Senior Loan & Limited Duration Opportunities Closed-End, Series 19
The global economy has pulled out of a recession unprecedented in the post–World War II era. According to the International Monetary Fund, world GDP growth is estimated to be 3.5% for 2013 and 4.1% for 2014.
The recession has had a big impact on defaults. The default rate on senior loans stood at an alltime high of 8.25% in November 2009 according to Standard & Poor's LCD. The previous all-time high was 8.23% in December 2000. In January 2013, the default rate on senior loans stood at 1.66%. Of course, there can be no assurance the default rate will not increase.
This unit investment trust seeks high current income by investing in a diversified portfolio of closed-end funds which invest in senior loan and limited duration fixed-income securities; however, there is no assurance the objective will be met. The portfolio terminates approximately fifteen months from the initial date of deposit.
Consider These Factors
- While senior loans are generally loans which have been made to companies whose debt is typically rated below investment grade, they are senior in the asset structure of a company and historical recovery rates in the event of a default tend to be much higher relative to junior high-yield corporate debt.
- The interest paid on a senior loan resets every 30-90 days based on prevailing shortterm interest rates. Therefore, should shortterm rates move higher, investors in senior loans would receive a higher income stream due to the floating rate nature of the interest on the loans. Unlike securities with a fixed rate coupon, a senior loan's floating rate feature provides a natural hedge against rising interest rates.
- We believe there is potential for interest rates to move higher which makes limited duration closed-end funds attractive because they provide investors with high income but with less interest rate sensitivity. The duration of a bond is a measure of its price sensitivity to interest rate movements based on the weighted average term to maturity of its interest and principal cash flows. Historically these funds have tended to hold up better in rising interest rate environments than closed-end funds which invest in longer duration bonds.
- Limited duration closed-end funds are typically diversified across several different segments of the fixed income market. This multi-sector income approach primarily helps to reduce volatility and also has the potential to enhance your returns because different sectors within the debt market often react differently to economic and market changes.
Since closed-end funds maintain a relatively fixed pool of investment capital, portfolio managers are better able to adhere to their investment philosophies through greater flexibility and control. In addition, closed-end funds do not have to manage fund liquidity to meet potentially large redemptions.
Closed-end funds are structured to generally provide a more stable income stream than other managed investment products because they are not subjected to cash inflows and outflows, which can dilute dividends over time. However, as a result of bond calls, redemptions and advanced refundings, which can dilute a fund's income, the portfolio cannot guarantee consistent income.
| Not FDIC Insured Not Bank Guaranteed May Lose Value
You should consider the portfolio's investment objectives, risks, and
charges and expenses carefully before investing. Contact your financial advisor
or call First Trust Portfolios, L.P. at 1.800.621.1675 to request a prospectus,
which contains this and other information about the portfolio. Read it carefully
before you invest.
An investment in this unmanaged unit investment trust should be made with an understanding of the risks associated with senior loan and limited duration closed-end funds.
Closed-end funds are subject to various risks, including management's ability to meet the fund's investment objective, and to manage the fund's portfolio when the underlying securities are redeemed or sold, during periods of market turmoil and as investors' perceptions regarding the funds or their underlying investments change. Unlike open-end funds, which trade at prices based on a current determination of the fund's net asset value, closed-end funds frequently trade at a discount to their net asset value in the secondary market. Certain closed-end funds may employ the use of leverage which increases the volatility of such funds.
Certain of the closed-end funds invest in preferred securities. Preferred securities are sensitive to changes in interest rates and the market price generally falls with rising interest rates. Preferred securities are more likely to be called for redemption in a declining interest rate environment.
The yield on closed-end funds which invest in senior loans will generally decline in a falling interest rate environment and increase in a rising interest rate environment. Senior loans are generally below investment grade quality ("high-yield" securities or "junk" bonds). Investing in such securities should be viewed as speculative and you should review your ability to assume the risks associated with investments which utilize such securities. High-yield securities are subject to numerous risks including higher interest rates, economic recession, deterioration of the high-yield securities market, possible downgrades and defaults of interest and/or principal. High-yield security prices tend to fluctuate more than higher rated securities and are affected by short-term credit developments to a greater degree.
Certain of the closed-end funds included in the portfolio invest in limited duration bonds. Limited duration bonds are subject to interest rate risk, which is the risk that the value of a security will fall if interest rates increase. While limited duration bonds are generally subject to less interest rate sensitivity than longer duration bonds, there can be no assurance that interest rates will not rise during the life of the trust.
Certain of the closed-end funds included in the portfolio invest in mortgage-backed securities. Rising interest rates tend to extend the duration of mortgage-backed securities, making them more sensitive to changes in interest rates, and may reduce the market value of the securities. In addition, mortgage-backed securities are subject to prepayment risk, the risk that borrowers may pay off their mortgages sooner than expected, particularly when interest rates decline.
Certain of the closed-end funds invest in subprime mortgage loans. Subprime mortgage loans are subject to numerous risks, including increased credit risks, higher interest rates, shifts in the market's perception of issuers and regulatory or tax changes adversely affecting the mortgage securities markets.
Certain of the closed-end funds included in the portfolio invest in investment grade bonds. Investment grade bonds are subject to numerous risks including higher interest rates, economic recession, deterioration of the investment grade bond market or investors' perception thereof, possible downgrades and defaults of interest and/or principal.
Certain of the closed-end funds included in the portfolio invest in securities issued by foreign issuers. Such securities are subject to certain risks including currency and interest rate fluctuations, nationalization or other adverse political or economic developments, lack of liquidity of certain foreign markets, withholding, the lack of adequate financial information, and exchange control restrictions impacting foreign issuers. Risks associated with investing in foreign securities may be more pronounced in emerging markets where the securities markets are substantially smaller, less liquid, less regulated and more volatile than the U.S. and developed foreign markets.
The value of the securities held by the trust may be subject to steep declines or increased volatility due to changes in performance or perception of the issuers.