The BlackRock Funds
Strategic Portfolio I
Annual Report
September 30, 1998
<PAGE>
The BlackRock Funds
Strategic Portfolio I
Statement of Net Assets
September 30, 1998
<TABLE>
<CAPTION>
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Principal
Amount Value
(000) DESCRIPTION
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<S> <C> <C> <C>
FOREIGN BONDS 24.0%
10,000 * Government of Canada
7.25% 06/01/07 $7,603,653
----------------
(Cost $7,214,773)
U.S. TREASURY OBLIGATIONS 72.9%
U.S. Treasury Notes
$ 5,750 6.37% 05/15/00 5,921,032
13,350 5.87% 09/30/02 14,084,600
2,700 6.50% 10/15/06 3,064,698
----------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $22,111,705) 23,070,330
----------------
SHORT TERM INVESTMENTS 1.1%
359 Galileo Money Market Fund
(Cost $359,368) 359,368
----------------
TOTAL INVESTMENTS IN SECURITIES
(Cost $29,685,846) 98.0% 31,033,351
Other Assets in Excess of Liabilities 2.0% 620,559
------------------- ----------------
NET ASSETS (Applicable to 3,025,180 100.0% $31,653,910
=================== ================
Institutional shares outstanding)
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE
($31,653,910 / 3,025,180) $10.46
================
</TABLE>
* In local currency.
See Notes to Financial Statements
<PAGE>
The BlackRock Funds
Strategic Portfolio I
Statement of Operations
<TABLE>
<CAPTION>
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For the Period
10/6/97 (a)
through
9/30/98
---------------------
<S> <C>
Investment Income:
Interest $1,608,792
Expenses:
Investment advisory fee 56,922
Administration fee 65,460
Custodian fee 8,618
Transfer agent fee 7,538
Legal and audit 6,814
Printing 9,587
Registration fees 6,921
Trustees fees 5,857
Other 3,583
---------------------
171,300
Less fees voluntarily waived and expenses reimbursed (97,308)
---------------------
Total operating expenses 73,992
---------------------
Interest expense 954
---------------------
Total expenses 74,946
---------------------
Net investment income 1,533,846
---------------------
Realized and unrealized gain (loss) on investments:
Net realized gain (loss) on:
Investment transactions 224,334
Foreign exchange transactions (57,581)
Net change in unrealized appreciation(depreciation) on:
Investments 1,347,265
Foreign currency transactions and forward foreign currency contracts (6,910)
---------------------
---------------------
Net gain on investments and foreign currency transactions 1,507,108
---------------------
Net increase in net assets resulting from operations $3,040,954
=====================
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</TABLE>
(a) Commencement of Operations
See Notes to Financial Statements
<PAGE>
The BlackRock Funds
Strategic Portfolio I
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
For the Period
10/6/97 (a)
through
Increase (decrease) in net assets: 9/30/98
---------------------
<S> <C>
Operations:
Net investment income $1,533,846
Net realized gain on investments and foreign currency related
transactions 166,753
Net unrealized appreciation on investment and foreign currency
related transactions 1,340,355
---------------------
Net increase in net assets resulting from operations 3,040,954
---------------------
Distributions to shareholders from:
Net investment income (1,668,846)
Net realized gain ---------
---------------------
(1,668,846)
---------------------
Capital share transactions:
Proceeds from shares subscribed 28,735,000
Net asset value of shares issued in reinvestment
of dividend distributions 1,546,802
---------------------
30,281,802
---------------------
Total increase in net assets 31,653,910
---------------------
Net Assets:
Beginning of period ---------
---------------------
End of period $31,653,910
=====================
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</TABLE>
(a) Commencement of operations.
