THE BLACKROCK FUNDS
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
ANNUAL REPORT TO SHAREHOLDERS
SEPTEMBER 30, 1999
<PAGE>
BLACKROCK MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
TOTAL ASSETS (9/30/99): $52.9 million
PERFORMANCE BENCHMARK: Salomon Broad Investment Grade Index
INVESTMENT APPROACH: Seeks to provide a total rate of return before fees
and expenses over rolling twelve-month periods that
exceeds the total return of the Salomon Broad
Investment Grade Index over the same periods by at
least 1.60% on an annualized basis.
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) The Portfolio maintained an overweight position versus the Index in the
commercial mortgage- backed sector, as the Manager believed this sector
offers attractive yields and total return opportunities relative to
Treasuries.
(BULLET) Within the commercial mortgage-backed sector the Manager emphasized
high quality liquid names as lower rated commercial mortgage-backed
securities offered little incremental return.
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
MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III AND THE SALOMON
BROAD INVESTMENT GRADE INDEX FROM INCEPTION AT EACH QUARTER END.
CHART
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
Multi Sector III Salomon Broad Investment Grade Index
10/06/94 $10,000 $10,000
12/31/94 10,078 10,101
3/31/95 10,608 10,612
6/30/95 11,278 11,263
9/30/95 11,328 11,477
12/31/95 11,806 11,975
3/31/96 11,853 11,766
6/30/96 11,737 11,823
9/30/96 11,991 12,043
12/31/96 12,777 12,407
3/31/97 12,821 12,342
6/31/97 13,082 12,787
9/30/97 13,538 13,212
12/31/97 13,933 13,601
3/31/98 14,186 13,821
6/30/98 14,452 14,141
9/30/98 14,762 14,727
12/31/98 15,041 14,787
3/31/99 14,911 14,719
6/30/99 15,065 14,582
9/30/99 14,851 14,688
Performance as of 9/30/99
- --------------------------------------------------------------------------------
MULTI SECTOR III - AVERAGE ANNUAL RETURN
1 Yr 3 Yr From Inception
0.51% 7.29% 8.66%
- --------------------------------------------------------------------------------
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS.
<PAGE>
THE BLACKROCK FUNDS
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
STATEMENT OF NET ASSETS
SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RATINGS** PAR
(UNAUDITED) (000) DESCRIPTION VALUE
- --------------------------------------------------------------------------------------------------------------
<C> <C> <S> <C>
U.S. GOVERNMENT OBLIGATIONS 4.2%
U. S. TREASURY NOTES,
$2,215 6.00%, Series 1999, 08/15/09 $2,232,305
----------
COMMERCIAL MORTGAGE - BACKED SECURITIES 88.0%
ASSET SECURITIZATION CORP.,
AA 1,000 7.36%, *** Series 1996-D2, Class A2 , 02/14/29 994,170
CBA MORTGAGE CORP.,
BBB 415 6.67%, *** Series 1993-C1, Class D, 12/25/03 404,488
COMM,
AAA 65 6.46%, Series 1999-1, Class A2, 09/15/08 61,622
BBB 2,000 7.24%, *** Series 1999-1, Class E, 10/15/08 1,858,776
COMMERCIAL MORTGAGE ACCEPTANCE CORP.,
BB+ 2,000 5.44%, *** Series 1998-C2, Class F, 05/15/13 1,230,000
COMMERCIAL MORTGAGE ASSET TRUST,
AAA 1,000 6.59%, Series 1999-C1, Class A2, 07/17/08 959,260
CREDIT SUISSE FIRST BOSTON MORTGAGE SECURITIES CORP.,
A+ 2,000 7.34%, Series 1997-C1, Class C, 06/20/07 1,943,665
DONALDSON, LUFKIN & JENRETTE COMMERCIAL MORTGAGE CORP.,
BBB- 1,500 7.30%, *** Series 1998-CF2, Class B2, 11/12/31 1,330,229
