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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 811-21727
First Trust Mortgage 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: October
31, 2023
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, NW, Washington, DC 20549. The OMB has reviewed this collection
of information under the clearance requirements of 44 U.S.C. § 3507.
Item 1. Reports to Stockholders.
(a) The
Report to Shareholders is attached herewith.
First
Trust
Mortgage
Income Fund (FMY)
Annual
Report
For
the Year Ended
October
31, 2023
First
Trust Mortgage Income Fund (FMY)
Annual
Report
October
31, 2023
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1
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3
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7
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14
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15
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16
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17
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18
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26
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27
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31
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37
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39
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Caution
Regarding Forward-Looking Statements
This
report contains certain forward-looking statements within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended. Forward-looking statements include statements regarding the goals, beliefs, plans or current expectations of
First Trust Advisors L.P. (“First Trust” or the “Advisor”) and its 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 Mortgage Income Fund (the “Fund”) to be materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. When evaluating the information included in this report, you are cautioned not
to place undue reliance on these forward-looking statements, which reflect the judgment of the Advisor and its representatives only as
of the date hereof. We undertake no obligation to publicly revise or update these forward-looking statements to reflect events and circumstances
that arise after the date hereof.
Performance
and Risk Disclosure
There
is no assurance that the Fund will achieve its investment objectives. The Fund is subject to market risk, which is the possibility that
the market values of securities owned by the Fund will decline and that the value of the Fund’s shares may therefore be less than
what you paid for them. Accordingly, you can lose money by investing in the Fund. See “Principal Risks” in the Investment
Objectives, Policies and Risks section of this report for a discussion of certain other risks of investing in the Fund.
Performance
data quoted represents past performance, which is no guarantee of future results, and current performance may be lower or higher than
the figures shown. For the most recent month-end performance figures, please visit www.ftportfolios.com
or speak with your financial advisor. Investment returns, net asset value and common share price will fluctuate and Fund shares, when
sold, may be worth more or less than their original cost.
The
Advisor may also periodically provide additional information on Fund performance on the Fund’s web page at www.ftportfolios.com.
How
to Read This Report
This
report contains information that may help you evaluate your investment in the Fund. It includes details about the Fund and presents data
and analysis that provide insight into the Fund’s performance and investment approach.
By
reading the portfolio commentary by the portfolio management team of the Fund, you may obtain an understanding of how the market environment
affected the Fund’s performance. The statistical information that follows may help you understand the Fund’s performance compared
to that of a relevant market benchmark.
It
is important to keep in mind that the opinions expressed by personnel of the Advisor are just that: informed opinions. They should not
be considered to be promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report.
The material risks of investing in the Fund are spelled out in the prospectus, the statement of additional information, this report and
other Fund regulatory filings.
First
Trust Mortgage Income Fund (FMY)
Annual
Letter from the Chairman and CEO
October
31, 2023
Dear
Shareholders,
First
Trust is pleased to provide you with the annual report for the First Trust Mortgage Income Fund (the “Fund”), which contains
detailed information about the Fund for the twelve months ended October 31, 2023.
The
Bureau of Economic Analysis recently announced that U.S. real gross domestic product (“GDP”) grew by a staggering 4.9% in
the third quarter of 2023 and is now up 2.9% on a year-over-year basis from where it stood in the third quarter of 2022. The most recent
quarter’s GDP data represents the fastest growth rate for any quarter since 2014. Consumer spending, which rose by 4.0% over the
period, was responsible for 2.7 percentage points of the total increase in GDP. Whether the consumer can keep up this pace of spending
remains to be seen, especially given recent news that excess savings from the pandemic-era stimulus have likely been depleted. From a
global perspective, the International Monetary Fund (“IMF”) notes that progress in fighting inflation has led to lower economic
growth. In their October 2023 publication of the World Economic Outlook, the IMF projected that the growth in world economic output is
expected to slow from 3.5% in 2022 to 2.9% in 2024. The economic growth in advanced economies is projected to plummet from 2.6% in 2022
to 1.4% in 2024.
In
the notes to their September 2023 meeting, the Federal Open Market Committee revealed that they may need to keep interest rates “higher
for longer” as they continue to battle stubbornly high inflation. As many investors are likely aware, a higher Federal Funds target
rate can have deep implications for consumers, such as driving up the cost of borrowing for homes, automobiles, and other large purchases.
The American consumer has yet to feel the full weight of those burdens, in my opinion. That said, the data reveals a different story among
corporate America. S&P Global Market Intelligence reported that a total of 516 U.S. corporations filed for bankruptcy protection on
a year-to-date basis through September 30, 2023, up from a total of 263 corporate bankruptcy filings over the same period last year. Higher
interest rates and Treasury bond yields have also sapped demand for commercial property loans. Data from Trepp, LLC, a leading provider
of data and analytics to the commercial real estate and banking markets, revealed that just $28.2 billion of loans converted into commercial
mortgage-backed securities have been issued in 2023, the lowest figure since 2011.
The
financial markets battled a myriad of headwinds over the past year, from geopolitical uncertainty resulting from war (the conflicts between
Israel and Hamas and Russia and Ukraine), to slowing global economic growth and sticky inflation. Brian Wesbury, Chief Economist at First
Trust, notes that a U.S. economic recession is likely to begin at some point early next year. While calls for a recession may concern
some investors, the following may offer solace. Data from Bloomberg reveals that the S&P 500®
Index has posted positive total returns over the 3-year period following every recession since 1948.
Thank
you for giving First Trust the opportunity to play a role in your financial future. We value our relationship with you and will report
on the Fund again in six months.
Sincerely,
James
A. Bowen
Chairman
of the Board of Trustees
Chief
Executive Officer of First Trust Advisors L.P.
First
Trust Mortgage Income Fund (FMY)
“AT
A GLANCE”
As
of October 31, 2023 (Unaudited)
Fund
Statistics |
|
Symbol
on New York Stock Exchange |
FMY
|
Common
Share Price |
$10.88
|
Common
Share Net Asset Value (“NAV”) |
$11.72
|
Premium
(Discount) to NAV |
(7.17)%
|
Net
Assets Applicable to Common Shares |
$49,398,421
|
Current
Distribution per Common Share(1) |
$0.0675
|
Current
Annualized Distribution per Common Share |
$0.8100
|
Current
Distribution Rate on Common Share Price(2) |
7.44%
|
Current
Distribution Rate on NAV(2) |
6.91%
|
Common
Share Price & NAV (weekly closing price)
Performance
|
|
|
|
|
|
|
Average
Annual Total Returns |
|
1
Year Ended 10/31/23 |
5
Years Ended 10/31/23 |
10
Years Ended 10/31/23 |
Inception
(5/25/05) to 10/31/23 |
Fund
Performance(3) |
|
|
|
|
NAV
|
2.88%
|
0.53%
|
1.70%
|
4.21%
|
Market
Value |
4.88%
|
1.85%
|
2.07%
|
3.53%
|
Index
Performance |
|
|
|
|
Bloomberg
U.S. Mortgage Backed Securities (MBS) Index |
-0.82%
|
-1.06%
|
0.34%
|
2.38%
|
Portfolio
Characteristics |
|
Weighted
Average Effective Duration |
6.8
Years |
Weighted
Average Effective Maturity |
10.7
Years |
Fund
Allocation |
%
of Net Assets |
Mortgage-Backed
Securities |
56.8%
|
U.S.
Government Agency Mortgage-Backed Securities |
56.4
|
Asset-Backed
Securities |
4.2
|
Money
Market Funds |
3.5
|
Put
Options Written |
(0.0)*
|
Net
Other Assets and Liabilities(4) |
(20.9)
|
Total
|
100.0%
|
*
|
Amount
is less than 0.1%. |
Credit
Quality(5) |
%
of Total Fixed-Income Investments |
AAA
|
13.0%
|
AA+
|
1.1
|
AA
|
0.3
|
AA-
|
1.5
|
A+
|
0.5
|
A
|
0.0*
|
A-
|
4.6
|
BBB
|
1.8
|
BBB-
|
8.2
|
BB
|
0.2
|
BB-
|
1.8
|
B
|
0.9
|
CCC
|
0.0*
|
CCC-
|
0.0*
|
CC
|
0.7
|
Not
Rated |
28.1
|
Government
|
37.3
|
Cash
& Cash Equivalents |
0.0*
|
Total
|
100.0%
|
*
|
Amount
is less than 0.1%. |
(1)
|
Most
recent distribution paid through October 31, 2023. Subject to change in the future. |
(2)
|
Distribution
rates are calculated by annualizing the most recent distribution paid through the report date and then dividing by Common Share Price
or NAV, as applicable, as of October 31, 2023. 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 of less than one year. Past performance is not indicative of
future results. |
(4)
|
Includes
variation margin on futures contracts. |
(5)
|
The
credit quality and ratings information presented above reflect the ratings assigned by one or more nationally recognized statistical rating
organizations (NRSROs), including S&P Global Ratings, 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 rating is 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. U.S. Treasury,
U.S. Agency and U.S. Agency mortgage-backed securities appear under “Government.” Credit ratings are subject to change. |
Portfolio
Commentary
First
Trust Mortgage Income Fund (FMY)
Annual
Report
October
31, 2023 (Unaudited)
Advisor
First
Trust Advisors L.P. (“First Trust” or the “Advisor”) serves as the investment advisor to the First Trust Mortgage
Income Fund (the “Fund” or “FMY”) and offers customized portfolio management using its structured, quantitative
approach to security selection.
Portfolio
Management Team
Jeremiah
Charles – Senior Vice President and Senior Portfolio Manager, First Trust Government & Securitized Products Group
James
Snyder – Senior Vice President and Senior Portfolio Manager, First Trust Government & Securitized Products Group
Owen
Aronson – Vice President and Portfolio Manager of the Fund, First Trust Government & Securitized Products Group
The
following information is a summary of certain changes during the fiscal year ended October 31, 2023 relating to the portfolio managers
of the Fund. This information may not reflect all of the changes that have occurred since you purchased shares of the Fund.
Effective
June 1, 2023, Owen Aronson was added as a portfolio manager to the Fund. Mr. Aronson is a Senior Investment Analyst for the First Trust
Government & Securitized Products Group. He has over 15 years of investment research and trading experience. At First Trust, he focuses
primarily on the Commercial Mortgage-Backed Securities (“CMBS”) sector and contributes to the management of the non-agency
sectors. Prior to joining First Trust in 2020, Owen spent the majority of his career in the Securitized Products team at Neuberger Berman
where he was responsible for CMBS investments. He began his career at Lehman Brothers Asset Management as an Analyst. Mr. Aronson holds
a B.A. in Economics from the University of Chicago.
Commentary
First
Trust Mortgage Income Fund
The
Fund’s primary investment objective is to seek a high level of current income. As a secondary objective the Fund seeks to preserve
capital. The Fund pursues its objectives by investing primarily in mortgage-backed securities (“MBS”) representing part ownership
in a pool of either residential or commercial mortgage loans that, in the opinion of the Fund’s investment advisor, offer an attractive
combination of credit quality, yield and maturity. There can be no assurance the Fund will achieve its investment objectives. The Fund
may not be appropriate for all investors.
Market
Recap
The
12-month period ended October 31, 2023 began with markets under considerable strain as the Federal Reserve (the “Fed”) continued
with its aggressive interest rate hiking campaign to combat soaring inflation. With volatility high and liquidity challenged as bond market
participants suffered through outflows, bond market spreads remained under pressure. The market began to once again price in just how
quickly inflation would cool, and how quickly the Fed would be “forced” to cut rates, just as the market incorrectly had done
several times over the preceding year. Contrary to the market belief however, the labor market showed significant strength, and the Fed
stood resolute pushing yields on the front end north of 5% in early March 2023, putting significant pressure on an already inverted curve,
until it all unraveled mere days later as the first of the large banks, Silicon Valley Bank (“SVB”), began to fail. Front
end Treasury yields plunged, which saw the 2-Year Treasury yield fall from 5.07% to sub 4%, while spreads gapped wider, with Option-Adjusted
Spreads (“OAS”) on Agency MBS widening approximately 20 basis points (“bps”), almost immediately. Ultimately,
the Federal Deposit Insurance Corporation took control of two banks, SVB and Signature Bank, and ultimately liquidated nearly $100 billion
worth of high-quality bond assets. As markets found their footing following these relatively contained bank failures, the labor market
remained stubbornly robust. And despite many forecasts, the housing market, and even the broader economy, have shown significant resilience
in spite of the proverbial Fed punch bowl being removed. As such, front end Treasury yields began to climb back toward 5% once again and
it would not take long for the longer maturity segment of the yield curve to follow suit. We believe the market was simply wrong in its
call for the timing of a recession. As such, as this resilient, and sometimes robust, economic data came in, the market was forced to
push back its call on rate cuts. After all, the Fed had not even stopped interest rate hiking. This change has reshaped the term “premium”
across the curve. Couple that with a newly acquired market appreciation for just how poorly managed we believe the fiscal house of the
United States continues to be post-pandemic, and the next stage, and perhaps even the final stage, of the ongoing bear market in rates
made its appearance known. Volatility remains high. Spreads remain wide relative to historical data. The 2-Year Treasury yield breached
5%. The 30-Year Treasury yield breached 5%. Agency MBS spreads breached the 80 bps OAS level, with nominal spreads setting multi-decade
wides near 180 bps. While the market is off these highs in rates, and wides in MBS spreads, it seems like a new world in fixed income
relative to the post-Great Financial Crisis of 2008 era, which was defined by heavy-handed government intervention and artificially suppressed
volatility. Yes, we believe it is safe to say that the aggressive campaign the Fed was forced to undertake when it was too late to respond
to the impending inflation debacle helped cause the banking issues and subsequent fallout. Less talked about, however, is the importance
of understanding the duration gap, and convexity
Portfolio
Commentary (Continued)
First
Trust Mortgage Income Fund (FMY)
Annual
Report
October
31, 2023 (Unaudited)
embedded
in a bond portfolio. These issues have been front and center in bond portfolios for the last 24 months as rates have risen so significantly
in such a short amount of time. The ability to understand and manage these risks, properly and with skill, has never been more important,
in our view.
Performance
Analysis
|
|
Average
Annual Total Returns |
|
1
Year Ended 10/31/23 |
5
Years Ended 10/31/23 |
10
Years Ended 10/31/23 |
Inception
(5/25/05) to 10/31/23 |
Fund Performance(1)
|
|
|
|
|
NAV
|
2.88%
|
0.53%
|
1.70%
|
4.21%
|
Market
Value |
4.88%
|
1.85%
|
2.07%
|
3.53%
|
Index
Performance |
|
|
|
|
Bloomberg
U.S. Mortgage Backed Securities (MBS) Index |
-0.82%
|
-1.06%
|
0.34%
|
2.38%
|
Performance figures assume reinvestment of all distributions and do not reflect the deduction of taxes that a shareholder would pay on
Fund distributions or the redemption or sale of Fund shares. An index is a statistical composite that tracks a specified financial market
or sector. Unlike the Fund, the index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred
by the Fund. These expenses negatively impact the performance of the Fund. The Fund’s past performance does not predict future performance.
Performance
in securitized product investment strategies can be impacted from the benefits of purchasing odd lot positions. The impact of these investments
can be particularly meaningful when funds have limited assets under management and may not be a sustainable source of performance as a
fund grows in size.
For
the 12-month period ended October 31, 2023, the Fund returned 2.88% on a net asset value (“NAV”) basis and 4.88% on a market
price basis.
For
the same period, the Bloomberg U.S. Mortgage Backed Securities (MBS) Index (the “Benchmark”) returned -0.82%. On a NAV basis,
the Fund outperformed the Benchmark by 370 bps, net of fees.
Typically,
the Fund is structured with a lower and more stable duration profile, which in a broader bond market rally, would likely cause it to underperform
its longer duration Benchmark. However, with bond market yields at levels not experienced in over a decade, the decision was made to increase
the duration of the Fund, predominantly by using Treasury futures. On the asset side, the Fund continued to reduce its holdings in Agency
Residential interest-only bonds (“IO”), maintained its Agency CMBS IO positioning, and took advantage of very spready opportunities
in both Non-Agency Residential Mortgage-Backed Securities (“RMBS”) and CMBS. CMBS, and more broadly commercial real estate,
faces challenges ahead, and has already experienced significant spread widening.
(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.
Total returns do not reflect sales load and are not annualized for periods of less than one year. Past performance is not indicative of
future results. |
Portfolio
Commentary (Continued)
First
Trust Mortgage Income Fund (FMY)
Annual
Report
October
31, 2023 (Unaudited)
The
portfolio management team put capital to work in bonds that were believed to be money good and that would benefit from extension or workout
scenarios, and such challenges were already reflected in the asset pricing. We believe this reallocation allowed the Fund to take advantage
of opportunities in the market and allowed the Fund to achieve its primary objective of a high level of current income more easily, as
evidenced by multiple dividend increases during the period. Given the relative perceived cheapness of the Agency MBS sector, the Fund
is also now using a modest amount of To-Be-Announced (“TBA”) leverage to take positions in Agency MBS. The Fund’s usage
of futures to extend or add duration was not beneficial to the strategy during the period as interest rates continued to climb. The Fund’s
use of options had minimal impact on the Fund’s performance during the period. As a reminder, over the last 3 years through October
31, 2023, which includes this most recent bear market cycle, the Fund has outperformed its Benchmark by nearly 1,100 bps on a NAV basis.
The
Fund has a practice of seeking to maintain a relatively stable monthly distribution, which may be changed at any time. The practice has
no impact on the Fund’s investment strategy and may reduce the Fund’s NAV. However, the Advisor believes the practice helps
maintain the Fund’s competitiveness and may benefit the Fund’s market price and premium/discount to the Fund’s NAV.
The monthly distribution rate began the period at $0.0550 per share and ended at $0.0675 per share. At the $0.0675 per share monthly distribution
rate, the annualized distribution rate at October 31, 2023 was 6.91% at NAV and 7.44% at market price. For the 12-month period ended October
31, 2023, 100.00% of the distributions were characterized as ordinary income. The final determination of the source and tax status of
all 2023 distributions will be made after the end of 2023 and will be provided on Form 1099-DIV. Not to be construed as tax advice. Please
consult your tax advisor for further information regarding tax matters.
Market
and Fund Outlook
In
the Fed tightening cycle of 2004-2006 and subsequent pause, the funding rate peaked in early October 2007. It had been 2+ years of consistent
Federal Funds target rate tightening but at a much slower rate than the recent cycle. Unlike that period, most homeowners of today locked
into long-dated mortgages and the loan underwriting of housing has been vastly superior to that deployed nearly two decades ago. The tsunami
that hit the mortgage market and banks that were leveraged to it in the 2007-2009 period does not exist in this cycle, and, as such, the
economy remains very resilient to the Fed’s interest rate increases. Further, corporations are also not exposed in the very near
term to significant funding cost increases. The implications are that the Fed’ s expectation of the economy’s reaction function
to its interest rate increases has been significantly overestimated leading it to the necessity of raising rates further than most market
participants, or the Fed itself, would have expected necessary. So, in this world, with less sensitivity to interest rate rises and still
healthy U.S. hiring, where is the forward economic contraction going to come from? In short, how does this cycle end? We think the answer
lies in both the government and U.S. corporations and interestingly, we believe it is likely to have similar timing as the cycle two decades
ago. We believe there will be three sources of future U.S. contraction that are baked in and all of them highly foreseeable. First, corporations
will likely start to see their funding costs go up as new projects become more expensive, but also starting in 2025, we believe we will
see meaningful amounts of corporate debt that need to be refinanced, and now, at much higher costs. Second, there will likely be cost
pressures on U.S. corporations at full U.S. employment as workers’ look to recoup real wage losses experienced over the last several
years as wages did not keep pace with inflation amidst government spending and Fed quantitative easing. We anticipate this financial pressure
will negatively impact the economy but will be, and has been, more delayed in timing this cycle than prior ones. Lastly, and likely the
most important fact, is the U.S. government’s debt as a percentage of gross domestic product is much higher than any other period
in modern U.S. history, short of the height of the pandemic when the country was shut down. Further, funding costs were near zero during
the pandemic but now are approximately 400 to 500 plus bps higher across the government’s borrowing maturities. In short, current
U.S. government interest costs are much higher than in the last 25 years and are comparable to those in the 1980s through late 1990s when
U.S. inflation was much higher. In earlier periods however, entitlement programs were in much better shape such that very large tax increases,
spending cuts, or both, were less necessary than today. We believe the contraction is coming; the timing is not as clear, but it is inevitable,
in our opinion. The continued rise in U.S. Treasury longer maturity interest rates (10 years and longer) in the third quarter of 2023
indicates there is little place for anyone borrowing to hide, least of all the U.S. government. We believe a recession is likely in our
future, and one only needs to wait for the foreseeable events to play out.
We
remain committed to finding value across the various credit sectors of the mortgage and securitized market, but also along the term spectrum
of the U.S. yield curve. Given the massive increase in interest rates over the last 24 months, we have increased the interest rate sensitivity
in the Fund as duration risks feel more balanced, and perhaps at 5%, more skewed to go lower. We are buyers of longer bonds and will extend
duration as the long maturity sector moves toward, and through, 5.0 % yield levels. To us, these real yield levels compensate us adequately
for the inflation risk and equally importantly the expected slow-down in the U.S. economy. As mentioned above, we expect further interest
rate rises from here to hinder growth, and more likely, over a strategic period, to push interest rates lower. We remain committed to
actively managing the convexity component in the portfolio and will look to continue to manage the Fund to a more stable duration target
than its Benchmark; meaning we do not want to extend in duration as rates rise, and conversely,
Portfolio
Commentary (Continued)
First
Trust Mortgage Income Fund (FMY)
Annual
Report
October
31, 2023 (Unaudited)
and,
at this point in the cycle, most importantly, we do not want to shorten or lose duration into a rally. From an asset allocation perspective,
we plan to take advantage of very wide spreads in select CMBS, RMBS and Asset-Backed Securities credit opportunities that the portfolio
managers find to be attractively priced in the short to intermediate part of the curve, while capturing longer maturity opportunities
in Agency MBS TBA and Treasury futures. In our view, this approach would provide higher current yield, income, total return, and spread
protection for shareholders. As an ongoing reminder, as part of the investment team’s ongoing Agency MBS strategy, a portion of
the agency securities have been, and will continue to be, invested in the interest-only sectors in an attempt to increase the income and
economic earnings of the portfolio. We believe this strategy can be very effective with proper security selection, particularly when combined
with appropriate yield curve management. We plan to continue to maintain a tradeable portfolio as that is critical to being able to act
should opportunities arise.