See Notes to Financial Statements
<PAGE>
The BlackRock Funds
Strategic Portfolio I
Financial Highlights
<TABLE>
<CAPTION>
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For a share outstanding throughout the period: For the Period
10/6/97 (a) through
9/30/98
--------------------
<S> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period $10.00
-------------------
Net investment income 0.51
Net realized and unrealized gain on investments 0.53
-------------------
Net increase from investment operations 1.04
-------------------
Distributions from net investment income (0.58)
Distributions from net realized capital gains ---------
-------------------
Total dividends and distributions (0.58)
-------------------
Net asset value, end of period $10.46
===================
Total Return 10.84%
Ratios / Supplemental data
Net assets, end of period (in thousands) $31,654
Ratio of expenses to average net assets (b) 0.26%
Ratio of expenses to average net assets (excluding waivers) (b) 0.60%
Ratio of net investment income to average net assets (b) 5.39%
Ratio of net investment income to average net assets (excluding waivers) (b) 5.05%
Portfolio turnover 164%
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</TABLE>
(a) Commencement of investment operations.
(b) Annualized
See Notes to Financial Statements
<PAGE>
The BlackRock Funds
Strategic Portfolio I
Notes to Financial Statements
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Note 1. Organization and Accounting Policies
BlackRock FundsSM (the "Fund") (formerly the Compass Capital (R) Funds) was
organized on December 22, 1988 as a Massachusetts business trust and is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company. The Fund currently has 37 investment portfolios.
These financial statements relate to the Fund's Strategic Portfolio I (the
"Portfolio"). The Portfolio is authorized to issue an unlimited number of shares
with a par value of $0.001.
The following is a summary of significant accounting policies followed by
the Fund in preparation of its financial statements. The preparation of
financial statements in conformity with generally accepted accounting principles
requires the use of management estimates. Actual results could differ from the
estimates.
Securities Valuation: The Fund values mortgage-backed, asset-backed and
other debt securities on the basis of current market quotations provided by
dealers or pricing services approved by the Fund's Board of Trustees. In
determining the value of a particular security, pricing services may use certain
information with respect to transactions in such securities, quotations from
dealers, market transactions in comparable securities, various relationships
observed in the market between securities, and calculated yield measures based
on valuation technology commonly employed in the market for such securities.
Exchange-traded options are valued at their last sales price as of the close of
options trading on the applicable exchanges. In the absence of a last sale,
options are valued at the average of the quoted bid and asked prices as of the
close of business. A futures contract is valued at the last sale price as of the
close of the commodities exchange on which it trades. Any securities or other
assets for which such current market quotations are not readily available are
valued at fair value as determined in good faith under procedures established by
and under the general supervision and responsibility of the Fund's Board of
Trustees.
Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost, if their term to maturity from date of purchase
was 60 days or less, or by amortizing their value on the 61st day prior to
maturity, if their original term to maturity from date of purchase exceeded 60
days.
In connection with transactions in repurchase agreements, the Fund's
custodian takes possession of the underlying collateral securities, the value of
which at least equals the principal amount of the repurchase transaction,
including accrued interest. To the extent that any repurchase transaction
exceeds one business day, the value of the collateral is marked-to-market on a
daily basis to ensure the adequacy of the collateral. If the seller defaults and
the value of the collateral declines or if bankruptcy proceedings are commenced
with respect to the seller of the security, realization of the collateral by the
Fund may be delayed or limited.
<PAGE>
The BlackRock Funds
Strategic Portfolio I
Notes to Financial Statements
(Continued)
- --------------------------------------------------------------------------
Foreign Currency Translation- The books and records of Strategic Portfolio
I are maintained in U.S. dollars. Foreign currency amounts are translated into
U.S. dollars on the following basis:
(I) market value of investment securities, assets and liabilities at the
current rate of exchange; and
(II) purchases and sales of investment securities, income and expenses at
the relevant rates of exchange prevailing on the respective dates of
such transactions.
The Portfolio isolates that portion of gains and losses on investment
securities which is due to changes in the foreign exchange rates from that which
is due to changes in market prices of such securities.
