UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-Q
QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED
MANAGEMENT INVESTMENT COMPANY
Investment Company Act file number 811-21756
FIRST TRUST STRATEGIC HIGH INCOME FUND
(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
WHEATON, IL 60187
(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
WHEATON, IL 60187
(Name and address of agent for service)
Registrant's telephone number, including area code: 630-765-8000
Date of fiscal year end: OCTOBER 31
Date of reporting period: JULY 31, 2009
Form N-Q is to be used by management investment companies, other than small
business investment companies registered on Form N-5 (ss.ss. 239.24 and 274.5 of
this chapter), to file reports with the Commission, not later than 60 days after
the close of the first and third fiscal quarters, pursuant to rule 30b1-5 under
the Investment Company Act of 1940 (17 CFR 270.30b1-5). The Commission may use
the information provided on Form N-Q in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-Q, and
the Commission will make this information public. A registrant is not required
to respond to the collection of information contained in Form N-Q unless the
Form displays a currently valid Office of Management and Budget ("OMB") control
number. Please direct comments concerning the accuracy of the information
collection burden estimate and any suggestions for reducing the burden to the
Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC
20549. The OMB has reviewed this collection of information under the clearance
requirements of 44 U.S.C. ss. 3507.
ITEM 1. SCHEDULE OF INVESTMENTS.
The Schedule(s) of Investments is attached herewith.
FIRST TRUST STRATEGIC HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (a)
JULY 31, 2009 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- -------------------------------------------------------------------------- ------ -------- ---------------
ASSET-BACKED SECURITIES - 38.3%
ABCLO, Ltd.
$ 1,788,696 Series 2007-1A, Class D (b) (c) ....................................... 4.41% 04/15/21 $ 109,218
ACE Securities Corp., Home Equity Loan Trust
270,675 Series 2003-OP1, Class B .............................................. 6.00% 12/25/33 82,583
Aircraft Finance Trust
768,863 Series 1999-1A, Class A2 (b) (d) ...................................... 0.79% 05/15/24 384,431
Atherton Franchisee Loan Funding
348,495 Series 1999-A, Class A2 (d) ........................................... 7.23% 03/15/21 327,959
BNC Mortgage Loan Trust
57,469 Series 2007-2, Class B1 (b) (d) ....................................... 2.79% 05/25/37 461
Bombardier Capital Mortgage Securitization Corp.
327,668 Series 1999-B, Class A1B .............................................. 6.61% 09/15/10 146,446
838,917 Series 1999-B, Class A3 ............................................... 7.18% 12/15/15 395,901
Conseco Finance Securitizations Corp.
3,456,942 Series 2000-6, Class M1 ............................................... 7.72% 09/01/31 961,109
EMAC Owner Trust, LLC
1,155,469 Series 1998-1, Class A3 (d) ........................................... 6.63% 01/15/25 693,282
828,273 Series 2000-1, Class A1 (d) ........................................... 7.06% 01/15/27 271,682
1,061,014 Series 2000-1, Class A2 (d) ........................................... 7.06% 01/15/27 348,023
Falcon Franchise Loan Trust
4,905,000 Series 2000-1, Class E (d) ............................................ 6.50% 04/05/16 1,039,811
4,231,000 Series 2003-1, Class E (c) ............................................ 6.00% 01/05/25 0
FFCA Secured Lending Corp.
5,000,000 Series 1999-2, Class B1 (c) ........................................... 8.27% 05/18/26 500,756
FMAC Loan Receivables Trust
703,829 Series 1997-B, Class A (d) ............................................ 6.85% 09/15/19 563,063
Green Tree Financial Corp.
323,949 Series 1997-4, Class B1 ............................................... 7.23% 02/15/29 60,760
956,103 Series 1998-4, Class M1 ............................................... 6.83% 04/01/30 337,492
3,000,000 Series 1998-8, Class M1 ............................................... 6.98% 09/01/30 1,216,051
5,556,293 Series 1999-3, Class M1 ............................................... 6.96% 02/01/31 813,956
GSAMP Trust
508,937 Series 2004-AR2, Class B4 (c) ......................................... 5.00% 08/25/34 2,382
985,032 Series 2006-S3, Class A2 .............................................. 5.77% 05/25/36 74,311
862,203 Series 2006-S5, Class A1 (b) .......................................... 0.38% 09/25/36 17,046
Halyard Multi Asset CBO I, Ltd.