A 2,000 6.77%, Series 1999-CG1, Class A3, 02/10/09 1,891,060
BBB 2,000 7.61%, Series 1999-CG2, Class B1, 06/10/09 1,940,000
FDIC REAL ESTATE MORTGAGE INSURANCE CORP. TRUST,
AAA 1,000 8.45%, Series 1994-C1, Class 2C, 09/25/25 1,006,250
BBB 500 7.25%, Series 1996-C1, Class 1D, 05/25/26 482,278
FIRST BOSTON MORTGAGE SECURITIES CORP.,
AAA 2,861 6.75%, Series 1993-M1, Class 1A, 09/25/06 2,849,169
GENERAL MOTORS ACCEPTANCE CORP. COMMERCIAL MORTGAGE SECURITIES, INC.,
BBB- 2,000 7.22%, Series 1997-C1, Class F, 11/15/11 1,686,094
JP MORGAN COMMERCIAL MORTGAGE FINANCE CORP.,
AA 1,575 7.67%, Series 1999-C8, Class B, 07/15/31 1,579,568
LEHMAN BROTHERS COMMERCIAL CONDUIT MORTGAGE TRUST,
BBB 2,000 7.11%, *** Series 1995-C2, Class D, 05/25/05 1,950,757
AAA 2,898 7.43%, *** Series 1996-C2, Class A, 10/25/26 2,940,883
AAA 1,350 6.40%, Series 1998-C1, Class A2, 08/18/07 1,304,519
MORGAN STANLEY CAPITAL INVESTMENTS, INC.,
AAA 2,320 7.27%, Series 1997-HF1, Class A2, 01/15/07 2,346,207
AA 2,656 7.33%, Series 1997-HF1, Class B, 03/15/07 2,665,491
AAA 2,000 6.48%, Series 1998-HF2, Class A2, 11/15/30 1,906,980
A 2,000 6.95%, Series 1999-RM1, Class B, 12/15/31 1,909,140
MORTGAGE CAPITAL FUNDING, INC., 2,308,859
BB 1,000 7.15%, Series 1996, Class G, 06/15/06 813,125
A 2,000 7.41%, Series 1997, Class C, 04/20/07 1,965,160
NOMURA ASSET CAPITAL CORP.,
BBB+ 1,000 7.64%, Series 1993-M1, Class A1, 11/25/03 995,849
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
1
<PAGE>
THE BLACKROCK FUNDS
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
STATEMENT OF NET ASSETS (CONTINUED)
SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------------------------------------
RATINGS** PAR
(UNAUDITED) (000) DESCRIPTION VALUE
- --------------------------------------------------------------------------------------------------------------
OREGON COMMERCIAL MORTGAGE, INC.,
A $ 363 7.60%, Series 1995-1, Class C, 06/25/26 $ 361,330
PAINE WEBBER MORTGAGE ACCEPTANCE CORP.,
A- 2,000 7.30%, Series 1995 MI, Class D, 01/15/07 1,987,731
SALOMON BROTHERS MORTGAGE SECURITIES,
BBB 2,542 7.75%, Series 1996-C1, Class D, 01/20/28 2,511,466
SOUTHERN PACIFIC THRIFT AND LOAN ASSOCIATION,
A+ 1,000 6.84%, *** Series 1996-C1, Class D, 04/25/28 993,750
STRUCTURED ASSET SECURITIES CORP.,
A+ 1,000 7.38%, Series 1995-C1, Class D, 09/25/24 993,607
AA+ 660 7.00%, Series 1995-C4, Class C, 06/25/26 665,721
------------
TOTAL COMMERCIAL MORTGAGE - BACKED SECURITIES
(COST $48,154,067) 46,528,345
------------
SHORT-TERM INVESTMENTS 8.70%
STUDENT LOAN MARKETING ASSOCIATION DISCOUNT NOTE
4,600 5.18% DUE 10/01/99 (COST $4,600,000) 4,600,000
TOTAL INVESTMENTS IN SECURITIES (COST $54,985,004*) 100.90% 53,360,650
LIABILITIES IN EXCESS OF ASSETS -0.90% (505,337)
---------------------
NET ASSETS (APPLICABLE TO 58,356.8 INSTITUTIONAL SHARES OUTSTANDING) 100.00% $52,855,313
=====================
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
($52,855,313 / 58,356.8) $905.73
============
<FN>
- --------------------------------------------------------------------------------------------------------------
* Also cost for Federal income tax purposes. The gross unrealized appreciation (depreciation) on a tax basis is as follows:
Gross unrealized appreciation $186,406
Gross unrealized depreciation (1,810,760)
-----------
($1,624,354)
