged price reviews. The
Page 12 See Notes to Financial Statements
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2016 (UNAUDITED)
Advisor's Pricing Committee also reviews monthly back testing of pricing
services prices by comparing sales prices of Fund investments to prior day
pricing service prices. Additionally, the Advisor's Pricing Committee reviews
periodic information from the Fund's third-party pricing service that compares
secondary market trade prices to their daily valuations.
The following table presents the activity of the Fund's investments measured at
fair value on a recurring basis using significant unobservable inputs (Level 3)
for the period presented.
BEGINNING BALANCE AT OCTOBER 31, 2015
Common Stocks $ 248,220
Preferred Securities 1,250
Structured Notes 4,922
Net Realized Gain (Loss) --
Net Change in Unrealized Appreciation/Depreciation
Common Stocks 33,687
Preferred Securities --
Structured Notes 781
Purchases --
Sales --
Transfers In --
Transfers Out --
ENDING BALANCE AT APRIL 30, 2016
Common Stocks 281,907
Preferred Securities 1,250
Structured Notes 5,703
----------
Total Level 3 holdings $ 288,860
==========
There was a net change of $34,468 in unrealized appreciation (depreciation) from
Level 3 investments held as of April 30, 2016.
FORWARD FOREIGN CURRENCY CONTRACTS
----------------------------------------------------
PURCHASE SALE UNREALIZED
SETTLEMENT AMOUNT AMOUNT VALUE AS OF VALUE AS OF APPRECIATION/
DATE COUNTERPARTY PURCHASED (a) SOLD (a) APRIL 30, 2016 APRIL 30, 2016 (DEPRECIATION)
---------- ------------ --------------- --------------- ---------------- ---------------- --------------
05/09/16 BNYM USD 462,134 CAD 605,465 $ 462,134 $ 482,558 $ (20,424)
05/09/16 BNYM CAD 605,465 USD 415,626 482,558 415,626 66,932
--------------
Net unrealized appreciation (depreciation)......................................................... $ 46,508
==============
(a) Please see Portfolio of Investments for currency description.
Counterparty Abbreviations:
BNYM Bank of New York Mellon
See Notes to Financial Statements Page 13
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2016 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $158,992,077)............................................................................. $ 150,553,006
Cash............................................................................................... 2,037,339
Unrealized appreciation on forward foreign currency contracts...................................... 66,932
Receivables:
Interest........................................................................................ 2,510,560
Investment securities sold...................................................................... 963,531
Dividends....................................................................................... 8,985
Prepaid expenses................................................................................... 13,622
-------------
Total Assets.................................................................................... 156,153,975
-------------
LIABILITIES:
Outstanding loan................................................................................... 43,350,000
Unrealized depreciation on forward foreign currency contracts...................................... 20,424
Payables:
Investment securities purchased................................................................. 944,497
Investment advisory fees........................................................................ 112,309
Audit and tax fees.............................................................................. 36,942
Printing fees................................................................................... 17,692
Administrative fees............................................................................. 11,997
Interest and fees on loan....................................................................... 10,113
Transfer agent fees............................................................................. 7,962
Custodian fees.................................................................................. 6,830
Trustees' fees and expenses..................................................................... 6,130
Legal fees...................................................................................... 1,460
Financial reporting fees........................................................................ 771
-------------
Total Liabilities............................................................................... 44,527,127
-------------
NET ASSETS......................................................................................... $ 111,626,848
=============
NET ASSETS CONSIST OF:
Paid-in capital.................................................................................... $ 185,047,836
Par value.......................................................................................... 82,605
Accumulated net investment income (loss)........................................................... 569,009
Accumulated net realized gain (loss) on investments, forward foreign currency
contracts and foreign currency transactions...................................................... (65,680,039)
Net unrealized appreciation (depreciation) on investments, forward foreign
currency contracts and foreign currency translation................................................ (8,392,563)
-------------
NET ASSETS......................................................................................... $ 111,626,848
=============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)............................... $ 13.51
=============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized)........ 8,260,463
=============
Page 14 See Notes to Financial Statements
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2016 (UNAUDITED)
INVESTMENT INCOME:
Interest........................................................................................... $ 5,462,564
Dividends (net of foreign withholding tax of $424)................................................. 38,077
Other.............................................................................................. 281,157
-------------
Total investment income......................................................................... 5,781,798
-------------
EXPENSES:
Investment advisory fees........................................................................... 684,312
Interest and fees on loan.......................................................................... 452,826
Administrative fees................................................................................ 45,359
Audit and tax fees................................................................................. 35,893
Printing fees...................................................................................... 30,584
Transfer agent fees................................................................................ 19,928
Custodian fees..................................................................................... 12,459
Trustees' fees and expenses........................................................................ 8,970
Financial reporting fees........................................................................... 4,625
Legal fees......................................................................................... 2,390
Other.............................................................................................. 37,919
-------------
Total expenses.................................................................................. 1,335,265
-------------
NET INVESTMENT INCOME (LOSS)....................................................................... 4,446,533
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments..................................................................................... (9,647,699)
Forward foreign currency contracts.............................................................. (51,929)
Foreign currency transactions................................................................... 5,878
-------------
Net realized gain (loss)........................................................................... (9,693,750)
-------------
Net change in unrealized appreciation (depreciation) on:
Investments..................................................................................... 4,633,023
Forward foreign currency contracts.............................................................. 76,648
Foreign currency translation.................................................................... 3,259
-------------
Net change in unrealized appreciation (depreciation)............................................... 4,712,930
NET REALIZED AND UNREALIZED GAIN (LOSS)............................................................ (4,980,820)
