THE BLACKROCK FUNDS
STRATEGIC PORTFOLIO I
ANNUAL REPORT TO SHAREHOLDERS
SEPTEMBER 30, 1999
<PAGE>
BLACKROCK STRATEGIC PORTFOLIO I
TOTAL ASSETS (9/30/99): $7.2 million
PERFORMANCE BENCHMARK: Lehman Brothers Aggregate Index
INVESTMENT APPROACH: Seeks to maximize total return through the investment
in a portfolio of investment grade fixed income
securities of foreign and U.S. issuers denominated in
foreign currencies, baskets of foreign currencies and
the U.S. dollar.
RECENT PORTFOLIO MANAGEMENT ACTIVITY:
(BULLET) In sharp contrast to the first nine months of fiscal year 1998,
Treasury yields rose sharply during the past twelve months. For the
period, the yield of the 10-year Treasury rose 1.47% from 4.41% on
September 30, 1998 to 5.88% on September 30, 1999.
(BULLET) During the period, bond yields generally fell in Japan, Europe and the
dollar bloc (Canada and Australia), while U.S. bond yields rose.
(BULLET) The Portfolio maintained a defensive posture during the period and was
predominantly invested in U.S. Treasuries. Relative to its benchmark
the Portfolio was rewarded for an overweight in Treasuries.
Although the portfolio holdings and sectors listed above were current as of the
end of the annual period ended September 30, 1999, the Portfolio is actively
managed and the composition will vary.
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE
STRATEGIC PORTFOLIO I AND THE LEHMAN BROTHERS AGGREGATE INDEX
FROM INCEPTION AT EACH QUARTER END.
CHART
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
Strategic Portfolio I Lehman Brothers Aggregate Index
10/6/97 $10,000 $10,000
12/31/97 10,141 10,101
3/31/98 10,303 10,135
6/30/98 10,516 10,221
9/30/98 11,084 10,461
12/31/98 11,136 10,492
3/31/99 11,131 10,550
6/30/99 11,163 10,516
9/30/99 11,289 10,638
Performance as of 9/30/99
- --------------------------------------------------------------------------------
STRATEGIC PORTFOLIO I - AVERAGE ANNUAL RETURN
1 Yr From Inception
1.86% 6.30%
- --------------------------------------------------------------------------------
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS.
<PAGE>
THE BLACKROCK FUNDS
STRATEGIC PORTFOLIO I
STATEMENT OF NET ASSETS
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Principal/Share
Amount Value
(000) DESCRIPTION
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. TREASURY OBLIGATIONS 97.40%
U.S. TREASURY NOTES
$5,250 6.38% 5/15/00 5,285,939
1,700 6.50% 10/15/06 1,739,360
TOTAL U.S. TREASURY OBLIGATIONS
(COST $7,180,768) $7,025,299
----------
SHORT TERM INVESTMENTS 0.70%
51 Galileo Money Market Fund
(COST $50,855) 50,855
----------
TOTAL INVESTMENTS IN SECURITIES
(COST $7,231,623*) 98.10% $7,076,154
OTHER ASSETS IN EXCESS OF LIABILITIES 1.90% 137,669
------- ----------
NET ASSETS (APPLICABLE TO 847,840 100.00% $7,213,823
INSTITUTIONAL SHARES OUTSTANDING)
======= ==========
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE
($7,213,823 / 847,840) $8.51
=====
-------------------
* Also cost for Federal Income tax purposes. The gross unrealized
appreciation (depreciation) on a tax basis is as follows:
Gross unrealized appreciation $7,244
Gross unrealized depreciation ($162,713)
----------
($155,469)
==========
</TABLE>
SEE NOTES TO FINANCIAL STATMENTS
1
<PAGE>
THE BLACKROCK FUNDS
STRATEGIC PORTFOLIO I
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
For the
Year Ended
9/30/99
-----------
Investment Income:
Interest $515,346
Expenses:
Investment advisory fee 19,643
Administration fee 17,589
Custodian fee 9,405
Transfer agent fee 3,312
Legal and audit 550
Printing 877
Trustees fees 652
Other 9,504
----------
61,532
Less fees voluntarily waived and expenses reimbursed (35,996)
----------
Total operating expenses 25,536
----------
Interest expense 5,005
----------
Total expenses 30,541
----------
Net investment income 484,805
----------
Realized and unrealized gain (loss) on investments:
Net realized gain on:
Investment transactions 1,179,446
Foreign exchange transactions 31,617
Net change in unrealized appreciation(depreciation) on:
Investments (1,502,905)
Foreign currency transactions and forward foreign currency contracts 6,910
----------
Net gain (loss) on investments and foreign currency transactions (284,932)
----------
Net increase in net assets resulting from operations $199,873
==========
- --------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
2
<PAGE>
THE BLACKROCK FUNDS
STRATEGIC PORTFOLIO I
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the For the Period
Year Ended 10/6/97 (a) through
Increase (decrease) in net assets: 9/30/99 9/30/98
---------- -------------------
<S> <C> <C>
Operations:
Net investment income $484,805 $1,533,846
Net realized gain on investments and foreign currency related
transactions 1,211,063 166,753
Net unrealized appreciation on investment and foreign currency
related transactions (1,495,995) 1,340,355
---------- -----------
Net increase in net assets resulting from operations 199,873 3,040,954
---------- -----------
Distributions to shareholders from:
Net investment income (484,805) (1,668,846)
Net realized gain (1,284,601) - - - - -
---------- -----------
(1,769,406) (1,668,846)
---------- -----------
Capital share transactions:
Proceeds from shares subscribed 20,000 28,735,000
Net asset value of shares issued in reinvestment
of dividends 1,857,535 1,546,802
Shares redeemed (24,748,089) - - - - -
---------- -----------
(22,870,554) 30,281,802
---------- -----------
Total increase (decrease) in net assets (24,440,087) 31,653,910
---------- -----------
Net Assets:
Beginning of period 31,653,910 - - - - -
---------- -----------
End of period $7,213,823 $31,653,910
========== ===========
<FN>
- --------------------------------------------------------------------------------
(a) Commencement of operations.