1,641,391 Series 1A, Class B (b) (c) ............................................ 3.20% 03/24/10 98,484
Independence lll CDO, Ltd.
5,146,226 Series 3A, Class C1 (b) (c) ........................................... 3.09% 10/03/37 331,674
Indymac Residential Asset Backed Trust
2,375,000 Series 2005-B, Class M10 (b) .......................................... 3.79% 08/25/35 16,494
Long Beach Mortgage Loan Trust
1,934,955 Series 2006-A, Class A2 ............................................... 5.55% 05/25/36 135,447
Longhorn CDO, Ltd.
2,920,880 Series 1, Class C (b) (c) ............................................. 7.21% 05/10/12 29
Merit Securities Corp.
1,960,910 Series 13, Class B1 (c) ............................................... 7.97% 12/28/33 75,926
2,602,000 Series 13, Class M2 ................................................... 7.97% 12/28/33 962,531
See Notes to Quarterly Portfolio of Investments
Page 1
FIRST TRUST STRATEGIC HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JULY 31, 2009 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- -------------------------------------------------------------------------- ------ -------- ---------------
ASSET-BACKED SECURITIES - CONTINUED
Park Place Securities, Inc.
$2,677,641 Series 2004-WCW1, Class M8 (b) ........................................ 3.79% 09/25/34 $ 33,111
1,301,976 Series 2004-WCW2, Class M10 (b) (c) ................................... 3.04% 10/25/34 17,589
2,179,209 Series 2005-WCW3, Class M11 (b) (c) ................................... 2.79% 08/25/35 10,112
Rosedale CLO, Ltd.
3,500,000 Series I-A, Class II (c) .............................................. (f) 07/24/21 35,000
Signature 5, Ltd.
1,129,120 Series 5A, Class C (c) ................................................ 12.56% 10/27/12 146,684
Soundview Home Equity Loan Trust
1,634,000 Series 2007-OPT3, Class M10 (b) (c) ................................... 2.79% 08/25/37 28,350
Summit CBO I, Ltd.
4,705,734 Series 1A, Class B (b) (c) ............................................ 2.17% 05/23/11 85,268
---------------
TOTAL ASSET-BACKED SECURITIES
(Cost $32,921,844) .................................................... 10,323,422
---------------
COLLATERALIZED MORTGAGE OBLIGATIONS - 3.2%
Bear Stearns Alt-A Trust
1,999,672 Series 2006-8, Class 2A2 .............................................. 5.33% 08/25/46 339,106
Countrywide Alternative Loan Trust
3,267,748 Series 2005-56, Class M4 (b) .......................................... 1.21% 11/25/35 178,550
Deutsche Alt-A Securities, Inc. Mortgage Loan Trust
3,691,244 Series 2007-OA4, Class M10 (b) ........................................ 3.29% 08/25/47 57,473
HarborView Mortgage Loan Trust
3,858,652 Series 2005-9, Class B10 (b). ......................................... 2.04% 06/20/35 282,260
---------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $9,442,365) ..................................................... 857,389
---------------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 20.9%
Banc of America Commercial Mortgage, Inc.
1,171,422 Series 2000-1, Class M (c) ............................................ 6.00% 11/15/31 12
Banc of America Large Loan, Inc.
2,000,000 Series 2005-MIB1, Class L (b) (c) ..................................... 3.29% 03/15/22 200,314
Banc of America Structural Securities Trust
2,878,166 Series 2002-X1, Class O (d) ........................................... 7.00% 10/11/33 2,077,174
2,878,166 Series 2002-X1, Class P (d) ........................................... 7.00% 10/11/33 1,391,624
Bear Stearns Commercial Mortgage Securities
1,776,400 Series 2000-WF1, Class K .............................................. 6.50% 02/15/32 152,980
GE Capital Commercial Mortgage Corp.
700,000 Series 2000-1, Class G (c) ............................................ 6.13% 01/15/33 168,229
GMAC Commercial Mortgage Securities, Inc.