-------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.................................... $ (534,287)
=============
See Notes to Financial Statements Page 15
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
4/30/2016 ENDED
(UNAUDITED) 10/31/2015
-------------- --------------
OPERATIONS:
Net investment income (loss)........................................................ $ 4,446,533 $ 10,452,634
Net realized gain (loss)............................................................ (9,693,750) (1,448,155)
Net change in unrealized appreciation (depreciation)................................ 4,712,930 (18,619,141)
-------------- --------------
Net increase (decrease) in net assets resulting from operations..................... (534,287) (9,614,662)
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................................... (5,249,546) (9,735,535)
Return of capital................................................................... -- (1,768,527)
-------------- --------------
Total distributions to shareholders................................................. (5,249,546) (11,504,062)
-------------- --------------
CAPITAL TRANSACTIONS:
Repurchase of Common Shares......................................................... (1,885,348) (322,116)
-------------- --------------
Net increase (decrease) in net assets resulting from capital transactions........... (1,885,348) (322,116)
-------------- --------------
Total increase (decrease) in net assets............................................. (7,669,181) (21,440,840)
NET ASSETS:
Beginning of period................................................................. 119,296,029 140,736,869
-------------- --------------
End of period....................................................................... $ 111,626,848 $ 119,296,029
============== ==============
Accumulated net investment income (loss) at end of period........................... $ 569,009 $ 1,372,022
============== ==============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period................................................ 8,432,081 8,458,869
Common Shares repurchased*.......................................................... (171,618) (26,788)
-------------- --------------
Common Shares at end of period...................................................... 8,260,463 8,432,081
============== ==============
* On September 15, 2015, the Fund commenced a share repurchase program. The
program originally expired on March 15, 2016, but on March 15, 2016, the
Fund announced that the Board of Trustees of the Fund authorized the
continuation of the Fund's share repurchase program. For the six months
ended April 30, 2016, and the year ended October 31, 2015, the Fund
repurchased 171,618 and 26,788, respectively, of its shares at a
weighted-average discount of 15.59% and 14.92%, respectively, from net
asset value per share. The Fund expects to continue to repurchase its
outstanding shares until the earlier of (i) the repurchase of an
additional 224,537 common shares (for an aggregate of 422,943), or (ii)
September 15, 2016.
Page 16 See Notes to Financial Statements
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
STATEMENT OF CASH FLOWS FOR THE
SIX MONTHS ENDED APRIL 30, 2016 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations..................... $ (534,287)
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by operating activities:
Purchases of investments...................................................... (12,806,280)
Sales, maturities and paydowns of investments................................. 16,572,304
Net amortization/accretion of premiums/discounts on investments............... (76,488)
Net realized gain/loss on investments......................................... 9,647,699
Net change in unrealized appreciation/depreciation on forward foreign
currency contracts ....................................................... (76,648)
Net change in unrealized appreciation/depreciation on investments............. (4,633,023)
CHANGES IN ASSETS AND LIABILITIES:
Decrease in interest receivable............................................... 294,777
Increase in dividends receivable.............................................. (360)
Increase in prepaid expenses.................................................. (6,792)
Increase in interest and fees on loan payable................................. 3,313
Decrease in investment advisory fees payable.................................. (15,341)
Increase in legal fees payable................................................ 594
Decrease in printing fees payable............................................. (4,337)
Decrease in administrative fees payable....................................... (27,463)
Increase in custodian fees payable............................................ 736
Increase in transfer agent fees payable....................................... 4,144
Increase in Trustees' fees and expenses payable............................... 4,655
Decrease in other liabilities payable......................................... (1,030)
--------------
CASH PROVIDED BY OPERATING ACTIVITIES............................................... $ 8,312,915
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of Common Shares................................................... (1,931,280)
Distributions to Common Shareholders from net investment income............... (5,249,546)
Repayment of borrowing........................................................ (5,000,000)
--------------
CASH USED IN FINANCING ACTIVITIES................................................... (12,180,826)
--------------
Increase in cash and foreign currency (a)........................................... (3,867,911)
Cash and foreign currency at beginning of period.................................... 5,905,250
--------------
Cash and foreign currency at end of period.......................................... $ 2,037,339
==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees................................... $ 449,513
==============
-----------------------------
(a) Includes net change in unrealized appreciation (depreciation) on foreign
currency of $3,259.
See Notes to Financial Statements Page 17
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR ENDED OCTOBER 31,
APRIL 30, 2016 ------------------------------------------------------------------------
(UNAUDITED) 2015 2014 2013 2012 2011
-------------- ------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period..... $ 14.15 $ 16.64 $ 17.52 $ 17.06 $ 16.17 $ 15.87
---------- ---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)............. 0.54 1.24 1.38 1.48 1.52 0.59
Net realized and unrealized gain (loss).. (0.59) (2.38) (0.82) 0.43 0.90 0.32
---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations......... (0.05) (1.14) 0.56 1.91 2.42 0.91
---------- ---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income.................... (0.63) (1.15) (1.19) (0.66) (0.61) (0.54)
Return of capital........................ -- (0.21) (0.25) (0.79) (0.94) (0.07)
---------- ---------- ---------- ---------- ---------- ----------
Total distributions to Common
Shareholders.......................... (0.63) (1.36) (1.44) (1.45) (1.55) (0.61)
---------- ---------- ---------- ---------- ---------- ----------
Premiums from shares sold in Common
Share offering........................ -- -- -- 0.00 (a) 0.02 --
Common Share repurchases................. 0.04 0.01 -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of period........... $ 13.51 $ 14.15 $ 16.64 $ 17.52 $ 17.06 $ 16.17
========== ========== ========== ========== ========== ==========
Market value, end of period.............. $ 11.80 $ 12.21 $ 15.60 $ 15.97 $ 17.69 $ 14.51
========== ========== ========== ========== ========== ==========
TOTAL RETURN BASED ON NET ASSET
VALUE (b)............................. 0.95% (6.04)% 4.03% 12.19% 16.11% 13.60%
========== ========== ========== ========== ========== ==========
TOTAL RETURN BASED ON MARKET VALUE (b)... 2.34% (13.52)% 6.99% (1.38)% 34.16% 11.64%
========== ========== ========== ========== ========== ==========
-----------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)..... $ 111,627 $ 119,296 $ 140,737 $ 148,238 $ 144,205 $ 131,109
Ratio of total expenses to average
net assets............................ 2.49% (c) 2.23% 2.34% 2.22% 2.52% 2.35%
Ratio of total expenses to average net
assets excluding interest expense..... 1.65% (c) 1.57% 1.77% 1.71% 1.93% 1.93%
Ratio of net investment income (loss)
to average net assets................. 8.29% (c) 8.01% 8.00% 8.55% 9.52% 9.65%
Portfolio turnover rate.................. 9% 30% 28% 27% 33% 49%
INDEBTEDNESS:
Total loan outstanding (in 000's)........ $ 43,350 $ 48,350 $ 58,850 $ 55,400 $ 54,400 $ 54,400
Asset coverage per $1,000 of
indebtedness (b)...................... $ 3,575 $ 3,467 $ 3,391 $ 3,676 $ 3,651 $ 3,410
-----------------------------
(a) Amount represents less than $0.01 per share.
