BlackRock Funds
The Multi-Sector Mortgage Securities Portfolio III
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Semi-Annual Report
March 31, 1998
(Unaudited)
<PAGE>
The BlackRock Funds
The Multi-Sector Mortgage Securities Portfolio III
Statement of Net Assets (Unaudited)
March 31, 1998
<TABLE>
<CAPTION>
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Principal
Amount
Rating* (000) DESCRIPTION Value
- ---------------------------------------------------------------------------------------------
<C> <C> <S> <C> <C>
Commercial Mortgage - Backed Securities 85.1%
Aetna Commercial Mortgage,
AA+ $500 6.89%, Series 1995-C5, Class C, 12/26/30 $ 502,317
Asset Securitization Corp.,
AA 1,000 7.36%, Series 1996-D2, Class A2 , 02/14/29 1,062,299
CBA Mortgage Corp.,
A 367 7.76%, Series 1993-C1, Class C, 12/25/03 368,760
BBB 1,000 7.76%, Series 1993-C1, Class D, 12/25/03 1,004,739
Carolina First Bank,
BBB 3,000 7.86%, Series 1996 C1, Class B, 03/18/27 3,000,000
Chase Commercial Mortgage Securities Corp.,
BB- 1,984 7.37%, Series 1997-1, Class G, 12/19/11 1,823,133
Citibank, N.A. Multifamily Mortgage,
BBB+ 3,000 8.00%, Series 1994-1, Class M2, 01/25/19 3,135,000
CS First Boston Mortgage
BBB 500 8.12%, Series 1995-AEW1, Class D, 11/25/28 512,422
FDIC Real Estate Mortgage Insurance Corp.,
AAa 1,000 8.45%, Series 1994-C1, Class 2C, 09/25/25 1,027,500
AAA 189 7.85%, Series 1994-C1, Class 2A2, 09/25/25 189,126
First Union - Lehman Brothers Commercial Mortgage,
BB 2,000 7.00%, Series 1997-C1, Class F, 04/18/29 1,812,873
General Motors Acceptance Corp.,
BB+ 3,000 7.86%, Series 1996-C1, Class E. 10/15/28 3,032,812
J.P. Morgan, Commercial Mortgage Finance Corp.,
BBB 2,153 6.67%, Series 1997-SPC1, Class D, 06/25/27 2,149,636
LB Commercial Conduit Mortgage Trust,
BBB 2,000 7.05%, Series 1995-C2, Class D, 09/25/25 2,021,585
LTC Commercial Mortgage Pass-Through Certificates,
AA 2,125 9.50%, Series 1994-1, Class C, 06/15/26 2,189,000
Morgan Stanley Capital Investments, Inc.,
Pass-Through Certificates,
AA 2,656 7.33%, Series 1997-HF1, Class B, 07/15/29 2,782,977
BBB- 1,700 7.51%, Series 1996-C1, Class D2, 02/15/06 1,701,877
Mortgage Capital Funding, Inc.,
BB 1,000 7.15%, Series 1996 Class G, 06/15/06 945,000
A 2,000 7.41%, Series 1997- Class C, 07/20/27 2,088,750
Nationslink Funding Corp.,
BB 1,000 7.35%, Series 1996-1, Class F, 02/20/06 955,000
NB Commercial Mortgage Certificate
BB 2,500 8.73%, Series FSI, Class E, 10/20/23 2,316,406
Nomura Asset Capital Corp.,
AA 200 7.64%, Series 1993-M1, Class A1 11/25/03 206,217
BBB 1,000 7.64%, Series 1993-M1, Class A1, 11/25/03 1,023,437
Oregon Commercial Mortgage,
A 3,000 7.60%, Series 1995 - 1 Class C, 06/01/23 3,030,936
Paine Webber Mortgage Acceptance Corp.,
BBB 2,000 7.30%, Series 1995 MI, Class D, 01/15/07 2,028,909
A 2,000 6.90%, Series 1995 M2, Class C, 12/01/03 2,021,403
Resolution Trust Corp.,
A 1,796 7.10%, Series 1993-C3, Class D, 12/25/24 1,802,163
A 565 8.00%, Series 1994-C1, Class D, 06/25/26 574,961
BBB 2,618 7.00%, Series 1995-C2, Class D, 05/25/27 2,610,188
Salomon Brothers Mortgage Securities,
BBB 2,542 7.75%, Series 1996-C1, Class D, 01/20/28 2,650,200
</TABLE>
See Notes to Financial Statements
1
<PAGE>
The BlackRock Funds
The Multi-Sector Mortgage Securities Portfolio III
Statement of Net Assets (Unaudited)
March 31, 1998
<TABLE>
<CAPTION>
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Principal
Amount
Rating* (000) DESCRIPTION Value
- ---------------------------------------------------------------------------------------------
<C> <C> <S> <C> <C>
Southern Pacific Securities,
BBB $ 1,000 7.47%, Series 1996-C1, Class D, 02/14/29 $ 1,020,937
Structured Asset Securities Corp. Multi,
BBB 3,000 7.38%, Series 1995-C1, Class D, 09/25/24 3,019,665
AA 1,900 7.00%, Series 1995-C4, Class C, 06/25/26 1,991,749
BB+ 3,000# 7.75%, Series 1996-CFL, Class F, 02/25/28 2,982,939
BBB 1,970 7.75%, Series 1996-CFL, Class E, 02/25/28 1,917,975
United States Treasury Notes
2,000 5.50%, Series 1998, 01/31/03 1,985,938
WHP Commercial Mortgage,
A 677 7.76%, Series 1995-C1, Class C, 07/20/25 675,939
----------
Total commercial mortgage-backed securities
(Cost $62,119,502) 64,164,768
SHORT-TERM INVESTMENTS 15.0%
Federal Home Loan Bank Discount Notes
11,320 5.90% Due 4/1/98 (Cost $11,320,000) 11,320,000
----------
Total investments (Cost $73,439,502) 100.1% 75,484,768
Liabilities in excess of other assets (0.1%) (71,783)