First
Trust Mortgage Income Fund (FMY)
Portfolio
of Investments
October
31, 2023
Principal
Value |
|
Description
|
|
Stated
Coupon |
|
Stated
Maturity |
|
Value
|
MORTGAGE-BACKED
SECURITIES – 56.8% |
|
|
Collateralized
Mortgage Obligations – 18.1% |
|
|
|
|
|
|
|
|
Banc
of America Mortgage Trust |
|
|
|
|
|
|
$44,186
|
|
Series 2002-L, Class 1A1 (a)
|
|
3.55%
|
|
12/01/32
|
|
$32,736
|
|
|
Citigroup
Mortgage Loan Trust |
|
|
|
|
|
|
70,344
|
|
Series 2005-6, Class A1, US Treasury Yield Curve Rate T Note Constant Maturity 1 Year + 2.10% (b)
|
|
6.15%
|
|
09/01/35
|
|
69,175
|
10,095
|
|
Series 2009-10, Class 1A1 (a) (c)
|
|
5.68%
|
|
09/01/33
|
|
9,870
|
|
|
Connecticut
Avenue Securities Trust |
|
|
|
|
|
|
1,000,000
|
|
Series 2019-R01, Class 2B1, 30 Day Average SOFR + CSA + 4.35% (b) (c)
|
|
9.79%
|
|
07/25/31
|
|
1,066,505
|
|
|
Countrywide
Home Loan Mortgage Pass-Through Trust |
|
|
|
|
|
|
238,040
|
|
Series 2006-HYB5, Class 3A1A (a)
|
|
4.97%
|
|
09/01/36
|
|
203,241
|
|
|
DSLA
Mortgage Loan Trust |
|
|
|
|
|
|
235,042
|
|
Series 2004-AR3, Class 2A2A, 1 Mo. CME Term SOFR + CSA + 0.74% (b)
|
|
6.19%
|
|
07/19/44
|
|
210,947
|
|
|
GSR
Mortgage Loan Trust |
|
|
|
|
|
|
2,350
|
|
Series 2003-10, Class 1A12 (a)
|
|
5.71%
|
|
10/01/33
|
|
2,208
|
79,085
|
|
Series 2005-AR1, Class 4A1 (a)
|
|
3.18%
|
|
01/01/35
|
|
66,576
|
|
|
JP
Morgan Mortgage Trust |
|
|
|
|
|
|
214,323
|
|
Series 2006-A2, Class 4A1 (a)
|
|
5.59%
|
|
08/01/34
|
|
210,378
|
32,550
|
|
Series 2006-A2, Class 5A3 (a)
|
|
5.74%
|
|
11/01/33
|
|
31,006
|
|
|
LHOME
Mortgage Trust |
|
|
|
|
|
|
1,000,000
|
|
Series 2023-RTL2, Class M (c) (d)
|
|
9.00%
|
|
06/25/28
|
|
899,804
|
|
|
MASTR
Alternative Loan Trust |
|
|
|
|
|
|
3,544,974
|
|
Series 2006-2, Class 2A3, 1 Mo. CME Term SOFR + CSA + 0.35% (b)
|
|
5.79%
|
|
03/25/36
|
|
376,533
|
|
|
MASTR
Asset Securitization Trust |
|
|
|
|
|
|
14,675
|
|
Series 2003-11, Class 6A16
|
|
5.25%
|
|
12/01/33
|
|
13,668
|
|
|
MortgageIT
Trust |
|
|
|
|
|
|
158,385
|
|
Series 2005-2, Class 2A, 1 Mo. CME Term SOFR + CSA + 1.65% (b)
|
|
7.08%
|
|
05/01/35
|
|
145,051
|
|
|
Pretium
Mortgage Credit Partners I LLC |
|
|
|
|
|
|
1,000,000
|
|
Series 2021-NPL2, Class A2 (c) (d)
|
|
3.84%
|
|
06/27/60
|
|
778,515
|
|
|
PRKCM
Trust |
|
|
|
|
|
|
1,000,000
|
|
Series 2021-AFC1, Class B2 (c)
|
|
3.95%
|
|
08/01/56
|
|
507,170
|
|
|
Residential
Accredit Loans, Inc. |
|
|
|
|
|
|
72,609
|
|
Series 2006-QO1, Class 2A1, 1 Mo. CME Term SOFR + CSA + 0.54% (b)
|
|
5.98%
|
|
02/25/46
|
|
43,883
|
673,459
|
|
Series 2006-QS6, Class 1AV, IO (a)
|
|
0.77%
|
|
06/01/36
|
|
14,008
|
|
|
Residential
Asset Securitization Trust |
|
|
|
|
|
|
19,007
|
|
Series 2004-A3, Class A7
|
|
5.25%
|
|
06/01/34
|
|
16,431
|
|
|
Roc
Mortgage Trust |
|
|
|
|
|
|
1,000,000
|
|
Series 2021-RTL1, Class M (c)
|
|
5.68%
|
|
08/25/26
|
|
888,603
|
|
|
RUN
Trust |
|
|
|
|
|
|
873,759
|
|
Series 2022-NQM1, Class A1 (c)
|
|
4.00%
|
|
03/01/67
|
|
790,056
|
|
|
Starwood
Mortgage Residential Trust |
|
|
|
|
|
|
889,034
|
|
Series 2022-3, Class A1 (c)
|
|
4.16%
|
|
03/01/67
|
|
781,359
|
|
|
Structured
Asset Securities Corp. Mortgage Pass-Through Certificates |
|
|
|
|
|
|
7,318
|
|
Series 2001-SB1, Class A2
|
|
3.38%
|
|
08/01/31
|
|
7,282
|
|
|
VCAT
LLC |
|
|
|
|
|
|
1,000,000
|
|
Series 2021-NPL5, Class A2 (c) (d)
|
|
3.84%
|
|
08/25/51
|
|
778,846
|
1,000,000
|
|
Series 2021-NPL6, Class A2 (c) (d)
|
|
3.97%
|
|
09/25/51
|
|
778,306
|
|
|
Washington
Mutual Alternative Mortgage Pass-Through Certificates |
|
|
|
|
|
|
9,982
|
|
Series 2007-5, Class A11, (1 Mo. CME Term SOFR + CSA) x -6 + 39.48% (e)
|
|
6.85%
|
|
06/25/37
|
|
8,649
|
See
Notes to Financial Statements
Page
7
First
Trust Mortgage Income Fund (FMY)
Portfolio
of Investments (Continued)
October
31, 2023
Principal
Value |
|
Description
|
|
Stated
Coupon |
|
Stated
Maturity |
|
Value
|
MORTGAGE-BACKED
SECURITIES (Continued) |
|
|
Collateralized
Mortgage Obligations (Continued) |
|
|
|
|
|
|
|
|
WinWater
Mortgage Loan Trust |
|
|
|
|
|
|
$213,378
|
|
Series 2015-3, Class B1 (a) (c)
|
|
3.84%
|
|
03/01/45
|
|
$191,676
|
|
|
|
|
8,922,482
|
|
|
Commercial
Mortgage-Backed Securities – 38.7% |
|
|
|
|
|
|
|
|
1211
Avenue of the Americas Trust |
|
|
|
|
|
|
935,000
|
|
Series 2015-1211, Class C (a) (c)
|
|
4.14%
|
|
08/01/35
|
|
841,716
|
|
|
Aventura
Mall Trust |
|
|
|
|
|
|
1,250,000
|
|
Series 2018-AVM, Class D (a) (c)
|
|
4.11%
|
|
07/01/40
|
|
1,014,983
|
|
|
BAMLL
Commercial Mortgage Securities Trust |
|
|
|
|
|
|
1,000,000
|
|
Series 2013-WBRK, Class A (a) (c)
|
|
3.53%
|
|
03/01/37
|
|
872,126
|
|
|
BANK
|
|
|
|
|
|
|
22,342,755
|
|
Series 2017-BNK7, Class XA, IO (a)
|
|
0.72%
|
|
09/01/60
|
|
464,506
|
2,160,500
|
|
Series 2020-BNK30, Class E (c)
|
|
2.50%
|
|
12/01/53
|
|
1,038,969
|
|
|
BBCMS
Mortgage Trust |
|
|
|
|
|
|
1,000,000
|
|
Series 2018-TALL, Class B, 1 Mo. CME Term SOFR + CSA + 1.12% (b) (c)
|
|
6.50%
|
|
03/15/37
|
|
870,682
|
|
|
Benchmark
Mortgage Trust |
|
|
|
|
|
|
1,000,000
|
|
Series 2020-IG2, Class UBRD (a) (c)
|
|
3.51%
|
|
09/01/48
|
|
848,005
|
|
|
CCRE
Commercial Mortgage Securities L.P. |
|
|
|
|
|
|
7,919,618
|
|
CFCRE Mortgage Trust Commercial Mortgage Pass-Through Certificates, Series 2017-C8, Class XA, IO (a)
|
|
1.48%
|
|
06/01/50
|
|
307,017
|
|
|
CD
Mortgage Trust |
|
|
|
|
|
|
8,622,086
|
|
Series 2018-CD7, Class XA, IO (a)
|
|
0.64%
|
|
08/01/51
|
|
220,659
|
|
|
Citigroup
Commercial Mortgage Trust |
|
|
|
|
|
|
4,177,399
|
|
Series 2015-GC29, Class XA, IO (a)
|
|
1.01%
|
|
04/01/48
|
|
45,088
|
8,608,812
|
|
Series 2016-GC37, Class XA, IO (a)
|
|
1.65%
|
|
04/01/49
|
|
249,455
|
5,515,032
|
|
Series 2016-P4, Class XA, IO (a)
|
|
1.89%
|
|
07/01/49
|
|
204,890
|
|
|
COMM
Mortgage Trust |
|
|
|
|
|
|
122,774,000
|
|
Series 2014-UBS6, Class XB, IO (a) (c)
|
|
0.04%
|
|
12/01/47
|
|
60,491
|
3,829,000
|
|
Series 2015-CCRE26, Class XD, IO (a) (c)
|
|
1.21%
|
|
10/01/48
|
|
77,816
|
14,711,211
|
|
Series 2015-LC21, Class XA, IO (a)
|
|
0.64%
|
|
07/01/48
|
|
114,016
|
|
|
Credit
Suisse Mortgage Capital Certificates |
|
|
|
|
|
|
1,000,000
|
|
Series 2021-980M, Class G (a) (c)
|
|
3.54%
|
|
07/15/31
|
|
733,716
|
|
|
Credit
Suisse Mortgage Trust |
|
|
|
|
|
|
1,000,000
|
|
Series 2022-CNTR, Class A, 1 Mo. CME Term SOFR + CSA + 3.94%, 4.09% Floor (b) (c)
|
|
9.28%
|
|
01/15/24
|
|
867,235
|
|
|
CSAIL
Commercial Mortgage Trust |
|
|
|
|
|
|
5,883,588
|
|
Series 2020-C19, Class XA, IO (a)
|
|
1.10%
|
|
03/01/53
|
|
294,185
|
|
|
FIVE
Mortgage Trust |
|
|
|
|
|
|
28,958,917
|
|
Series 2023-V1, Class XA, IO (b)
|
|
0.83%
|
|
02/01/56
|
|
852,336
|
|
|
GS
Mortgage Securities Corp Trust |
|
|
|
|
|
|
1,000,000
|
|
Series 2018-3PCK, Class C, 1 Mo. CME Term SOFR + CSA + 3.50% (b) (c)
|
|
8.95%
|
|
09/15/31
|
|
967,384
|
|
|
GS
Mortgage Securities Trust |
|
|
|
|
|
|
823,474
|
|
Series 2012-GCJ9, Class D (a) (c)
|
|
4.60%
|
|
11/01/45
|
|
745,214
|
|
|
Houston
Galleria Mall Trust |
|
|
|
|
|
|
1,000,000
|
|
Series 2015-HGLR, Class D (c)
|
|
3.98%
|
|
03/01/37
|
|
914,007
|
|
|
Hudsons
Bay Simon JV Trust |
|
|
|
|
|
|
156,152
|
|
Series 2015-HBFL, Class DFL, 1 Mo. CME Term SOFR + CSA + 3.90% (b) (c)
|
|
9.34%
|
|
08/05/34
|
|
132,646
|
|
|
JP
Morgan Chase Commercial Mortgage Securities Trust |
|
|
|
|
|
|
20,237,120
|
|
Series 2016-JP4, Class XA, IO (a)
|
|
0.58%
|
|
12/01/49
|
|
269,111
|
969,086
|
|
Series 2018-PHH, Class A, 1 Mo. CME Term SOFR + CSA + 1.21%, 2.71% Floor (b) (c)
|
|
6.59%
|
|
06/15/35
|
|
857,040
|
Page
8
See
Notes to Financial Statements
First
Trust Mortgage Income Fund (FMY)
Portfolio
of Investments (Continued)
October
31, 2023
Principal
Value |
|
Description
|
|
Stated
Coupon |
|
Stated
Maturity |
|
Value
|
MORTGAGE-BACKED
SECURITIES (Continued) |
|
|
Commercial
Mortgage-Backed Securities (Continued) |
|
|
|
|
|
|
|
|
LSTAR
Commercial Mortgage Trust |
|
|
|
|
|
|
$1,500,000
|
|
Series 2017-5, Class D (a) (c)
|
|
4.67%
|
|
03/01/50
|
|
$1,034,949
|
23,596,467
|
|
Series 2017-5, Class X, IO (a) (c)
|
|
0.80%
|
|
03/01/50
|
|
405,998
|
|
|
LUXE
Trust |
|
|
|
|
|
|
1,000,000
|
|
Series 2021-TRIP, Class F, 1 Mo. CME Term SOFR + CSA + 3.25% (b) (c)
|
|
8.70%
|
|
10/15/38
|
|
973,026
|
|
|
Morgan
Stanley Bank of America Merrill Lynch Trust |
|
|
|
|
|
|
14,448,664
|
|
Series 2014-C16, Class XA, IO (a)
|
|
0.87%
|
|
06/01/47
|
|
20,368
|
1,863,910
|
|
Series 2014-C19, Class XA, IO (a)
|
|
0.95%
|
|
12/01/47
|
|
9,691
|
5,632,500
|
|
Series 2014-C19, Class XE, IO (a) (c)
|
|
1.18%
|
|
12/01/47
|
|
68,845
|
429,743
|
|
Series 2016-C31, Class XA, IO (a)
|
|
1.26%
|
|
11/01/49
|
|
12,123
|
|
|
Morgan
Stanley Capital I Trust |
|
|
|
|
|
|
2,180,000
|
|
Series 2016-UBS9, Class XD, IO (a) (c)
|
|
1.59%
|
|
03/01/49
|
|
71,016
|
1,320,000
|
|
Series 2019-L2, Class C (a)
|
|
4.97%
|
|
03/01/52
|
|
978,146
|
|
|
VMC
Finance |
|
|
|
|
|
|
820,463
|
|
Series 2021-HT1, Class A, 1 Mo. CME Term SOFR + CSA + 1.65% (b) (c)
|
|
7.10%
|
|
01/18/37
|
|
801,060
|
|
|
Wells
Fargo Commercial Mortgage Trust |
|
|
|
|
|
|
1,255,060
|
|
Series 2015-C26, Class XA, IO (a)
|
|
1.18%
|
|
02/01/48
|
|
13,054
|
1,034,000
|
|
Series 2016-NXS6, Class C (a)
|
|
4.39%
|
|
11/01/49
|
|
870,665
|
|
|
|
|
19,122,234
|
|
|
Total Mortgage-Backed Securities
|
|
28,044,716
|
|
|
(Cost
$31,793,510) |
|
|
|
|
|
|
U.S.
GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES – 56.4% |
|
|
Collateralized
Mortgage Obligations – 19.3% |
|
|
|
|
|
|
|
|
Federal
Home Loan Mortgage Corp. |
|
|
|
|
|
|
450
|
|
Series 2303, Class SW, IO, ECOFIN x -15.87 + 121.11%, Capped at 10.00% (e)
|
|
10.00%
|
|
03/01/24
|
|
5
|
117,942
|
|
Series 2439, Class XI, IO, if 1 Mo. LIBOR x -1 + 7.74% is less than 7.50%, then 6.50%, otherwise 0.00% (e)
|
|
6.50%
|
|
03/01/32
|
|
15,859
|
593,792
|
|
Series 2975, Class SJ, IO, (30 Day Average SOFR + CSA) x -1 + 6.65% (e)
|
|
1.22%
|
|
05/15/35
|
|
33,544
|
14,051
|
|
Series 3451, Class SB, IO, (30 Day Average SOFR + CSA) x -1 + 6.03% (e)
|
|
0.60%
|
|
05/15/38
|
|
705
|
208,187
|
|
Series 3471, Class SD, IO, (30 Day Average SOFR + CSA) x -1 + 6.08% (e)
|
|
0.65%
|
|
12/15/36
|
|
12,253
|
9,670
|
|
Series 4021, Class IP, IO
|
|
3.00%
|
|
03/01/27
|
|
310
|
169,972
|
|
Series 4057, Class YI, IO
|
|
3.00%
|
|
06/01/27
|
|
5,873
|
337,638
|
|
Series 4082, Class PI, IO
|
|
3.00%
|
|
06/01/27
|
|
11,598
|
229,423
|
|
Series 4206, Class IA, IO
|
|
3.00%
|
|
03/01/33
|
|
18,115
|
|
|
Federal
Home Loan Mortgage Corp. STACR REMIC Trust |
|
|
|
|
|
|
1,000,000
|
|
Series 2020-DNA1, 30 Day Average SOFR + CSA + 5.25% (b) (c)
|
|
10.69%
|
|
01/25/50
|
|
1,016,062
|
1,000,000
|
|
Series 2020-DNA2, Class B2, 30 Day Average SOFR + CSA + 4.80% (b) (c)
|
|
10.24%
|
|
02/25/50
|
|
1,003,031
|
1,000,000
|
|
Series 2020-HQA1, 30 Day Average SOFR + CSA + 5.10% (b) (c)
|
|
10.54%
|
|
01/25/50
|
|
997,772
|
1,000,000
|
|
Series 2020-HQA2, Class B2, 30 Day Average SOFR + CSA + 7.60% (b) (c)
|
|
13.04%
|
|
03/25/50
|
|
1,090,675
|
|
|
Federal
Home Loan Mortgage Corp. STACR Trust |
|
|
|
|
|
|
1,000,000
|
|
Series 2019-DNA3, Class B2, 30 Day Average SOFR + CSA + 8.15% (b) (c)
|
|
13.59%
|
|
07/25/49
|
|
1,111,099
|
See
Notes to Financial Statements
Page
9
First
Trust Mortgage Income Fund (FMY)
Portfolio
of Investments (Continued)
October
31, 2023
Principal
Value |
|
Description
|
|
Stated
Coupon |
|
Stated
Maturity |
|
Value
|
U.S.
GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
|
|
Collateralized
Mortgage Obligations (Continued) |
|
|
|
|
|
|
|
|
Federal
Home Loan Mortgage Corp. STACR Trust (Continued) |
|
|
|
|
|
|
$1,000,000
|
|
Series 2019-DNA4, Class B2, 30 Day Average SOFR + CSA + 6.25% (b) (c)
|
|
11.69%
|
|
10/25/49
|
|
$1,065,983
|
|
|
Federal
Home Loan Mortgage Corp. Structured Pass-Through Certificates |
|
|
|
|
|
|
44,295
|
|
Series T-56, Class APO, PO
|
|
(f)
|
|
05/01/43
|
|
32,683
|
|
|
Federal
Home Loan Mortgage Corp., STRIPS |
|
|
|
|
|
|
16,492
|
|
Series 177, IO
|
|
7.00%
|
|
07/01/26
|
|
985
|
|
|
Federal
National Mortgage Association |
|
|
|
|
|
|
12,689
|
|
Series 1996-46, Class ZA
|
|
7.50%
|
|
11/01/26
|
|
12,690
|
6,040
|
|
Series 1997-85, Class M, IO
|
|
6.50%
|
|
12/01/27
|
|
55
|
16,328
|
|
Series 2002-80, Class IO, IO
|
|
6.00%
|
|
09/01/32
|
|
1,081
|
43,808
|
|
Series 2003-15, Class MS, IO, (30 Day Average SOFR + CSA) x -1 + 8.00% (e)
|
|
2.56%
|
|
03/25/33
|
|
3,938
|
50,753
|
|
Series 2003-44, Class IU, IO
|
|
7.00%
|
|
06/01/33
|
|
7,901
|
51,222
|
|
Series 2005-6, Class SE, IO, (30 Day Average SOFR + CSA) x -1 + 6.70% (e)
|
|
1.26%
|
|
02/25/35
|
|
3,060
|
26,477
|
|
Series 2007-100, Class SM, IO, (30 Day Average SOFR + CSA) x -1 + 6.45% (e)
|
|
1.01%
|
|
10/25/37
|
|
1,765
|
153,017
|
|
Series 2007-37, Class SB, IO, (30 Day Average SOFR + CSA) x -1 + 6.75% (e)
|
|
1.31%
|
|
05/25/37
|
|
12,240
|
294,177
|
|
Series 2008-17, Class BE
|
|
5.50%
|
|
10/01/37
|
|
275,627
|
596,095
|
|
Series 2010-103, Class ID, IO
|
|
5.00%
|
|
09/01/40
|
|
96,382
|
36,439
|
|
Series 2010-99, Class SG, (30 Day Average SOFR + CSA) x -5 + 25.00%, 0.00% Floor (b) (e)
|
|
0.00%
|
|
09/01/40
|
|
34,246
|
313,231
|
|
Series 2011-81, Class PI, IO
|
|
3.50%
|
|
08/01/26
|
|
8,019
|
208,010
|
|
Series 2012-112, Class BI, IO
|
|
3.00%
|
|
09/01/31
|
|
3,671
|
1,275,563
|
|
Series 2012-125, Class MI, IO
|
|
3.50%
|
|
11/01/42
|
|
177,516
|
16,897
|
|
Series 2013-132, Class SW, (30 Day Average SOFR + CSA) x -2.67 + 10.67%, 0.00% Floor (b) (e)
|
|
0.00%
|
|
01/01/44
|
|
9,719
|
1,589,806
|
|
Series 2013-32, Class IG, IO
|
|
3.50%
|
|
04/01/33
|
|
165,218
|
1,300,064
|
|
Series 2015-20, Class ES, IO, (30 Day Average SOFR + CSA) x -1 + 6.15% (e)
|
|
0.71%
|
|
04/25/45
|
|
114,947
|
84,786
|
|
Series 2015-76, Class BI, IO
|
|
4.00%
|
|
10/01/39
|
|
1,796
|
168,142
|
|
Series 2016-74, Class LI, IO
|
|
3.50%
|
|
09/01/46
|
|
41,857
|
2,364,481
|
|
Series 2017-109, Class SJ, IO, (30 Day Average SOFR + CSA) x -1 + 6.20% (e)
|
|
0.76%
|
|
01/25/48
|
|
214,222
|
1,939,915
|
|
Series 5179, Class GZ
|
|
2.00%
|
|
01/01/52
|
|
854,239
|
|
|
Federal
National Mortgage Association, STRIPS |
|
|
|
|
|
|
15,947
|
|
Series 305, Class 12, IO (g)
|
|
6.50%
|
|
12/01/29
|
|
1,394
|
31,057
|
|
Series 355, Class 18, IO
|
|
7.50%
|
|
11/01/33
|
|
4,321
|
434,515
|
|
Series 406, Class 6, IO (g)
|
|
4.00%
|
|
01/01/41
|
|
71,876
|
|
|
Government
National Mortgage Association |
|
|
|
|
|
|
108,661
|
|
Series 2005-33, Class AY
|
|
5.50%
|
|
04/01/35
|
|
107,540
|
133,858
|
|
Series 2007-68, Class PI, IO, (1 Mo. CME Term SOFR + CSA) x -1 + 6.65% (e)
|
|
1.20%
|
|
11/20/37
|
|
3,176
|
100,000
|
|
Series 2008-2, Class HB
|
|
5.50%
|
|
01/01/38
|
|
96,601
|
110,129
|
|
Series 2008-73, Class SK, IO, (1 Mo. CME Term SOFR + CSA) x -1 + 6.74% (e)
|
|
1.29%
|
|
08/20/38
|
|
5,353
|
210,067
|
|
Series 2013-104, Class YS, IO, (1 Mo. CME Term SOFR + CSA) x -1 + 6.15% (e)
|
|
0.70%
|
|
07/16/43
|
|
10,269
|
3,543,476
|
|
Series 2015-158, Class KS, IO, (1 Mo. CME Term SOFR + CSA) x -1 + 6.25% (e)
|
|
0.80%
|
|
11/20/45
|
|
314,292
|
76,284
|
|
Series 2016-139, Class MZ
|
|
1.50%
|
|
07/01/45
|
|
53,740
|
161,588
|
|
Series 2017-4, Class CZ
|
|
3.00%
|
|
01/01/47
|
|
114,339
|
Page
10
See
Notes to Financial Statements
First
Trust Mortgage Income Fund (FMY)
Portfolio
of Investments (Continued)
October
31, 2023
Principal
Value |
|
Description
|
|
Stated
Coupon |
|
Stated
Maturity |
|
Value
|
U.S.
GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (Continued) |
|
|
Collateralized
Mortgage Obligations (Continued) |
|
|
|
|
|
|
|
|
Government
National Mortgage Association (Continued) |
|
|
|
|
|
|
$132,257
|
|
Series 2017-H18, Class DZ (g)
|
|
4.63%
|
|
09/01/67
|
|
$115,940
|
9,996,077
|
|
Series 2020-13, Class BT, IO, (1 Mo. CME Term SOFR + CSA) x -1 + 6.20%, Capped at 0.50% (e)
|
|
0.50%
|
|
11/20/45
|
|
199,310
|
|
|
|
|
9,554,892
|
|
|
Commercial
Mortgage-Backed Securities – 14.9% |
|
|
|
|
|
|
|
|
Federal
Home Loan Mortgage Corp. Multifamily Structured Pass-Through Certificates |
|
|
|
|
|
|
30,000,000
|
|
Series K043, Class X3, IO (a)
|
|
1.63%
|
|
02/01/43
|
|
550,479
|
14,500,000
|
|
Series K071, Class X3, IO (a)
|
|
2.01%
|
|
11/01/45
|
|
1,020,382
|
4,000,000
|
|
Series K110, Class X3, IO (a)
|
|
3.40%
|
|
06/01/48
|
|
663,421
|
4,605,411
|
|
Series K115, Class X3, IO (a)
|
|
2.96%
|
|
09/01/48
|
|
680,819
|
4,326,216
|
|
Series K118, Class X3, IO (a)
|
|
2.69%
|
|
10/25/48
|
|
594,308
|
1,900,000
|
|
Series K122, Class X3, IO (a)
|
|
2.63%
|
|
01/01/49
|
|
259,838
|
5,000,000
|
|
Series K124, Class X3, IO (a)
|
|
2.62%
|
|
02/01/49
|
|
693,239
|
3,343,856
|
|
Series K128, Class X3, IO (a)
|
|
2.78%
|
|
04/01/31
|
|
501,017
|
1,831,144
|
|
Series K739, Class X3, IO (a)
|
|
2.81%
|
|
11/25/48
|
|
160,151
|
341,978,793
|
|
Series KBX1, Class X1, IO (a)
|
|
0.09%
|
|
01/01/26
|
|
444,299
|
4,571,896
|
|
Series KG06, Class X3, IO (a)
|
|
2.73%
|
|
10/01/31
|
|
678,627
|
|
|
Federal
National Mortgage Association, ACES |
|
|
|
|
|
|
13,100,000
|
|
Series 2019-M29, Class X4, IO
|
|
0.70%
|
|
03/01/29
|
|
362,596
|
|
|
Freddie
Mac Multiclass Certificates |
|
|
|
|
|
|
5,782,630
|
|
Series 2021-P011, Class X1, IO (a)
|
|
1.78%
|
|
09/01/45
|
|
666,270
|
|
|
Government
National Mortgage Association |
|
|
|
|
|
|
2,187,863
|
|
Series 2016-11, Class IO, IO (g)
|
|
0.78%
|
|
01/01/56
|
|
74,672
|
|
|
|
|
7,350,118
|
|
|
Pass-through
Security – 22.2% |
|
|
|
|
|
|
|
|
Fannie
Mae or Freddie Mac |
|
|
|
|
|
|
2,000,000
|
|
Pool TBA (h)
|
|
3.50%
|
|
11/01/53
|
|
1,665,573
|
3,000,000
|
|
Pool TBA (h)
|
|
5.00%
|
|
11/01/53
|
|
2,765,859
|
1,500,000
|
|
Pool TBA (h)
|
|
5.50%
|
|
11/01/53
|
|
1,422,774
|
2,000,000
|
|
Pool TBA (h)
|
|
3.50%
|
|
12/01/53
|
|
1,667,448
|
4,000,000
|
|
Pool TBA (h)
|
|
4.00%
|
|
12/01/53
|
|
3,458,125
|
|
|
|
|
10,979,779
|
|
|
Total U.S. Government Agency Mortgage-Backed Securities
|
|
27,884,789
|
|
|
(Cost
$31,647,281) |
|
|
|
|
|
|
ASSET-BACKED
SECURITIES – 4.2% |
|
|
Adams
Outdoor Advertising LP |
|
|
|
|
|
|
1,000,000
|
|
Series 2023-1, Class B (c)
|
|
8.81%
|
|
07/15/53
|
|
994,988
|
|
|
CoreVest
American Finance Trust |
|
|
|
|
|
|
8,938,703
|
|
Series 2021-3, Class XA, IO (a) (c)
|
|
2.38%
|
|
10/01/54
|
|
510,283
|
|
|
Mid-State
Capital Corp. Trust |
|
|
|
|
|
|
116,540
|
|
Series 2005-1, Class A
|
|
5.75%
|
|
01/01/40
|
|
113,949
|
|
|
PAGAYA
AI Debt Trust |
|
|
|
|
|
|
447,246
|
|
Series 2022-3, Class A (c)
|
|
6.06%
|
|
03/15/30
|
|
445,186
|
|
|
Total Asset-Backed Securities
|
|
2,064,406
|
|
|
(Cost
$2,115,223) |
|
|
|
|
|
|
See
Notes to Financial Statements
Page
11
First
Trust Mortgage Income Fund (FMY)
Portfolio
of Investments (Continued)
October
31, 2023
Shares
|
|
Description
|
|
Value
|
MONEY
MARKET FUNDS – 3.5% |
1,748,885
|
|
Morgan Stanley Institutional Liquidity Funds - Treasury Portfolio - Institutional Class - 5.22% (i)
|
|
$1,748,885
|
|
|
(Cost
$1,748,885) |
|
|
|
Total Investments – 120.9%
|
|
59,742,796
|
|
(Cost
$67,304,899) |
|
|
|
|
Number
of Contracts |
|
Description
|
|
Notional
Amount |
|
Exercise
Price |
|
Expiration
Date |
|
Value
|
PUT
OPTIONS WRITTEN – (0.0)% |
(10)
|
|
U.S. 10-Year Treasury Futures Put
|
|
$(1,061,719)
|
|
$104.50
|
|
11/24/23
|
|
(2,813)
|
|
|
(Premiums
received $7,005) |
|
|
|
|
|
|
|
|
|
Net Other Assets and Liabilities – (20.9)%
|
|
(10,341,562)
|
|
Net Assets – 100.0%
|
|
$49,398,421
|
Futures
Contracts (See Note 2C - Futures Contracts in the Notes to Financial Statements):
Futures
Contracts |
|
Position
|
|
Number
of Contracts |
|
Expiration
Date |
|
Notional
Value |
|
Unrealized
Appreciation (Depreciation)/ Value |
US
Treasury 10 Year Note Future |
|
Long
|
|
6
|
|
Dec
2023 |
|
$
637,031 |
|
$1,781
|
US
Treasury 2 Year Note Future |
|
Long
|
|
8
|
|
Dec
2023 |
|
1,619,350
|
|
(187)
|
US
Treasury 5 Year Note Future |
|
Long
|
|
26
|
|
Dec
2023 |
|
2,716,391
|
|
(656)
|
US
Treasury Bond Future |
|
Long
|
|
33
|
|
Dec
2023 |
|
3,611,437
|
|
13,906
|
US
Treasury Ultra 10 Year Note Future |
|
Long
|
|
54
|
|
Dec
2023 |
|
5,876,719
|
|
(216,828)
|
|
|
|
|
|
|
|
|
$14,460,928
|
|
$(201,984)
|
(a)
|
Collateral
Strip Rate security. Coupon is based on the weighted net interest rate of the investment’s underlying collateral. The interest rate
resets periodically. |
(b)
|
Floating
or variable rate security. |
(c)
|
This
security, sold within the terms of a private placement memorandum, is exempt from registration upon resale under Rule 144A of the Securities
Act of 1933, as amended, 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 First Trust Advisors L.P.,
the Fund’s investment 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 October 31,
2023, securities noted as such amounted to $29,902,713 or 60.5% of net assets. |
(d)
|
Step-up
security. A security where the coupon increases or steps up at a predetermined date. Interest rate shown reflects the rate in effect at
October 31, 2023. |
(e)
|
Inverse
floating rate security. |
(f)
|
Zero
coupon security. |
(g)
|
Weighted
Average Coupon security. Coupon is based on the blended interest rate of the underlying holdings, which may have different coupons. The
coupon may change in any period. |
(h)
|
All
or portion of this security is part of a mortgage dollar roll agreement (see Note 2I - Mortgage Dollar Rolls and TBA Transactions in the
Notes to Financial Statements). |
(i)
|
Rate
shown reflects yield as of October 31, 2023. |
Page
12
See
Notes to Financial Statements
First
Trust Mortgage Income Fund (FMY)
Portfolio
of Investments (Continued)
October
31, 2023
Abbreviations
throughout the Portfolio of Investments: |
ACES
|
–
Alternative Credit Enhancement Securities |
CME
|
–
Chicago Mercantile Exchange |
CSA
|
–
Credit Spread Adjustment |
ECOFIN
|
–
Enterprise 11th District COFI Institutional Replacement Index |
IO
|
–
Interest-Only Security - Principal amount shown represents par value on which interest payments are based. |
LIBOR
|
–
London Interbank Offered Rate |
PO
|
–
Principal-Only Security |
REMIC
|
–
Real Estate Mortgage Investment Conduit |
SOFR
|
–
Secured Overnight Financing Rate |
STACR
|
–
Structured Agency Credit Risk |
STRIPS
|
–
Separate Trading of Registered Interest and Principal of Securities |
TBA
|
–
To-Be-Announced Security |
Valuation
Inputs
A
summary of the inputs used to value the Fund’s investments as of October 31, 2023 is as follows (see Note 2A - Portfolio Valuation
in the Notes to Financial Statements):
ASSETS
TABLE |
|
Total
Value at 10/31/2023 |
Level
1 Quoted Prices |
Level
2 Significant Observable Inputs |
Level
3 Significant Unobservable Inputs |
Mortgage-Backed Securities
|
$ 28,044,716
|
$ —
|
$ 28,044,716
|
$ —
|
U.S. Government Agency Mortgage-Backed Securities
|
27,884,789
|
—
|
27,884,789
|
—
|
Asset-Backed Securities
|
2,064,406
|
—
|
2,064,406
|
—
|
Money Market Funds
|
1,748,885
|
1,748,885
|
—
|
—
|
Total Investments
|
59,742,796
|
1,748,885
|
57,993,911
|
—
|
Futures Contracts*
|
15,687
|
15,687
|
—
|
—
|
Total
|
$ 59,758,483
|
$ 1,764,572
|
$ 57,993,911
|
$—
|
|
LIABILITIES
TABLE |
|
Total
Value at 10/31/2023 |
Level
1 Quoted Prices |
Level
2 Significant Observable Inputs |
Level
3 Significant Unobservable Inputs |
Futures Contracts*
|
$ (217,671)
|
$ (217,671)
|
$ —
|
$ —
|
Written Options
|
(2,813)
|
(2,813)
|
—
|
—
|
Total
|
$ (220,484)
|
$ (220,484)
|
$—
|
$—
|
*
|
Includes
cumulative appreciation/depreciation on futures contracts as reported in the Futures Contracts table. Only the current day’s variation
margin is presented on the Statement of Assets and Liabilities. |
See
Notes to Financial Statements
Page
13
First
Trust Mortgage Income Fund (FMY)
Statement
of Assets and Liabilities
October
31, 2023
ASSETS:
|
|
Investments, at value
|
$ 59,742,796
|
Restricted Cash
|
361,818
|
Receivables:
|
|
Interest
|
490,599
|
Variation margin
|
3,914
|
Prepaid expenses
|
5,366
|
Total Assets
|
60,604,493
|
LIABILITIES:
|
|
Options written, at value
|
2,813
|
Payables:
|
|
Investment securities purchased
|
11,053,668
|
Audit and tax fees
|
74,188
|
Investment advisory fees
|
35,878
|
Administrative fees
|
15,673
|
Shareholder reporting fees
|
7,438
|
Legal fees
|
6,289
|
Custodian fees
|
4,065
|
Transfer agent fees
|
3,213
|
Trustees’ fees and expenses
|
932
|
Financial reporting fees
|
771
|
Other liabilities
|
1,144
|
Total Liabilities
|
11,206,072
|
NET ASSETS
|
$49,398,421
|
NET
ASSETS consist of: |
|
Paid-in capital
|
$ 63,705,638
|
Par value
|
42,131
|
Accumulated distributable earnings (loss)
|
(14,349,348)
|
NET ASSETS
|
$49,398,421
|
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)
|
$11.72
|
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized)
|
4,213,115
|
Investments, at cost
|
$67,304,899
|
Premiums received on options written
|
$7,005
|
Page
14
See
Notes to Financial Statements
First
Trust Mortgage Income Fund (FMY)
Statement
of Operations
For
the Year Ended October 31, 2023
INVESTMENT
INCOME: |
|
Interest
|
$ 3,876,178
|
Other
|
9,974
|
Total investment income
|
3,886,152
|
EXPENSES:
|
|
Investment advisory fees
|
438,137
|
Audit and tax fees
|
74,811
|
Administrative fees
|
49,230
|
Shareholder reporting fees
|
28,090
|
Listing expense
|
23,750
|
Transfer agent fees
|
18,992
|
Trustees’ fees and expenses
|
18,707
|
Legal fees
|
13,242
|
Financial reporting fees
|
9,250
|
Custodian fees
|
8,070
|
Other
|
19,268
|
Total expenses
|
701,547
|
NET INVESTMENT INCOME (LOSS)
|
3,184,605
|
NET
REALIZED AND UNREALIZED GAIN (LOSS): |
|
Net
realized gain (loss) on: |
|
Investments
|
(1,335,140)
|
Purchased options contracts
|
(44,617)
|
Written options contracts
|
32,820
|
Futures contracts
|
(651,269)
|
Net realized gain (loss)
|
(1,998,206)
|
Net
change in unrealized appreciation (depreciation) on: |
|
Investments
|
276,494
|
Written options contracts
|
4,192
|
Futures contracts
|
(132,922)
|
Net change in unrealized appreciation (depreciation)
|
147,764
|
NET REALIZED AND UNREALIZED GAIN (LOSS)
|
(1,850,442)
|
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS
|
$ 1,334,163
|
See
Notes to Financial Statements
Page
15
First
Trust Mortgage Income Fund (FMY)
Statements
of Changes in Net Assets
|
Year
Ended 10/31/2023 |
|
Year
Ended 10/31/2022 |
OPERATIONS:
|
|
|
|
Net investment income (loss)
|
$ 3,184,605
|
|
$ 2,122,909
|
Net realized gain (loss)
|
(1,998,206)
|
|
(1,419,227)
|
Net change in unrealized appreciation (depreciation)
|
147,764
|
|
(5,640,691)
|
Net increase (decrease) in net assets resulting from operations
|
1,334,163
|
|
(4,937,009)
|
DISTRIBUTIONS
TO SHAREHOLDERS FROM: |
|
|
|
Investment operations
|
(2,864,918)
|
|
(1,819,898)
|
Return of capital
|
—
|
|
(960,758)
|
Total distributions to shareholders
|
(2,864,918)
|
|
(2,780,656)
|
Total increase (decrease) in net assets
|
(1,530,755)
|
|
(7,717,665)
|
NET
ASSETS: |
|
|
|
Beginning of period
|
50,929,176
|
|
58,646,841
|
End of period
|
$ 49,398,421
|
|
$ 50,929,176
|
COMMON
SHARES: |
|
|
|
Common Shares at end of period
|
4,213,115
|
|
4,213,115
|
Page
16
See
Notes to Financial Statements
First
Trust Mortgage Income Fund (FMY)
Financial
Highlights
For
a Common Share outstanding throughout each period
|
Year
Ended October 31, |
2023
|
|
2022
|
|
2021
|
|
2020
|
|
2019
|
Net asset value, beginning of period
|
$ 12.09
|
|
$ 13.92
|
|
$ 14.45
|
|
$ 14.91
|
|
$ 14.96
|
Income
from investment operations: |
|
|
|
|
|
|
|
|
|
Net investment income (loss)
|
0.76 (a)
|
|
0.50
|
|
0.44
|
|
0.44
|
|
0.34
|
Net realized and unrealized gain (loss)
|
(0.45)
|
|
(1.67)
|
|
(0.25)
|
|
(0.18)
|
|
0.33
|
Total from investment operations
|
0.31
|
|
(1.17)
|
|
0.19
|
|
0.26
|
|
0.67
|
Distributions
paid to shareholders from: |
|
|
|
|
|
|
|
|
|
Net investment income
|
(0.68)
|
|
(0.43)
|
|
(0.35)
|
|
(0.63)
|
|
(0.50)
|
Return of capital
|
—
|
|
(0.23)
|
|
(0.37)
|
|
(0.09)
|
|
(0.22)
|
Total distributions paid to Common Shareholders
|
(0.68)
|
|
(0.66)
|
|
(0.72)
|
|
(0.72)
|
|
(0.72)
|
Net asset value, end of period
|
$11.72
|
|
$12.09
|
|
$13.92
|
|
$14.45
|
|
$14.91
|
Market value, end of period
|
$10.88
|
|
$11.01
|
|
$13.70
|
|
$13.40
|
|
$13.99
|
Total return based on net asset value (b)
|
2.88%
|
|
(8.38)%
|
|
1.51%
|
|
2.12%
|
|
5.08%
|
Total return based on market value (b)
|
4.88%
|
|
(15.22)%
|
|
7.74%
|
|
0.93%
|
|
13.37%
|
Ratios
to average net assets/supplemental data: |
|
|
|
|
|
|
|
|
|
Net assets, end of period (in 000’s)
|
$ 49,398
|
|
$ 50,929
|
|
$ 58,647
|
|
$ 60,878
|
|
$ 62,832
|
Ratio of total expenses to average net assets
|
1.36%
|
|
1.33%
|
|
1.31%
|
|
1.33%
|
|
1.33%
|
Ratio of net investment income (loss) to average net assets
|
6.18%
|
|
3.86%
|
|
3.11%
|
|
3.03%
|
|
2.29%
|
Portfolio turnover rate
|
143%
|
|
44%
|
|
67%
|
|
28%
|
|
69%
|
(a)
|
Based
on average shares outstanding. |
(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 of less than one year. Past performance
is not indicative of future results. |
See
Notes to Financial Statements
Page
17
Notes
to Financial Statements
First
Trust Mortgage Income Fund (FMY)
October
31, 2023
1. Organization
First
Trust Mortgage Income Fund (the “Fund”) is a diversified, closed-end management investment company organized as a Massachusetts
business trust on February 22, 2005, and is registered with the Securities and Exchange Commission under the Investment Company Act of
1940, as amended (the “1940 Act”). The Fund trades under the ticker symbol “FMY” on the New York Stock Exchange
(“NYSE”).
The
Fund’s primary investment objective is to seek a high level of current income. As a secondary objective, the Fund seeks to preserve
capital. The Fund pursues its objectives by investing primarily in mortgage-backed securities (“MBS”) representing part ownership
in a pool of either residential or commercial mortgage loans that, in the opinion of First Trust Advisors L.P. (“First Trust”
or the “Advisor”), offer an attractive combination of credit quality, yield and maturity. There can be no assurance the Fund
will achieve its investment objectives. The Fund may not be appropriate for all investors.
2. Significant
Accounting Policies
The
Fund is considered an investment company and follows accounting and reporting guidance under Financial Accounting Standards Board 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 the financial statements. The preparation of the 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 the absence of market value with respect to any portfolio securities,
at fair value. Market value prices represent readily available market quotations such as 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 Advisor’s
Pricing Committee in accordance with valuation procedures approved by the Fund’s Board of Trustees, and in accordance with provisions
of the 1940 Act and rules thereunder. 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:
U.S.
government securities, mortgage-backed securities, asset-backed securities and other debt securities are fair valued on the basis of valuations
provided by a third-party pricing service approved by the Advisor’s Pricing Committee, 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. |
Pricing
services generally value fixed-income securities assuming orderly transactions of an institutional round lot size, but a Fund may hold
or transact in such securities in smaller, odd lot sizes. Odd lots may trade at lower prices than institutional round lots.
Exchange-traded
futures contracts are valued at the end of the day settlement price.
Shares
of open-end funds are valued based on NAV per share.
Exchange-traded
options contracts are valued at the closing price in the market where such contracts are principally traded. If no closing price is available,
exchange-traded options contracts are fair valued at the mean of their most recent bid and ask price, if
Notes
to Financial Statements (Continued)
First
Trust Mortgage Income Fund (FMY)
October
31, 2023
both
are available. Over-the-counter options contracts are valued as follows, depending on the market in which the investment trades: (1) the
mean of the most recent bid and ask price, if available; or (2) a price based on the equivalent exchange-traded option.
Fixed
income and other debt securities having a remaining maturity of sixty 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 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) for which a third-party 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 the Fund’s NAV or make it difficult or impossible
to obtain a reliable market quotation; and a security whose price, as provided by the third-party 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 market 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 issuer; |
2)
|
available
market prices for the fixed-income security; |
3)
|
an
evaluation of the forces which influence the market in which these securities are purchased and sold; |
4)
|
the
type, size and cost of the security; |
5)
|
the
financial statements of the issuer; |
6)
|
the
credit quality and cash flow of the issuer, based on the Advisor’s or external analysis; |
7)
|
the
information as to any transactions in or offers for the security; |
8)
|
the
price and extent of public trading in similar securities (or equity securities) of the borrower/issuer, or comparable companies; |
9)
|
the
coupon payments; |
10)
|
the
quality, value and salability of collateral, if any, securing the security; |
11)
|
the
business prospects of the issuer, including any ability to obtain money or resources from a parent or affiliate and an assessment of the
issuer’s management; |
12)
|
the
prospects for the issuer’s industry, and multiples (of earnings and/or cash flows) being paid for similar businesses in that industry;
and |
13)
|
other
relevant factors. |
The
Fund is subject to fair value accounting standards that define fair value, establish the framework for measuring fair value and provide
a three-level hierarchy for fair valuation based upon the inputs to the valuation as of the measurement date. The three levels of the
fair value hierarchy are as follows:
•
|
Level
1 – Level 1 inputs are quoted prices in active markets for identical 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. |
•
|
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. |
Notes
to Financial Statements (Continued)
First
Trust Mortgage Income Fund (FMY)
October
31, 2023
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. |
•
|
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 October 31, 2023, 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 interest-only securities. 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 the related interest income may be reduced by ceasing current accruals 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 or sold 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 October 31,
2023, the Fund had no when-issued, delayed-delivery or forward purchase commitments.
The
United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates the London Interbank Offered Rates (“LIBOR”),
ceased making LIBOR available as a reference rate over a phase-out period that began December 31, 2021. The overnight and 12-month USD
LIBOR settings permanently ceased as of June 30, 2023. The FCA announced that the 1-, 3- and 6-month USD LIBOR settings will continue
to be published using a synthetic methodology to serve as a fallback for non-U.S. contracts until September 2024. In response to the discontinuation
of LIBOR, investors have added fallback provisions to existing contracts for investments whose value is tied to LIBOR, with most fallback
provisions requiring the adoption of the Secured Overnight Financing Rate (“SOFR”) as a replacement rate. There is no assurance
that any alternative reference rate, including SOFR, will be similar to or produce the same value or economic equivalence as LIBOR or
that instruments using an alternative rate will have the same volume or liquidity. At this time, it is not possible to predict the full
impact of the elimination of LIBOR and the establishment of an alternative reference rate on the Fund or its investments.
C. Futures
Contracts
The
Fund may purchase or sell (i.e., is long or short) exchange-listed futures contracts to hedge against changes in interest rates (interest
rate risk). Futures contracts are agreements between the Fund and a counterparty to buy or sell a specific quantity of an underlying instrument
at a specified price and at a specified date. Depending on the terms of the contract, futures contracts are settled either through physical
delivery of the underlying instrument on the settlement date or by payment of a cash settlement amount on the settlement date. Open futures
contracts can also be closed out prior to settlement by entering into an offsetting transaction in a matching futures contract. If the
Fund is not able to enter into an offsetting transaction, the Fund will continue to be required to maintain margin deposits on the futures
contract. When the contract is closed or expires, the Fund records a realized gain or loss equal to the difference between the value of
the contract at the time it was opened and the value at the time it was closed or expired. This gain or loss is included in “Net
realized gain (loss) on futures contracts” on the Statement of Operations.
Upon
entering into a futures contract, the Fund must deposit funds, called margin, with its custodian in the name of the clearing broker equal
to a specified percentage of the current value of the contract. Open futures contracts are marked to market daily with the change in value
recognized as a component of “Net change in unrealized appreciation (depreciation) on futures contracts” on the Statement
of Operations. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily
Notes
to Financial Statements (Continued)
First
Trust Mortgage Income Fund (FMY)
October
31, 2023
fluctuation
in value of the contract. Such receipts or payments are known as variation margin and are included in “Variation margin” payable
or receivable on the Statement of Assets and Liabilities.
If
market conditions change unexpectedly, the Fund may not achieve the anticipated benefits of the futures contract and may realize a loss.
The use of futures contracts involves the risk of imperfect correlation in movements in the price of the futures contracts, interest rates
and the underlying instruments.
Restricted
cash segregated as collateral for futures contracts in the amount of $361,818 is shown as “Restricted Cash” on the Statement
of Assets and Liabilities.
D. Options
Contracts
The
Fund may invest in exchange-listed options on U.S. Treasury securities, exchange-listed options on U.S. Treasury futures contracts, exchange-listed
U.S. Treasury futures contracts, exchange-listed options on secured overnight financing rate futures contracts and options on interest-rate
swap agreements. The Fund uses derivative instruments primarily to hedge interest rate risk and actively manage interest rate exposure.
The primary risk exposure is interest rate risk.
The
Fund may purchase (buy) or write (sell) put and call options on futures contracts and enter into closing transactions with respect to
such options to terminate an existing position. A futures option gives the holder the right, in return for the premium paid, to assume
a long position (call) or short position (put) in a futures contract at a specified exercise price prior to the expiration of the option.
Upon exercise of a call option, the holder acquires a long position in the futures contract and the writer is assigned the opposite short
position. In the case of a put option, the opposite is true. Prior to exercise or expiration, a futures option contract may be closed
out by an offsetting purchase or sale of a futures option of the same series. When the Fund writes (sells) an option, an amount equal
to the premium received by the Fund is included in “Options written, at value” on the Statement of Assets and Liabilities.
When the Fund purchases (buys) an option, the premium paid represents the cost of the option, which is included in “Premiums paid
on options purchased” on the Statement of Assets and Liabilities. Options are marked-to-market daily and their value is affected
by changes in the value of the underlying security, changes in interest rates, changes in the actual or perceived volatility of the securities
markets and the underlying securities, and the remaining time to the option’s expiration. The value of options may also be adversely
affected if the market for the options becomes less liquid or the trading volume diminishes.
The
Fund uses options on futures contracts in connection with hedging strategies. Generally, these strategies are applied under the same market
and market sector conditions in which the Fund uses put and call options on securities. The purchase of put options on futures contracts
is analogous to the purchase of puts on securities so as to hedge the Fund’s securities holdings against the risk of declining market
prices. The writing of a call option or the purchasing of a put option on a futures contract constitutes a partial hedge against declining
prices of securities which are deliverable upon exercise of the futures contract. If the price at expiration of a written call option
is below the exercise price, the Fund will retain the full amount of the option premium which provides a partial hedge against any decline
that may have occurred in the Fund’s holdings of securities. If the price when the option is exercised is above the exercise price,
however, the Fund may incur a loss (depending on the original sale price of the option), which may be offset, in whole or in part, by
the increase in the value of the securities held by the Fund that were being hedged. Writing a put option or purchasing a call option
on a futures contract serves as a partial hedge against an increase in the value of the securities the Fund intends to acquire. Realized
gains and losses on written options are included in “Net realized gain (loss) on written options contracts” on the Statement
of Operations. Realized gains and losses on purchased options are included in “Net realized gain (loss) on purchased options contracts”
on the Statement of Operations.
The
Fund is required to deposit and maintain margin with respect to put and call options on futures contracts written by it. Such margin deposits
will vary depending on the nature of the underlying futures contract (and the related initial margin requirements), the current market
value of the option and other futures positions held by the Fund. The Fund will pledge in a segregated account at the Fund’s custodian,
liquid assets, such as cash, U.S. government securities or other high-grade liquid debt obligations equal in value to the amount due on
the underlying obligation. Such segregated assets will be marked-to-market daily, and additional assets will be pledged in the segregated
account whenever the total value of the pledged assets falls below the amount due on the underlying obligation.
The
risks associated with the use of options on future contracts include the risk that the Fund may close out its position as a writer of
an option only if a liquid secondary market exists for such options, which cannot be assured. The Fund’s successful use of options
on futures contracts depends on the Advisor’s ability to correctly forecast the movement in prices on futures contracts and the
underlying instruments, which may prove to be incorrect. In addition, there may be imperfect correlation between the instruments being
hedged and the futures contract subject to option.
Notes
to Financial Statements (Continued)
First
Trust Mortgage Income Fund (FMY)
October
31, 2023
E. Inverse
Floating-Rate Securities
An
inverse floating-rate security is one where the coupon is inversely indexed to a short-term floating interest rate multiplied by a specific
factor. As the floating rate rises, the coupon is reduced. Conversely, as the floating rate declines, the coupon is increased. The price
of these securities may be more volatile than the price of a comparable fixed-rate security. These instruments are typically used to enhance
the yield of the portfolio and have the effect of creating leverage. These securities, if any, are identified on the Portfolio of Investments.
F. Stripped
Mortgage-Backed Securities
Stripped
Mortgage-Backed Securities are created by segregating the cash flows from underlying mortgage loans or mortgage securities to create two
or more new securities, each with a specified percentage of the underlying security’s principal or interest payments. Mortgage securities
may be partially stripped so that each investor class receives some interest and some principal. When securities are completely stripped,
however, all of the interest is distributed to holders of one type of security known as an interest-only security (“IO Security”)
and all of the principal is distributed to holders of another type of security known as a principal-only security. These securities, if
any, are identified on the Portfolio of Investments.
G. Interest-Only
Securities
An
IO Security is the interest-only portion of a mortgage-backed security that receives some or all of the interest portion of the underlying
mortgage-backed security 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 securities, if any, are identified
on the Portfolio of Investments.
H. Principal-Only
Securities
A
principal-only security (“PO Security”) is the principal-only portion of a mortgage-backed security that does not receive
any interest, is priced at a deep discount to its redemption value and ultimately receives the redemption value. Generally speaking, when
interest rates are falling and prepayment rates are increasing, the value of a PO Security will rise. Conversely, when interest rates
are rising and prepayment rates are decreasing, generally the value of a PO Security will fall. These securities, if any, are identified
on the Portfolio of Investments.
I. Mortgage
Dollar Rolls and TBA Transactions
The
Fund may invest, without limitation, in mortgage dollar rolls. The Fund intends to enter into mortgage dollar rolls only with high quality
securities dealers and banks, as determined by the Fund’s investment advisor. In a mortgage dollar roll, the Fund will sell (or
buy) mortgage-backed securities for delivery on a specified date and simultaneously contract to repurchase (or sell) substantially similar
(same type, coupon and maturity) securities on a future date. Mortgage dollar rolls are recorded as separate purchases and sales in the
Fund. The Fund may also invest in to-be-announced transactions (“TBA Transactions”). A TBA Transaction is a method of trading
mortgage-backed securities. TBA Transactions generally are conducted in accordance with widely-accepted guidelines which establish commonly
observed terms and conditions for execution, settlement and delivery. In a TBA Transaction, the buyer and the seller agree on general
trade parameters such as agency, settlement date, par amount and price.
J. 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 of any net long-term capital gains earned by the Fund are distributed
at least annually. 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 net investment income and realized capital gains are determined in accordance with federal 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.
Permanent differences incurred during the fiscal year ended October 31, 2023, resulting in book and tax accounting differences, have been
reclassified at year end to reflect a decrease in accumulated net investment income (loss) of $191,394 and an increase in accumulated
net realized gain (loss) of $191,394. Accumulated distributable earnings (loss) consists of accumulated net investment income (loss),
accumulated net realized gain (loss) on investments, and unrealized appreciation (depreciation) on investments. Net assets were not affected
by this reclassification.