(b) 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 net asset value per share
for net asset value returns and changes in Common Share price for market
value returns. Total returns do not reflect sales load and are not
annualized for periods less than one year. Past performance is not
indicative of future results.
(c) Annualized.
(d) Calculated by subtracting the Fund's total liabilities (not including the
loan outstanding) from the Fund's total assets, and dividing by the
outstanding loan balance in 000's.
Page 18 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
APRIL 30, 2016 (UNAUDITED)
1. ORGANIZATION
First Trust Strategic High Income Fund II (the "Fund") is a diversified,
closed-end management investment company organized as a Massachusetts business
trust on January 18, 2006, and is registered with the Securities and Exchange
Commission ("SEC") under the Investment Company Act of 1940, as amended (the
"1940 Act"). The Fund trades under the ticker symbol "FHY" on the New York Stock
Exchange ("NYSE").
The Fund's primary investment objective is to seek a high level of current
income. The Fund seeks capital growth as a secondary objective. The Fund seeks
to achieve its investment objectives by investing in a diversified portfolio of
below-investment grade and investment grade debt securities, and equity
securities that Brookfield Investment Management Inc. ("Brookfield" or the
"Sub-Advisor") believes offer attractive yield and/or capital appreciation
potential. The Fund may invest up to 100% of its Managed Assets in
below-investment grade debt securities (commonly referred to as "high-yield" or
"junk" bonds). Managed Assets means the average daily total asset value of the
Fund minus the sum of the Fund's liabilities other than the principal amount of
borrowings or reverse repurchase agreements, if any. There can be no assurance
that the Fund will achieve its investment objectives. The Fund may not be
appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund, which is an investment company within the scope of Financial
Accounting Standards Board ("FASB") Accounting Standards Update 2013-08, follows
accounting and reporting guidance under FASB Accounting Standards Codification
Topic 946, "Financial Services-Investment Companies." The following is a summary
of significant accounting policies consistently followed by the Fund in the
preparation of its financial statements. The preparation of financial statements
in accordance with accounting principles generally accepted in the United States
of America ("U.S. GAAP") requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial statements.
Actual results could differ from those estimates.
A. PORTFOLIO VALUATION
The net asset value ("NAV") of the Common Shares of the Fund is determined
daily, as of the close of regular trading on the NYSE, normally 4:00 p.m.
Eastern time, on each day the NYSE is open for trading. If the NYSE closes early
on a valuation day, the NAV is determined as of that time. Domestic debt
securities and foreign securities are priced using data reflecting the earlier
closing of the principal markets for those securities. The Fund's 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 absence of market
value with respect to any portfolio securities, at fair value. Market value
prices represent last sale or official closing prices from a national or foreign
exchange (i.e., a regulated market) and are primarily obtained from third-party
pricing services. Fair value prices represent any prices not considered market
value prices and are either obtained from a third-party pricing service or are
determined by the Pricing Committee of the Fund's investment advisor, First
Trust Advisors L.P. ("First Trust" or the "Advisor"), in accordance with
valuation procedures adopted by the Fund's Board of Trustees, and in accordance
with provisions of the 1940 Act. Investments valued by the Advisor's Pricing
Committee, if any, are footnoted as such in the footnotes to the Portfolio of
Investments. The Fund's investments are valued as follows:
Corporate bonds, notes, U.S. government securities, mortgage-backed
securities, asset-backed securities and other debt securities are valued
on the basis of valuations provided by dealers who make markets in such
securities or by an independent pricing service approved by the Fund's
Board of Trustees, which may use the following valuation inputs when
available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Common stocks and other equity securities listed on any national or
foreign exchange (excluding The Nasdaq Stock Market LLC ("Nasdaq") and the
London Stock Exchange Alternative Investment Market ("AIM")) are valued at
the last sale price on the exchange on which they are principally traded
or, for Nasdaq and AIM securities, the official closing price. Securities
traded on more than one securities exchange are valued at the last sale
price or official closing price, as applicable, at the close of the
securities exchange representing the principal market for such securities.
Securities traded in an over-the-counter market are fair valued at their
mean of the most recent bid and the asked price, if available, and
otherwise at their closing bid price.
Page 19
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
APRIL 30, 2016 (UNAUDITED)
The Senior Floating-Rate Loan interests ("Senior Loans")(1) held in the
Fund are not listed on any securities exchange or board of trade. Senior
Loans are typically bought and sold by institutional investors in
individually negotiated private transactions that function in many
respects like an over-the-counter secondary market, although typically no
formal market-makers exist. This market, while having grown substantially
since its inception, generally has fewer trades and less liquidity than
the secondary market for other types of securities. Some Senior Loans have
few or no trades, or trade infrequently, and information regarding a
specific Senior Loan may not be widely available or may be incomplete.
Accordingly, determinations of the market value of Senior Loans may be
based on infrequent and dated information. Because there is less reliable,
objective data available, elements of judgment may play a greater role in
valuation of Senior Loans than for other types of securities. Typically,
Senior Loans are fair valued using information provided by a third-party
pricing service. The third-party pricing service primarily uses
over-the-counter pricing from dealer runs and broker quotes from
indicative sheets to value the Senior Loans.