----- ------------
NET ASSETS 100.0% $75,412,985
===== ===========
</TABLE>
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* Using the higher of Standard & Poor's, Moody's or Fitch's rating.
# Principal amount of securities pledged as collateral of $2,927,999 on 223
net short U.S. Treasury Notes and 244 long U.S. Treasury Bonds future
contracts expiring December 1997. The value of such contracts on September
30, 1997 was $58,265,719, resulting in an unrealized gain of $145,062.
See Notes to Financial Statements
2
<PAGE>
The BlackRock Funds
The Multi-Sector Mortgage Securities Portfolio III
Statement of Assets and Liabilities
March 31, 1998 (Unaudited)
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Assets
Investments at value (cost $73,439,502) $75,484,768
Cash 10,754
Interest receivable 430,948
Margin receivable 57,750
Other assets 1,893
-----------
Total Assets 75,986,113
-----------
Liabilities
Dividends payable 472,734
Accrued expenses payable 100,394
-----------
Total Liabilities 573,128
-----------
Net Assets $75,412,985
===========
Net assets were comprised of:
Common stock, at par $ 73
Paid-in capital in excess of par 70,970,286
Accumulated net realized gain 2,397,649
Net unrealized appreciation 2,044,977
-----------
Net assets $75,412,985
===========
Net asset value per share $ 1,037.58
===========
Total shares outstanding 72,682
===========
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See Notes to Financial Statements
3
<PAGE>
The BlackRockFunds
The Multi-Sector Mortgage Securities Portfolio III
Statement of Operations (Unaudited)
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For the Period
10/1/97
through
3/31/98
------------
Investment Income:
Interest $ 4,195,867
-----------
Expenses:
Investment advisory fee 132,553
Administration fee 127,949
Custodian fee 19,525
Transfer agent fee 16,147
Legal and audit 6,428
Printing 5,957
Registration fees 3,777
Trustees fees 1,469
Other 6,490
-----------
Total expenses 320,295
Less fees voluntarily waived (124,117)
-----------
Total expenses 196,178
-----------
Net investment income 3,999,689
-----------
Realized and unrealized gain on investments:
Net realized gain on:
Investment transactions 2,382,903
Futures contracts 385,128
-----------
2,768,031
-----------
Net change in unrealized appreciation on:
Investments (2,611,462)
Futures contracts (147,225)
-----------
($2,758,687)
-----------
Net gain on investments 9,344
-----------
Net increase in net assets resulting from operations $ 4,009,033
===========
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See Notes to Financial Statements
4
<PAGE>
The BlackRock Funds
The Multi-Sector Mortgage Securities Portfolio III
Statements of Changes in Net Assets
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For the Period
10/1/97 For the Year
through Ended
Increase (decrease) in net assets: 3/31/98 9/30/97
------------- -----------
(Unaudited)
Operations:
Net investment income $ 3,999,689 $ 9,225,037
Net realized gain on investments 2,768,031 1,699,673
Net unrealized appreciation (depreciation)
on investments (2,758,687) 4,529,570
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Net increase in net assets resulting from
operations 4,009,033 15,454,280
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Distributions to shareholders from:
Net investment income (3,999,689) (9,225,037)
Net realized gain (1,765,965) (1,202,447)
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(5,765,654) (10,427,484)
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Capital share transactions:
Proceeds from shares subscribed -- --
Net asset value of shares issued in
reinvestment of dividend distributions 6,058,668 10,413,147
Net asset value of shares redeemed (50,140,000) (15,927,042)
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(44,081,332) (5,513,895)
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Total decrease in net assets (45,837,953) (487,099)
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Net Assets:
Beginning of period 121,250,938 121,738,037
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End of period $ 75,412,985 $ 121,250,938
============= =============
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See Notes to Financial Statements
5
<PAGE>
The BlackRock Funds
The Multi-Sector Mortgage Securities Portfolio III
Financial Highlights