1,000,000 Series 1999-C3, Class G (d) ........................................... 6.97% 08/15/36 650,000
GS Mortgage Securities Corp. II
7,000,000 Series 1998-C1, Class H (c) ........................................... 6.00% 10/18/30 388,995
LB-UBS Commercial Mortgage Trust
3,025,000 Series 2001-C7, Class Q (c) ........................................... 5.87% 11/15/33 151,413
2,083,703 Series 2001-C7, Class S (c) ........................................... 5.87% 11/15/33 14,398
See Notes to Quarterly Portfolio of Investments
Page 2
FIRST TRUST STRATEGIC HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JULY 31, 2009 (UNAUDITED)
PRINCIPAL STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
--------------- -------------------------------------------------------------------------- ------ -------- ---------------
COMMERCIAL MORTGAGE-BACKED SECURITIES - CONTINUED
Morgan Stanley Capital I, Inc.
$ 968,400 Series 1999-WF1, Class M (c) .......................................... 5.91% 11/15/31 $ 257,328
2,787,919 Series 2003-IQ5, Class O (c) .......................................... 5.24% 04/15/38 197,916
---------------
TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES
(Cost $17,842,199) .................................................... 5,650,383
---------------
CORPORATE BONDS AND NOTES - 3.6%
1,500,000 Lexington Precision Corp., Units (e) (g) ................................. (f) 08/01/10 964,950
---------------
TOTAL CORPORATE BONDS
(Cost $1,200,000) ..................................................... 964,950
---------------
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 60.6%
3,875,000 FannieMae, September (h) ................................................. 5.50% TBA 4,002,755
2,250,000 FannieMae, September (h) ................................................. 6.00% TBA 2,350,899
FannieMae-ACES
6,218,137 Series 1998-M7, Class N, IO ........................................... 0.45% 05/25/36 90,519
3,875,000 Government National Mortgage Association,
September (h) ......................................................... 5.00% TBA 3,963,408
Government National Mortgage Association
88,984,674 Series 2003-47, Class XA, IO .......................................... 1.24% 06/16/43 4,378,696
23,141,560 Series 2003-59, Class XA, IO .......................................... 2.06% 06/16/34 1,571,333
---------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES
(Cost $16,594,387) .................................................... 16,357,610
---------------
STRUCTURED NOTES - 1.2%
Bacchus Ltd.
1,225,000 Series 2006-1I, Subordinated Bond (c) ................................. (f) 01/20/19 245,000
InCaps Funding II Ltd./InCaps Funding II Corp.
2,000,000 Subordinated Note (c) ................................................. (f) 01/15/34 80,000
3,750,000 Preferred Term Securities XXV, Ltd. (c) .................................. (f) 06/22/37 375
---------------
TOTAL STRUCTURED NOTES
(Cost $824,566) ....................................................... 325,375
---------------
SHARES DESCRIPTION VALUE
--------------- ---------------------------------------------------------------------------------------------- ---------------
PREFERRED SECURITIES - 0.4%
1,450 Ajax Two Ltd., Series 2A (c) (f) ............................................................. 21,750
2,000 Ajax Two Ltd., Series 2X (c) (f) ............................................................. 20,000
4,000 Pro Rata Funding, Ltd., Inc. (c) (f) ......................................................... 40,000
2,000 Soloso CDO, Ltd., Series 2005-1 (c) (f) ...................................................... 20,000
3,000 White Marlin CDO, Ltd., Series AI (c) (e) (f) ................................................ 15,000
---------------
TOTAL PREFERRED SECURITIES
(Cost $2,044,459) ......................................................................... 116,750
---------------
TOTAL INVESTMENTS - 128.2%
(Cost $80,869,820) (i) .................................................................... 34,595,879
NET OTHER ASSETS AND LIABILITIES - (28.2%) ................................................... (7,603,900)
---------------
NET ASSETS - 100.0% .......................................................................... $ 26,991,979
===============
See Notes to Quarterly Portfolio of Investments
Page 3
FIRST TRUST STRATEGIC HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JULY 31, 2009 (UNAUDITED)
----------
(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) Floating rate security. The interest rate shown reflects the rate in effect
at July 31, 2009.