</FN>
</TABLE>
See Notes to Financial Statements
3
<PAGE>
THE BLACKROCK FUNDS
STRATEGIC PORTFOLIO I
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD:
<TABLE>
<CAPTION>
For the For the Period
Year Ended 10/6/97 (a) through
9/30/99 9/30/98
---------- -------------------
PER SHARE OPERATING
PERFORMANCE:
<S> <C> <C>
Net asset value, beginning of period $10.46 $10.00
------- --------
Net investment income 0.43 0.51
Net realized and unrealized gain on investments (0.28) 0.53
------- --------
Net increase from investment operations 0.15 1.04
------- --------
Distributions from net investment income (0.43) (0.58)
Distributions from net realized gains (1.67) - - - - -
------- --------
Total dividends and distributions (2.10) (0.58)
------- --------
Net asset value, end of period $8.51 $10.46
======= ========
TOTAL RETURN 1.86% 10.84%
Ratios / Supplemental data
Net assets, end of period (in thousands) $7,214 $31,654
Ratio of expenses to average net assets 0.31% 0.26%(b)
Ratio of expenses to average net assets (excluding interest expense) 0.26% 0.26%(b)
Ratio of expenses to average net assets (excluding waivers) 0.68% 0.60%(b)
Ratio of net investment income to average net assets 4.94% 5.39%(b)
Ratio of net investment income to average net assets (excluding waivers) 4.57% 5.05%(b)
Portfolio turnover 78% 164%
- --------------------------------------------------------------------------------
<FN>
(a) Commencement of investment operations.
(b) Annualized.
</FN>
</TABLE>
See Notes to Financial Statements
4
<PAGE>
THE BLACKROCK FUNDS
STRATEGIC PORTFOLIO I
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES
BlackRock Funds SM (the "Fund") 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 38 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.
SECURITY VALUATION: Portfolio securities for which market quotations are
readily available are valued at market value, which is currently determined
using the last reported sales price. Portfolio securities which are primarily
traded on foreign securities exchanges are normally valued at the preceding
closing values for such securities on their respective exchanges. If no sales
are reported, as in the case of some securities traded over-the-counter,
portfolio securities are valued at the mean between the last reported bid and
asked prices. Corporate bonds are valued on the basis of quotations provided by
a pricing service which uses information with respect to transactions on bonds,
quotations from bond dealers, market transactions in comparable securities and
various relationships between securities in determining value. Short-term
obligations with maturities of 60 days or less are valued at amortized cost
which approximates market value. Discounts and premiums on debt securities are
amortized for book and tax purposes using the effective yield-to- maturity
method over the term of the instrument. Securities for which market quotations
are not readily available are valued at fair value as determined in accordance
with procedures adopted by the Board of Directors. As of September 30, l999,
there were no securities valued in accordance with such procedures.
FUTURES TRANSACTIONS: The Strategic Portfolio I invests in financial
futures contracts solely for the purposes of hedging its existing portfolio
securities, or securities that the Strategic Portfolio I intends to purchase,
against fluctuations in fair value caused by changes in prevailing market
interest rates. The Fund invests in futures contracts and options on futures
contracts to commit funds awaiting investments in stocks or to maintain cash
liquidity or for other hedging purposes. These portfolios futures contracts
obligate a portfolio, at maturity, to take or make delivery of securities, the
cash value of a securities index or a stated quantity of a foreign currency.
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
5
<PAGE>
THE BLACKROCK FUNDS
STRATEGIC PORTFOLIO I
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
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
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 a Portfolio could lose more than the original margin deposit required to
initiate a futures transaction.
OPTION SELLING/PURCHASING: The Strategic Portfolio I may invest in
financial options contracts solely for the purpose of hedging its existing
portfolio securities, or securities that the Portfolio intends to purchase,
against fluctuations in fair value caused by changes in prevailing market
interest rates. When the Portfolio sells or purchases an option an amount equal
to the premium received or paid by the Portfolio is recorded as a liability or
an asset and is subsequently adjusted to the current market value of the option
written or purchased. Premiums received or paid from writing or purchasing
options which expire unexercised are treated by the Portfolio on the expiration
date as realized gains or losses. The difference between the premium and the
amount paid or received on effecting a closing purchase or sale transaction,
including brokerage commissions, is also treated as a realized gain or loss. If
an option is exercised, the premium paid or received is added to the cost of the
purchase or proceeds from the sale in determining whether the Fund has realized
a gain or loss on investment transactions. The Fund as writer of an option, may
have no control over whether the underlying securities may be sold (call) or
purchased (put) as a result bears the market risk of an unfavorable change in
the price of the security underlying the written option.