The Portfolio reports certain foreign currency related transactions as
components of realized and unrealized gains for financial reporting purposes,
whereas such components are treated as ordinary income for federal income tax
purposes.
Forward Foreign Currency Contracts- The Portfolio enters into forward
foreign currency contracts as a hedge against either specific transactions or
portfolio positions. These contracts are adjusted by the daily exchange rate of
the underlying currency and any gains or losses are recorded as unrealized until
the contract settlement date. Such contracts, which protect the value of the
Portfolio's investment securities against a decline in the value of currency, do
not eliminate fluctuations in the underlying prices of the securities. They
simply establish an exchange rate at a future date. Also, although such
contracts tend to minimize the risk of loss due to a decline in the value of a
hedged currency, at the same time they tend to limit any potential gain that
might be realized should the value of such foreign currency increase. Risks may
arise upon entering into these contracts from the potential inability of
counterparties to meet the terms of their contracts and from unanticipated
movements in the value of a foreign currency relative to the U.S.
dollar.
The aggregate principal amounts of the contracts are not recorded as the
Portfolio intends to settle the contracts prior to delivery. Under the terms of
foreign currency contracts open at September 30, 1998, the Portfolio is
obligated to deliver or receive currency in exchange for U.S. dollars as
indicated below:
Value at Unrealized
Settlement Currency Contract September Foreign
Date Sold Amount 30, 1998 Exchange Loss
- ---------- -------- -------- --------- -------------
10/21/98 Canadian Dollar $7,597,490 $7,605,061 $(7,571)
<PAGE>
The BlackRock Funds
Strategic Portfolio I
Notes to Financial Statements
(Continued)
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Security Transactions and Investment Income: Investment transactions are
accounted for on the trade date. The cost of investments sold is determined by
use of specific identification method for both financial reporting and federal
income purposes. Interest income is recorded on the accrual basis and the Fund
accretes premium or amortizes discount on securities purchased using the
interest method.
Taxes: No provision is made for federal taxes as its the Fund's intention to
have the Portfolio continue to qualify as a regulated investment company and to
make the requisite distributions to its shareholders which will be sufficient to
relieve it from federal income and excise taxes.
Dividends to Shareholders: Dividends from net investment income are declared
by the Portfolio each day on "settled" shares (i.e. shares for which the
Portfolio has received payment in federal funds) and are paid monthly. Net
realized capital gains, if any, will be distributed at least annually. The
character of distributions made during the year from net investment income or
net realized gains may differ from their ultimate characterization for federal
income tax purposes due to differences between generally accepted accounting
principles and tax accounting principles related to the character of income and
expense recognition.
Note 2. Transactions with Affiliates and Related Parties
Pursuant to an Investment Advisory Agreement, BlackRock Advisors, Inc., a
wholly-owned subsidiary of BlackRock, Inc., serves as investment adviser to the
Portfolio. For its advisory services, BlackRock Advisors Inc., is entitled to
receive fees, computed daily and paid monthly, at the annual rate of 0.20% of
the Portfolio's average daily net assets.
BlackRock Advisors, Inc.,may, at its discretion, waive all or any portion
of its advisory fee for the Portfolio and may reimburse the Portfolio for
certain operating expenses. For the period ended September 30, 1998, advisory
fees and waiver for the Portfolio were as follows:
Gross Net
Advisory Advisory
Fee Waiver Fee
--- ------ ---
Strategic Portfolio I $ 56,922 $ 56,922 $0
PFPC Inc. ("PFPC"), an indirect wholly-owned subsidiary of PNC Bank Corp.,
BlackRock Advisors, Inc., and BlackRock Distributors, Inc. ("BDI") act as
co-administrators for the Fund. The combined administration fee is computed
daily and payable monthly, based on a percentage of the average daily net assets
of the Portfolio, at the following annual rates: 0.23% of the first $500
million, 0.21% of the next $500 million, 0.19% of the average daily net assets
in excess of $1 billion.