(c) This security, sold within the terms of a private placement memorandum, is
exempt from registration under Rule 144A under the Securities Act of 1933,
as amended (the "1933 Act"), and may be resold in transactions exempt from
registration, normally to qualified institutional buyers (see Note 1C -
Restricted Securities in the Notes to Quarterly Portfolio of Investments).
(d) This security, sold within the terms of a private placement memorandum, is
exempt from registration under Rule 144A under the 1933 Act and may be
resold in transactions exempt from registration, normally to qualified
institutional buyers. Pursuant to procedures adopted by the Fund's Board of
Trustees, this security has been determined to be liquid by Hyperion
Brookfield Asset Management, Inc., the Fund's investment sub-advisor.
Although recent instability in the markets has resulted in periods of
increased overall market illiquidity, liquidity for each security is
determined based on security specific factors and assumptions, which
require subjective judgment. At July 31, 2009, securities noted as such
amounted to $7,747,510 or 28.7% of net assets.
(e) The issuer is in default. Income is not being accrued.
(f) Zero coupon bond.
(g) Security is fair valued in accordance with procedures adopted by the Fund's
Board of Trustees.
(h) Security purchased on a forward commitment basis.
(i) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of July 31, 2009, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $8,411,336 and the aggregate gross
unrealized depreciation for all securities in which there was an excess of
tax cost over value was $54,685,277.
ACES Alternative Credit Enhancement Securities
CBO Collateralized Bond Obligation
CDO Collateralized Debt Obligation
CLO Collateralized Loan Obligation
IO Interest Only Security
TBA To be announced, maturity date not yet been established. Upon settlement
and delivery of the mortgage pools, maturity dates will be assigned.
See Notes to Quarterly Portfolio of Investments
Page 4
FIRST TRUST STRATEGIC HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (a) - (CONTINUED)
JULY 31, 2009 (UNAUDITED)
VALUATION INPUTS
A summary of the inputs used to value the Fund's total investments as of July
31, 2009 is as follows (see Note 1A - Portfolio Valuation in the Notes to
Quarterly Portfolio of Investments):
LEVEL 2 LEVEL 3
TOTAL MARKET LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
07/31/09 PRICE INPUTS INPUTS
------------ ------- ----------- ------------
Asset-Backed Securities ............................... $10,323,422 $-- $ 8,413,715 $1,909,707
Collateralized Mortgage Obligations ................... 857,389 -- 857,389 --
Commercial Mortgage-Backed Securities ................. 5,650,383 -- 5,650,383 --
Corporate Bonds ....................................... 964,950 -- -- 964,950
U.S. Government Agency Mortgage-Backed Securities ..... 16,357,610 -- 16,357,610 --
Structured Notes ...................................... 325,375 -- 375 325,000
Preferred Securities .................................. 116,750 -- -- 116,750
----------- --- ----------- ----------
TOTAL INVESTMENTS ..................................... $34,595,879 $-- $31,279,472 $3,316,407
=========== === =========== ==========
The following table presents the Fund's investments measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for the period
presented.