Notes
to Financial Statements (Continued)
First
Trust Mortgage Income Fund (FMY)
October
31, 2023
The
tax character of distributions paid by the Fund during the fiscal years ended October 31, 2023 and 2022, was as follows:
Distributions
paid from: |
2023
|
2022
|
Ordinary income
|
$2,864,918
|
$1,819,898
|
Capital gains
|
—
|
—
|
Return of capital
|
—
|
960,758
|
As
of October 31, 2023, the components of distributable earnings and net assets on a tax basis were as follows:
Undistributed ordinary income
|
$179,390
|
Undistributed capital gains
|
—
|
Total undistributed earnings
|
179,390
|
Accumulated capital and other losses
|
(3,670,720)
|
Net unrealized appreciation (depreciation)
|
(10,858,018)
|
Total accumulated earnings (losses)
|
(14,349,348)
|
Other
|
—
|
Paid-in capital
|
63,747,769
|
Total net assets
|
$49,398,421
|
K. 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 and 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.
The
Fund intends to utilize provisions of the federal income tax laws which allow it to carry a realized capital loss forward indefinitely
following the year of the loss and offset such loss against any future realized capital gains. The Fund is subject to certain limitations
under 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. At October 31, 2023, the Fund had non-expiring capital loss carryforwards available for federal income
tax purposes of $3,670,720.
Certain
losses realized during the current fiscal year may be deferred and treated as occurring on the first day of the following fiscal year
for federal income tax purposes. For the fiscal year ended October 31, 2023, the Fund did not incur any net late year ordinary losses.
The
Fund is subject to accounting standards that establish a minimum threshold for recognizing, and a system for measuring, the benefits of
a tax position taken or expected to be taken in a tax return. Taxable years ended 2020, 2021, 2022, and 2023 remain open to federal and
state audit. As of October 31, 2023, 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.
As
of October 31, 2023, the aggregate cost, gross unrealized appreciation, gross unrealized depreciation, and net unrealized appreciation/(depreciation)
on investments (including short positions and derivatives, if any) for federal income tax purposes were as follows:
Tax
Cost |
|
Gross
Unrealized Appreciation |
|
Gross
Unrealized (Depreciation) |
|
Net
Unrealized Appreciation (Depreciation) |
$70,396,017
|
|
$416,595
|
|
$(11,274,613)
|
|
$(10,858,018)
|
L. Expenses
The
Fund will pay all expenses directly related to its operations.
Notes
to Financial Statements (Continued)
First
Trust Mortgage Income Fund (FMY)
October
31, 2023
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 selection and 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 0.85% of the Fund’s Managed Assets
(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). First Trust also provides fund reporting services to the Fund for a flat annual fee in the
amount of $9,250.
Computershare,
Inc. (“Computershare”) serves as the Fund’s transfer agent in accordance with certain fee arrangements. As transfer
agent, Computershare is responsible for maintaining shareholder records for the Fund.
The
Bank of New York Mellon (“BNYM”) serves as the Fund’s administrator, fund accountant, and custodian in accordance with
certain fee arrangements. As administrator and fund accountant, BNYM is responsible for providing certain administrative and accounting
services to the Fund, including maintaining the Fund’s books of account, records of the Fund’s securities transactions, and
certain other books and records. As custodian, BNYM is responsible for custody of the Fund’s assets. BNYM is a subsidiary of The
Bank of New York Mellon Corporation, a financial holding company.
Each
Trustee who is not an officer or employee of First Trust, any sub-advisor or any of their affiliates (“Independent Trustees”)
is paid a fixed annual retainer that is allocated equally among each fund in the First Trust Fund Complex. Each Independent Trustee is
also paid an annual per fund fee that varies based on whether the fund is a closed-end or other actively managed fund, a target outcome
fund or an index fund.
Additionally,
the Lead Independent Trustee and the Chairs of the Audit Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro rata among each fund in the First Trust Fund Complex based
on net assets. Independent Trustees are reimbursed for travel and out-of-pocket expenses in connection with all meetings. The Lead Independent
Trustee and Committee Chairs rotate every three years. The officers and “Interested” Trustee receive no compensation from
the Fund for acting in such capacities.
4. Purchases
and Sales of Securities
The
cost of purchases of U.S. Government securities and non-U.S. Government securities, excluding short-term investments, for the year ended
October 31, 2023, were $65,336,190 and $22,313,277, respectively. The proceeds from sales and paydowns of U.S. Government securities and
non-U.S. Government securities, excluding short-term investments, for the year ended October 31, 2023, were $57,196,905 and $17,436,608,
respectively.
5. Derivative
Transactions
The
following table presents the type of derivatives held by the Fund at October 31, 2023, 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
Instrument |
|
Risk
Exposure |
|
Statement
of Assets and Liabilities Location |
|
Value
|
|
Statement
of Assets and Liabilities Location |
|
Value
|
Futures
|
|
Interest
Rate Risk |
|
Unrealized
appreciation on futures contracts* |
|
$ 15,687
|
|
Unrealized
depreciation on futures contracts* |
|
$ 217,671
|
Options
|
|
Interest
Rate Risk |
|
Options
contracts purchased, at value |
|
—
|
|
Options
contracts written, at value |
|
2,813
|
*Includes
cumulative appreciation/depreciation on futures contracts as reported in the Futures Contracts table. Only the current day’s variation
margin is presented on the Statement of Assets and Liabilities.
The
following table presents the amount of net realized gain (loss) and change in net unrealized appreciation (depreciation) recognized for
the fiscal year ended October 31, 2023, on derivative instruments, as well as the primary underlying risk exposure associated with each
instrument.
Notes
to Financial Statements (Continued)
First
Trust Mortgage Income Fund (FMY)
October
31, 2023
Statement
of Operations Location |
|
Interest
Rate Risk Exposure |
|
Net
realized gain (loss) on purchased options contracts |
$(44,617)
|
Net
realized gain (loss) on written options contracts |
32,820
|
Net
change in unrealized appreciation (depreciation) on written options contracts |
4,192
|
Net
realized gain (loss) on futures contracts |
(651,269)
|
Net
change in unrealized appreciation (depreciation) on futures contracts |
(132,922)
|
During
the fiscal year ended October 31, 2023, the notional value of futures contracts opened and closed were $229,759,936 and $218,607,206,
respectively.
During
the fiscal year ended October 31, 2023, the premiums for purchased options opened were $426,062, and the premiums for purchased options
closed, exercised and expired were $426,062.
During
the fiscal year ended October 31, 2023, the premiums for written options opened were $234,881 and the premiums for written options closed,
exercised and expired were $227,876.
The
Fund does not have the right to offset financial assets and liabilities related to futures contracts on the Statement of Assets and Liabilities.
6. 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.
7. Subsequent
Events
Management
has evaluated the impact of all subsequent events on the Fund through the date the financial statements were issued and has determined
that there were no subsequent events requiring recognition or disclosure in the financial statements that have not already been disclosed.
*Includes
cumulative appreciation (depreciation) on futures contracts as reported in the Portfolio of Investments. Only the current day’s
variation margin is reported within the Statement of Assets and Liabilities.
Report
of Independent Registered Public Accounting Firm
To
the Shareholders and the Board of Trustees of First Trust Mortgage Income Fund:
Opinion
on the Financial Statements and Financial Highlights
We
have audited the accompanying statement of assets and liabilities of First Trust Mortgage Income Fund (the “Fund”), including
the portfolio of investments, as of October 31, 2023, the related statement of operations for the year then ended, the statements of changes
in net assets for each of the two years in the period then ended, the financial highlights for each of the five years in the period then
ended, and the related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects,
the financial position of the Fund as of October 31, 2023, and the results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then
ended in conformity with accounting principles generally accepted in the United States of America.
Basis
for Opinion
These
financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express
an opinion on the Fund’s financial statements and financial highlights based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to
error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no
such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audits also included evaluating
the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements and financial highlights. Our procedures included confirmation of securities owned as of October 31, 2023, by correspondence
with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our
audits provide a reasonable basis for our opinion.
/s/
Deloitte & Touche, LLP
Chicago,
Illinois
December
21, 2023
We
have served as the auditor of one or more First Trust investment companies since 2001.
Additional
Information
First
Trust Mortgage Income Fund (FMY)
October
31, 2023 (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 Computershare
Trust Company N.A. (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 Computershare, Inc., P.O. Box 43006, Providence,
RI 02940-3006.
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 at www.ftportfolios.com;
and (3) on the Securities and Exchange Commission’s (“SEC”) website at www.sec.gov.
Portfolio
Holdings
The
Fund files portfolio holdings information for each month in a fiscal quarter within 60 days after the end of the relevant fiscal quarter
on Form N-PORT. Portfolio holdings information for the third month of each fiscal quarter will be publicly available on the
Additional
Information (Continued)
First
Trust Mortgage Income Fund (FMY)
October
31, 2023 (Unaudited)
SEC’s
website at www.sec.gov. The Fund’s complete schedule of portfolio
holdings for the second and fourth quarters of each fiscal year is included in the semi-annual and annual reports to shareholders, respectively,
and is filed with the SEC on Form N-CSR. The semi-annual and annual report for the Fund is available to investors within 60 days after
the period to which it relates. The Fund’s Forms N-PORT and Forms N-CSR are available on the SEC’s website listed above.
Federal
Tax Information
Distributions
paid to foreign shareholders during the Fund’s fiscal year ended October 31, 2023, that were properly designated by the Fund as
“interest-related dividends” or “short-term capital gain dividends,” may not be subject to federal income tax
provided that the income was earned by such foreign shareholders.
Of
the ordinary income (including short-term capital gain) distributions made by the Fund during the period ended October 31, 2023, none
qualify for the corporate dividends received deduction available to corporate shareholders or as qualified dividend income.
NYSE
Certification Information
In
accordance with Section 303A-12 of the New York Stock Exchange (“NYSE”) Listed Company Manual, the Fund’s President
has certified to the NYSE that, as of April 18, 2023, he was not aware of any violation by the Fund of NYSE corporate governance listing standards.
In addition, the Fund’s reports to the SEC on Form N-CSR contain certifications by the Fund’s principal executive officer
and principal financial officer that relate to the Fund’s public disclosure in such reports and are required by Rule 30a-2 under
the 1940 Act.
Submission
of Matters to a Vote of Shareholders
The
Fund held its Annual Meeting of Shareholders (the “Annual Meeting”) on April 17, 2023. At the Annual Meeting, Denise M. Keefe
and Robert F. Keith were elected by the Common Shareholders of First Trust Mortgage Income Fund as Class I Trustees for a three-year term
expiring at the Fund’s annual meeting of shareholders in 2026. The number of votes cast in favor of Ms. Keefe was 1,984,094 and
the number of votes withheld was 8,063. The number of votes cast in favor of Mr. Keith was 1,941,903 and the number of votes withheld
was 50,254. Richard E. Erickson, Thomas R. Kadlec, James A. Bowen, Niel B. Nielson, and Bronwyn Wright are the other current and continuing
Trustees.
Amended
and Restated By-Laws
On
June 22, 2023, the Board of Trustees of the Fund amended and restated the existing Amended and Restated By-Laws (and as so amended and
restated, the “By-Laws”), effective immediately. The By-Laws were revised to rescind Article XII and its accompanying control
share provisions, along with other conforming amendments.
The
foregoing description is qualified in its entirety by reference to the full text of the By-Laws, a copy of which can be found in the Current
Report on Form 8-K filed by the Fund with the Securities and Exchange Commission on June 23, 2023, which is available at www.sec.gov,
and may also be obtained by writing to the Secretary of the Fund at the Fund’s principal executive office.
Board
of Trustees
Effective
September 10, 2023, Bronwyn Wright was appointed as a Trustee of the Fund. Ms. Wright has acted as an independent director to a
number of Irish collective investment funds since 2009. Ms. Wright is a former Managing Director of Citibank Europe plc and Head of Securities
and Fund Services for Citi Ireland. In these positions, she was responsible for the management and strategic direction of Citi Ireland’s
securities and fund services business which included funds, custody, security finance/lending and global agency and trust. She also had
responsibility for leading, managing and growing the Trustee, Custodian and Depositary business in Ireland, the United Kingdom, Luxembourg,
Jersey and Cayman.
Investment
Management Agreement
Board
Considerations Regarding Approval of the Continuation of the Investment Management Agreement
The
Board of Trustees of First Trust Mortgage Income Fund (the “Fund”), including the Independent Trustees, unanimously approved
the continuation of the Investment Management Agreement (the “Agreement”) between the Fund and First Trust Advisors L.P. (the
“Advisor”). The Board approved the continuation of the Agreement for a one-year period ending June 30, 2024 at a meeting
held on June 4–5, 2023. The Board determined that the continuation of the Agreement is in the best interests of the Fund in
light of the nature, extent and quality of the services provided and such other matters as the Board considered to be relevant in the
exercise of its business judgment.
Additional
Information (Continued)
First
Trust Mortgage Income Fund (FMY)
October
31, 2023 (Unaudited)
To
reach this determination, the Board considered its duties under the Investment Company Act of 1940, as amended (the “1940 Act”),
as well as under the general principles of state law, in reviewing and approving advisory contracts; the requirements of the 1940 Act
in such matters; the fiduciary duty of investment advisors with respect to advisory agreements and compensation; the standards used by
courts in determining whether investment company boards have fulfilled their duties; and the factors to be considered by the Board in
voting on such agreements. At meetings held on April 17, 2023 and June 4–5, 2023, the Board, including the Independent Trustees,
reviewed materials provided by the Advisor responding to requests for information from counsel to the Independent Trustees, submitted
on behalf of the Independent Trustees, that, among other things, outlined: the services provided by the Advisor to the Fund (including
the relevant personnel responsible for these services and their experience); the advisory fee rate payable by the Fund as compared to
fees charged to a peer group of funds (the “Expense Group”) and a broad peer universe of funds (the “Expense Universe”),
each assembled by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent source, and as compared to fees charged
to other clients of the Advisor; the expense ratio of the Fund as compared to expense ratios of the funds in the Fund’s Expense
Group and Expense Universe; performance information for the Fund, including comparisons of the Fund’s performance to that of one
or more relevant benchmark indexes and to that of a performance group of funds and a broad performance universe of funds (the “Performance
Universe”), each assembled by Broadridge; the nature of expenses incurred in providing services to the Fund and the potential for
the Advisor to realize economies of scale, if any; profitability and other financial data for the Advisor; any indirect benefits to the
Advisor; and information on the Advisor’s compliance program. The Board reviewed initial materials with the Advisor at the
meeting held on April 17, 2023, prior to which the Independent Trustees and their counsel met separately to discuss the information provided
by the Advisor. Following the April meeting, counsel to the Independent Trustees, on behalf of the Independent Trustees, requested
certain clarifications and supplements to the materials provided, and the information provided in response to those requests was considered
at an executive session of the Independent Trustees and their counsel held prior to the June 4–5, 2023 meeting, as well as at the
June meeting. The Board applied its business judgment to determine whether the arrangement between the Fund and the Advisor continues
to be a reasonable business arrangement from the Fund’s perspective. The Board determined that, given the totality of the
information provided with respect to the Agreement, the Board had received sufficient information to renew the Agreement. The Board
considered that shareholders chose to invest or remain invested in the Fund knowing that the Advisor manages the Fund.
In
reviewing the Agreement, the Board considered the nature, extent and quality of the services provided by the Advisor under the Agreement.
The Board considered that the Advisor is responsible for the overall management and administration of the Fund and reviewed all of the
services provided by the Advisor to the Fund, as well as the background and experience of the persons responsible for such services.
The Board noted that the Advisor’s Securitized Products Group is responsible for the day-to-day management of the Fund’s investments.
The Board considered the background and experience of the members of the Securitized Products Group and noted the Board’s prior
meetings with members of the Group. The Board considered the Advisor’s statement that it applies the same oversight model
internally with its Securitized Products Group as it uses for overseeing external sub-advisors, including portfolio risk monitoring and
performance review. In reviewing the services provided, the Board noted the compliance program that had been developed by the Advisor
and considered that it includes a robust program for monitoring the Advisor’s and the Fund’s compliance with the 1940 Act,
as well as the Fund’s compliance with its investment objectives, policies and restrictions. The Board also considered a report
from the Advisor with respect to its risk management functions related to the operation of the Fund. Finally, as part of the Board’s
consideration of the Advisor’s services, the Advisor, in its written materials and at the April 17, 2023 meeting, described to the
Board the scope of its ongoing investment in additional personnel and infrastructure to maintain and improve the quality of services provided
to the Fund and the other funds in the First Trust Fund Complex. In light of the information presented and the considerations made,
the Board concluded that the nature, extent and quality of the services provided to the Fund by the Advisor under the Agreement have been
and are expected to remain satisfactory and that the Advisor has managed the Fund consistent with its investment objectives, policies
and restrictions.
The
Board considered the advisory fee rate payable under the Agreement for the services provided. The Board received and reviewed information
showing the fee rates and expense ratios of the peer funds in the Expense Group, as well as advisory and unitary fee rates charged by
the Advisor to other fund and non-fund clients, as applicable. With respect to the Expense Group, the Board, at the April 17, 2023
meeting, discussed with Broadridge its methodology for assembling peer groups and discussed with the Advisor limitations in creating a
relevant peer group for the Fund, including that (i) certain peer fund assets are larger than those of the Fund, in which case the comparison
causes the fixed expenses of the Fund to be larger on a percentage basis; and (ii) the Fund is unique in its composition, which makes
assembling peers with similar strategies and asset mix difficult. The Board took these limitations into account in considering the
peer data. Based on the information provided, the Board noted that the contractual advisory fee rate payable by the Fund, based
on average net assets, was above the median contractual advisory fee of the peer funds in the Expense Group. With respect to fees
charged to other clients, the Board considered differences between the Fund and other clients that limited their comparability.
In considering the advisory fee rate overall, the Board also considered the Advisor’s statement that it seeks to meet investor needs
through innovative and value-added investment solutions and the Advisor’s demonstrated long-term commitment to the Fund and the
other funds in the First Trust Fund Complex.
Additional
Information (Continued)
First
Trust Mortgage Income Fund (FMY)
October
31, 2023 (Unaudited)
The
Board considered performance information for the Fund. The Board noted the process it has established for monitoring the Fund’s
performance and portfolio risk on an ongoing basis, which includes quarterly performance reporting from the Advisor for the Fund.
The Board determined that this process continues to be effective for reviewing the Fund’s performance. The Board received
and reviewed information comparing the Fund’s performance for periods ended December 31, 2022 to the performance of the funds in
the Performance Universe and to that of a benchmark index. In reviewing the Fund’s performance as compared to the performance
of the Performance Universe, the Board took into account the limitations described above with respect to creating a relevant peer group
for the Fund. Based on the information provided on net asset value performance, the Board noted that the Fund underperformed the
Performance Universe median for the one- and three-year periods ended December 31, 2022 and outperformed the benchmark index for the one-,
three-, five- and ten-year periods ended December 31, 2022. The Board also noted that there were no funds in the Performance Universe
other than the Fund that had performance track records for the five- and ten-year periods ended December 31, 2022. The Board also
received information on the Fund’s annual distribution rate as of December 31, 2022 and the Fund’s average trading discount
for various periods and comparable information for a peer group.
On
the basis of all the information provided on the fees, expenses and performance of the Fund and the ongoing oversight by the Board, the
Board concluded that the advisory fee continues to be reasonable and appropriate in light of the nature, extent and quality of the services
provided by the Advisor to the Fund under the Agreement.
The
Board considered information and discussed with the Advisor whether there were any economies of scale in connection with providing advisory
services to the Fund at current asset levels and whether the Fund may benefit from any economies of scale. The Board noted the Advisor’s
statement that it believes that its expenses relating to providing advisory services to the Fund will increase during the next twelve
months as the Advisor continues to build infrastructure and add new staff. The Board concluded that due to the Fund’s closed-end
structure, the potential for realization of economies of scale as Fund assets grow was not a material factor to be considered. The
Board considered the revenues and allocated costs (including the allocation methodology) of the Advisor in serving as investment advisor
to the Fund for the twelve months ended December 31, 2022 and the estimated profitability level for the Fund calculated by the Advisor
based on such data, as well as complex-wide and product-line profitability data, for the same period. The Board noted the inherent
limitations in the profitability analysis and concluded that, based on the information provided, the Advisor’s profitability level
for the Fund was not unreasonable. In addition, the Board considered indirect benefits described by the Advisor that may be realized
from its relationship with the Fund, including the Advisor’s compensation for fund reporting services pursuant to a separate Fund
Reporting Services Agreement. The Board also noted that the Advisor does not utilize soft dollars in connection with the Fund.
The Board concluded that the character and amount of potential indirect benefits to the Advisor were not unreasonable.
Based
on all of the information considered and the conclusions reached, the Board, including the Independent Trustees, unanimously determined
that the terms of the Agreement continue to be fair and reasonable and that the continuation of the Agreement is in the best interests
of the Fund. No single factor was determinative in the Board’s analysis.
Investment
Objectives, Policies and Risks
First
Trust Mortgage Income Fund (FMY)
October
31, 2023 (Unaudited)
Changes
Occurring During the Prior Fiscal Year
The
following information is a summary of certain changes during the most recent fiscal year ended October 31, 2023. This information may
not reflect all of the changes that have occurred since you purchased shares of the Fund.
During
the Fund’s most recent fiscal year, there were no material changes to the Fund’s investment objectives or policies that have
not been approved by shareholders or in the principal risk factors associated with an investment in the Fund.
Investment
Objectives
The
Fund’s primary investment objective is to seek a high level of current income. As a secondary objective the Fund seeks to preserve
capital.
Principal
Investment Policies
In
the pursuit of its investment objectives, under normal market conditions:
•
|
The
Fund invests at least 80% of its managed assets in mortgage-backed securities. Such MBS may include those with fixed, floating or variable
interest rates, those with interest rates that change based on multiples of changes in a specified index of interest rates and those with
interest rates that change inversely to changes in interest rates, as well as those that do not bear interest. The Fund may also invest
in MBS through TBA Transactions. The Fund does not invest in corporate bonds other than those primarily secured by interests in real
estate. |
•
|
The
Fund may invest up to 35% of its managed assets in securities that, at the time of investment, are rated below investment grade (including
securities that are unrated but judged to be of comparable quality by the Advisor). |
•
|
The
Fund may invest up to 20% of its managed assets in U.S. government securities, or cash or other short-term instruments, and may invest
up to 10% of its managed assets in real-estate related assets collateralized by pools of assets, such as home equity loans and lines of
credit, and asset-backed securities, including non-mortgage asset-backed securities. |
•
|
The
Fund may invest up to 10% of its managed assets in securities that, at the time of investment, are illiquid. |
To
the extent the Fund enters into derivatives transactions, it will do so pursuant to Rule 18f-4 under the 1940 Act. Rule 18f-4 requires
the Fund to implement certain policies and procedures designed to manage its derivatives risks, dependent upon the Fund’s level
of exposure to derivative instruments.
The
Fund may engage in the use of leverage by issuing preferred shares of beneficial interest, entering into reverse repurchase agreements,
and/or issuing notes or other evidences of indebtedness including bank borrowings or commercial paper.
In
addition, the Fund may, but is not required to, use various strategic transactions to: (1) seek to reduce interest rate risks arising
from any use of leverage; (2) facilitate portfolio management; and (3) mitigate risks, including interest rate risk and credit risks.
The Fund generally seeks to use these instruments and transactions as portfolio management or hedging techniques to protect against possible
adverse changes in the market value of securities held in or to be purchased for the Fund’s portfolio, protect the value of the
Fund’s portfolio, facilitate the sale of certain securities for investment purposes, manage the effective interest rate exposure
of the Fund or establish positions in the derivative markets as a substitute for purchasing or selling particular securities.
Fundamental
Policies
The
Fund, as a fundamental policy, may not:
1.
With respect to 75% of its total assets, purchase any securities if, as a result (i) more than 5% of the Fund’s total assets
would then be invested in securities of any single issuer, or (ii) the Fund would hold more than 10% of the outstanding voting securities
of any single issuer; provided, that government securities (as defined in the 1940 Act), securities issued by other investment companies
and cash items (including receivables) shall not be counted for purposes of this limitation;
2.
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 issuers of mortgage-backed securities or obligations issued or guaranteed by the
U.S. Government or by its agencies or instrumentalities;
3.
Borrow money, except as permitted by the 1940 Act, the rules thereunder and interpretations thereof or pursuant to a Securities
and Exchange Commission exemptive order;
Investment
Objectives, Policies and Risks (Continued)
First
Trust Mortgage Income Fund (FMY)
October
31, 2023 (Unaudited)
4.
Issue senior securities, as defined in the 1940 Act, other than: (i) Preferred Shares which immediately after issuance will have
asset coverage of at least 200%; (ii) indebtedness which immediately after issuance will have asset coverage of at least 300%; (iii) the
borrowings permitted by investment restriction 3 set forth above; or (iv) pursuant to a Securities and Exchange Commission exemptive order;
5.
Make loans of funds or other assets, other than by entering into repurchase agreements, lending portfolio securities and through
the purchase of debt securities in accordance with its investment objectives, policies and limitations;
6.
Act as underwriter of another issuer’s securities, except to the extent that the Fund may be deemed to be an underwriter within
the meaning of the Securities Act of 1933 in connection with the purchase and sale of portfolio securities;
7.
Purchase or sell real estate, but this shall not prevent the Fund from investing in securities of companies that deal in real estate
or are engaged in the real estate business, including real estate investment trusts, and securities secured by real estate or interests
therein and the Fund may hold and sell real estate or mortgages on real estate acquired through default, liquidation, or other distributions
of an interest in real estate as a result of the Fund’s ownership of such securities; and
8.
Purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments (but this shall
not prevent the Fund from purchasing or selling options, futures contracts or derivative instruments or from investing in securities or
other instruments backed by physical commodities).
For
the purpose of applying the limitation set forth in subparagraph 2 above, an issuer shall be deemed the sole issuer of a security when
its assets and revenues are separate from other governmental entities and its securities are backed only by its assets and revenues. Similarly,
in the case of a non-governmental issuer, such as an industrial corporation or a privately owned or operated hospital, if the security
is backed only by the assets and revenues of the non-governmental issuer, then such non-governmental issuer would be deemed to be the
sole issuer. Where a security is also backed by the enforceable obligation of a superior or unrelated governmental or other entity (other
than a bond insurer), it shall also be included in the computation of securities owned that are issued by such governmental or other entity.
Where a security is guaranteed by a governmental entity or some other facility, such as a bank guarantee or letter of credit, such a guarantee
or letter of credit would be considered a separate security and would be treated as an issue of such government, other entity or bank.
When a municipal bond is insured by bond insurance, it shall not be considered a security that is issued or guaranteed by the insurer;
instead, the issuer of such municipal bond will be determined in accordance with the principles set forth above.
Except
as noted above, the foregoing fundamental investment policies, together with the investment objectives of the Fund, cannot be changed
without approval by holders of a majority of the outstanding voting securities of the Fund, as defined in the 1940 Act, which includes
common shares of beneficial interest and preferred shares of beneficial interest (“Preferred Shares”), if any, voting together
as a single class, and of the holders of the outstanding Preferred Shares voting as a single class. Under the 1940 Act a “majority
of the outstanding voting securities” means the vote of: (A) 67% or more of the Fund’s shares present at a meeting, if the
holders of more than 50% of the Fund’s shares are present or represented by proxy; or (B) more than 50% of the Fund’s shares,
whichever is less.