Forward foreign currency contracts are fair valued at the current day's
interpolated foreign exchange rate, as calculated using the current day's
spot rate, and the thirty, sixty, ninety, and one-hundred eighty day
forward rates provided by an independent pricing service.
Fixed income and other debt securities having a remaining maturity of 60
days or less when purchased are fair valued at cost adjusted for
amortization of premiums and accretion of discounts (amortized cost),
provided the Advisor's Pricing Committee has determined that the use of
amortized cost is an appropriate reflection of fair value given market and
issuer-specific conditions existing at the time of the determination.
Factors that may be considered in determining the appropriateness of the
use of amortized cost include, but are not limited to, the following:
1) the credit conditions in the relevant market and changes thereto;
2) the liquidity conditions in the relevant market and changes thereto;
3) the interest rate conditions in the relevant market and changes
thereto (such as significant changes in interest rates);
4) issuer-specific conditions (such as significant credit
deterioration); and
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing Committee
may use last-obtained market-based data to assist it when valuing
portfolio securities using amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Fund's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended (the "1933 Act")) for which a pricing service is unable to
provide a market price; securities whose trading has been formally suspended; a
security whose market or fair value price is not available from a
pre-established pricing source; a security with respect to which an event has
occurred that is likely to materially affect the value of the security after the
market has closed but before the calculation of a Fund's NAV or make it
difficult or impossible to obtain a reliable market quotation; and a security
whose price, as provided by the pricing service, does not reflect the security's
fair value. As a general principle, the current fair value of a security would
appear to be the amount which the owner might reasonably expect to receive for
the security upon its current sale. When fair value prices are used, generally
they will differ from current quotations or official closing prices on the
applicable exchanges. A variety of factors may be considered in determining the
fair value of such securities, including, but not limited to, the following:
1) the fundamental business data relating to the borrower/issuer;
2) an evaluation of the forces which influence the market in which
these securities are purchased and sold;
3) the type, size and cost of a security;
4) the financial statements of the borrower/issuer;
5) the credit quality and cash flow of the borrower/issuer, based on
the Sub-Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities (or
equity securities) of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing
the security;
10) the business prospects of the issuer, including any ability to
obtain money or resources from a parent or affiliate and an
assessment of the borrower's/issuer's management;
11) the prospects for the borrower's/issuer's industry, and multiples
(of earnings and/or cash flows) being paid for similar businesses in
that industry;
12) the borrower's/issuer's competitive position within the industry;
13) the borrower's/issuer's ability to access additional liquidity
through public and/or private markets; and
14) other relevant factors
-----------------------------
(1) The terms "security" and "securities" used throughout the Notes to
Financial Statements include Senior Loans.
Page 20
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
APRIL 30, 2016 (UNAUDITED)
The Fund invests a significant portion of its assets in below-investment grade
debt securities, including structured finance securities and corporate bonds.
Structured finance securities include: asset-backed securities, including home
equity, manufactured housing, etc.; commercial mortgage-backed securities;
residential mortgage-backed or private-label collateralized mortgage
obligations; and collateralized debt obligations. The value and related income
of these securities is sensitive to changes in economic conditions, including
delinquencies and/or defaults.
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:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, 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.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of April 30, 2016, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Interest income is recorded daily on the accrual basis. Amortization of premiums
and accretion of discounts are recorded using the effective interest method.
The Fund invests in certain lower credit quality securitized assets (for
example, asset-backed securities, collateralized mortgage obligations and
commercial mortgage-backed securities), that have contractual cash flows. For
these securities, if there is a change in the estimated cash flows, based on an
evaluation of current information, then the estimated yield is adjusted.
Additionally, if the evaluation of current information indicates a permanent
impairment of the security, the cost basis of the security is written down and a
loss is recognized. Debt obligations may be placed on non-accrual status, and
related interest income may be reduced by ceasing current accruals and
amortization/accretion and writing off interest receivables when the collection
of all or a portion of interest has become doubtful based on consistently
applied procedures. A debt obligation is removed from non-accrual status when
the issuer resumes interest payments or when collectability of interest is
reasonably assured.
Securities purchased on a when-issued, delayed-delivery or forward purchase
commitment basis may have extended settlement periods. The value of the security
so purchased is subject to market fluctuations during this period. The Fund
maintains liquid assets with a current value at least equal to the amount of its
when-issued, delayed-delivery or forward purchase commitments until payment is
made. At April 30, 2016, the Fund had no when-issued, delayed-delivery or
forward purchase commitments.
C. RESTRICTED SECURITIES
The Fund invests in restricted securities, which are securities that may not be
offered for public sale without first being registered under the 1933 Act. Prior
to registration, restricted securities may only be resold in transactions exempt
from registration under Rule 144A under the 1933 Act, normally to qualified
institutional buyers. As of April 30, 2016, the Fund held restricted securities
as shown in the following table that the Sub-Advisor has deemed illiquid
pursuant to procedures adopted by the Fund's Board of Trustees. Although 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 note
(Note 2A) and are not expressed as a discount to the carrying value of a
comparable unrestricted security. There are no unrestricted securities with the
same maturity dates and yields for these issuers.
Page 21
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
APRIL 30, 2016 (UNAUDITED)
% OF
ACQUISITION PRINCIPAL CARRYING NET
SECURITY DATE VALUE/SHARES PRICE COST VALUE ASSETS
----------------------------------------------------------------------------------------------------------------------------
ION Geophysical Corp., 12/15/21 4/25/16 $ 1,000,000 55.88 $ 559,088 $ 558,750 0.01%
LBC Tank Terminals Holding Netherlands BV,
05/15/23 9/03/14 $ 1,800,000 96.50 1,909,332 1,737,000 1.56
Preferred Term Securities XXV, Ltd.
Zero Coupon, 06/22/37 03/27/07 $ 5,750,000 0.00* -- 1,797 0.00 **
Preferred Term Securities XXVI, Ltd.