INVESTMENTS AT FAIR VALUE USING SIGNIFICANT
UNOBSERVABLE INPUTS (LEVEL 3) INVESTMENTS
------------------------------------------- ------------
Balance as of October 31, 2008 ........................ $ 23,044,686
Net realized gains (losses) ........................... (15,522,681)
Net unrealized appreciation (depreciation) ............ 1,574,691
Net purchases (sales) ................................. (2,874,375)
Transfers in (out) of Level 3 ......................... (2,905,914)
------------
Balance as of July 31, 2009 ........................... $ 3,316,407
============
See Notes to Quarterly Portfolio of Investments
Page 5
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS
FIRST TRUST STRATEGIC HIGH INCOME FUND
JULY 31, 2009 (UNAUDITED)
1. VALUATION AND INVESTMENT PRACTICES
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of First Trust Strategic High
Income Fund (the "Fund") is determined daily as of the close of regular trading
on the New York Stock Exchange ("NYSE"), normally 4:00 p.m. Eastern time, on
each day the NYSE is open for trading. Domestic debt securities and foreign
securities are priced using data reflecting the earlier closing of the principal
markets for those securities. The NAV per Common Share is calculated by dividing
the value of all assets of the Fund (including accrued interest and dividends),
less all liabilities (including accrued expenses, dividends declared but unpaid
and any borrowings of the Fund) by the total number of Common Shares
outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value according
to procedures adopted by the Fund's Board of Trustees. Securities for which
market quotations are readily available are valued at market value, which is
currently determined using the last reported sale price on the business day as
of which such value is being determined or, if no sales are reported on such day
(as in the case of some securities traded over-the-counter), the last reported
bid price, except that certain U.S. Government securities are valued at the mean
between the last reported bid and asked prices. The Fund values mortgage-backed
securities and other debt securities not traded in an organized market on the
basis of valuations provided by dealers who make markets in such securities or
by independent pricing services approved by the Fund's Board of Trustees which
use information with respect to transactions in such securities, quotations from
dealers, market transactions for comparable securities, various relationships
between securities and yield to maturity in determining value. The Fund's
Portfolio of Investments includes investments with a value of $3,316,407 (9.6%
of total investments) as of July 31, 2009, whose values have been determined
based on prices supplied by dealers and investments with a value of $31,279,472
(90.4% of total investments), whose values have been determined based on prices
supplied by independent pricing services. These values may differ from the
values that would have been used had a ready market for these investments
existed, and the differences could be material.
Debt securities having a remaining maturity of less than sixty days when
purchased are valued at cost adjusted for amortization of premiums and accretion
of discounts.
In the event that market quotations are not readily available, the pricing
service or dealer does not provide a valuation for a particular security, or the
valuations are deemed unreliable, the Fund's Board of Trustees has designated
First Trust Advisors L.P. ("First Trust") to use a fair value method to value
the Fund's securities and investments. Additionally, if events occur after the
close of the principal markets for particular securities (e.g., domestic debt
and foreign securities), but before the Fund values its assets, that could
materially affect NAV, First Trust may use a fair value method to value the
Fund's securities and other investments. As a general principle, the fair value
of a security is the amount which the Fund might reasonably expect to receive
for the security upon its current sale. A variety of factors may be considered
in determining the fair value of such securities including 1) the fundamental
business data relating to the issuer; 2) an evaluation of the forces which
influence the market in which these securities are purchased and sold; 3) type
of holding; 4) financial statements of the issuer; 5) cost at date of purchase;
6) credit quality and cash flow of the issuer based on external analysis; 7)
information as to any transactions in or offers for the holding; 8) price and
extent of public trading in similar securities of the issuer/borrower, or
comparable companies; and 9) other relevant factors. The use of fair value
pricing by the Fund is governed by valuation procedures adopted by the Fund's
Board of Trustees, and in accordance with the provisions of the Investment
Company Act of 1940, as amended. When fair value pricing of securities is
employed, the prices of securities used by the Fund to calculate its NAV may
differ from market quotations or official closing prices. In light of the
judgment involved in fair valuations, there can be no assurance that a fair
value assigned to a particular security will be the amount which the Fund might
be able to receive upon its current sale.
The Fund invests a significant portion of its assets in below-investment grade
debt securities, including mortgage-backed securities, asset-backed securities,
corporate bonds and collateralized debt obligations. The value and related
income of these securities is sensitive to changes in economic conditions,
including delinquencies and/or defaults. Instability in the markets for fixed
income securities, particularly mortgage-backed and asset-backed securities, has
resulted in increased volatility and periods of illiquidity that have adversely
impacted the valuation of certain securities held by the Fund.
Page 6
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS - (CONTINUED)
FIRST TRUST STRATEGIC HIGH INCOME FUND
JULY 31, 2009 (UNAUDITED)
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 157 "Fair Value Measurements"
("FAS 157"), effective for fiscal years beginning after November 15, 2007. This
standard clarifies the definition of fair value for financial reporting,
establishes a framework for measuring fair value and requires additional
disclosures about the use of fair value measurements. FAS 157 became effective
for the Fund as of November 1, 2008, the beginning of its current fiscal year.
The three levels of the fair value hierarchy under FAS 157 are described as
follows:
- Level 1 - quoted prices in active markets for identical securities
- Level 2 - other significant observable inputs (including quoted prices
for similar securities, interest rates, prepayment speeds, credit
risk, etc.)
- Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
In April 2009, FASB issued FASB Staff Position No. 157-4, "Determining Fair
Value when the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly" ("FSP
157-4"). FSP 157-4 is effective for fiscal years and interim periods ending
after June 15, 2009. FSP 157-4 provides additional guidance for estimating fair
value in accordance with FAS 157, when the volume and level of activity for the
asset or liability have significantly decreased. FSP 157-4 also includes
guidance on identifying circumstances that indicate a transaction is not
orderly. FSP 157-4 requires entities to describe the inputs used in valuation
techniques used to measure fair value and changes in inputs over the period. FSP
157-4 expands the three-level hierarchy disclosure and the Level 3 roll-forward
disclosure for each major security type.
The inputs or methodology used for valuing securities are not necessarily an
indication of the risk associated with investing in those securities. A summary
of the inputs used to value the Fund's investments as of July 31, 2009 is
included in the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Securities purchased or sold on a when-issued or delayed-delivery basis may be
settled a month or more after the trade date; interest income on such securities
is not accrued until settlement date. The Fund maintains liquid assets of the
Fund with a current value at least equal to the amount of its when-issued or
delayed-delivery purchase commitments. At July 31, 2009, the Fund had no
when-issued or delayed-delivery purchase commitments.
C. RESTRICTED SECURITIES:
The Fund invests in restricted securities, which are securities that may not be
offered for public sale without first being registered under the 1933 Act. Prior
to registration, restricted securities may only be resold in transactions exempt
from registration under Rule 144A under the 1933 Act, normally to qualified
institutional buyers. As of July 31, 2009, the Fund held restricted securities
as shown in the table below that the sub-advisor, Hyperion Brookfield Asset
Management, Inc., has deemed illiquid pursuant to procedures adopted by the
Fund's Board of Trustees. Although recent instability in the markets has
resulted in periods of increased overall market illiquidity, liquidity for each
security is determined based on security specific factors and assumptions, which
require subjective judgment. The Fund does not have the right to demand that
such securities be registered. These securities are valued according to the
valuation procedures as stated in the Portfolio Valuation footnote (Note 1A) 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.
CARRYING % OF
ACQUISITION PRINCIPAL VALUE CARRYING NET
SECURITY DATE VALUE/SHARES PER SHARE COST VALUE ASSETS
-------- ----------- ------------ --------- ---------- -------- ------
ABCLO, Ltd.
Series 2007-1A, Class D, 4.41%, 04/15/21 04/25/07 $1,788,696 $ 6.11 $1,756,608 $109,218 0.41%
Ajax Two Ltd., Series 2A 11/30/05 1,450 1.50 558,175 21,750 0.08
Ajax Two Ltd., Series 2X 11/30/05 2,000 1.00 762,973 20,000 0.07
Bacchus Ltd.
Series 2006-1I, Subordinated Bond, Zero Coupon,
01/20/19 05/15/07 $1,225,000 20.00 188,228 245,000 0.91
Banc of America Commercial Mortgage, Inc.
Series 2000-1, Class M, 6.00%, 11/15/31 08/22/05 $1,171,422 0.00 44,371 12 0.00
Banc of America Large Loan, Inc.
Series 2005-MIB1, Class L, 3.29%, 03/15/22 08/26/06 $2,000,000 10.02 2,008,557 200,314 0.74
Page 7
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS - (CONTINUED)
FIRST TRUST STRATEGIC HIGH INCOME FUND
JULY 31, 2009 (UNAUDITED)
CARRYING % OF
ACQUISITION PRINCIPAL VALUE CARRYING NET
SECURITY DATE VALUE/SHARES PER SHARE COST VALUE ASSETS
-------- ----------- ------------ --------- ----------- ---------- ------
Falcon Franchise Loan Trust
Series 2003-1, Class E, 6.00%, 01/05/25 08/09/05 $ 4,231,000 $ 0.00 $ 4,174,579 $ 0 0.00%
FFCA Secured Lending Corp.
Series 1999-2, Class B-1, 8.27%, 05/18/26 05/18/05 $ 5,000,000 10.02 0 500,756 1.86
GE Capital Commercial Mortgage Corp.