Principal
Risks
The
Fund is a closed-end management investment company designed primarily as a long-term investment and not as a trading vehicle. The Fund
is not intended to be a complete investment program and, due to the uncertainty inherent in all investments, there can be no assurance
that the Fund will achieve its investment objectives. The following discussion summarizes the principal risks associated with investing
in the Fund, which includes the risk that you could lose some or all of your investment in the Fund. The Fund is subject to the
informational requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940 and, in accordance therewith,
files reports, proxy statements and other information that is available for review.
Collateralized
Mortgage Obligations Risk. Collateralized mortgage obligations (“CMOs”) are debt obligations
collateralized by mortgage loans or mortgage pass-through securities and are a type of mortgage-backed security. CMOs are created
by dividing the principal and interest payments collected on a pool of mortgages into several revenue streams (tranches) with different
priority rights to portions of the underlying mortgage payments. CMO tranches are often specially structured in a manner that provides
a variety of investment characteristics, such as yield, effective maturity and interest rate sensitivity. A risk of CMOs is the uncertainty
of the timing of cash flows that results from the rate of prepayments on the underlying mortgages serving as collateral and from the structure
of the particular CMO transaction (that is, the priority of the individual tranches). An increase or decrease in prepayment rates (resulting
from a decrease or increase in mortgage interest rates) may cause the CMOs to be retired substantially earlier than their stated maturities
or final distribution dates and will affect the yield and price of CMOs. Certain classes of CMOs are structured in a manner that makes
them extremely sensitive to changes in prepayment rates. In addition, if the collateral securing CMOs or any third-party guarantees are
insufficient to make payments, the Fund could sustain a loss.
Investment
Objectives, Policies and Risks (Continued)
First
Trust Mortgage Income Fund (FMY)
October
31, 2023 (Unaudited)
Credit
Agency Risk. Credit ratings are determined by credit rating agencies and are only the opinions of such
entities. Ratings assigned by a rating agency are not absolute standards of credit quality and do not evaluate market risk or the liquidity
of securities. Any shortcomings or inefficiencies in credit rating agencies’ processes for determining credit ratings may adversely
affect the credit ratings of securities held by the Fund or such credit rating agency’s ability to evaluate creditworthiness and,
as a result, may adversely affect those securities’ perceived or actual credit risk.
Credit
and Below-Investment Grade Securities Risk. Credit risk is the risk that the issuer or other obligated
party of a debt security in the Fund’s portfolio will fail to pay, or it is perceived that it will fail to pay, dividends or interest
and/or repay principal, when due. Below-investment grade instruments, including instruments that are not rated but judged to be of comparable
quality, are commonly referred to as high-yield securities or “junk” bonds and are considered speculative with respect to
the issuer’s capacity to pay dividends or interest and repay principal and are more susceptible to default or decline in market
value than investment grade securities due to adverse economic and business developments. High-yield securities are often unsecured and
subordinated to other creditors of the issuer. The market values for high-yield securities tend to be very volatile, and these securities
are generally less liquid than investment grade securities. For these reasons, an investment in the Fund is subject to the following specific
risks: (i) increased price sensitivity to changing interest rates and to a deteriorating economic environment; (ii) greater risk of loss
due to default or declining credit quality; (iii) adverse company specific events more likely to render the issuer unable to make dividend,
interest and/or principal payments; (iv) negative perception of the high-yield market which may depress the price and liquidity of high-yield
securities; (v) volatility; and (vi) liquidity.
Current
Market Conditions Risk. Current market conditions risk is the risk that a particular investment, or
shares of the Fund in general, may fall in value due to current market conditions. As a means to fight inflation, which remains at elevated
levels, the Federal Reserve and certain foreign central banks have raised interest rates and expect to continue to do so, and the Federal
Reserve has announced that it intends to reverse previously implemented quantitative easing. U.S. regulators have proposed several changes
to market and issuer regulations which would directly impact the Fund, and any regulatory changes could adversely impact the Fund’s
ability to achieve its investment strategies or make certain investments. Recent and potential future bank failures could result in disruption
to the broader banking industry or markets generally and reduce confidence in financial institutions and the economy as a whole, which
may also heighten market volatility and reduce liquidity. The ongoing adversarial political climate in the United States, as well as political
and diplomatic events both domestic and abroad, have and may continue to have an adverse impact the U.S. regulatory landscape, markets
and investor behavior, which could have a negative impact on the Fund’s investments and operations. Other unexpected political,
regulatory and diplomatic events within the U.S. and abroad may affect investor and consumer confidence and may adversely impact financial
markets and the broader economy. For example, in February 2022, Russia invaded Ukraine which has caused and could continue to cause significant
market disruptions and volatility within the markets in Russia, Europe, and the United States. The hostilities and sanctions resulting
from those hostilities have and could continue to have a significant impact on certain Fund investments as well as Fund performance and
liquidity. The economies of the United States and its trading partners, as well as the financial markets generally, may be adversely impacted
by trade disputes and other matters. For example, the United States has imposed trade barriers and restrictions on China. In addition,
the Chinese government is engaged in a longstanding dispute with Taiwan, continually threatening an invasion. If the political climate
between the United States and China does not improve or continues to deteriorate, if China were to attempt invading Taiwan, or if other
geopolitical conflicts develop or worsen, economies, markets and individual securities may be adversely affected, and the value of the
Fund’s assets may go down. The COVID-19 global pandemic, or any future public health crisis, and the ensuing policies enacted by
governments and central banks have caused and may continue to cause significant volatility and uncertainty in global financial markets,
negatively impacting global growth prospects. While vaccines have been developed, there is no guarantee that vaccines will be effective
against emerging future variants of the disease. As this global pandemic illustrated, such events may affect certain geographic regions,
countries, sectors and industries more significantly than others. Advancements in technology may also adversely impact markets and the
overall performance of the Fund. For instance, the economy may be significantly impacted by the advanced development and increased regulation
of artificial intelligence. These events, and any other future events, may adversely affect the prices and liquidity of the Fund’s
portfolio investments and could result in disruptions in the trading markets.
Cyber
Security Risk. The Fund is susceptible to potential operational risks through breaches in cyber security.
A breach in cyber security refers to both intentional and unintentional events that may cause the Fund to lose proprietary information,
suffer data corruption or lose operational capacity. Such events could cause the Fund to incur regulatory penalties, reputational damage,
additional compliance costs associated with corrective measures and/or financial loss. Cyber security breaches may involve unauthorized
access to the Fund’s digital information systems through “hacking” or malicious software coding, but may also result
from outside attacks such as denial-of-service attacks through efforts to make network services unavailable to intended users. In addition,
cyber security breaches of the Fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor,
as applicable, or issuers in which the Fund invests, can also subject the Fund to many of the same risks associated with direct cyber
security breaches. The Fund has established risk management systems designed to reduce the risks associated with cyber security. However,
there is no guarantee that such efforts will succeed, especially because the Fund does not directly control the cyber
Investment
Objectives, Policies and Risks (Continued)
First
Trust Mortgage Income Fund (FMY)
October
31, 2023 (Unaudited)
security
systems of issuers or third party service providers. Substantial costs may be incurred by the Fund in order to resolve or prevent cyber
incidents in the future.
Extension
Risk. Extension risk is the risk that, when interest rates rise, certain obligations will be paid off
by the issuer (or other obligated party) more slowly than anticipated, causing the value of these debt securities to fall. Rising interest
rates tend to extend the duration of debt securities, making their market value more sensitive to changes in interest rates. The value
of longer-term debt securities generally changes more in response to changes in interest rates than shorter-term debt securities. As a
result, in a period of rising interest rates, securities may exhibit additional volatility and may lose value.
Fixed-Income
Securities Risk. An investment in fixed-income securities is subject to certain risks, including:
•
|
Issuer
Risk. The value of fixed-income securities may decline for a number of reasons which directly relate
to the issuer, such as management performance, leverage and reduced demand for the issuer’s goods and services. In addition, an
issuer of fixed-income securities may default on its obligation to pay interest and repay principal. |
•
|
Prepayment
Risk. Prepayment risk is the risk that the issuer of a debt security will repay principal prior to the
scheduled maturity date. During periods of declining interest rates, the issuer of a security may exercise its option to prepay principal
earlier than scheduled, forcing the Fund to reinvest the proceeds from such prepayment in lower yielding securities, which may result
in a decline in the Fund’s income and distributions to common shareholders. |
•
|
Reinvestment
Risk. Reinvestment risk is the risk that income from the Fund’s portfolio will decline if the Fund
invests the proceeds from matured, traded or called securities or loans at market interest rates that are below the Fund portfolio’s
current earnings rate. |
Futures
Contracts Risk. The primary risks associated with the use of futures contracts are (a) the imperfect
correlation between the change in market value of the instruments or indices underlying the futures contracts and the price of the futures
contracts; (b) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures contract
when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; (d) the investment adviser’s
inability to predict correctly the direction of securities prices, interest rates, currency exchange rates and other economic factors;
and (e) the possibility that the counterparty will default in the performance of its obligations.
Illiquid
and Restricted Securities Risk. The Fund may invest in securities that are restricted and/or illiquid
securities. Restricted securities are securities that cannot be offered for public resale unless registered under the applicable securities
laws or that have a contractual restriction that prohibits or limits their resale. Restricted securities may be illiquid as they generally
are not listed on an exchange and may have no active trading market. Investments in restricted securities could have the effect of increasing
the amount of the Fund’s assets invested in illiquid securities if qualified institutional buyers are unwilling to purchase these
securities. Illiquid and restricted securities may be difficult to dispose of at a fair price at the times when the Fund believes it is
desirable to do so. The market price of illiquid and restricted securities generally is more volatile than that of more liquid securities,
which may adversely affect the price that the Fund pays for or recovers upon the sale of such securities. Illiquid and restricted securities
are also more difficult to value, especially in challenging markets.
Inflation
Risk. The Fund invests in securities that are subject to inflation risk. Inflation risk is the risk
that the value of assets or income from investments will be worth less in the future as inflation decreases the value of money. As inflation
increases, the present value of the Fund’s assets and distributions may decline. This risk is more prevalent with respect to debt
securities. Inflation creates uncertainty over the future real value (after inflation) of an investment. Inflation rates may change frequently
and drastically as a result of various factors, including unexpected shifts in the domestic or global economy, and the Fund’s investments
may not keep pace with inflation, which may result in losses to Fund investors.
Interest
Rate and Duration Risk. Interest rate risk is the risk that securities will decline in value because
of changes in market interest rates. For fixed income securities, when market interest rates rise, the market value of such securities
generally will fall. During periods of rising interest rates, the average life of certain types of securities may be extended because
of slower than expected prepayments. This may lock in a below-market yield, increase the security’s duration and further reduce
the value of the security. Fixed income securities with longer durations tend to be more sensitive to changes in interest rates, usually
making them more volatile than securities with shorter durations. Investments in fixed rate securities with long-term maturities may experience
significant price declines if long-term interest rates increase.
The
interest rates payable on floating rate securities are not fixed and may fluctuate based upon changes in market rates. As short-term interest
rates decline, interest payable on floating rate securities typically decreases. Alternatively, during periods of rising interest rates,
interest payable on floating rate securities typically increases. Changes in interest rates on floating rate securities may lag behind
changes in market rates or may have limits on the maximum increases in interest rates. The value of floating rate securities may decline
if their interest rates do not rise as much, or as quickly, as interest rates in general.
Investment
Objectives, Policies and Risks (Continued)
First
Trust Mortgage Income Fund (FMY)
October
31, 2023 (Unaudited)
Many
financial instruments use or may use a floating rate based upon the LIBOR. The United Kingdom’s Financial Conduct Authority (the
“FCA”), which regulates LIBOR, has ceased making LIBOR available as a reference rate over a phase-out period that began December 31,
2022. There is no assurance that any alternative reference rate, including the Secured Overnight Financing Rate (“SOFR”) will
be similar to or produce the same value or economic equivalence as LIBOR or that instruments using an alternative rate will have the same
volume or liquidity. The unavailability or replacement of LIBOR may affect the value, liquidity or return on certain Fund investments
and may result in costs incurred in connection with closing out positions and entering into new trades. Any potential effects of the transition
away from LIBOR on the Fund or on certain instruments in which the Fund invests can be difficult to ascertain, and they may vary depending
on a variety of factors, and they could result in losses to the Fund.
In
general, income on inverse floating rate securities will decrease when interest rates increase and increase when interest rates decrease.
Inverse floating rate securities generally will underperform the market for fixed rate securities in a rising interest rate environment.
An inverse floating rate security’s price may be more volatile than that of a fixed rate security.
In
the case of stripped mortgage-backed securities, in general, when interest rates are falling and prepayment rates are increasing, the
value of a principal only security (“PO Security”) will rise and the value of an interest only security (“IO Security”)
will fall. Conversely, when interest rates are rising and prepayment rates are decreasing, in general, the value of a PO Security will
fall and the value of an IO Security will rise. Yields on IOs and POs are very sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets.
Leverage
Risk. The use of leverage by the Fund can magnify the effect of any losses. If the income and gains
from the securities and investments purchased with leverage proceeds do not cover the cost of leverage, the return to the common shares
will be less than if leverage had not been used. Leverage involves risks and special considerations for common shareholders including:
the likelihood of greater volatility of net asset value and market price of the common shares than a comparable portfolio without leverage;
the risk that fluctuations in interest rates on borrowings will reduce the return to the common shareholders or will result in fluctuations
in the dividends paid on the common shares; in a declining market, the use of leverage is likely to cause a greater decline in the net
asset value of the common shares than if the Fund were not leveraged, which may result in a greater decline in the market price of the
common shares; and when the Fund uses certain types of leverage, the investment advisory fee payable to the Advisor will be higher than
if the Fund did not use leverage.
Management
Risk and Reliance on Key Personnel. The implementation of the Fund’s investment strategy depends
upon the continued contributions of certain key employees of the Advisor, some of whom have unique talents and experience and would be
difficult to replace. The loss or interruption of the services of a key member of the portfolio management team could have a negative
impact on the Fund.
Market
Discount from Net Asset Value. Shares of closed-end investment companies such as the Fund frequently
trade at a discount from their net asset value. The Fund cannot predict whether its common shares will trade at, below or above net asset
value.
Market
Risk. Investments held by the Fund, as well as shares of the Fund itself, are subject to market fluctuations
caused by real or perceived economic conditions, political events, regulatory factors or market developments, changes in interest rates
and perceived trends in securities prices. Shares of the Fund could decline in value or underperform other investments as a result of
the risk of loss associated with these market fluctuations. In addition, local, regional or global events such as war, acts of terrorism,
market manipulation, government defaults, government shutdowns, regulatory actions, political changes, diplomatic developments, the imposition
of sanctions and other similar measures, spread of infectious diseases or other public health issues, recessions, or other events could
have a significant negative impact on the Fund and its investments. Any of such circumstances could have a materially negative impact
on the value of the Fund’s shares, the liquidity of an investment, and result in increased market volatility. During any such events,
the Fund’s shares may trade at increased premiums or discounts to their net asset value, the bid/ask spread on the Fund’s
shares may widen and the returns on investment may fluctuate.
Mortgage-Backed
Securities Risk. The Fund invests in mortgage-backed securities, representing direct or indirect interests
in pools of underlying residential or commercial mortgage loans that are secured by real property. These securities provide investors
with payments consisting of both principal and interest as the mortgages in the underlying mortgage pools are paid. A mortgage-backed
security may be negatively affected by the quality of the mortgages underlying such security and the structure of its issuer. For example,
if a mortgage underlying a particular mortgage-backed security defaults, the value of that security may decrease. Moreover, a downturn
in the markets for residential or commercial real estate or a general economic downturn could negatively affect both the price and liquidity
of privately issued mortgage-backed securities. Mortgage-backed securities are subject to prepayment risk, which is the risk that the
borrowers under the mortgage loans underlying a Fund’s mortgage-backed securities might pay off their mortgage loans sooner than
expected, which could happen when interest rates fall or for other reasons, which could cause the value of the Fund’s mortgage-backed
securities to fall. Moreover, if the underlying mortgage loans are paid off sooner than expected, the Fund may have to reinvest the proceeds
in other securities that have lower yields. Mortgage-backed securities are also subject to extension risk, which
Investment
Objectives, Policies and Risks (Continued)
First
Trust Mortgage Income Fund (FMY)
October
31, 2023 (Unaudited)
is
the risk that rising interest rates could cause mortgages underlying the securities to be prepaid more slowly than expected, resulting
in slower prepayments of the securities. This would, in effect, convert a short or medium-duration mortgage-backed security into a longer-duration
security, increasing its sensitivity to interest rate changes and likely causing its price to decline. Mortgage-backed securities issued
by a private issuer, such as commercial mortgage-backed securities, generally entail greater risk than obligations directly or indirectly
guaranteed by the U.S. government or a government-sponsored entity.
A
portion of the Fund’s managed assets may be invested in subordinated classes of mortgage-backed securities. Such subordinated classes
are subject to a greater degree of non-payment risk than are senior classes of the same issuer or agency. In addition, under certain
market conditions, the market for subordinated classes of mortgage-backed securities may not be as liquid as the market for other fixed
income securities.
Given
its focus in mortgage-backed securities, the Fund may be more susceptible to adverse economic, political and regulatory events that affect
the value of real estate.
Non-Agency
Securities Risk. Investments in asset-backed or mortgage-backed securities offered by non-governmental
issuers, such as commercial banks, savings and loans, private mortgage insurance companies, mortgage bankers and other secondary market
issuers are subject to additional risks. There are no direct or indirect government or agency guarantees of payments in loan pools created
by non-government issuers. Securities issued by private issuers are subject to the credit risks of such issuers. An unexpectedly high
rate of defaults on the loan pool may adversely affect the value of a non-agency security and could result in losses to the Fund. The
risk of such defaults is generally higher in the case of pools that include subprime loans. Non-agency securities are typically traded
“over-the-counter” rather than on a securities exchange and there may be a limited market for the securities, especially when
there is a perceived weakness in the mortgage and real estate market sectors. Without an active trading market, the non-agency mortgage-related
securities held by the Fund may be particularly difficult to value because of the complexities involved in assessing the value of the
underlying loans.
Operational
Risk. The Fund is subject to risks arising from various operational factors, including, but not limited
to, human error, processing and communication errors, errors of the Fund’s service providers, counterparties or other third-parties,
failed or inadequate processes and technology or systems failures. The Fund relies on third-parties for a range of services, including
custody. Any delay or failure relating to engaging or maintaining such service providers may affect the Fund’s ability to meet its
investment objective. Although the Fund and the Advisor seek to reduce these operational risks through controls and procedures, there
is no way to completely protect against such risks.
Potential
Conflicts of Interest Risk. First Trust and the portfolio managers have interests which may conflict
with the interests of the Fund. In particular, First Trust currently manages and may in the future manage and/or advise other investment
funds or accounts with the same or substantially similar investment objectives and strategies as the Fund. In addition, while the Fund
is using leverage, the amount of the fees paid to First Trust for investment advisory and management services are higher than if the Fund
did not use leverage because the fees paid are calculated based on managed assets. Therefore, First Trust has a financial incentive to
leverage the Fund.
TBA
Transactions Risk. The Fund may purchase securities via TBA (To Be Announced) Transactions. In such
a transaction, the purchase price of the securities is typically fixed at the time of the commitment, but delivery and payment can take
place a month or more after the date of the commitment. At the time of delivery of the securities, the value may be more or less than
the purchase or sale price. Purchasing securities in a TBA Transaction may give rise to investment leverage and may increase the Fund’s
volatility. Default by, or bankruptcy of, a counterparty to a TBA Transaction would expose the Fund to possible losses because of an adverse
market action, expenses or delays in connection with the purchase or sale of the pools specified in such transaction.
Valuation
Risk. The valuation of securitized assets may carry more risk than that of common stock. Uncertainties
in the conditions of the financial markets, unreliable reference data, lack of transparency and inconsistency of valuation models and
processes may lead to inaccurate asset pricing. The Fund may hold investments in sizes smaller than institutionally-sized round lot positions
(sometimes referred to as odd lots). However, third-party pricing services generally provide evaluations on the basis of institutionally-sized
round lots. If the Fund sells certain of its investments in an odd lot transaction, the sale price may be less than the value at which
such securities have been held by the Fund. Odd lots often trade at lower prices than institutional round lots. There is no assurance
that the Fund will be able to sell a portfolio security at the price established by the pricing service, which could result in a loss
to the Fund.
NOT
FDIC INSURED |
NOT
BANK GUARANTEED |
MAY
LOSE VALUE |
Board
of Trustees and Officers
First
Trust Mortgage Income Fund (FMY)
October
31, 2023 (Unaudited)
The
following tables identify the Trustees and Officers of the Fund. Unless otherwise indicated, the address of all persons is 120 East Liberty
Drive, Suite 400, Wheaton, IL 60187.
Name,
Year of Birth and Position with the Fund |
Term
of Office and Year First Elected or Appointed(1) |
Principal
Occupations During Past 5 Years |
Number
of Portfolios in the First Trust Fund Complex Overseen by Trustee |
Other
Trusteeships or Directorships Held by Trustee During Past 5 Years |
INDEPENDENT
TRUSTEES |
Richard
E. Erickson, Trustee (1951) |
• Three
Year Term• Since Fund Inception |
Retired;
Physician, Edward-Elmhurst Medical Group (2021 to September 2023); Physician and Officer, Wheaton Orthopedics (1990 to 2021) |
254
|
None
|
Thomas
R. Kadlec, Trustee (1957) |
• Three
Year Term• Since Fund Inception |
Retired;
President, ADM Investor Services, Inc. (Futures Commission Merchant) (2010 to July 2022) |
254
|
Director,
National Futures Association and ADMIS Singapore Ltd.; Formerly, Director of ADM Investor Services, Inc., ADM Investor Services International,
ADMIS Hong Kong Ltd., and Futures Industry Association |
Denise
M. Keefe, Trustee (1964) |
• Three
Year Term• Since 2021 |
Executive
Vice President, Advocate Aurora Health and President, Advocate Aurora Continuing Health Division (Integrated Healthcare System) |
254
|
Director
and Board Chair of Advocate Home Health Services, Advocate Home Care Products and Advocate Hospice; Director and Board Chair of Aurora
At Home (since 2018); Director of Advocate Physician Partners Accountable Care Organization; Director of RML Long Term Acute Care Hospitals;
Director of Senior Helpers (since 2021); and Director of MobileHelp (since 2022) |
Robert
F. Keith, Trustee (1956) |
• Three
Year Term• Since June 2006 |
President,
Hibs Enterprises (Financial and Management Consulting) |
254
|
Formerly,
Director of Trust Company of Illinois |
Niel
B. Nielson, Trustee (1954) |
• Three
Year Term• Since Fund Inception |
Senior
Advisor (2018 to Present), Managing Director and Chief Operating Officer (2015 to 2018), Pelita Harapan Educational Foundation (Educational
Products and Services) |
254
|
None
|
Bronwyn
Wright, Trustee (1971) |
• Three
Year Term• Since 2023 |
Independent
Director to a number of Irish collective investment funds (2009 to Present); Various roles at international affiliates of Citibank (1994
to 2009), including Managing Director, Citibank Europe plc and Head of Securities and Fund Services, Citi Ireland (2007 to 2009) |
229
|
None
|
(1)
|
Currently,
Denise M. Keefe and Robert F. Keith, as Class I Trustees, are serving as trustees until the Fund’s 2026 annual meeting of shareholders.
Richard E. Erickson and Thomas R. Kadlec, as Class II Trustees, are serving as trustees until the Fund’s 2024 annual meeting of
shareholders. James A. Bowen, Niel B. Nielson, and Bronwyn Wright, as Class III Trustees, are serving as trustees until the Fund’s
2025 annual meeting of shareholders. |
Board
of Trustees and Officers (Continued)
First
Trust Mortgage Income Fund (FMY)
October
31, 2023 (Unaudited)
Name,
Year of Birth and Position with the Fund |
Term
of Office and Year First Elected or Appointed(1) |
Principal
Occupations During Past 5 Years |
Number
of Portfolios in the First Trust Fund Complex Overseen by Trustee |
Other
Trusteeships or Directorships Held by Trustee During Past 5 Years |
INTERESTED
TRUSTEE |
James
A. Bowen(2), Trustee and Chairman of the Board (1955)
|
• Three
Year Term• Since Fund Inception |
Chief
Executive Officer, First Trust Advisors L.P. and First Trust Portfolios L.P.; Chairman of the Board of Directors, BondWave LLC (Software
Development Company) and Stonebridge Advisors LLC (Investment Advisor) |
254
|
None
|
Name
and Year of Birth |
Position
and Offices with Fund |
Term
of Office and Length of Service |
Principal
Occupations During Past 5 Years |
OFFICERS(3)
|
James
M. Dykas (1966) |
President
and Chief Executive Officer |
• Indefinite
Term • Since 2016 |
Managing
Director and Chief Financial Officer, First Trust Advisors L.P. and First Trust Portfolios L.P.; Chief Financial Officer, BondWave LLC
(Software Development Company) and Stonebridge Advisors LLC (Investment Advisor) |
Derek
D. Maltbie (1972) |
Treasurer,
Chief Financial Officer and Chief Accounting Officer |
• Indefinite
Term • Since 2023 |
Senior
Vice President, First Trust Advisors L.P. and First Trust Portfolios L.P., July 2021 to Present. Previously, Vice President, First Trust
Advisors L.P. and First Trust Portfolios L.P., 2014 to 2021. |
W.
Scott Jardine (1960) |
Secretary
and Chief Legal Officer |
• Indefinite
Term • Since Fund Inception |
General
Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P.; Secretary and General Counsel, BondWave LLC; Secretary, Stonebridge
Advisors LLC |
Daniel
J. Lindquist (1970) |
Vice
President |
• Indefinite
Term • Since Fund Inception |
Managing
Director, First Trust Advisors L.P. and First Trust Portfolios L.P. |
Kristi
A. Maher (1966) |
Chief
Compliance Officer and Assistant Secretary |
•
Indefinite Term • Chief Compliance Officer Since January 2011• Assistant Secretary Since Fund
Inception |
Deputy
General Counsel, First Trust Advisors L.P. and First Trust Portfolios L.P. |
(1)
|
Currently,
Denise M. Keefe and Robert F. Keith, as Class I Trustees, are serving as trustees until the Fund’s 2026 annual meeting of shareholders.
Richard E. Erickson and Thomas R. Kadlec, as Class II Trustees, are serving as trustees until the Fund’s 2024 annual meeting of
shareholders. James A. Bowen, Niel B. Nielson, and Bronwyn Wright, as Class III Trustees, are serving as trustees until the Fund’s
2025 annual meeting of shareholders. |
(2)
|
Mr.