OTHER: Securities denominated in currencies other that U.S. dollars are
subject to changes in value due to fluctuations in exchange rates.
Some countries in which the Portfolio invests require governmental approval
for the repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if there is a deterioration in a
country's balance of payments or for the other reasons, a country may impose
temporary restrictions on foreign capital remittances abroad.
The securities exchanges of certain foreign markets are substantially
smaller, less liquid and more volatile than the major securities markets in the
United States. Consequently, acquisition and disposition of securities by the
Portfolio may be inhibited.
6
<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 Strategic Portfolio I 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. There were no forward currency contracts held for the Strategic
Portfolio I at September 30, 1999.
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
7
<PAGE>
THE BLACKROCK FUNDS
STRATEGIC PORTFOLIO I
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
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 for and elect the tax treatment
applicable to regulated investment companies under subchapter M of the Internal
Revenue Code of 1986, as amended, 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 year ended September 30, 1999, advisory fees
and waiver for the Portfolio were as follows:
GROSS NET
ADVISORY ADVISORY
FEE WAIVER FEE
--- ------ ---
Strategic Portfolio I $ 19,643 $19,610 $ 33
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. For theses services, the co-administrators
receive a combined administration fee computed daily and payable monthly, based
on a percentage of the average daily net assets of the Portfolio, at the
following annual rates: 0.085% of the first $500 million, 0.075% of the next
$500 million and 0.065% of assets in excess of $1 billion. In addition, the
Portfolio is charged an administration fee based on the following percentage of
average daily net assets of the Portfolio: 0.145% of the first $500 million,
0.135% of the next $500 million and 0.125% of assets in excess of $1 billion.
8
<PAGE>
THE BLACKROCK FUNDS
STRATEGIC PORTFOLIO I
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
PFPC, BlackRock Advisors, Inc. and BDI may, at their discretion, waive all
or any portion of their administration fees for the Portfolio. For the year
ended September 30, 1999, administration fees and waivers for the Portfolio were
as follows:
Gross Net
Administration Administration
Fee Waiver Fee
--- ------ ---
Strategic Portfolio I $17,589 $16,386 $1,203
In addition, PFPC Trust Co. (formerly PNC Bank, National Association)
serves as custodian for the Portfolio. PFPC serves as transfer and dividend
disbursing agent.
NOTE 3. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term
investments and government securities, for the year ended September 30, 1999
were $0 and $7,683,883 respectively. Purchases and sales of government
securities for the year ended September 30, 1999 were $7,362,266 and
$22,963,621, respectively.
NOTE 4. CAPITAL SHARES
Transactions in capital shares were as follows:
For the For the Period
Year 10/06/97 (a)
Ended Through
9/30/99 09/30/98
------- --------------
Shares sold .............................. 2,301 2,870,975
Shares issued in reinvestment
of dividends ............................. 209,121 154,205
Shares redeemed .......................... (2,388,762) --
----------- ---------
Net increase (decrease) (2,177,340) 3,025,180
=========== =========
9
<PAGE>
THE BLACKROCK FUNDS
STRATEGIC PORTFOLIO I
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
NOTE 5. AT SEPTEMBER 30, 1999, NET ASSETS CONSISTED OF:
Capital paid-in ................................................ $ 7,398,519
Distributions in excess of net investment income ............... (29,056)
Net unrealized depreciation on investment transactions and
foreign exchange contracts .................................. (155,640)
------------
$ 7,213,823
============
- ---------------
(a) Commencement of Operations
10
<PAGE>
PricwaterhouseCoopers LLP
[LOGO OMITTED]
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
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
the Strategic Portfolio I of the BlackRock Funds (the "Fund") at September 30,
1999, 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 periods 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 audits. We conducted our
audits 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
audits, which included confirmation of securities owned at September 30, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
/S/PRICEWATERHOUSECOOPERS LLP
November 15, 1999
<PAGE>
INVESTMENT ADVISER CO-ADMINISTRATOR AND TRANSFER AGENT
BlackRock Advisors, Inc. PFPC Inc.
New York, New York 10154 Wilmington, Delaware 19809
SUB-ADVISER CO-ADMINISTRATOR AND DISTRIBUTOR
BlackRock Financial Management, Inc. BlackRock Distributors, Inc.
New York, New York 10154 West Conshohocken, Pennsylvania 19428
CUSTODIAN CO-ADMINISTRATOR
PFPC Trust Co. BlackRock Advisors, Inc.
Philadelphia, Pennsylvania 19103 New York, New York 10154
COUNSEL
Simpson,Thatcher & Bartlett
New York, New York 10017
(A partnership which includes
professional corporations)
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
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.
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.