Series 2000-1, Class G, 6.13%, 01/15/33 06/27/07 $ 700,000 24.03 688,910 168,229 0.62
GSAMP Trust
Series 2004-AR2, Class B4, 5.00%, 08/25/34 08/17/05 $ 508,937 0.47 0 2,382 0.01
GS Mortgage Securities Corp. II
Series 1998-C1, Class H, 6.00%, 10/18/30 08/02/05 $ 7,000,000 5.56 3,967,964 388,995 1.44
Halyard Multi Asset CBO I, Ltd
Series 1A, Class B, 3.20%, 03/24/10 03/26/06 $ 1,641,391 6.00 306,488 98,484 0.37
InCaps Funding II Ltd./InCaps Funding II Corp.
Subordinated Note, Zero Coupon, 01/15/34 05/01/07 $ 2,000,000 4.00 561,338 80,000 0.30
Independence III CDO, Ltd.
Series 3A, Class C1, 3.09%, 10/03/37 12/27/06 $ 5,146,226 6.45 3,129,798 331,674 1.23
LB-UBS Commercial Mortgage Trust
Series 2001-C7, Class Q, 5.87%, 11/15/33 09/19/05 $ 3,025,000 5.01 2,673,730 151,413 0.56
Series 2001-C7, Class S, 5.87%, 11/15/33 09/29/08 $ 2,083,703 0.69 613,044 14,398 0.05
Longhorn CDO, Ltd.
Series 1, Class C, 7.21%, 05/10/12 03/24/06 $ 2,920,880 0.00 693,503 29 0.00
Merit Securities Corp.
Series 13, Class B1, 7.97%, 12/28/33 02/20/07 $ 1,960,910 3.87 56,083 75,926 0.28
Morgan Stanley Capital I, Inc.
Series 1999-WF1, Class M, 5.91%, 11/15/31 08/03/05 $ 968,400 26.57 674,208 257,328 0.95
Series 2003-IQ5, Class O, 5.24%, 04/15/38 10/19/06 $ 2,787,919 7.10 179,175 197,916 0.73
Park Place Securities, Inc.
Series 2004-WCW2, Class M10, 3.04%, 10/25/34 03/24/06 $ 1,301,976 1.35 313,821 17,589 0.07
Series 2005-WCW3, Class M11, 2.79%, 08/25/35 12/26/07 $ 2,179,209 0.46 201,546 10,112 0.04
Preferred Term Securities XXV, Ltd.
Zero Coupon, 06/22/37 03/22/07 $ 3,750,000 0.01 75,000 375 0.00
Pro Rata Funding, Ltd, Inc. 04/11/06 4,000 1.00 383,311 40,000 0.15
Rosedale CLO, Ltd.
Series I-A, Class II, Zero Coupon, 07/24/21 01/12/07 $ 3,500,000 1.00 713,774 35,000 0.13
Signature 5, Ltd.
Series 5A, Class C, 12.56%, 10/27/12 05/21/07 $ 1,129,120 12,99 1,162,512 146,684 0.54
Soloso CDO, Ltd., Series 2005-1 11/30/05 2,000 1.00 40,000 20,000 0.07
Soundview Home Equity Loan Trust
Series 2007-OPT3. Class M10, 2.79%, 08/25/37 06/21/07 $ 1,634,000 1.74 1,475,464 28,350 0.10
Summit CBO I, Ltd
Series 1A, Class B, 2.17%, 05/23/11 08/03/05 $ 4,705,734 1.81 715,206 85,268 0.32
White Marlin CDO, Ltd., Series AI 06/01/07 3,000 0.50 300,000 15,000 0.06
----------- ----------- ---------- -----
$64,371,973 $28,418,366 $3,262,202 12.09%
=========== =========== ========== =====
D. INTEREST ONLY SECURITIES:
An interest only security ("IO Security") is the interest only portion of a
mortgage-backed security ("MBS") that receives some or all of the interest
portion of the underlying MBS and little or no principal. A reference principal
value called a notional value is used to calculate the amount of interest due to
the IO Security. IO Securities are sold at a deep discount to their notional
principal amount. Generally speaking, when interest rates are falling and
prepayment rates are increasing, the value of an IO Security will fall.