Bowen is deemed an “interested person” of the Fund due to his position as CEO of First Trust Advisors L.P., investment advisor
of the Fund. |
(3)
|
The
term “officer” means the president, vice president, secretary, treasurer, controller or any other officer who performs a policy
making function. |
Privacy
Policy
First
Trust Mortgage Income Fund (FMY)
October
31, 2023 (Unaudited)
Privacy
Policy
First
Trust values our relationship with you and considers your privacy an important priority in maintaining that relationship. We are committed
to protecting the security and confidentiality of your personal information.
Sources
of Information
We
collect nonpublic personal information about you from the following sources:
•
|
Information
we receive from you and your broker-dealer, investment professional or financial representative through interviews, applications, agreements
or other forms; |
•
|
Information
about your transactions with us, our affiliates or others; |
•
|
Information
we receive from your inquiries by mail, e-mail or telephone; and |
•
|
Information
we collect on our website through the use of “cookies.” For example, we may identify the pages on our website that your browser
requests or visits. |
Information
Collected
The
type of data we collect may include your name, address, social security number, age, financial status, assets, income, tax information,
retirement and estate plan information, transaction history, account balance, payment history, investment objectives, marital status,
family relationships and other personal information.
Disclosure
of Information
We
do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. In addition
to using this information to verify your identity (as required under law), the permitted uses may also include the disclosure of such
information to unaffiliated companies for the following reasons:
•
|
In
order to provide you with products and services and to effect transactions that you request or authorize, we may disclose your personal
information as described above to unaffiliated financial service providers and other companies that perform administrative or other services
on our behalf, such as transfer agents, custodians and trustees, or that assist us in the distribution of investor materials such as trustees,
banks, financial representatives, proxy services, solicitors and printers. |
•
|
We
may release information we have about you if you direct us to do so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud). |
In
addition, in order to alert you to our other financial products and services, we may share your personal information within First Trust.
Use
of Website Analytics
We
currently use third party analytics tools, Google Analytics and AddThis, to gather information for purposes of improving First Trust’s
website and marketing our products and services to you. These tools employ cookies, which are small pieces of text stored in a file by
your web browser and sent to websites that you visit, to collect information, track website usage and viewing trends such as the number
of hits, pages visited, videos and PDFs viewed and the length of user sessions in order to evaluate website performance and enhance navigation
of the website. We may also collect other anonymous information, which is generally limited to technical and web navigation information
such as the IP address of your device, internet browser type and operating system for purposes of analyzing the data to make First Trust’s
website better and more useful to our users. The information collected does not include any personal identifiable information such
as your name, address, phone number or email address unless you provide that information through the website for us to contact you in
order to answer your questions or respond to your requests. To find out how to opt-out of these services click on: Google
Analytics and AddThis.
Confidentiality
and Security
With
regard to our internal security procedures, First Trust restricts access to your nonpublic personal information to those First Trust employees
who need to know that information to provide products or services to you. We maintain physical, electronic and procedural safeguards to
protect your nonpublic personal information.
Policy
Updates and Inquiries
As
required by federal law, we will notify you of our privacy policy annually. We reserve the right to modify this policy at any time, however,
if we do change it, we will tell you promptly. For questions about our policy, or for additional copies of this notice, please go to www.ftportfolios.com,
or contact us at 1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust Advisors).
March
2023
This
page intentionally left blank
INVESTMENT
ADVISOR
First
Trust Advisors L.P.
120
East Liberty Drive, Suite 400
Wheaton,
IL 60187
ADMINISTRATOR,
FUND ACCOUNTANT,
AND CUSTODIAN
The
Bank of New York Mellon
240
Greenwich Street
New
York, NY 10286
TRANSFER
AGENT
Computershare,
Inc.
P.O.
Box 43006
Providence,
RI 02940
INDEPENDENT
REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte
& Touche LLP
111
South Wacker Drive
Chicago,
IL 60606
LEGAL
COUNSEL
Chapman
and Cutler LLP
320
South Canal Street
Chicago,
IL 60606
(b) Not applicable.
Item 2. Code of Ethics.
|
(a) |
The registrant, as of the end of the period covered by this report, has adopted a code of ethics that
applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller,
or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party. |
|
(c) |
There have been no amendments, during the period covered by this report, to a provision of the code of ethics
that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller,
or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party, and
that relates to any element of the code of ethics description. |
|
(d) |
The registrant has not granted any waivers, including an implicit waiver, from a provision of the code of
ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third
party, that relates to one or more of the items set forth in paragraph (b) of this item’s instructions. |
|
(f) |
A copy of the code of ethics that applies to the registrant’s principal executive officer, principal
financial officer, principal accounting officer or controller is filed as an exhibit pursuant to Item 13(a)(1). |
Item 3. Audit Committee Financial Expert.
As of the end of the period covered by the report,
the registrant’s board of trustees has determined that Thomas R. Kadlec, Robert F. Keith and Bronwyn Wright are qualified to serve
as audit committee financial experts serving on its audit committee and that each of them is “independent,” as defined by
Item 3 of Form N-CSR.
Item 4. Principal Accountant Fees and Services.
|
(a) |
Audit Fees (registrant) -- The aggregate fees billed for each of the last two fiscal years for professional
services rendered by the principal accountant for the audit of the registrant’s annual financial statements or services that are
normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years were $47,000
for the fiscal year ended October 31, 2022 and $47,000 for the fiscal year ended October 31, 2023. |
|
(b) |
Audit-Related Fees (registrant) -- The aggregate fees billed in each of the last two fiscal years for
assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant’s
financial statements and are not reported under paragraph (a) of this Item were $0 for the fiscal year ended October 31, 2022 and $0 for
the fiscal year ended October 31, 2023. |
Audit-Related Fees (Investment Advisor)
-- The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that
are reasonably related to the performance of the audit of the registrant’s financial statements and are not reported under paragraph
(a) of this Item were $0 for the fiscal year ended October 31, 2022 and $0 for the fiscal year ended October 31, 2023.
|
(c) |
Tax Fees (registrant) -- The aggregate fees billed in each of the last two fiscal years for professional
services rendered by the principal accountant for tax compliance, tax advice, and tax planning were $28,762 for the fiscal year ended
October 31, 2022 and $33,120 for the fiscal year ended October 31, 2023. These fees were for tax consultation and/or tax return preparation. |
Tax Fees (Investment Advisor)
-- The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax
compliance, tax advice, and tax planning were $0 for the fiscal year ended October 31, 2022 and $0 for the fiscal year ended October 31,
2023.
|
(d) |
All Other Fees (registrant) -- The aggregate fees billed in each of the last two fiscal years for products
and services provided by the principal accountant to the registrant, other than the services reported in paragraphs (a) through (c) of
this Item were $0 for the fiscal year ended October 31, 2022 and $0 for the fiscal year ended October 31, 2023. |
All Other Fees (Investment Advisor)
The aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant to the
registrant, other than the services reported in paragraphs (a) through (c) of this Item were $0 for the fiscal year ended October 31,
2022 and $0 for the fiscal year ended October 31, 2023.
|
(e)(1) |
Disclose the audit committee’s pre-approval policies and procedures described in paragraph (c)(7) of
Rule 2-01 of Regulation S-X. |
Pursuant to its charter
and its Audit and Non-Audit Services Pre-Approval Policy, the Audit Committee (the “Committee”) is responsible for
the pre-approval of all audit services and permitted non-audit services (including the fees and terms thereof) to be performed for the
registrant by its independent auditors. The Chairman of the Committee is authorized to give such pre-approvals on behalf of the Committee
up to $25,000 and report any such pre-approval to the full Committee.
The Committee is also
responsible for the pre-approval of the independent auditor’s engagements for non-audit services with the registrant’s advisor
(not including a sub-advisor whose role is primarily portfolio management and is sub-contracted or overseen by another investment advisor)
and any entity controlling, controlled by or under common control with the investment advisor that provides ongoing services to the registrant,
if the engagement relates directly to the operations and financial reporting of the registrant, subject to the de minimis exceptions
for non-audit services described in Rule 2-01 of Regulation S-X. If the independent auditor has provided non-audit services to the
registrant’s advisor (other than any sub-advisor whose role is primarily portfolio management and is sub-contracted with or overseen
by another investment advisor) and any entity controlling, controlled by or under common control with the investment advisor that provides
ongoing services to the registrant that were not pre-approved pursuant to its policies, the Committee will consider whether the provision
of such non-audit services is compatible with the auditor’s independence.
|
(e)(2) |
The percentage of services described in each of paragraphs (b) through (d) for the registrant and the registrant’s
investment advisor and distributor of this Item that were approved by the audit committee pursuant to the pre-approval exceptions included
in paragraph (c)(7)(i)(C) or paragraph (C)(7)(ii) of Rule 2-01 of Regulation S-X are as follows: |
|
Registrant: |
Advisor
and Distributor: |
|
|
|
|
(b) 0% |
(b) 0% |
|
|
|
|
(c) 0% |
(c) 0% |
|
|
|
|
(d) 0% |
(d) 0% |
|
(f) |
The percentage of hours expended on the principal accountant’s engagement to audit the registrant’s
financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant’s
full-time, permanent employees was less than fifty percent. |
|
(g) |
The aggregate non-audit fees billed by the registrant’s accountant for services rendered to the registrant,
and rendered to the registrant’s investment advisor (not including any sub-advisor whose role is primarily portfolio management
and is subcontracted with or overseen by another investment advisor), and any entity controlling, controlled by, or under common control
with the advisor that provides ongoing services to the registrant for the registrant’s fiscal year ended October 31, 2022 were $28,762
for the registrant and $0 for the registrant’s investment advisor and for the registrant’s fiscal year ended October 31, 2023
were $33,120 for the registrant and $44,000 for the registrant’s investment advisor. |
|
(h) |
The registrant’s audit committee of the board of directors has considered whether the provision of non-audit
services that were rendered to the registrant’s investment advisor (not including any sub-advisor whose role is primarily portfolio
management and is subcontracted with or overseen by another investment advisor), and any entity controlling, controlled by, or under common
control with the investment advisor that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant’s independence. |
Item 5. Audit Committee of Listed Registrants.
|
(a) |
The registrant has a separately designated standing audit committee established in accordance with Section
3(a)(58)(A) of the Securities Exchange Act of 1934 consisting of all the independent directors of the registrant. The audit committee
of the registrant is comprised of: Richard E. Erickson, Thomas R. Kadlec, Denise M. Keefe, Robert F. Keith, Niel B. Nielson and Bronwyn
Wright. |
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. |
Item 7. Disclosure of Proxy Voting
Policies and Procedures for Closed-End Management Investment Companies.
A description of the policies and procedures used to vote proxies on behalf of the Fund is attached as an exhibit.
Item 8. Portfolio Managers of Closed-End Management Investment
Companies.
|
(a)(1) |
Identification of Portfolio Manager(s) or Management Team Members and Description of Role of Portfolio Manager(s) or Management Team Members. |
Information provided as of January 8, 2024.
The First Trust Government &
Securitized Products Group of First Trust Advisors L.P. is responsible for the day–to-day management of the registrant’s
portfolio. The First Trust Government &
Securitized Products group has been led by James Snyder and Jeremiah Charles since 2013 and was previously known as
the Mortgage Securities Team.
Jim Snyder. Mr. Snyder is a Senior Portfolio
Manager and Co-head of the First Trust Government &
Securitized Products Group. He has over 32 years of investment and portfolio management experience.
At First Trust, he is responsible for the management of the firm’s mortgage and securitized product fund offerings. Prior to joining
First Trust in 2013, Jim spent most of his career leading several mortgage trading and portfolio management groups at American Express
Financial Advisors, where he managed the AXP Federal Income Fund, and at Deerfield Capital, where he managed Deerfield’s Mortgage
REIT and Opportunity Fund. Additionally, he has held senior positions at Fort Sheridan Advisors and Spyglass Capital. Mr. Snyder holds
a B.S. and M.A. in Economics from DePaul University and an MBA from the University of Chicago Booth School of Business.
Jeremiah Charles. Mr. Charles is a Senior
Portfolio Manager and Co-head of the First Trust Government & Securitized Products Group. He has over 19 years of investment,
trading and portfolio management experience. At First Trust, he is responsible for the management of the firm’s mortgage and
securitized product fund offerings. Prior to joining First Trust in 2013, Jeremiah spent the majority of his career as a Senior
Portfolio Manager at Deerfield Capital Management where he helped manage the Deerfield Mortgage REIT. In his career, he has also
held positions at CRT Capital, where he worked as a Vice President in Securitized Products and at Piper Jaffray, where he began his
career as an Analyst. Mr. Charles holds a B.S. in Finance from the Leeds School of Business at the University of Colorado, and a MS
in Real Estate with honors from the Charles H. Kellstadt Graduate School of Business at DePaul University.
Owen Aronson. Mr.
Aronson is a Senior Investment Analyst for the First Trust Government & Securitized Products Group. He has over 15 years of investment
research and trading experience. At First Trust, he focuses primarily on the commercial mortgage-backed securities, CMBS, sector and contributes
to the management of the non-agency sectors. Prior to joining First Trust in 2020, Owen spent the majority of his career in the Securitized
Products team at Neuberger Berman where he was responsible for CMBS investments. He began his career at Lehman Brothers Asset Management
as an Analyst. Mr. Aronson holds a B.A. in Economics from the University of Chicago.
|
(2) |
Other Accounts Managed by Portfolio Managers or Management Team Member and Potential Conflicts of Interest |
Information provided as of October 31, 2023.
Name
of Portfolio Manager or Team Member |
Type
of Accounts* |
Total
# of Accounts Managed |
Total
Assets |
#
of Accounts Managed for which Advisory Fee is Based on Performance |
Total
Assets for which Advisory Fee is Based on Performance |
1.
Jeremiah Charles |
Registered
Investment Companies: |
5 |
$11,568,521,334 |
0 |
$
0 |
|
Other
Pooled Investment Vehicles: |
0 |
$
0 |
0 |
$
0 |
|
Other
Accounts: |
0 |
$
0 |
0 |
$
0 |
2. James Snyder |
Registered
Investment Companies: |
5 |
$11,568,521,334 |
0 |
$ 0 |
|
Other
Pooled Investment Vehicles: |
0 |
$
0 |
0 |
$
0 |
|
Other
Accounts: |
0 |
$
0 |
0 |
$
0 |
3.
Owen Aronson |
Registered
Investment Companies: |
2 |
$3,841,816,649 |
0 |
$
0 |
|
Other
Pooled Investment Vehicles: |
0 |
$
0 |
0 |
$
0 |
|
Other
Accounts: |
0 |
$
0 |
0 |
$
0 |
*Information excludes the registrant.
Portfolio Manager Material Conflicts of Interest
Potential
conflicts of interest may arise when a portfolio manager of the registrant has day-to-day management responsibilities with respect to
one or more other funds or other accounts. The First Trust Securitized Products Group adheres
to its trade allocation policy utilizing a pro-rata methodology to address this conflict.
First Trust and its
affiliate, First Trust Portfolios L.P. (“FTP”), have in place a joint Code of Ethics and Insider Trading Policies and Procedures
that are designed to (a) prevent First Trust personnel from trading securities based upon material inside information in the possession
of such personnel and (b) ensure that First Trust personnel avoid actual or potential conflicts of interest or abuse of their positions
of trust and responsibility that could occur through such activities as front running securities trades for the registrant. Personnel
are required to have duplicate confirmations and account statements delivered to First Trust and FTP compliance personnel who then compare
such trades to trading activity to detect any potential conflict situations.
(3) Compensation Structure
of Portfolio Managers or Management Team Members
Portfolio Manager Compensation
Information provided
as of October 31, 2023.
The compensation structure
at First Trust is based on a fixed salary and discretionary bonus determined by First Trust management. Salaries are based on each individual’s
position and overall value to First Trust. Bonuses are determined by First Trust management and are based on individual performance, the
commitment to team performance and profitability, and the profitability of First Trust. Certain internal portfolio managers have an indirect
ownership stake in the firm and will therefore receive their allocable share of ownership-related distributions.
(4)(a) Disclosure of Securities Ownership
Information provided as of October 31, 2023.
Name |
Dollar Range of Fund Shares
Beneficially Owned |
Jeremiah Charles |
None |
James Snyder |
None |
Owen Aronson |
None |
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 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. Disclosure of Securities Lending Activities for Closed-End
Management Investment Companies.
Item 13. Exhibits.
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 Mortgage Income Fund |
By (Signature and Title)* |
|
/s/ James M. Dykas |
|
|
James M. Dykas, President and Chief Executive Officer (principal executive officer) |
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) |
By (Signature and Title)* |
|
/s/ Derek D. Maltbie |
|
|
Derek D. Maltbie, Treasurer, Chief Financial Officer and Chief Accounting Officer (principal financial
officer) |
* Print the name and title of each signing officer under his
or her signature.
SENIOR FINANCIAL OFFICER
CODE OF CONDUCT
I. Introduction
This code of conduct is being
adopted by the investment companies advised by First Trust Advisors L.P., from time to time, (the "FUNDS"). The reputation and
integrity of the Funds are valuable assets that are vital to the Funds' success. Each officer of the Funds, and officers and employees
of the investment adviser to the Funds who work on Fund matters, including each of the Funds' senior financial officers ("SFOS"),
is responsible for conducting each Fund's business in a manner that demonstrates a commitment to the highest standards of integrity.
SFOs include the Principal Executive Officer (who is the President), the Controller (who is the principal accounting officer),
and the Treasurer (who is the principal financial officer), and any person who performs a similar function.
The Funds, First Trust Advisors
L.P. and First Trust Portfolios have adopted Codes of Ethics under Rule 17j-1 under the Investment Company Act of 1940 (the "RULE
17J-1 CODE"). These Codes of Ethics are designed to prevent certain conflicts of interest that may arise when officers, employees,
or directors of the Funds and the foregoing entities know about present or future Fund transactions and/or have the power to influence
those transactions, and engage in transactions with respect to those same securities in their personal account(s) or otherwise
take advantage of their position and knowledge with respect to those securities. In an effort to prevent these conflicts and in
accordance with Rule 17j-1, the Funds adopted their Rule 17j-1 Code to prohibit transactions and conduct that create conflicts
of interest, and to establish compliance procedures.
The Sarbanes-Oxley Act of
2002 was designed to address corporate malfeasance and to help assure investors that the companies in which they invest are accurately
and completely disclosing financial information. Under Section 406 of the Act, all public companies (including the Funds) must
either have a code of ethics for their SFOs, or disclose why they do not. The Act was intended to prevent future situations (such
as occurred in well-reported situations involving such companies as Enron and WorldCom) where a company creates an environment
in which employees are afraid to express their opinions or to question unethical and potentially illegal business practices.
The Funds have chosen to
adopt a senior financial officer Code of Conduct to encourage their SFOs, and other Fund officers and employees of First Trust
Advisors or First Trust Portfolios to act ethically and to question potentially unethical or illegal practices, and to strive
to ensure that the Funds' financial disclosures are complete, accurate, and understandable.
II. Purposes of This Code of Conduct
The purposes of this Code
are:
A. To promote honest and
ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional
relationships;
B. To promote full, fair,
accurate, timely, and understandable disclosure in reports and documents that the Funds file with, or submits to, the SEC and
in other public communications the Funds make;
C. To promote compliance
with applicable governmental laws, rules and regulations;
D. To encourage the prompt
internal reporting to an appropriate person of violations of the Code; and
E. To establish accountability
for adherence to the Code.
III. Questions About This Code
The Funds' Boards of Trustees
have designated W. Scott Jardine or other appropriate officer designated by the President of the respective Funds to be the Compliance
Coordinator for the implementation and administration of the Code.
IV. Handling of Financial Information
The Funds have adopted guidelines
under which its SFOs perform their duties. However, the Funds expect that all officers or employees of the adviser or distributor
who participate in the preparation of any part of any Fund's financial statements follow these guidelines with respect to each
Fund:
A. Act with honesty and
integrity and avoid violations of this Code, including actual or apparent conflicts of interest with the Fund in personal and
professional relationships.
B. Disclose to the Fund's
Compliance Coordinator any material transaction or relationship that reasonably could be expected to give rise to any violations
of the Code, including actual or apparent conflicts of interest with the Fund. You should disclose these transactions or relationships
whether you are involved or have only observed the transaction or relationship. If it is not possible to disclose the matter to
the Compliance Coordinator, it should be disclosed to the Fund's Principal Financial Officer or Principal Executive Officer.
C. Provide information
to the Fund's other officers and appropriate employees of service providers (adviser, administrator, outside auditor, outside
counsel, custodian, etc.) that is accurate, complete, objective, relevant, timely, and understandable.
D. Endeavor to ensure
full, fair, timely, accurate, and understandable disclosure in the Fund's periodic reports.
E. Comply with the federal
securities laws and other applicable laws and rules, such as the Internal Revenue Code.
F. Act in good faith,
responsibly, and with due care, competence and diligence, without misrepresenting material facts or allowing your independent
judgment to be subordinated.
G. Respect the confidentiality
of information acquired in the course of your work except when you have Fund approval to disclose it or where disclosure is otherwise
legally mandated. You may not use confidential information acquired in the course of your work for personal advantage.
H. Share and maintain
skills important and relevant to the Fund's needs.
I. Proactively promote
ethical behavior among peers in your work environment.
J. Responsibly use and
control all assets and resources employed or entrusted to you.
K. Record or participate
in the recording of entries in the Fund's books and records that are accurate to the best of your knowledge.
V. Waivers of This Code
SFOs and other parties subject
to this Code may request a waiver of a provision of this Code (or certain provisions of the Fund's Rule 17j-1 Code) by submitting
their request in writing to the Compliance Coordinator for appropriate review. An executive officer of the Fund or the Audit Committee
will decide whether to grant a waiver. All waivers of this Code must be disclosed to the Fund's shareholders to the extent required
by SEC rules. A good faith interpretation of the provisions of this Code, however, shall not constitute a waiver.
VI. Annual Certification
Each SFO will be asked to
certify on an annual basis that he/she is in full compliance with the Code and any related policy statements.
VII. Reporting Suspected Violations
A. SFOs or other officers
of the Funds or employees of the First Trust group who work on Fund matters who observe, learn of, or, in good faith, suspect
a violation of the Code MUST immediately report the violation to the Compliance Coordinator, another member of the Funds' or First
Trust's senior management, or to the Audit Committee of the Fund Board. An example of a possible Code violation is the preparation
and filing of financial disclosure that omits material facts, or that is accurate but is written in a way that obscures its meaning.
B. Because service providers
such as an administrator, outside accounting firm, and custodian provide much of the work relating to the Funds' financial statements,
you should be alert for actions by service providers that may be illegal, or that could be viewed as dishonest or unethical conduct.
You should report these actions to the Compliance Coordinator even if you know, or think, that the service provider has its own
code of ethics for its SFOs or employees.
C. SFOs or other officers
or employees who report violations or suspected violations in good faith will not be subject to retaliation of any kind. Reported
violations will be investigated and addressed promptly and will be treated confidentially to the extent possible.
VIII. Violations of The Code
A. Dishonest, unethical or
illegal conduct will constitute a violation of this Code, regardless of whether this Code specifically refers to that particular
conduct. A violation of this Code may result in disciplinary action, up to and including termination of employment. A variety
of laws apply to the Funds and their operations, including the Securities Act of 1933, the Investment Company Act of 1940, state
laws relating to duties owed by Fund directors and officers, and criminal laws. The federal securities laws generally prohibit
the Funds from making material misstatements in its prospectus and other documents filed with the SEC, or from omitting to state
a material fact. These material misstatements and omissions include financial statements that are misleading or omit materials
facts.
B. Examples of criminal violations
of the law include stealing, embezzling, misapplying corporate or bank funds, making a payment for an expressed purpose on a Fund's
behalf to an individual who intends to use it for a different purpose; or making payments, whether corporate or personal, of cash
or other items of value that are intended to influence the judgment or actions of political candidates, government officials or
businesses in connection with any of the Funds' activities. The Funds must and will report all suspected criminal violations to
the appropriate authorities for possible prosecution, and will investigate, address and report, as appropriate, non-criminal violations.
Amended: June 1, 2009
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 Mortgage Income Fund; |
| 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 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: |
|
January 8,
2024 |
|
/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, Derek D. Maltbie, certify that:
| 1. | I have reviewed this report on Form N-CSR of First Trust Mortgage Income Fund; |
| 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 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: |
|
January 8,
2024 |
|
/s/ Derek D. Maltbie |
|
|
|
|
|
Derek D. Maltbie, Treasurer, Chief Financial Officer
and
Chief Accounting Officer
(principal financial officer) |
|
Certification Pursuant to Rule 30a-2(b) under the
1940 Act and Section 906
of the Sarbanes-Oxley Act
I, James M. Dykas, President and Chief Executive Officer
of First Trust Mortgage Income Fund (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: |
|
January 8,
2024 |
|
/s/ James M. Dykas |
|
|
|
|
|
James M. Dykas, President and Chief Executive Officer
(principal executive officer) |
|
I, Derek D. Maltbie, Treasurer, Chief Financial Officer
and Chief Accounting Officer of First Trust Mortgage Income Fund (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: |
|
January 8,
2024 |
|
/s/ Derek D. Maltbie |
|
|
|
|
|
Derek D. Maltbie, Treasurer, Chief Financial Officer
and
Chief Accounting Officer
(principal financial officer) |
|
FIRST TRUST ADVISORS L.P.
PROXY VOTING GUIDELINES
First Trust Advisors
L.P. (“FTA” or the “Adviser”) serves as investment adviser to open- and closed-end investment companies, and other
collective investments (“Funds”), as well as separately managed accounts (collectively,“Clients”). As part of
these services, the Adviser has, in most cases, agreed to or been delegated proxy voting responsibility on such Clients’ behalf
(“Proxy Clients”). FTA is required to adopt and implement policies and procedures reasonably designed to ensure proxy voting
on behalf of Proxy Clients is conducted in a manner that is in their best interests and addresses how conflicts of interest between FTA’s
interests and Proxy Clients’ interests are managed. FTA has adopted the
following policies and procedures to comply with this requirement (the “Policy”).
1. It is the Adviser’s policy
to seek and to ensure that proxies are voted consistently and in the best economic interests of the Proxy Client. The FTA Investment Committee
is responsible for the implementation of the Policy.
2. The Adviser engaged Institutional
Shareholder Services (“ISS”) to provide proxy research, recommendations, and voting services. ISS provides a password protected
website which is accessible to authorized FTA personnel to download upcoming proxy meeting data, including research reports of companies
held in Proxy Client portfolios. The website can be used to view proposed proxy votes and to enter votes for upcoming meetings for Proxy
Client portfolio securities.
3. FTA will generally follow the
ISS Proxy Voting Guidelines (the “Guidelines”) to vote proxies for Proxy Clients’ accounts, so long as such Guidelines
are considered to be in the best interests of the Proxy Client, and there are no noted or perceived conflicts of interest. FTA’s
use of the Guidelines is not intended to constrain FTA’s consideration of any proxy proposal, and there are times when FTA deviates
from the Guidelines. This includes when required by Rule 12d1-4 agreements between Fund Proxy Clients and certain acquired funds, if applicable.