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<TABLE>
<CAPTION>
For the Period For the Year For the Period For the Period For the Period
For a share outstanding throughout 10/1/97 through Ended 4/1/96 through 7/1/95 through 10/6/94(a)
the period: 3/31/98 9/30/97 9/30/96 3/31/96 through 6/30/95
------------ ----------- ------------- ------------- ---------------
PER SHARE OPERATING (Unaudited)
PERFORMANCE:
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 1,056.37 $ 1,016.08 $ 1,019.41 $ 1,068.11 $ 1,000.00
---------- ---------- ---------- ---------- ----------
Net investment income 39.19 73.74 38.33 61.37 55.81
Net realized and unrealized gain
(loss) on investments (3.53) 49.82 (3.33) (9.06) 68.11
---------- ---------- ---------- ---------- ----------
Net increase from investment operations 35.66 123.56 35.00 52.31 123.92
---------- ---------- ---------- ---------- ----------
Distributions from net investment income (39.19) (73.74) (38.33) (61.37) (55.81)
Distributions from net realized capital gains (15.26) (9.53) -- (39.64) --
---------- ---------- ---------- ---------- ----------
Total dividends and distributions (54.45) (83.27) (38.33) (101.01) (55.81)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 1,037.58 $ 1,056.37 $ 1,016.08 $ 1,019.41 $ 1,068.11
========== ========== ========== ========== ==========
Total Return 3.44% 12.67% 3.53% 5.02% 12.78%
Ratios / Supplemental data
Net assets, end of period (in thousands) $ 75,413 $ 121,251 $ 121,738 $ 117,569 $ 112,810
Ratio of expenses to average net assets 0.37%(b) 0.37% 0.37%(b) 0.37%(b) 0.37%(b)
Ratio of expenses to average net assets
(excluding waivers) 0.60%(b) 0.62% 0.51%(b) 0.37%(b) 0.45%(b)
Ratio of net investment income to
average net assets 7.54%(b) 7.13% 7.60%(b) 7.77%(b) 7.54%(b)
Ratio of net investment income to average
net assets (excluding waivers) 7.31%(b) 6.51% 7.45%(b) 7.76%(b) 7.46%(b)
Portfolio turnover 5% 52% 24% 119% 215%
</TABLE>
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(a) Commencement of investment operations.
(b) Annualized
See Notes to Financial Statements
6
<PAGE>
BlackRock Funds
The Multi-Sector Mortgage Securities Portfolio III
Notes to Financial Statements (Unaudited)
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Note 1. Organization and Accounting Policies
BlackRock Funds(SM) (the "Fund") (formerly The Compass Capital 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 31 investment portfolios.
These financial statements relate to the Fund's Multi-Sector Mortgage Securities
Portfolio III (the "Portfolio"). The Portfolio is authorized to issue an
unlimited number of shares with a par value of $0.001.
As of March 31, 1998, 99.97% of the shares of capital stock of the
Portfolio are owned by Ameritech Pension/VEBA Fund.
The following is a summary of significant accounting policies followed by
the Fund.
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.
Futures Transactions: The Portfolio invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities, or
securities the Portfolio intends to purchase, against fluctuations in fair value
caused by changes in prevailing market interest rates. The Portfolio may
7
<PAGE>
enter into futures contracts subject to certain limitations. Upon entering into
a futures contract, the Portfolio is required to deposit cash or pledge U.S.
Government securities of an initial margin. Subsequent payments, which are
dependent on the daily fluctuations in the value of the underlying security or
securities, are made or received by the Portfolio each day (daily variation
margin) and are recorded as unrealized gains or losses until the contracts are
closed. When the contracts are closed, the Portfolio records a realized gain or
loss equal to the difference between the proceeds from (or cost of) the closing
transaction and the Portfolio's basis in the contracts. Risks of entering into
futures contracts include the possibility that there will not be a perfect price
correlation between the futures contracts and the underlying securities. Second,
it is possible that a lack of liquidity for futures contracts could exist in the
secondary market, resulting in an inability to close a futures position prior to
its maturity date. Third, the purchase of a futures contract involves the risk
that the Portfolio could lose more than the original margin deposit required to
initiate a futures transaction.