Conversely, when interest rates are rising and prepayment rates are decreasing,
generally the value of an IO Security will rise. These investments are
identified on the Portfolio of Investments.
Page 8
NOTES TO QUARTERLY PORTFOLIO OF INVESTMENTS - (CONTINUED)
FIRST TRUST STRATEGIC HIGH INCOME FUND
JULY 31, 2009 (UNAUDITED)
2. SUBSEQUENT EVENTS
On June 30, 2009, First Trust announced that the Board of Trustees of the Fund
voted to approve Hyperion Brookfield Asset Management, Inc. ("Hyperion") as
investment sub-advisor to the Fund, replacing Valhalla Capital Partners, LLC.
The Fund has entered into an interim investment sub-advisory agreement with
First Trust and Hyperion, as investment sub-advisor, effective June 29, 2009.
Unless otherwise terminated in accordance with its terms, the interim
sub-advisory agreement with Hyperion will remain in effect until the earlier of
November 26, 2009 or until a new sub-advisory agreement with Hyperion is
approved by the shareholders of the Fund.
Subject to shareholder approval, the Board of Trustees of the Fund also approved
a change in the Fund's industry concentration policy to provide that the Fund
may not purchase any security if, as a result of the purchase, 25% or more of
the Fund's total assets (taken at current value) would be invested in the
securities of borrowers and other issuers having their principal business
activities in the same industry; provided that this limitation shall not apply
with respect to obligations issued or guaranteed by the U.S. Government or by
its agencies or instrumentalities. Currently, the Fund's industry concentration
policy states that it will invest at least 25% of its total assets in
residential mortgage-backed securities under normal market conditions.
Shareholders of the Fund will be asked to vote on a proposal to approve the new
investment sub-advisory agreement with Hyperion as well as the above-referenced
proposal to change the industry concentration policy for the Fund at a joint
special meeting of shareholders to be held on October 14, 2009. Any solicitation
of proxies made in connection with this shareholder meeting will only be made
pursuant to separate proxy materials filed with the U.S. Securities and Exchange
Commission ("SEC") under applicable federal securities laws. There can be no
assurance that the necessary percentage of the shareholders of the Fund will
vote to approve Hyperion as the new investment sub-advisor or the change in the
industry concentration policy. Proxy materials in connection with the joint
special meeting of shareholders to be held on October 14, 2009 were mailed to
shareholders on or about August 24, 2009, and are available on the Fund's
website at http://www.ftportfolios.com or the SEC's website at
http://www.sec.gov.
On June 29, 2009, the Board of Trustees of the Fund approved a change in
investment policy so that 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). This investment policy is non-fundamental and therefore may be
changed by approval of the Board of Trustees without shareholder approval. The
investment policy became effective on or about September 1, 2009. Previously,
the Fund pursued its investment objectives by investing at least 80% of its
managed assets in a diversified portfolio of high income producing securities
that the investment sub-advisor believes offer attractive yield and capital
appreciation potential. High income producing securities in which the Fund
invests consist of below-investment grade debt securities (high-yield or junk
bonds) and investment grade securities which offer yields comparable to
below-investment grade securities.
Page 9
ITEM 2. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial
officers, or persons performing similar functions, have concluded
that the registrant's disclosure controls and procedures (as
defined in Rule 30a-3(c) under the Investment Company Act of 1940,
as amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective,
as of a date within 90 days of the filing date of the report that
includes the disclosure required by this paragraph, based on their
evaluation of these controls and procedures required by Rule
30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules
13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934,
as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940
Act (17 CFR 270.30a-3(d)) that occurred during the registrant's
last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
ITEM 3. EXHIBITS.
Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of
the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) FIRST TRUST STRATEGIC HIGH INCOME FUND
By (Signature and Title)* /S/ JAMES A. BOWEN
-------------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date 9/23/09
----------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /S/ JAMES A. BOWEN
-------------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date 9/23/09
----------------------------------------------------------------------------
By (Signature and Title)* /S/ MARK R. BRADLEY
-------------------------------------------------------
Mark R. Bradley, Treasurer, Controller,
Chief Financial Officer and Chief Accounting Officer
(principal financial officer)
Date 9/23/09
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.