Generally, FTA will not rely on ISS Proxy Voting Guidelines to withhold votes or vote against directors solely based on (i) quota criteria
or (ii) the exclusion of certain climate-related disclosures, which may or may not relate to the company’s core business or may
not materially impact shareholder value. In such cases, FTA will consider such proxy voting decisions in light of merit-based considerations
which it believes may impact shareholder value. In addition, FTA will vote against shareholder proposals that are not related to a company’s
core business and/or do not appear to be an appropriate use of a company’s resources to maximize shareholder value. FTA retains
final authority and fiduciary responsibility for proxy voting.
In certain circumstances,
where FTA has determined that it is consistent with Proxy Clients’ best interests, FTA will not vote a proxy on behalf of one or
more Proxy Clients. Such circumstances include:
(a) Limited
Value. Proxies will not be required to be voted on securities in a Proxy Client’s account if the value of the Proxy Client’s
economic interest in the securities is indeterminable or insignificant (less than $1,000). Proxies will also not be required to be voted
for any securities that are no longer held in Proxy Client’s account(s).
(b) Securities Lending
Program. When Fund portfolio securities are out on loan, they are transferred into the borrower’s name and are voted by the
borrower, in its discretion. In most cases, FTA will not recall securities on loan in order to vote a proxy. However, where FTA determines
that a proxy vote, or other shareholder action, is materially important to the Fund Proxy Client’s account, FTA will make a good
faith effort to recall the security for purposes of voting, understanding that in certain cases, the attempt to recall the security may
not be effective in time to meet voting deadlines. In certain instances, in FTA’s discretion, disclosure regarding FTA’s process
for determining whether or not to recall Fund portfolio securities on loan for proxy voting purposes may be provided as part of the Funds’
annual Form N-PX filing.
(c) Unjustifiable Costs.
In certain circumstances, based on cost-benefit analysis, FTA may choose not to vote when the cost of voting on behalf of a Proxy Client
would exceed any anticipated benefits of the proxy proposal to such Proxy Client (e.g. foreign securities).
(d) International Markets
Share Blocking. Share blocking is the “freezing” of shares for trading purposes at the custodian/sub-custodian bank level
in order to vote proxies. While shares are frozen, they may not be traded. Therefore, the potential exists for a pending trade to fail
if trade settlement falls on a date during the blocking period. In international markets where share blocking applies, FTA typically will
not, but reserves the right to, vote proxies due to the liquidity constraints associated with share blocking.
4. On a regular basis, FTA Research
reviews ISS recommendations on matters determined to have a potential impact of shareholder value to decide whether to vote as the Guidelines
recommend and advises the FTA Investment Committee of its determination.
5. FTA may determine voting in
accordance with the Guidelines is not in the best interests of a Proxy Client. Whenever a conflict of interest arises between ISS and
a target company subject to a proxy vote, the Adviser will consider the recommendation of the company and what the Adviser believes to
be in the best interests of the Proxy Client and will vote the proxy without using the Guidelines. If FTA has knowledge of a material
conflict of interest between itself and a Proxy Client, the Adviser shall vote the applicable proxy in accordance with the Guidelines
to avoid such conflict of interest. If there is a decision to vote against the Guidelines, the FTA Investment Committee will document
the reason and instruct ISS to change the vote to reflect this decision.
If there is a conflict
of interest between a Fund Proxy Client and FTA or other Fund service providers, FTA will vote the proxy based on the Guidelines to avoid
such conflict of interest.
6. If a Proxy Client requests the
Adviser to follow specific voting guidelines or additional guidelines, the Adviser shall review the request and follow such guidelines,
unless the Adviser determines that it is unable to do so. In such case, the Adviser shall inform the Proxy Client that it is not able
to honor the Proxy Client’s request.
7. FTA periodically reviews proxy
votes to ensure compliance with this Policy.
8. This Policy, the Guidelines
and votes cast for Proxy Clients are available upon request and such Proxy Client requests must be forwarded to FTA Compliance for review
and response. This Policy is also provided with each advisory contract and described and provided with the Form ADV, Part 2A.
Shareholders of Fund
Proxy Clients can review the Policy and a Fund’s voted proxies (if any) during the most recent 12-month period ended June 30 on
the First Trust website at www.ftportfolios.com or by accessing EDGAR on the SEC website at
www.sec.gov.
9. FTA provides reasonable ongoing
oversight of ISS. FTA, or ISS on behalf of FTA, maintains the following records relating to proxy voting:
(a) a copy of this Policy;
(b) a copy of each proxy
form for which it is responsible to vote;
(c) a copy of each proxy
solicitation, including proxy statements and related materials with regard to each proxy issue it votes;
(d) documents relating to
the identification and resolution of conflicts of interest, if any;
(e) any documents created
by FTA or ISS that were material to a proxy voting decision or that memorialized the basis for that decision; and
(f) a copy of each written
request from any Proxy Client for information on how FTA voted proxies on the Proxy Client’s behalf, and a copy of any written response
by FTA to any written or oral request for information by a Proxy Client on how FTA voted proxies for that Proxy Client’s account.
These records are either maintained
at FTA’s office or are electronically available to FTA through access to the ISS Proxy Exchange portal.
| Adopted: | September 15, 2003 |
| Amended: | December 10, 2007 |
| Amended: | September 21, 2009 |
| Amended: | September 12, 2016 |
| Amended: | September 22, 2022 |
v3.23.4
N-2
|
12 Months Ended |
Oct. 31, 2023
$ / shares
shares
|
Cover [Abstract] |
|
Entity Central Index Key |
0001319183
|
Amendment Flag |
false
|
Entity Inv Company Type |
N-2
|
Document Type |
N-CSR
|
Entity Registrant Name |
First Trust Mortgage Income Fund
|
General Description of Registrant [Abstract] |
|
Investment Objectives and Practices [Text Block] |
Investment
Objectives
The
Fund’s primary investment objective is to seek a high level of current income. As a secondary objective the Fund seeks to preserve
capital.
Principal
Investment Policies
In
the pursuit of its investment objectives, under normal market conditions:
•
|
The
Fund invests at least 80% of its managed assets in mortgage-backed securities. Such MBS may include those with fixed, floating or variable
interest rates, those with interest rates that change based on multiples of changes in a specified index of interest rates and those with
interest rates that change inversely to changes in interest rates, as well as those that do not bear interest. The Fund may also invest
in MBS through TBA Transactions. The Fund does not invest in corporate bonds other than those primarily secured by interests in real
estate. |
•
|
The
Fund may invest up to 35% of its managed assets in securities that, at the time of investment, are rated below investment grade (including
securities that are unrated but judged to be of comparable quality by the Advisor). |
•
|
The
Fund may invest up to 20% of its managed assets in U.S. government securities, or cash or other short-term instruments, and may invest
up to 10% of its managed assets in real-estate related assets collateralized by pools of assets, such as home equity loans and lines of
credit, and asset-backed securities, including non-mortgage asset-backed securities. |
•
|
The
Fund may invest up to 10% of its managed assets in securities that, at the time of investment, are illiquid. |
To
the extent the Fund enters into derivatives transactions, it will do so pursuant to Rule 18f-4 under the 1940 Act. Rule 18f-4 requires
the Fund to implement certain policies and procedures designed to manage its derivatives risks, dependent upon the Fund’s level
of exposure to derivative instruments.
The
Fund may engage in the use of leverage by issuing preferred shares of beneficial interest, entering into reverse repurchase agreements,
and/or issuing notes or other evidences of indebtedness including bank borrowings or commercial paper.
In
addition, the Fund may, but is not required to, use various strategic transactions to: (1) seek to reduce interest rate risks arising
from any use of leverage; (2) facilitate portfolio management; and (3) mitigate risks, including interest rate risk and credit risks.
The Fund generally seeks to use these instruments and transactions as portfolio management or hedging techniques to protect against possible
adverse changes in the market value of securities held in or to be purchased for the Fund’s portfolio, protect the value of the
Fund’s portfolio, facilitate the sale of certain securities for investment purposes, manage the effective interest rate exposure
of the Fund or establish positions in the derivative markets as a substitute for purchasing or selling particular securities.
Fundamental
Policies
The
Fund, as a fundamental policy, may not:
1.
With respect to 75% of its total assets, purchase any securities if, as a result (i) more than 5% of the Fund’s total assets
would then be invested in securities of any single issuer, or (ii) the Fund would hold more than 10% of the outstanding voting securities
of any single issuer; provided, that government securities (as defined in the 1940 Act), securities issued by other investment companies
and cash items (including receivables) shall not be counted for purposes of this limitation;
2.
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 issuers of mortgage-backed securities or obligations issued or guaranteed by the
U.S. Government or by its agencies or instrumentalities;
3.
Borrow money, except as permitted by the 1940 Act, the rules thereunder and interpretations thereof or pursuant to a Securities
and Exchange Commission exemptive order;
4.
Issue senior securities, as defined in the 1940 Act, other than: (i) Preferred Shares which immediately after issuance will have
asset coverage of at least 200%; (ii) indebtedness which immediately after issuance will have asset coverage of at least 300%; (iii) the
borrowings permitted by investment restriction 3 set forth above; or (iv) pursuant to a Securities and Exchange Commission exemptive order;
5.
Make loans of funds or other assets, other than by entering into repurchase agreements, lending portfolio securities and through
the purchase of debt securities in accordance with its investment objectives, policies and limitations;
6.
Act as underwriter of another issuer’s securities, except to the extent that the Fund may be deemed to be an underwriter within
the meaning of the Securities Act of 1933 in connection with the purchase and sale of portfolio securities;
7.
Purchase or sell real estate, but this shall not prevent the Fund from investing in securities of companies that deal in real estate
or are engaged in the real estate business, including real estate investment trusts, and securities secured by real estate or interests
therein and the Fund may hold and sell real estate or mortgages on real estate acquired through default, liquidation, or other distributions
of an interest in real estate as a result of the Fund’s ownership of such securities; and
8.
Purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments (but this shall
not prevent the Fund from purchasing or selling options, futures contracts or derivative instruments or from investing in securities or
other instruments backed by physical commodities).
For
the purpose of applying the limitation set forth in subparagraph 2 above, an issuer shall be deemed the sole issuer of a security when
its assets and revenues are separate from other governmental entities and its securities are backed only by its assets and revenues. Similarly,
in the case of a non-governmental issuer, such as an industrial corporation or a privately owned or operated hospital, if the security
is backed only by the assets and revenues of the non-governmental issuer, then such non-governmental issuer would be deemed to be the
sole issuer. Where a security is also backed by the enforceable obligation of a superior or unrelated governmental or other entity (other
than a bond insurer), it shall also be included in the computation of securities owned that are issued by such governmental or other entity.
Where a security is guaranteed by a governmental entity or some other facility, such as a bank guarantee or letter of credit, such a guarantee
or letter of credit would be considered a separate security and would be treated as an issue of such government, other entity or bank.
When a municipal bond is insured by bond insurance, it shall not be considered a security that is issued or guaranteed by the insurer;
instead, the issuer of such municipal bond will be determined in accordance with the principles set forth above.
Except
as noted above, the foregoing fundamental investment policies, together with the investment objectives of the Fund, cannot be changed
without approval by holders of a majority of the outstanding voting securities of the Fund, as defined in the 1940 Act, which includes
common shares of beneficial interest and preferred shares of beneficial interest (“Preferred Shares”), if any, voting together
as a single class, and of the holders of the outstanding Preferred Shares voting as a single class. Under the 1940 Act a “majority
of the outstanding voting securities” means the vote of: (A) 67% or more of the Fund’s shares present at a meeting, if the
holders of more than 50% of the Fund’s shares are present or represented by proxy; or (B) more than 50% of the Fund’s shares,
whichever is less.
|
Risk Factors [Table Text Block] |
Principal
Risks
The
Fund is a closed-end management investment company designed primarily as a long-term investment and not as a trading vehicle. The Fund
is not intended to be a complete investment program and, due to the uncertainty inherent in all investments, there can be no assurance
that the Fund will achieve its investment objectives. The following discussion summarizes the principal risks associated with investing
in the Fund, which includes the risk that you could lose some or all of your investment in the Fund. The Fund is subject to the
informational requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940 and, in accordance therewith,
files reports, proxy statements and other information that is available for review.
Collateralized
Mortgage Obligations Risk. Collateralized mortgage obligations (“CMOs”) are debt obligations
collateralized by mortgage loans or mortgage pass-through securities and are a type of mortgage-backed security. CMOs are created
by dividing the principal and interest payments collected on a pool of mortgages into several revenue streams (tranches) with different
priority rights to portions of the underlying mortgage payments. CMO tranches are often specially structured in a manner that provides
a variety of investment characteristics, such as yield, effective maturity and interest rate sensitivity. A risk of CMOs is the uncertainty
of the timing of cash flows that results from the rate of prepayments on the underlying mortgages serving as collateral and from the structure
of the particular CMO transaction (that is, the priority of the individual tranches). An increase or decrease in prepayment rates (resulting
from a decrease or increase in mortgage interest rates) may cause the CMOs to be retired substantially earlier than their stated maturities
or final distribution dates and will affect the yield and price of CMOs. Certain classes of CMOs are structured in a manner that makes
them extremely sensitive to changes in prepayment rates. In addition, if the collateral securing CMOs or any third-party guarantees are
insufficient to make payments, the Fund could sustain a loss.
Credit
Agency Risk. Credit ratings are determined by credit rating agencies and are only the opinions of such
entities. Ratings assigned by a rating agency are not absolute standards of credit quality and do not evaluate market risk or the liquidity
of securities. Any shortcomings or inefficiencies in credit rating agencies’ processes for determining credit ratings may adversely
affect the credit ratings of securities held by the Fund or such credit rating agency’s ability to evaluate creditworthiness and,
as a result, may adversely affect those securities’ perceived or actual credit risk.
Credit
and Below-Investment Grade Securities Risk. Credit risk is the risk that the issuer or other obligated
party of a debt security in the Fund’s portfolio will fail to pay, or it is perceived that it will fail to pay, dividends or interest
and/or repay principal, when due. Below-investment grade instruments, including instruments that are not rated but judged to be of comparable
quality, are commonly referred to as high-yield securities or “junk” bonds and are considered speculative with respect to
the issuer’s capacity to pay dividends or interest and repay principal and are more susceptible to default or decline in market
value than investment grade securities due to adverse economic and business developments. High-yield securities are often unsecured and
subordinated to other creditors of the issuer. The market values for high-yield securities tend to be very volatile, and these securities
are generally less liquid than investment grade securities. For these reasons, an investment in the Fund is subject to the following specific
risks: (i) increased price sensitivity to changing interest rates and to a deteriorating economic environment; (ii) greater risk of loss
due to default or declining credit quality; (iii) adverse company specific events more likely to render the issuer unable to make dividend,
interest and/or principal payments; (iv) negative perception of the high-yield market which may depress the price and liquidity of high-yield
securities; (v) volatility; and (vi) liquidity.
Current
Market Conditions Risk. Current market conditions risk is the risk that a particular investment, or
shares of the Fund in general, may fall in value due to current market conditions. As a means to fight inflation, which remains at elevated
levels, the Federal Reserve and certain foreign central banks have raised interest rates and expect to continue to do so, and the Federal
Reserve has announced that it intends to reverse previously implemented quantitative easing. U.S. regulators have proposed several changes
to market and issuer regulations which would directly impact the Fund, and any regulatory changes could adversely impact the Fund’s
ability to achieve its investment strategies or make certain investments. Recent and potential future bank failures could result in disruption
to the broader banking industry or markets generally and reduce confidence in financial institutions and the economy as a whole, which
may also heighten market volatility and reduce liquidity. The ongoing adversarial political climate in the United States, as well as political
and diplomatic events both domestic and abroad, have and may continue to have an adverse impact the U.S. regulatory landscape, markets
and investor behavior, which could have a negative impact on the Fund’s investments and operations. Other unexpected political,
regulatory and diplomatic events within the U.S. and abroad may affect investor and consumer confidence and may adversely impact financial
markets and the broader economy. For example, in February 2022, Russia invaded Ukraine which has caused and could continue to cause significant
market disruptions and volatility within the markets in Russia, Europe, and the United States. The hostilities and sanctions resulting
from those hostilities have and could continue to have a significant impact on certain Fund investments as well as Fund performance and
liquidity. The economies of the United States and its trading partners, as well as the financial markets generally, may be adversely impacted
by trade disputes and other matters. For example, the United States has imposed trade barriers and restrictions on China. In addition,
the Chinese government is engaged in a longstanding dispute with Taiwan, continually threatening an invasion. If the political climate
between the United States and China does not improve or continues to deteriorate, if China were to attempt invading Taiwan, or if other
geopolitical conflicts develop or worsen, economies, markets and individual securities may be adversely affected, and the value of the
Fund’s assets may go down. The COVID-19 global pandemic, or any future public health crisis, and the ensuing policies enacted by
governments and central banks have caused and may continue to cause significant volatility and uncertainty in global financial markets,
negatively impacting global growth prospects. While vaccines have been developed, there is no guarantee that vaccines will be effective
against emerging future variants of the disease. As this global pandemic illustrated, such events may affect certain geographic regions,
countries, sectors and industries more significantly than others. Advancements in technology may also adversely impact markets and the
overall performance of the Fund. For instance, the economy may be significantly impacted by the advanced development and increased regulation
of artificial intelligence. These events, and any other future events, may adversely affect the prices and liquidity of the Fund’s
portfolio investments and could result in disruptions in the trading markets.
Cyber
Security Risk. The Fund is susceptible to potential operational risks through breaches in cyber security.
A breach in cyber security refers to both intentional and unintentional events that may cause the Fund to lose proprietary information,
suffer data corruption or lose operational capacity. Such events could cause the Fund to incur regulatory penalties, reputational damage,
additional compliance costs associated with corrective measures and/or financial loss. Cyber security breaches may involve unauthorized
access to the Fund’s digital information systems through “hacking” or malicious software coding, but may also result
from outside attacks such as denial-of-service attacks through efforts to make network services unavailable to intended users. In addition,
cyber security breaches of the Fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor,
as applicable, or issuers in which the Fund invests, can also subject the Fund to many of the same risks associated with direct cyber
security breaches. The Fund has established risk management systems designed to reduce the risks associated with cyber security. However,
there is no guarantee that such efforts will succeed, especially because the Fund does not directly control the cyber
security
systems of issuers or third party service providers. Substantial costs may be incurred by the Fund in order to resolve or prevent cyber
incidents in the future.
Extension
Risk. Extension risk is the risk that, when interest rates rise, certain obligations will be paid off
by the issuer (or other obligated party) more slowly than anticipated, causing the value of these debt securities to fall. Rising interest
rates tend to extend the duration of debt securities, making their market value more sensitive to changes in interest rates. The value
of longer-term debt securities generally changes more in response to changes in interest rates than shorter-term debt securities. As a
result, in a period of rising interest rates, securities may exhibit additional volatility and may lose value.
Fixed-Income
Securities Risk. An investment in fixed-income securities is subject to certain risks, including:
•
|
Issuer
Risk. The value of fixed-income securities may decline for a number of reasons which directly relate
to the issuer, such as management performance, leverage and reduced demand for the issuer’s goods and services. In addition, an
issuer of fixed-income securities may default on its obligation to pay interest and repay principal. |
•
|
Prepayment
Risk. Prepayment risk is the risk that the issuer of a debt security will repay principal prior to the
scheduled maturity date. During periods of declining interest rates, the issuer of a security may exercise its option to prepay principal
earlier than scheduled, forcing the Fund to reinvest the proceeds from such prepayment in lower yielding securities, which may result
in a decline in the Fund’s income and distributions to common shareholders. |
•
|
Reinvestment
Risk. Reinvestment risk is the risk that income from the Fund’s portfolio will decline if the Fund
invests the proceeds from matured, traded or called securities or loans at market interest rates that are below the Fund portfolio’s
current earnings rate. |
Futures
Contracts Risk. The primary risks associated with the use of futures contracts are (a) the imperfect
correlation between the change in market value of the instruments or indices underlying the futures contracts and the price of the futures
contracts; (b) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures contract
when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; (d) the investment adviser’s
inability to predict correctly the direction of securities prices, interest rates, currency exchange rates and other economic factors;
and (e) the possibility that the counterparty will default in the performance of its obligations.
Illiquid
and Restricted Securities Risk. The Fund may invest in securities that are restricted and/or illiquid
securities. Restricted securities are securities that cannot be offered for public resale unless registered under the applicable securities
laws or that have a contractual restriction that prohibits or limits their resale. Restricted securities may be illiquid as they generally
are not listed on an exchange and may have no active trading market. Investments in restricted securities could have the effect of increasing
the amount of the Fund’s assets invested in illiquid securities if qualified institutional buyers are unwilling to purchase these
securities. Illiquid and restricted securities may be difficult to dispose of at a fair price at the times when the Fund believes it is
desirable to do so. The market price of illiquid and restricted securities generally is more volatile than that of more liquid securities,
which may adversely affect the price that the Fund pays for or recovers upon the sale of such securities. Illiquid and restricted securities
are also more difficult to value, especially in challenging markets.
Inflation
Risk. The Fund invests in securities that are subject to inflation risk. Inflation risk is the risk
that the value of assets or income from investments will be worth less in the future as inflation decreases the value of money. As inflation
increases, the present value of the Fund’s assets and distributions may decline. This risk is more prevalent with respect to debt
securities. Inflation creates uncertainty over the future real value (after inflation) of an investment. Inflation rates may change frequently
and drastically as a result of various factors, including unexpected shifts in the domestic or global economy, and the Fund’s investments
may not keep pace with inflation, which may result in losses to Fund investors.
Interest
Rate and Duration Risk. Interest rate risk is the risk that securities will decline in value because
of changes in market interest rates. For fixed income securities, when market interest rates rise, the market value of such securities
generally will fall. During periods of rising interest rates, the average life of certain types of securities may be extended because
of slower than expected prepayments. This may lock in a below-market yield, increase the security’s duration and further reduce
the value of the security. Fixed income securities with longer durations tend to be more sensitive to changes in interest rates, usually
making them more volatile than securities with shorter durations. Investments in fixed rate securities with long-term maturities may experience
significant price declines if long-term interest rates increase.
The
interest rates payable on floating rate securities are not fixed and may fluctuate based upon changes in market rates. As short-term interest
rates decline, interest payable on floating rate securities typically decreases. Alternatively, during periods of rising interest rates,
interest payable on floating rate securities typically increases. Changes in interest rates on floating rate securities may lag behind
changes in market rates or may have limits on the maximum increases in interest rates. The value of floating rate securities may decline
if their interest rates do not rise as much, or as quickly, as interest rates in general.
Many
financial instruments use or may use a floating rate based upon the LIBOR. The United Kingdom’s Financial Conduct Authority (the
“FCA”), which regulates LIBOR, has ceased making LIBOR available as a reference rate over a phase-out period that began December 31,
2022. There is no assurance that any alternative reference rate, including the Secured Overnight Financing Rate (“SOFR”) will
be similar to or produce the same value or economic equivalence as LIBOR or that instruments using an alternative rate will have the same
volume or liquidity. The unavailability or replacement of LIBOR may affect the value, liquidity or return on certain Fund investments
and may result in costs incurred in connection with closing out positions and entering into new trades. Any potential effects of the transition
away from LIBOR on the Fund or on certain instruments in which the Fund invests can be difficult to ascertain, and they may vary depending
on a variety of factors, and they could result in losses to the Fund.
In
general, income on inverse floating rate securities will decrease when interest rates increase and increase when interest rates decrease.
Inverse floating rate securities generally will underperform the market for fixed rate securities in a rising interest rate environment.
An inverse floating rate security’s price may be more volatile than that of a fixed rate security.
In
the case of stripped mortgage-backed securities, in general, when interest rates are falling and prepayment rates are increasing, the
value of a principal only security (“PO Security”) will rise and the value of an interest only security (“IO Security”)
will fall. Conversely, when interest rates are rising and prepayment rates are decreasing, in general, the value of a PO Security will
fall and the value of an IO Security will rise. Yields on IOs and POs are very sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets.
Leverage
Risk. The use of leverage by the Fund can magnify the effect of any losses. If the income and gains
from the securities and investments purchased with leverage proceeds do not cover the cost of leverage, the return to the common shares
will be less than if leverage had not been used. Leverage involves risks and special considerations for common shareholders including:
the likelihood of greater volatility of net asset value and market price of the common shares than a comparable portfolio without leverage;
the risk that fluctuations in interest rates on borrowings will reduce the return to the common shareholders or will result in fluctuations
in the dividends paid on the common shares; in a declining market, the use of leverage is likely to cause a greater decline in the net
asset value of the common shares than if the Fund were not leveraged, which may result in a greater decline in the market price of the
common shares; and when the Fund uses certain types of leverage, the investment advisory fee payable to the Advisor will be higher than
if the Fund did not use leverage.
Management
Risk and Reliance on Key Personnel. The implementation of the Fund’s investment strategy depends
upon the continued contributions of certain key employees of the Advisor, some of whom have unique talents and experience and would be
difficult to replace. The loss or interruption of the services of a key member of the portfolio management team could have a negative
impact on the Fund.
Market
Discount from Net Asset Value. Shares of closed-end investment companies such as the Fund frequently
trade at a discount from their net asset value. The Fund cannot predict whether its common shares will trade at, below or above net asset
value.
Market
Risk. Investments held by the Fund, as well as shares of the Fund itself, are subject to market fluctuations
caused by real or perceived economic conditions, political events, regulatory factors or market developments, changes in interest rates
and perceived trends in securities prices. Shares of the Fund could decline in value or underperform other investments as a result of
the risk of loss associated with these market fluctuations. In addition, local, regional or global events such as war, acts of terrorism,
market manipulation, government defaults, government shutdowns, regulatory actions, political changes, diplomatic developments, the imposition
of sanctions and other similar measures, spread of infectious diseases or other public health issues, recessions, or other events could
have a significant negative impact on the Fund and its investments. Any of such circumstances could have a materially negative impact
on the value of the Fund’s shares, the liquidity of an investment, and result in increased market volatility. During any such events,
the Fund’s shares may trade at increased premiums or discounts to their net asset value, the bid/ask spread on the Fund’s
shares may widen and the returns on investment may fluctuate.