Subordinated Note, Zero Coupon, 09/22/37 06/06/07 $ 2,500,000 0.00* -- 3,906 0.00 **
Soloso CDO, Ltd., Series 2005-1 04/24/06 4,000 0.31 -- 1,250 0.00 **
Watco Cos. LLC/Watco Finance Corp., 04/01/23 03/31/15-04/08/15 $ 1,800,000 100.00 1,814,756 1,800,000 1.61
----------- ----------- -----
$ 4,283,176 $ 4,102,703 3.18%
=========== =========== =====
* Amount is less than $0.01.
** Amount is less than 0.01%.
D. 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.
E. FORWARD FOREIGN CURRENCY CONTRACTS
The Fund is subject to foreign currency risk in the normal course of pursuing
its investment objectives. Forward foreign currency contracts are agreements
between two parties ("counterparties") to exchange one currency for another at a
future date and at a specified price. The Fund uses forward foreign currency
contracts to facilitate transactions in foreign securities and to manage the
Fund's foreign currency exposure. These contracts are valued daily, and the
Fund's net equity therein, representing unrealized gain or loss on the contracts
as measured by the difference between the forward foreign exchange rates at the
dates of entry into the contracts and the forward rates at the reporting date,
is included in "Unrealized appreciation (depreciation) on forward foreign
currency contracts" on the Statement of Assets and Liabilities. When the forward
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or the cost of) the closing transaction
and the Fund's basis in the contract. This realized gain or loss is included in
"Net realized gain (loss) on forward foreign currency contracts" on the
Statement of Operations. Risks arise from the possible inability of
counterparties to meet the terms of their contracts and from movement in
currency and securities values and interest rates. Due to the risks, the Fund
could incur losses in excess of the net unrealized value shown on the Forward
Foreign Currency Contracts table in the Portfolio of Investments. In the event
of default by the Counterparty, the Fund will provide notice to the Counterparty
of the Fund's intent to convert the currency held by the Fund into the currency
that the Counterparty agreed to exchange with the Fund. If a Counterparty
becomes bankrupt or otherwise fails to perform its obligations due to financial
difficulties, the Fund may experience significant delays in obtaining any
recovery in a bankruptcy or other reorganization proceeding. The Fund may obtain
only limited recovery or may obtain no recovery in such circumstances.
F. FOREIGN CURRENCY
The books and records of the Fund are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investments and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses on assets and liabilities, other than investments in securities, which
result from changes in foreign currency exchange rates have been included in
"Net change in unrealized appreciation (depreciation) on foreign currency
translation" on the Statement of Operations. Unrealized gains and losses on
investments in securities which result from changes in foreign exchange rates
are included with fluctuations arising from changes in market price and are
shown in "Net change in unrealized appreciation (depreciation) on investments"
on the Statement of Operations. Net realized foreign currency gains and losses
include the effect of changes in exchange rates between trade date and
settlement date on investment security transactions, foreign currency
transactions and interest and dividends received are shown in "Net realized gain
Page 22
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
APRIL 30, 2016 (UNAUDITED)
(loss) on foreign currency transactions" on the Statement of Operations. The
portion of foreign currency gains and losses related to fluctuation in exchange
rates between the initial purchase settlement date and subsequent sale trade
date is included in "Net realized gain (loss) on foreign currency transactions"
on the Statement of Operations.
G. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
The Fund will distribute to holders of its Common Shares monthly dividends of
all or a portion of its net income after the payment of interest and dividends
in connection with leverage, if any. Distributions will automatically be
reinvested into additional Common Shares pursuant to the Fund's Dividend
Reinvestment Plan unless cash distributions are elected by the shareholder.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from U.S. GAAP. Certain capital
accounts in the financial statements are periodically adjusted for permanent
differences in order to reflect their tax character. These permanent differences
are primarily due to the varying treatment of income and gain/loss on portfolio
securities held by the Fund and have no impact on net assets or NAV per share.
Temporary differences, which arise from recognizing certain items of income,
expense and gain/loss in different periods for financial statement and tax
purposes, will reverse at some point in the future.
The tax character of distributions paid during the fiscal year ended October 31,
2015 was as follows:
Distributions paid from:
Ordinary income................................. $ 9,735,535
Capital gain.................................... --
Return of capital............................... 1,768,527
As of October 31, 2015, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income................... $ --
Undistributed capital gains..................... --
Total undistributed earnings.................... --
Accumulated capital and other losses............ (41,705,880)
Net unrealized appreciation (depreciation)...... (25,960,824)
------------
Total accumulated earnings (losses)............. (67,666,704)
Other........................................... (53,056)
Paid-in capital................................. 187,015,789
------------
Net assets...................................... $119,296,029
============
H. INCOME TAXES
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
Under the Regulated Investment Company Modernization Act of 2010 (the "Act"),
net capital losses arising in taxable years after December 22, 2010, may be
carried forward indefinitely, and their character is retained as short-term
and/or long-term losses. Previously, net capital losses were carried forward for
up to eight years and treated as short-term losses. As a transition rule, the
Act requires that post-enactment net capital losses be used before pre-enactment
net capital losses. At October 31, 2015, for federal income tax purposes, the
Fund had capital loss carryforwards available that are shown in the table below,
to the extent provided by regulations, to offset future capital gains through
the years indicated. To the extent that these loss carryforwards are used to
offset future capital gains, it is probable that the capital gains offset will
not be distributed to Fund shareholders.
CAPITAL LOSS CAPITAL LOSS CAPITAL LOSS
AVAILABLE AVAILABLE AVAILABLE POST EFFECTIVE - TOTAL CAPITAL
THROUGH 2017 THROUGH 2018 THROUGH 2019 NO EXPIRATION LOSS AVAILABLE
-------------- -------------- -------------- ---------------- ---------------
$ 5,621,803 $ 15,342,938 $ 7,053,888 $ 13,687,251 $ 41,705,880
Of these losses, $27,984,014 is subject to loss limitation resulting from
reorganization activity. These limitations generally reduce the utilization of
these losses to a maximum of $4,318,194 per year.
Page 23
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
APRIL 30, 2016 (UNAUDITED)
The Fund is subject to certain limitations under the U.S. tax rules on the use
of capital loss carryforwards and net unrealized built-in losses. These
limitations apply when there has been a 50% change in ownership.