Security Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized and unrealized gains or losses are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis and the Fund accretes premium or amortizes discount on securities
purchased using the interest method.
Taxes: It is the Fund's intention to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to shareholders. Therefore,
no federal income or excise tax provision is required.
Dividends to Shareholders: Dividends from net investment income are declared
daily and paid monthly. Net realized capital gains, if any, will be distributed
at least annually.
Note 2. Transactions with Affiliates and Related Parties
Pursuant to an Investment Advisory Agreement, BlackRock Advisors, Inc.,
(formerly PNC Asset Management Group, Inc.), a wholly-owned subsidiary of
BlackRock, Inc., serves as investment advisor for the Portfolio. BlackRock
Financial Management, Inc., a wholly-owned subsidiary of BlackRock Advisors,
Inc., serves as sub-advisor to the Portfolio. BlackRock, Inc. is an indirect
majority-owned subsidiary of PNC Bank Corporation.
For its advisory services, BlackRock Advisors, Inc. is entitled to receive
fees, computed daily and paid quarterly, at the annual rate of .25% 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 March 31, 1998, advisory fees
and waiver for the Portfolio were as follows:
Gross Net
Advisory Advisory
Fee Waiver Fee
----------- --------- ----------
Multi-Sector Mortgage
Securities Portfolio III $132,553 $1,632 $130,921
8
<PAGE>
PFPC Inc. ("PFPC"), an indirect wholly-owned subsidiary of PNC Bank Corp.,
BlackRock Advisors, Inc., and BlackRock Distributors, Inc. ("BDI") (formerly
Compass Distributors, Inc.) 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:
.23% of the first $500 million, .21% of the next $500 million, .19% of the next
$1 billion and .18% of the average daily net assets in excess of $2 billion.
PFPC and BDI may, at their discretion, voluntarily waive all or any
portion of their administration fees for the Portfolio. For the period ended
March 31, 1998, administration fees and waivers for the Portfolio were as
follows:
Gross Net
Administration Administration
Fee Waiver Fee
----------- --------- ----------
Multi-Sector Mortgage
Securities Portfolio III $127,949 $122,485 $5,464
In addition, PNC Bank, National Association ("PNC Bank") serves as
custodian for the Portfolio. PFPC serves as transfer and dividend disbursing
agent.
BlackRock Advisors, Inc. voluntarily agreed to waive fees and reimburse
expenses to the extent necessary to cap the Portfolio's expenses (exclusive of
advisory fees) at no more than .12% of its average daily net assets for the
period ended March 31, 1998.
Note 3. Portfolio Securities
Purchases and sales of investment securities, other than short-term
investments and government securities, for the period ended March 31, 1998 were
$6,867,596 and $60,219,664, respectively. Purchases of government securities for
the period ended March 31, 1998 were $2,003,281, respectively. The federal
income tax basis of the investments of the Portfolio at March 31, 1998 was
$73,439,502 and, accordingly, as of March 31, 1998 net unrealized appreciation
for federal income tax purposes aggregated $2,045,266 which $2,079,636 related
to appreciated securities and $34,370 related to depreciated securities.
Note 4. Capital Shares
Transactions in capital shares were as follows:
For the Period For the Year
Ended Ended
03/31/98 09/30/97
-------- --------
(Unaudited)
Shares subscribed ............................... -- --
Shares issued in connection with
the reinvestment of dividends
and distributions ............................. 5,782 10,081
Shares redeemed ................................. (47,881) (15,112)
------- -------
Net decrease .................................... (42,099) (5,031)
======= =======
9
<PAGE>
Co-Administrator and Distributor
BlackRock Distributors, Inc.
West Conshohocken, Pennsylvania 19428
Co-Administrator and Transfer Agent
PFPC Inc.
Wilmington, Delaware 19809
Investment Adviser
BlackRock Advisor, Inc.
New York, New York 10154
Co-Administrator
BlackRock Advisor, Inc.
New York, New York 10154
Sub-Adviser
BlackRock Financial Management, Inc.
New York, New York 10154
Custodian
PNC Bank, National Association
Philadelphia, Pennsylvania 19101
Counsel
Simpson, Thatcher & Bartlett
New York, New York 10017
(A partnership which includes professional corporations)
Independent Accountants
Coopers & Lybrand, L.L.P.
Philadelphia, Pennsylvania 19103
This report is for shareholder information. This is
not a prospectus intended for use in the purchase
or sale of Fund shares.
BlackRock Funds
103 Bellevue Parkway
Wilmington, Delaware 19809
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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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