<PAGE>
The BlackRock Funds
Strategic Portfolio I
Notes to Financial Statements
(Continued)
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PFPC, BlackRock Advisors, Inc. and BDI may, at their discretion,
voluntarily waive all or any portion of their administration fees for the
Portfolio. For the period ended September 30, 1998, administration fees and
waivers for the Portfolio were as follows:
Gross Net
Administration Administration
Fee Waiver Fee
--- ------ ---
Strategic Portfolio I $ 65,460 $ 37,227 $ 28,233
In addition, PNC Bank, National Association serves as custodian for the
Portfolio. PFPC serves as transfer and dividend disbursing agent.
PFPC, BlackRock Advisors, Inc. and BDI have also voluntarily agreed to
reimburse expenses in the amount of $3,159 with respect to the Strategic
Portfolio I for the period ended September 30, 1998.
Note 3. Portfolio Securities
Purchases and sales of investment securities, other than short-term
investments and government securities, for the period ended September 30, 1998
were $25,029,869 and $17,090,537, respectively. Purchases and sales of
government securities for the period ended September 30, 1998 were $50,043,249
and $27,928,746, respectively. The federal income tax basis of the investments
of the Portfolio at September 30, 1998 was $29,737,661 and, accordingly, as of
September 30, 1998 net unrealized appreciation for federal income tax purposes
aggregated $1,295,690 which $51,815 related to depreciated securities and
$1,347,505 related to appreciated securities.
<PAGE>
The BlackRock Funds
Strategic Portfolio I
Notes to Financial Statements
(Concluded)
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Note 4. Capital Shares
Transactions in capital shares were as follows:
For the Period
10/06/97 (a)
Through
09/30/98
--------
Shares subscribed........................................ 2,870,975
Shares issued in connection with the reinvestment
of dividends and distributions........................... 154,205
Shares redeemed ---
------------
Net increase 3,025,180
------------
Note 5. At September 30, 1998, net assets consisted of:
Capital paid-in......................................... $ 30,281,802
Accumulated net realized gain on investment transactions
and foreign exchange contracts........................ 31,753
Net unrealized appreciation on investment transactions
and foreign exchange contracts........................ 1,340,355
------------
$ 31,653,910
============
- ---------------
(a) Commencement of Operations
<PAGE>
Report of Independent Accountants
To the Shareholders and Board of Trustees of the BlackRock Funds:
In our opinion, the accompanying statement of net assets and the related
statement of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
the BlackRock Strategic Portfolio I of the BlackRock Funds (the "Fund") at
September 30, 1998, the results of its operations, the changes in its net
assets, and the financial highlights for the period presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities owned at September 30, 1998 by
correspondence with the custodian and brokers, provides a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
November 13, 1998
<PAGE>
Co-Administrator and Distributor Co-Administrator and Transfer Agent
BlackRock Distributors, Inc. PFPC Inc.
West Conshohocken, PA 19428 Wilmington, DE 19809
Investment Adviser Co-Administrator
BlackRock Advisors, Inc. BlackRock Advisors, Inc.
New York, NY 10154 New York, NY 10154
Custodian Counsel
PNC Bank, National Association Simpson, Thatcher & Bartlett
Philadelphia, PA 19103 New York, NY 10017
(A partnership which includes
professional corporations)
Independent Accountants
PricewaterhouseCoopers LLP
Philadelphia, PA 19103
This report is for shareholder information. This is not a prospectus intended
for use in the purchase or sale of Fund shares.
The BlackRock Funds
103 Bellevue Parkway
Wilmington, DE 19809
- --------------------------------------------------------------------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY PNC BANK, NATIONAL ASSOCIATION OR ANY OTHER BANK AND SHARES ARE NOT FEDERALLY
INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY THE U.S.
GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER GOVERNMENTAL AGENCY. INVESTMENTS IN SHARES OF THE FUND
INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
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