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 ending 2012, 2013,
2014 and 2015 remain open to federal and state audit. As of April 30, 2016,
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.
I. 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
investment management services, First Trust is entitled to a monthly fee
calculated at an annual rate of 0.90% of the Fund's Managed Assets. First Trust
also provides fund reporting services to the Fund for a flat annual fee in the
amount of $9,250.
Brookfield 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 0.45% of 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
administrator, fund accountant and transfer agent in accordance with certain fee
arrangements. As administrator and fund accountant, BNYM IS 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 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 custodian in accordance with certain
fee arrangements. 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. Prior to January 1, 2016, the fixed annual retainer was allocated pro
rata based on each fund's net assets. 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, or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen 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.
Trustees are reimbursed for travel and out-of-pocket expenses in connection with
all meetings. The Lead Independent Trustee and Committee Chairmen 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 six months ended April 30, 2016, were
$13,750,777 and $17,583,559, respectively.
5. DERIVATIVES TRANSACTIONS
The following table presents the type of derivative held by the Fund at April
30, 2016, the primary underlying risk exposure and the location of these
instruments as presented on the Statement of Assets and Liabilities.
ASSET DERIVATIVES LIABILITY DERIVATIVES
-------------------------------------- --------------------------------------
DERIVATIVE STATEMENT OF ASSETS AND STATEMENT OF ASSETS AND
INSTRUMENT RISK EXPOSURE LIABILITIES LOCATION FAIR VALUE LIABILITIES LOCATION FAIR VALUE
------------------ --------------- -------------------------- ---------- -------------------------- ----------
Unrealized appreciation on Unrealized depreciation on
Forward foreign forward foreign currency forward foreign currency
currency contracts Currency Risk contracts $ 66,932 contracts $ 20,424
Page 24
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
APRIL 30, 2016 (UNAUDITED)
The following table presents the amount of net realized gain (loss) and change
in net unrealized appreciation (depreciation) recognized for the six months
ended April 30, 2016, on derivative instruments, as well as the primary
underlying risk exposure associated with each instrument.
STATEMENT OF OPERATIONS LOCATION
-------------------------------------------------------------------------------
CURRENCY RISK EXPOSURE
Net realized gain (loss) on forward foreign
currency contracts $ (51,929)
Net change in unrealized appreciation (depreciation) on
forward foreign currency contracts 76,648
During the six months ended April 30, 2016, the notional values of forward
foreign currency contracts opened and closed were $2,209,140 and $5,935,981,
respectively.
The Fund does not have the right to offset financial assets and financial
liabilities to forward foreign currency contracts on the Statement of Assets and
Liabilities.
6. BORROWINGS
The Fund entered into a committed facility agreement with BNP Paribas Prime
Brokerage Inc. ("BNP") that has a maximum commitment amount of $66,000,000.
Absent certain events of default or failure to maintain certain collateral
requirements, BNP may not terminate the committed facility agreement except upon
180 calendar days' prior notice. Effective July 24, 2013, $13,850,000 of the
commitment was converted to fixed-rate financing of 2.79% for a seven-year
period. The borrowing rate on the floating rate financing amount is equal to
1-month LIBOR plus 70 basis points. Under the facility, the Fund pays a
commitment fee of 0.80% on the undrawn amount of such facility.
The average amount outstanding for the six months ended April 30, 2016 was
$45,047,802 with a weighted average interest rate of 1.60%. As of April 30,
2016, the Fund had outstanding borrowings of $43,350,000 under this committed
facility agreement. On the floating rate financing amount, the high and low
annual interest rates for the six months ended April 30, 2016 were 1.14% and
0.89%, respectively. The weighted average interest rate at April 30, 2016 was
1.66%.
7. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
8. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined that there was
the following subsequent event:
On May 19, 2016, the Fund declared a dividend of $0.10 per share to Common
Shareholders of record on June 3, 2016, payable June 15, 2016.
Page 25
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
APRIL 30, 2016 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) NAV per Common Share on that date or
(ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the NYSE or
elsewhere, for the participants' accounts. It is possible that the
market price for the Common Shares may increase before the Plan
Agent has completed its purchases. Therefore, the average purchase
price per share paid by the Plan Agent may exceed the market price
at the time of valuation, resulting in the purchase of fewer shares
than if the dividend or distribution had been paid in Common Shares
issued by the Fund. The Plan Agent will use all dividends and
distributions received in cash to purchase Common Shares in the open
market within 30 days of the valuation date except where temporary
curtailment or suspension of purchases is necessary to comply with
federal securities laws. Interest will not be paid on any uninvested
cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
--------------------------------------------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio investments during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
Page 26
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
APRIL 30, 2016 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR") in
Washington, DC. Information regarding the operation of the PRR may be obtained
by calling (800) SEC-0330.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, First Trust Energy
Income and Growth Fund, First Trust Enhanced Equity Income Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income Fund,
First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging
Opportunity Fund, First Trust Specialty Finance and Financial Opportunities
Fund, First Trust High Income Long/Short Fund, First Trust Energy Infrastructure
Fund, First Trust MLP and Energy Income Fund, First Trust Intermediate Duration
Preferred & Income Fund and First Trust New Opportunities MLP & Energy Fund was
held on April 22, 2016 (the "Annual Meeting"). At the Annual Meeting, James A.
Bowen and Niel B. Nielson were elected by the Common Shareholders of the First
Trust Strategic High Income Fund II as the Class III Trustees for a three-year
term expiring at the Fund's annual meeting of shareholders in 2019. The number
of votes cast in favor of Mr. Bowen was 6,206,832, the number of votes withheld
was 622,792 and the number of broker non-votes was 1,468,770. The number of
votes cast in favor of Mr. Nielson was 6,210,863, the number of votes withheld
was 618,761 and the number of broker non-votes was 1,468,770. Richard E.
Erickson, Thomas R. Kadlec and Robert F. Keith are the other current and
continuing Trustees.
RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some of the risks
that should be considered for the Fund. For additional information about the
risks associated with investing in the Fund, please see the Fund's prospectus
and statement of additional information, as well as other Fund regulatory
filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund dividends
and distributions. Security prices can fluctuate for several reasons including
the general condition of the securities markets, or when political or economic
events affecting the issuers occur, including the risk that borrowers do not pay
their mortgages. When the Advisor or Sub-Advisor determines that it is
temporarily unable to follow the Fund's investment strategy or that it is
impractical to do so (such as when a market disruption event has occurred and
trading in the securities is extremely limited or absent), the Advisor or
Sub-Advisor may take temporary defensive positions.
RESIDENTIAL MORTGAGE-BACKED SECURITIES RISK: MBS's may have less potential for
capital appreciation than comparable fixed-income securities due to the
likelihood of increased prepayments of mortgages as interest rates decline. If
the Fund buys MBS's at a premium, mortgage foreclosures and prepayments of
principal by mortgagors (which usually may be made at any time without penalty)
may result in some loss of the Fund's principal investment to the extent of the
premium paid. Alternatively, in a rising interest rate environment, the value of
MBS's may be adversely affected when payments on underlying mortgages do not
occur as anticipated, resulting in the extension of the security's effective
maturity and the related increase in interest rate sensitivity of a longer-term
instrument. The value of MBS's may also change due to shifts in the market's
perception of issuers and regulatory or tax changes adversely affecting the
markets as a whole. In addition, MBS's are subject to the credit risk associated
with the performance of the underlying mortgage properties. In certain
instances, third-party guarantees or other forms of credit support can reduce
the credit risk. The Fund may also invest in MBS's which are interest-only
securities ("IO") and principal-only ("PO") securities. Generally speaking, when
interest rates are falling and prepayment rates are increasing, the value of a
PO security will rise and the value of an IO security will fall. Conversely,
when interest rates are rising and prepayment rates are decreasing, generally
the value of a PO will fall and the value of an IO security will rise. In
addition to the foregoing, residential MBS's are subject to additional risks,
including, but not limited to: (i) the United States residential mortgage market
has recently encountered various difficulties and changed economic conditions.
In addition, recently, residential property values in various states have
declined or remained stable after extended periods of appreciation. A continued
decline or an extended flattening in those values may result in additional
increases in delinquencies and losses on residential mortgage loans generally;
(ii) if a residential mortgage obligation is secured by a junior lien it will be
subordinate to the rights of the mortgagees or beneficiaries under the related
Page 27
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
APRIL 30, 2016 (UNAUDITED)
senior mortgages or deeds of trust; and (iii) depending on the length of a
residential mortgage obligation underling a residential MBS, unscheduled or
early payments of principal and interest may shorten the security's effective
maturity and prevailing interest rates may be higher or lower than the current
yield of the Fund's portfolio at the time the Fund receives the payments for
reinvestment.
VALUE INVESTING RISK: The Sub-Advisor focuses the Fund's investments on
securities that they believe are undervalued or inexpensive relative to other
investments. Such securities are subject to the risk of misestimating certain
fundamental factors. Disciplined adherence to a "value" investment mandate
during periods in which that style is "out of favor" can result in significant
underperformance relative to overall market indices and other managed investment
vehicles that pursue growth style investments and/or flexible style mandates.
BELOW-INVESTMENT GRADE SECURITIES RISK: The Fund invests in below-investment
grade securities. The market values for high-yield securities tend to be very
volatile, and these securities are less liquid than investment grade debt
securities. For these reasons, an investment in the Fund is subject to the
following specific risks: (a) increased price sensitivity to changing interest
rates and to a deteriorating economic environment; (b) greater risk of loss due
to default or declining credit quality; (c) adverse issuer specific events are
more likely to render the issuer unable to make interest and/or principal
payments; and (d) a negative perception of the high-yield market may depress the
price and liquidity of high-yield securities.
DISTRESSED SECURITIES RISK: The Fund may invest in securities issued by
companies in a bankruptcy reorganization proceeding, subject to some other form
of a public or private debt restructuring or otherwise in default or in
significant risk of default in the payment of interest or repayment of principal
or trading at prices substantially below other below-investment grade debt
securities of companies in similar industries. Distressed securities frequently
do not produce income while they are outstanding. The Fund may be required to
incur certain extraordinary expenses in order to protect and recover its
investment. Therefore, to the extent the Sub-Advisor seeks capital appreciation
through investment in distressed securities; the ability to achieve current
income may be diminished.
ECONOMIC CONDITIONS RISK: Adverse changes in economic conditions are more likely
to lead to a weakened capacity of a high-yield issuer to make principal payments
and interest payments than an investment grade issuer. An economic downturn
could severely affect the ability of highly leveraged issuers to service their
debt obligations or to repay their obligations upon maturity. Under adverse
market or economic conditions, the secondary market for high-yield securities
could contract further, independent of any specific adverse changes in the
condition of a particular issuer and these securities may become illiquid. As a
result, the Sub-Advisor could find it more difficult to sell these securities or
may be able to sell the securities only at prices lower than if such securities
were widely traded.
FIXED-INCOME SECURITIES RISK: Debt securities, including high yield securities,
are subject to certain risks, including: (i) issuer risk, which is the risk that
the value of fixed-income securities may decline for a number of reasons which
directly relate to the issuer, such as management performance, financial
leverage and reduced demand for the issuer's goods and services or, in the case
of asset-backed issuers, a decline in the value and/or cash flows of the
underlying assets; (ii) reinvestment risk, which is the risk that income from
the Fund's portfolio will decline if the proceeds from matured, traded or called
bonds are reinvested at market interest rates that are below the portfolio's
current earnings rate; (iii) prepayment risk, which is the risk that during
periods of declining interest rates, the issuer of a security may exercise its
option to prepay principal earlier than scheduled, forcing the reinvestment in
lower yielding securities; and (iv) credit risk, which is the risk that a
security in the Fund's portfolio will decline in price or the issuer fails to
make interest payments when due because the issuer of the security experiences a
decline in its financial status.