Mortgage-Backed
Securities Risk. The Fund invests in mortgage-backed securities, representing direct or indirect interests
in pools of underlying residential or commercial mortgage loans that are secured by real property. These securities provide investors
with payments consisting of both principal and interest as the mortgages in the underlying mortgage pools are paid. A mortgage-backed
security may be negatively affected by the quality of the mortgages underlying such security and the structure of its issuer. For example,
if a mortgage underlying a particular mortgage-backed security defaults, the value of that security may decrease. Moreover, a downturn
in the markets for residential or commercial real estate or a general economic downturn could negatively affect both the price and liquidity
of privately issued mortgage-backed securities. Mortgage-backed securities are subject to prepayment risk, which is the risk that the
borrowers under the mortgage loans underlying a Fund’s mortgage-backed securities might pay off their mortgage loans sooner than
expected, which could happen when interest rates fall or for other reasons, which could cause the value of the Fund’s mortgage-backed
securities to fall. Moreover, if the underlying mortgage loans are paid off sooner than expected, the Fund may have to reinvest the proceeds
in other securities that have lower yields. Mortgage-backed securities are also subject to extension risk, which
is
the risk that rising interest rates could cause mortgages underlying the securities to be prepaid more slowly than expected, resulting
in slower prepayments of the securities. This would, in effect, convert a short or medium-duration mortgage-backed security into a longer-duration
security, increasing its sensitivity to interest rate changes and likely causing its price to decline. Mortgage-backed securities issued
by a private issuer, such as commercial mortgage-backed securities, generally entail greater risk than obligations directly or indirectly
guaranteed by the U.S. government or a government-sponsored entity.
A
portion of the Fund’s managed assets may be invested in subordinated classes of mortgage-backed securities. Such subordinated classes
are subject to a greater degree of non-payment risk than are senior classes of the same issuer or agency. In addition, under certain
market conditions, the market for subordinated classes of mortgage-backed securities may not be as liquid as the market for other fixed
income securities.
Given
its focus in mortgage-backed securities, the Fund may be more susceptible to adverse economic, political and regulatory events that affect
the value of real estate.
Non-Agency
Securities Risk. Investments in asset-backed or mortgage-backed securities offered by non-governmental
issuers, such as commercial banks, savings and loans, private mortgage insurance companies, mortgage bankers and other secondary market
issuers are subject to additional risks. There are no direct or indirect government or agency guarantees of payments in loan pools created
by non-government issuers. Securities issued by private issuers are subject to the credit risks of such issuers. An unexpectedly high
rate of defaults on the loan pool may adversely affect the value of a non-agency security and could result in losses to the Fund. The
risk of such defaults is generally higher in the case of pools that include subprime loans. Non-agency securities are typically traded
“over-the-counter” rather than on a securities exchange and there may be a limited market for the securities, especially when
there is a perceived weakness in the mortgage and real estate market sectors. Without an active trading market, the non-agency mortgage-related
securities held by the Fund may be particularly difficult to value because of the complexities involved in assessing the value of the
underlying loans.
Operational
Risk. The Fund is subject to risks arising from various operational factors, including, but not limited
to, human error, processing and communication errors, errors of the Fund’s service providers, counterparties or other third-parties,
failed or inadequate processes and technology or systems failures. The Fund relies on third-parties for a range of services, including
custody. Any delay or failure relating to engaging or maintaining such service providers may affect the Fund’s ability to meet its
investment objective. Although the Fund and the Advisor seek to reduce these operational risks through controls and procedures, there
is no way to completely protect against such risks.
Potential
Conflicts of Interest Risk. First Trust and the portfolio managers have interests which may conflict
with the interests of the Fund. In particular, First Trust currently manages and may in the future manage and/or advise other investment
funds or accounts with the same or substantially similar investment objectives and strategies as the Fund. In addition, while the Fund
is using leverage, the amount of the fees paid to First Trust for investment advisory and management services are higher than if the Fund
did not use leverage because the fees paid are calculated based on managed assets. Therefore, First Trust has a financial incentive to
leverage the Fund.
TBA
Transactions Risk. The Fund may purchase securities via TBA (To Be Announced) Transactions. In such
a transaction, the purchase price of the securities is typically fixed at the time of the commitment, but delivery and payment can take
place a month or more after the date of the commitment. At the time of delivery of the securities, the value may be more or less than
the purchase or sale price. Purchasing securities in a TBA Transaction may give rise to investment leverage and may increase the Fund’s
volatility. Default by, or bankruptcy of, a counterparty to a TBA Transaction would expose the Fund to possible losses because of an adverse
market action, expenses or delays in connection with the purchase or sale of the pools specified in such transaction.
Valuation
Risk. The valuation of securitized assets may carry more risk than that of common stock. Uncertainties
in the conditions of the financial markets, unreliable reference data, lack of transparency and inconsistency of valuation models and
processes may lead to inaccurate asset pricing. The Fund may hold investments in sizes smaller than institutionally-sized round lot positions
(sometimes referred to as odd lots). However, third-party pricing services generally provide evaluations on the basis of institutionally-sized
round lots. If the Fund sells certain of its investments in an odd lot transaction, the sale price may be less than the value at which
such securities have been held by the Fund. Odd lots often trade at lower prices than institutional round lots. There is no assurance
that the Fund will be able to sell a portfolio security at the price established by the pricing service, which could result in a loss
to the Fund.
|
Share Price |
$ 10.88
|
NAV Per Share |
$ 11.72
|
Capital Stock, Long-Term Debt, and Other Securities [Abstract] |
|
Outstanding Security, Title [Text Block] |
Common Shares outstanding (unlimited number of Common Shares has been authorized)
|
Outstanding Security, Held [Shares] | shares |
4,213,115
|
Collateralized Mortgage Obligations Risk [Member] |
|
General Description of Registrant [Abstract] |
|
Risk [Text Block] |
Collateralized
Mortgage Obligations Risk. Collateralized mortgage obligations (“CMOs”) are debt obligations
collateralized by mortgage loans or mortgage pass-through securities and are a type of mortgage-backed security. CMOs are created
by dividing the principal and interest payments collected on a pool of mortgages into several revenue streams (tranches) with different
priority rights to portions of the underlying mortgage payments. CMO tranches are often specially structured in a manner that provides
a variety of investment characteristics, such as yield, effective maturity and interest rate sensitivity. A risk of CMOs is the uncertainty
of the timing of cash flows that results from the rate of prepayments on the underlying mortgages serving as collateral and from the structure
of the particular CMO transaction (that is, the priority of the individual tranches). An increase or decrease in prepayment rates (resulting
from a decrease or increase in mortgage interest rates) may cause the CMOs to be retired substantially earlier than their stated maturities
or final distribution dates and will affect the yield and price of CMOs. Certain classes of CMOs are structured in a manner that makes
them extremely sensitive to changes in prepayment rates. In addition, if the collateral securing CMOs or any third-party guarantees are
insufficient to make payments, the Fund could sustain a loss.
|
Credit Agency Risk [Member] |
|
General Description of Registrant [Abstract] |
|
Risk [Text Block] |
Credit
Agency Risk. Credit ratings are determined by credit rating agencies and are only the opinions of such
entities. Ratings assigned by a rating agency are not absolute standards of credit quality and do not evaluate market risk or the liquidity
of securities. Any shortcomings or inefficiencies in credit rating agencies’ processes for determining credit ratings may adversely
affect the credit ratings of securities held by the Fund or such credit rating agency’s ability to evaluate creditworthiness and,
as a result, may adversely affect those securities’ perceived or actual credit risk.
|
Credit And Below Investment Grade Securities Risk [Member] |
|
General Description of Registrant [Abstract] |
|
Risk [Text Block] |
Credit
and Below-Investment Grade Securities Risk. Credit risk is the risk that the issuer or other obligated
party of a debt security in the Fund’s portfolio will fail to pay, or it is perceived that it will fail to pay, dividends or interest
and/or repay principal, when due. Below-investment grade instruments, including instruments that are not rated but judged to be of comparable
quality, are commonly referred to as high-yield securities or “junk” bonds and are considered speculative with respect to
the issuer’s capacity to pay dividends or interest and repay principal and are more susceptible to default or decline in market
value than investment grade securities due to adverse economic and business developments. High-yield securities are often unsecured and
subordinated to other creditors of the issuer. The market values for high-yield securities tend to be very volatile, and these securities
are generally less liquid than investment grade securities. For these reasons, an investment in the Fund is subject to the following specific
risks: (i) increased price sensitivity to changing interest rates and to a deteriorating economic environment; (ii) greater risk of loss
due to default or declining credit quality; (iii) adverse company specific events more likely to render the issuer unable to make dividend,
interest and/or principal payments; (iv) negative perception of the high-yield market which may depress the price and liquidity of high-yield
securities; (v) volatility; and (vi) liquidity.
|
Current Market Conditions Risk [Member] |
|
General Description of Registrant [Abstract] |
|
Risk [Text Block] |
Current
Market Conditions Risk. Current market conditions risk is the risk that a particular investment, or
shares of the Fund in general, may fall in value due to current market conditions. As a means to fight inflation, which remains at elevated
levels, the Federal Reserve and certain foreign central banks have raised interest rates and expect to continue to do so, and the Federal
Reserve has announced that it intends to reverse previously implemented quantitative easing. U.S. regulators have proposed several changes
to market and issuer regulations which would directly impact the Fund, and any regulatory changes could adversely impact the Fund’s
ability to achieve its investment strategies or make certain investments. Recent and potential future bank failures could result in disruption
to the broader banking industry or markets generally and reduce confidence in financial institutions and the economy as a whole, which
may also heighten market volatility and reduce liquidity. The ongoing adversarial political climate in the United States, as well as political
and diplomatic events both domestic and abroad, have and may continue to have an adverse impact the U.S. regulatory landscape, markets
and investor behavior, which could have a negative impact on the Fund’s investments and operations. Other unexpected political,
regulatory and diplomatic events within the U.S. and abroad may affect investor and consumer confidence and may adversely impact financial
markets and the broader economy. For example, in February 2022, Russia invaded Ukraine which has caused and could continue to cause significant
market disruptions and volatility within the markets in Russia, Europe, and the United States. The hostilities and sanctions resulting
from those hostilities have and could continue to have a significant impact on certain Fund investments as well as Fund performance and
liquidity. The economies of the United States and its trading partners, as well as the financial markets generally, may be adversely impacted
by trade disputes and other matters. For example, the United States has imposed trade barriers and restrictions on China. In addition,
the Chinese government is engaged in a longstanding dispute with Taiwan, continually threatening an invasion. If the political climate
between the United States and China does not improve or continues to deteriorate, if China were to attempt invading Taiwan, or if other
geopolitical conflicts develop or worsen, economies, markets and individual securities may be adversely affected, and the value of the
Fund’s assets may go down. The COVID-19 global pandemic, or any future public health crisis, and the ensuing policies enacted by
governments and central banks have caused and may continue to cause significant volatility and uncertainty in global financial markets,
negatively impacting global growth prospects. While vaccines have been developed, there is no guarantee that vaccines will be effective
against emerging future variants of the disease. As this global pandemic illustrated, such events may affect certain geographic regions,
countries, sectors and industries more significantly than others. Advancements in technology may also adversely impact markets and the
overall performance of the Fund. For instance, the economy may be significantly impacted by the advanced development and increased regulation
of artificial intelligence. These events, and any other future events, may adversely affect the prices and liquidity of the Fund’s
portfolio investments and could result in disruptions in the trading markets.
|
Cyber Security Risk [Member] |
|
General Description of Registrant [Abstract] |
|
Risk [Text Block] |
Cyber
Security Risk. The Fund is susceptible to potential operational risks through breaches in cyber security.
A breach in cyber security refers to both intentional and unintentional events that may cause the Fund to lose proprietary information,
suffer data corruption or lose operational capacity. Such events could cause the Fund to incur regulatory penalties, reputational damage,
additional compliance costs associated with corrective measures and/or financial loss. Cyber security breaches may involve unauthorized
access to the Fund’s digital information systems through “hacking” or malicious software coding, but may also result
from outside attacks such as denial-of-service attacks through efforts to make network services unavailable to intended users. In addition,
cyber security breaches of the Fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor,
as applicable, or issuers in which the Fund invests, can also subject the Fund to many of the same risks associated with direct cyber
security breaches. The Fund has established risk management systems designed to reduce the risks associated with cyber security. However,
there is no guarantee that such efforts will succeed, especially because the Fund does not directly control the cyber
security
systems of issuers or third party service providers. Substantial costs may be incurred by the Fund in order to resolve or prevent cyber
incidents in the future.
|
Extension Risk [Member] |
|
General Description of Registrant [Abstract] |
|
Risk [Text Block] |
Extension
Risk. Extension risk is the risk that, when interest rates rise, certain obligations will be paid off
by the issuer (or other obligated party) more slowly than anticipated, causing the value of these debt securities to fall. Rising interest
rates tend to extend the duration of debt securities, making their market value more sensitive to changes in interest rates. The value
of longer-term debt securities generally changes more in response to changes in interest rates than shorter-term debt securities. As a
result, in a period of rising interest rates, securities may exhibit additional volatility and may lose value.
|
Fixed Income Securities Risk [Member] |
|
General Description of Registrant [Abstract] |
|
Risk [Text Block] |
Fixed-Income
Securities Risk. An investment in fixed-income securities is subject to certain risks, including:
•
|
Issuer
Risk. The value of fixed-income securities may decline for a number of reasons which directly relate
to the issuer, such as management performance, leverage and reduced demand for the issuer’s goods and services. In addition, an
issuer of fixed-income securities may default on its obligation to pay interest and repay principal. |
•
|
Prepayment
Risk. Prepayment risk is the risk that the issuer of a debt security will repay principal prior to the
scheduled maturity date. During periods of declining interest rates, the issuer of a security may exercise its option to prepay principal
earlier than scheduled, forcing the Fund to reinvest the proceeds from such prepayment in lower yielding securities, which may result
in a decline in the Fund’s income and distributions to common shareholders. |
•
|
Reinvestment
Risk. Reinvestment risk is the risk that income from the Fund’s portfolio will decline if the Fund
invests the proceeds from matured, traded or called securities or loans at market interest rates that are below the Fund portfolio’s
current earnings rate. |
|
Futures Contracts Risk [Member] |
|
General Description of Registrant [Abstract] |
|
Risk [Text Block] |
Futures
Contracts Risk. The primary risks associated with the use of futures contracts are (a) the imperfect
correlation between the change in market value of the instruments or indices underlying the futures contracts and the price of the futures
contracts; (b) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures contract
when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; (d) the investment adviser’s
inability to predict correctly the direction of securities prices, interest rates, currency exchange rates and other economic factors;
and (e) the possibility that the counterparty will default in the performance of its obligations.
|
Illiquid And Restricted Securities Risk [Member] |
|
General Description of Registrant [Abstract] |
|
Risk [Text Block] |
Illiquid
and Restricted Securities Risk. The Fund may invest in securities that are restricted and/or illiquid
securities. Restricted securities are securities that cannot be offered for public resale unless registered under the applicable securities
laws or that have a contractual restriction that prohibits or limits their resale. Restricted securities may be illiquid as they generally
are not listed on an exchange and may have no active trading market. Investments in restricted securities could have the effect of increasing
the amount of the Fund’s assets invested in illiquid securities if qualified institutional buyers are unwilling to purchase these
securities. Illiquid and restricted securities may be difficult to dispose of at a fair price at the times when the Fund believes it is
desirable to do so. The market price of illiquid and restricted securities generally is more volatile than that of more liquid securities,
which may adversely affect the price that the Fund pays for or recovers upon the sale of such securities. Illiquid and restricted securities
are also more difficult to value, especially in challenging markets.
|
Inflation Risk [Member] |
|
General Description of Registrant [Abstract] |
|
Risk [Text Block] |
Inflation
Risk. The Fund invests in securities that are subject to inflation risk. Inflation risk is the risk
that the value of assets or income from investments will be worth less in the future as inflation decreases the value of money. As inflation
increases, the present value of the Fund’s assets and distributions may decline. This risk is more prevalent with respect to debt
securities. Inflation creates uncertainty over the future real value (after inflation) of an investment. Inflation rates may change frequently
and drastically as a result of various factors, including unexpected shifts in the domestic or global economy, and the Fund’s investments
may not keep pace with inflation, which may result in losses to Fund investors.
|
Interest Rate And Duration Risk [Member] |
|
General Description of Registrant [Abstract] |
|
Risk [Text Block] |
Interest
Rate and Duration Risk. Interest rate risk is the risk that securities will decline in value because
of changes in market interest rates. For fixed income securities, when market interest rates rise, the market value of such securities
generally will fall. During periods of rising interest rates, the average life of certain types of securities may be extended because
of slower than expected prepayments. This may lock in a below-market yield, increase the security’s duration and further reduce
the value of the security. Fixed income securities with longer durations tend to be more sensitive to changes in interest rates, usually
making them more volatile than securities with shorter durations. Investments in fixed rate securities with long-term maturities may experience
significant price declines if long-term interest rates increase.
The
interest rates payable on floating rate securities are not fixed and may fluctuate based upon changes in market rates. As short-term interest
rates decline, interest payable on floating rate securities typically decreases. Alternatively, during periods of rising interest rates,
interest payable on floating rate securities typically increases. Changes in interest rates on floating rate securities may lag behind
changes in market rates or may have limits on the maximum increases in interest rates. The value of floating rate securities may decline
if their interest rates do not rise as much, or as quickly, as interest rates in general.
Many
financial instruments use or may use a floating rate based upon the LIBOR. The United Kingdom’s Financial Conduct Authority (the
“FCA”), which regulates LIBOR, has ceased making LIBOR available as a reference rate over a phase-out period that began December 31,
2022. There is no assurance that any alternative reference rate, including the Secured Overnight Financing Rate (“SOFR”) will
be similar to or produce the same value or economic equivalence as LIBOR or that instruments using an alternative rate will have the same
volume or liquidity. The unavailability or replacement of LIBOR may affect the value, liquidity or return on certain Fund investments
and may result in costs incurred in connection with closing out positions and entering into new trades. Any potential effects of the transition
away from LIBOR on the Fund or on certain instruments in which the Fund invests can be difficult to ascertain, and they may vary depending
on a variety of factors, and they could result in losses to the Fund.
In
general, income on inverse floating rate securities will decrease when interest rates increase and increase when interest rates decrease.
Inverse floating rate securities generally will underperform the market for fixed rate securities in a rising interest rate environment.
An inverse floating rate security’s price may be more volatile than that of a fixed rate security.
In
the case of stripped mortgage-backed securities, in general, when interest rates are falling and prepayment rates are increasing, the
value of a principal only security (“PO Security”) will rise and the value of an interest only security (“IO Security”)
will fall. Conversely, when interest rates are rising and prepayment rates are decreasing, in general, the value of a PO Security will
fall and the value of an IO Security will rise. Yields on IOs and POs are very sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets.
|
Leverage Risk [Member] |
|
General Description of Registrant [Abstract] |
|
Risk [Text Block] |
Leverage
Risk. The use of leverage by the Fund can magnify the effect of any losses. If the income and gains
from the securities and investments purchased with leverage proceeds do not cover the cost of leverage, the return to the common shares
will be less than if leverage had not been used. Leverage involves risks and special considerations for common shareholders including:
the likelihood of greater volatility of net asset value and market price of the common shares than a comparable portfolio without leverage;
the risk that fluctuations in interest rates on borrowings will reduce the return to the common shareholders or will result in fluctuations
in the dividends paid on the common shares; in a declining market, the use of leverage is likely to cause a greater decline in the net
asset value of the common shares than if the Fund were not leveraged, which may result in a greater decline in the market price of the
common shares; and when the Fund uses certain types of leverage, the investment advisory fee payable to the Advisor will be higher than
if the Fund did not use leverage.
|
Management Risk And Reliance On Key Personnel [Member] |
|
General Description of Registrant [Abstract] |
|
Risk [Text Block] |
Management
Risk and Reliance on Key Personnel. The implementation of the Fund’s investment strategy depends
upon the continued contributions of certain key employees of the Advisor, some of whom have unique talents and experience and would be
difficult to replace. The loss or interruption of the services of a key member of the portfolio management team could have a negative
impact on the Fund.
|
Market Discount From Net Asset Value [Member] |
|
General Description of Registrant [Abstract] |
|
Risk [Text Block] |
Market
Discount from Net Asset Value. Shares of closed-end investment companies such as the Fund frequently
trade at a discount from their net asset value. The Fund cannot predict whether its common shares will trade at, below or above net asset
value.
|
Market Risk [Member] |
|
General Description of Registrant [Abstract] |
|
Risk [Text Block] |
Market
Risk. Investments held by the Fund, as well as shares of the Fund itself, are subject to market fluctuations
caused by real or perceived economic conditions, political events, regulatory factors or market developments, changes in interest rates
and perceived trends in securities prices. Shares of the Fund could decline in value or underperform other investments as a result of
the risk of loss associated with these market fluctuations. In addition, local, regional or global events such as war, acts of terrorism,
market manipulation, government defaults, government shutdowns, regulatory actions, political changes, diplomatic developments, the imposition
of sanctions and other similar measures, spread of infectious diseases or other public health issues, recessions, or other events could
have a significant negative impact on the Fund and its investments. Any of such circumstances could have a materially negative impact
on the value of the Fund’s shares, the liquidity of an investment, and result in increased market volatility. During any such events,
the Fund’s shares may trade at increased premiums or discounts to their net asset value, the bid/ask spread on the Fund’s
shares may widen and the returns on investment may fluctuate.
|
Mortgage Backed Securities Risk [Member] |
|
General Description of Registrant [Abstract] |
|
Risk [Text Block] |
Mortgage-Backed
Securities Risk. The Fund invests in mortgage-backed securities, representing direct or indirect interests
in pools of underlying residential or commercial mortgage loans that are secured by real property. These securities provide investors
with payments consisting of both principal and interest as the mortgages in the underlying mortgage pools are paid. A mortgage-backed
security may be negatively affected by the quality of the mortgages underlying such security and the structure of its issuer. For example,
if a mortgage underlying a particular mortgage-backed security defaults, the value of that security may decrease. Moreover, a downturn
in the markets for residential or commercial real estate or a general economic downturn could negatively affect both the price and liquidity
of privately issued mortgage-backed securities. Mortgage-backed securities are subject to prepayment risk, which is the risk that the
borrowers under the mortgage loans underlying a Fund’s mortgage-backed securities might pay off their mortgage loans sooner than
expected, which could happen when interest rates fall or for other reasons, which could cause the value of the Fund’s mortgage-backed
securities to fall. Moreover, if the underlying mortgage loans are paid off sooner than expected, the Fund may have to reinvest the proceeds
in other securities that have lower yields. Mortgage-backed securities are also subject to extension risk, which
is
the risk that rising interest rates could cause mortgages underlying the securities to be prepaid more slowly than expected, resulting
in slower prepayments of the securities. This would, in effect, convert a short or medium-duration mortgage-backed security into a longer-duration
security, increasing its sensitivity to interest rate changes and likely causing its price to decline. Mortgage-backed securities issued
by a private issuer, such as commercial mortgage-backed securities, generally entail greater risk than obligations directly or indirectly
guaranteed by the U.S. government or a government-sponsored entity.
A
portion of the Fund’s managed assets may be invested in subordinated classes of mortgage-backed securities. Such subordinated classes
are subject to a greater degree of non-payment risk than are senior classes of the same issuer or agency. In addition, under certain
market conditions, the market for subordinated classes of mortgage-backed securities may not be as liquid as the market for other fixed
income securities.
Given
its focus in mortgage-backed securities, the Fund may be more susceptible to adverse economic, political and regulatory events that affect
the value of real estate.
|
Non Agency Securities Risk [Member] |
|
General Description of Registrant [Abstract] |
|
Risk [Text Block] |
Non-Agency
Securities Risk. Investments in asset-backed or mortgage-backed securities offered by non-governmental
issuers, such as commercial banks, savings and loans, private mortgage insurance companies, mortgage bankers and other secondary market
issuers are subject to additional risks. There are no direct or indirect government or agency guarantees of payments in loan pools created
by non-government issuers. Securities issued by private issuers are subject to the credit risks of such issuers. An unexpectedly high
rate of defaults on the loan pool may adversely affect the value of a non-agency security and could result in losses to the Fund. The
risk of such defaults is generally higher in the case of pools that include subprime loans. Non-agency securities are typically traded
“over-the-counter” rather than on a securities exchange and there may be a limited market for the securities, especially when
there is a perceived weakness in the mortgage and real estate market sectors. Without an active trading market, the non-agency mortgage-related
securities held by the Fund may be particularly difficult to value because of the complexities involved in assessing the value of the
underlying loans.
|
Operational Risk [Member] |
|
General Description of Registrant [Abstract] |
|
Risk [Text Block] |
Operational
Risk. The Fund is subject to risks arising from various operational factors, including, but not limited
to, human error, processing and communication errors, errors of the Fund’s service providers, counterparties or other third-parties,
failed or inadequate processes and technology or systems failures. The Fund relies on third-parties for a range of services, including
custody. Any delay or failure relating to engaging or maintaining such service providers may affect the Fund’s ability to meet its
investment objective. Although the Fund and the Advisor seek to reduce these operational risks through controls and procedures, there
is no way to completely protect against such risks.
|
Potential Conflicts Of Interest Risk [Member] |
|
General Description of Registrant [Abstract] |
|
Risk [Text Block] |
Potential
Conflicts of Interest Risk. First Trust and the portfolio managers have interests which may conflict
with the interests of the Fund. In particular, First Trust currently manages and may in the future manage and/or advise other investment
funds or accounts with the same or substantially similar investment objectives and strategies as the Fund. In addition, while the Fund
is using leverage, the amount of the fees paid to First Trust for investment advisory and management services are higher than if the Fund
did not use leverage because the fees paid are calculated based on managed assets. Therefore, First Trust has a financial incentive to
leverage the Fund.
|
T B A Transactions Risk [Member] |
|
General Description of Registrant [Abstract] |
|
Risk [Text Block] |
TBA
Transactions Risk. The Fund may purchase securities via TBA (To Be Announced) Transactions. In such
a transaction, the purchase price of the securities is typically fixed at the time of the commitment, but delivery and payment can take
place a month or more after the date of the commitment. At the time of delivery of the securities, the value may be more or less than
the purchase or sale price. Purchasing securities in a TBA Transaction may give rise to investment leverage and may increase the Fund’s
volatility. Default by, or bankruptcy of, a counterparty to a TBA Transaction would expose the Fund to possible losses because of an adverse
market action, expenses or delays in connection with the purchase or sale of the pools specified in such transaction.
|
Valuation Risk [Member] |
|
General Description of Registrant [Abstract] |
|
Risk [Text Block] |
Valuation
Risk. The valuation of securitized assets may carry more risk than that of common stock. Uncertainties
in the conditions of the financial markets, unreliable reference data, lack of transparency and inconsistency of valuation models and
processes may lead to inaccurate asset pricing. The Fund may hold investments in sizes smaller than institutionally-sized round lot positions
(sometimes referred to as odd lots). However, third-party pricing services generally provide evaluations on the basis of institutionally-sized
round lots. If the Fund sells certain of its investments in an odd lot transaction, the sale price may be less than the value at which
such securities have been held by the Fund. Odd lots often trade at lower prices than institutional round lots. There is no assurance
that the Fund will be able to sell a portfolio security at the price established by the pricing service, which could result in a loss
to the Fund.
|
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