INTEREST RATE RISK: The Fund's portfolio is also subject to interest rate risk.
Interest rate risk is the risk that fixed-income securities will decline in
value because of changes in market interest rates. Investments in debt
securities with long-term maturities may experience significant price declines
if long-term interest rates increase.
LEVERAGE RISK: The Fund may borrow an amount up to 33-1/3% (or such other
percentage as permitted by law) of its assets (including the amount borrowed)
less liabilities other than borrowings. The Fund may use leverage for investment
purposes and to meet cash requirements. Its leveraged capital structure creates
special risks not associated with unleveraged funds having similar investment
objectives and policies. These include the possibility of higher volatility of
the NAV of the Fund. The Fund previously leveraged its assets through the use of
reverse repurchase agreements. Reverse repurchase agreements are subject to the
risks that the market value of the securities sold by the Fund may decline below
the price of the securities the Fund is obligated to repurchase, and that the
securities may not be returned to the Fund. The Fund may from time to time
consider changing the amount of the leverage in response to actual or
anticipated changes in interest rates or the value of the Fund's investment
portfolio. There can be no assurance that the leverage strategies will be
successful.
FOREIGN SECURITIES RISK: The Fund may invest in securities (equity or debt) of
foreign issuers. Investing in securities of foreign issuers, which are generally
denominated in foreign currencies, may involve certain risks not typically
associated with investing in securities of U.S. issuers. These risks include:
(i) there may be less publicly available information about foreign issuers or
Page 28
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
APRIL 30, 2016 (UNAUDITED)
markets due to less rigorous disclosure or accounting standards or regulatory
practices; (ii) foreign markets may be smaller, less liquid and more volatile
than the U.S. market; (iii) potential adverse effects of fluctuations in
currency exchange rates or controls on the value of the Fund's investments; (iv)
the economies of foreign countries may grow at slower rates than expected or may
experience a downturn or recession; (v) the impact of economic, political,
social or diplomatic events; (vi) certain foreign countries may impose
restrictions on the ability of foreign issuers to make payments of principal and
interest to investors located in the United States due to blockage of foreign
currency exchanges or otherwise; and (vii) withholding and other foreign taxes
may decrease the Fund's return. These risks may be more pronounced to the extent
that the Fund invests a significant amount of its assets in companies located in
one region and to the extent that the Fund invests in securities of issuers in
emerging markets.
Page 29
This Page Left Blank Intentionally.
This Page Left Blank Intentionally.
This Page Left Blank Intentionally.
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Brookfield Investment Management Inc.
Brookfield Place
250 Vesey Street, 15th Floor
New York, NY 10281
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
The Bank of New York Mellon
101 Barclay Street, 20th Floor
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
There has been no change, as of the date of this filing, in any of the
portfolios managers identified in response to paragraph (a)(1) of this Item in
the Registrant's most recently filed annual report on Form N-CSR.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the registrant's
disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR
270.30a-3(c))) are effective, as of a date within 90 days of the filing
date of the report that includes the disclosure required by this
paragraph, based on their evaluation of these controls and procedures
required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and
Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as
amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the registrant's second fiscal quarter
of the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Not applicable.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section
302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section
906 of the Sarbanes- Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) First Trust Strategic High Income Fund II
-----------------------------------------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: June 20, 2016
---------------
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 M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: June 20, 2016
---------------
By (Signature and Title)* /s/ Donald P. Swade
----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: June 20, 2016
---------------
* Print the name and title of each signing officer under his or her signature.
EX-99.CERT
2
cert_302.txt
SECTION 302 CERTIFICATION
CERTIFICATION PURSUANT TO RULE 30A-2(A) UNDER THE 1940 ACT AND SECTION 302
OF THE SARBANES-OXLEY ACT
I, James M. Dykas, certify that:
1. I have reviewed this report on Form N-CSR of First Trust Strategic High
Income Fund II;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations, changes in net
assets, and cash flows (if the financial statements are required to
include a statement of cash flows) of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Rule 30a-3(c) under the Investment Company Act of 1940) and
internal control over financial reporting (as defined in Rule 30a-3(d)
under the Investment Company Act of 1940) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of a
date within 90 days prior to the filing date of this report based on
such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the second
fiscal quarter of the period covered by this report that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize, and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: June 20, 2016 /s/ James M. Dykas
-------------------- ----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
CERTIFICATION PURSUANT TO RULE 30A-2(A) UNDER THE 1940 ACT AND SECTION 302
OF THE SARBANES-OXLEY ACT
I, Donald P. Swade, certify that:
1. I have reviewed this report on Form N-CSR of First Trust Strategic High
Income Fund II;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations, changes in net
assets, and cash flows (if the financial statements are required to
include a statement of cash flows) of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Rule 30a-3(c) under the Investment Company Act of 1940) and
internal control over financial reporting (as defined in Rule 30a-3(d)
under the Investment Company Act of 1940) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of a
date within 90 days prior to the filing date of this report based on
such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the second
fiscal quarter of the period covered by this report that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize, and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: June 20, 2016 /s/ Donald P. Swade
-------------------- ----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
EX-99.906 CERT
3
cert_906.txt
SECTION 906 CERTIFICATION
CERTIFICATION PURSUANT TO RULE 30A-2(B) UNDER THE 1940 ACT AND SECTION 906 OF
THE SARBANES-OXLEY ACT
I, James M. Dykas, Chairman of the Board, President and Chief Executive Officer
of First Trust Strategic High Income Fund II (the "Registrant"), certify that:
1. The Form N-CSR of the Registrant (the "Report") fully complies with
the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Registrant.
Date: June 20, 2016 /s/ James M. Dykas
------------------- ----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
I, Donald P. Swade, Treasurer, Chief Financial Officer and Chief Accounting
Officer of First Trust Strategic High Income Fund II (the "Registrant"), certify
that:
1. The Form N-CSR of the Registrant (the "Report") fully complies with
the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Registrant.
Date: June 20, 2016 /s/ Donald P. Swade
------------------- ----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)