===========
** Using the higher of Standard & Poor's, Moody's or Fitch's rating.
*** Rates shown are the rates as of September 30, 1999.
# Principal amount of securities pledged as collateral of $2,940,883 on 44 long U.S. Treasury Notes futures contracts,
34 long U.S. Treasury Bonds futures contracts and 33 short U.S Treasury Notes futures contracts expiring December
1999. The value of such contracts on September 30, 1999 was $15,450,625, thereby resulting in an unrealized gain of
$13,058
</FN>
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
2
<PAGE>
THE BLACKROCK FUNDS
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
For the Year
Ended
9/30/99
------------
Investment Income:
Interest $3,839,779
------------
Expenses:
Investment advisory fee 130,294
Administration fee 119,869
Custodian fee 21,759
Transfer agent fee 15,738
Legal and audit 2,856
Printing 2,793
Trustees fees and officer's salary 1,324
Other 784
------------
Total expenses 295,417
Less fees voluntarily waived (102,746)
------------
Total expenses 192,671
------------
Net investment income 3,647,108
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) from:
Investment transactions (272,635)
Futures contracts 13,930
------------
(258,705)
------------
Change in unrealized depreciation from:
Investments (2,553,809)
Futures contracts (507,890)
------------
(3,061,699)
------------
Net loss on investments (3,320,404)
------------
Net increase in net assets resulting from operations $326,704
=============
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
3
<PAGE>
THE BLACKROCK FUNDS
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year For the Year
Ended Ended
------------ ------------
<S> <C> <C>
Increase (decrease) in net assets: 9/30/99 9/30/98
------------ ------------
Operations:
Net investment income $3,647,108 $5,714,822
Net realized gain (loss) on investments and futures transactions (258,705) 4,322,510
Net unrealized depreciation on investments and futures transactions (3,061,699) (3,353,002)
------------ ------------
Net increase in net assets resulting from operations 326,704 6,684,330
------------ ------------
Distributions to shareholders from:
Net investment income (3,647,108) (5,714,822)
Net realized gains (4,419,435) (1,765,966)
------------ ------------
(8,066,543) (7,480,788)
------------ ------------
Capital share transactions:
Proceeds from shares sold 6,000,000 --
Net asset value of shares issued in reinvestment
of dividends 7,994,700 7,985,972
Net asset value of shares redeemed -- (81,840,000)
------------ ------------
13,994,700 (73,854,028)
------------ ------------
Total increase (decrease) in net assets 6,254,861 (74,650,486)
------------ ------------
Net Assets:
Beginning of period 46,600,452 121,250,938
------------ ------------
End of period $52,855,313 $46,600,452
============ ============
</TABLE>
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
THE BLACKROCK FUNDS
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For a share outstanding throughout the period:
For the Year For the Year For the Year For the Period
Ended Ended Ended 4/1/96 through
9/30/99 9/30/98 9/30/97 9/30/96
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period $1,056.37 $1,056.37 $1,016.08 $1,019.41
------------ ------------ ------------ --------------
Net investment income 66.88 74.41 73.74 38.33
Net realized and unrealized gain (loss) on investments (63.20) 15.26 49.82 (3.33
------------ ------------ ------------ --------------
Net increase from investment operations 3.68 89.67 123.56 35.00
------------ ------------ ------------ --------------
Distributions from net investment income (66.88) (74.41) (73.74) (38.33)
Distributions from net realized capital gains (87.44) (15.26) (9.53) --
------------ ------------ ------------ --------------
Total dividends and distributions (154.32) (89.67) (83.27) (38.33)
------------ ------------ ------------ --------------
Net asset value, end of period $905.73 $1,056.37 $1,056.37 $1,016.08
============ ============ ============ ==============
Total Return 0.51% 9.06% 12.67% 3.53%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $52,855 $46,600 $121,251 $121,738
Ratio of expenses to average net assets 0.37% 0.37% 0.37% 0.37%(b)
Ratio of expenses to average net assets (excluding waivers) 0.57% 0.61% 0.62% 0.51%(b)
Ratio of net investment income to average net assets 7.00% 7.28% 7.13% 7.6%(b)
Ratio of net investment income to average net assets (excluding waivers) 6.80% 7.04% 6.88% 7.45%(b)
Portfolio turnover rate 76% 11% 52% 24%
- ------------------------------------------------------------------------------------------------------------------------------------
(a) Commencement of investment operations.
(b) Annualized.
For a share outstanding throughout the period:
For the Period For the Period
7/1/95 through 10/6/94 (a) through
3/31/96 6/30/95
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period $1,068.11 $1,000.00
-------------- -------------------
Net investment income 61.37 55.81
Net realized and unrealized gain (loss) on investments (9.06) 68.11
-------------- -------------------
Net increase from investment operations 52.31 123.92
-------------- -------------------
Distributions from net investment income (61.37) (55.81)
Distributions from net realized capital gains (39.64) --
-------------- -------------------
Total dividends and distributions (101.01) (55.81)
-------------- -------------------
Net asset value, end of period $1,019.41 $1,068.11
============== ===================
TOTAL RETURN 5.02% 12.78%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $117,569 $112,810
Ratio of expenses to average net assets 0.37%(b) 0.37%(b)
Ratio of expenses to average net assets (excluding waivers) 0.37%(b) 0.45%(b)
Ratio of net investment income to average net assets 7.77%(b) 7.54%(b)
Ratio of net investment income to average net assets (excluding waivers) 7.76%(b) 7.46%(b)
Portfolio turnover rate 119% 215%
</TABLE>
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
BLACKROCK FUNDS
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------
(A) 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 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 September 30, 1999, 99.93% 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 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 these
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.
REPURCHASE AGREEMENTS: 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 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.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
BLACKROCK FUNDS
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------
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: No provision is made for federal taxes as it is the Fund's intention
to have the Portfolio continue to qualify for and elect the tax treatment
applicable the 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
daily and paid monthly. Net realized gains, if any, will be distributed at least
annually.
(B) 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 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 wholly-owned subsidiary of PNC Bank Corp.
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 year ended September 30, 1999, advisory fees and
waiver for the Portfolio were as follows:
GROSS NET
ADVISORY ADVISORY
FEE WAIVER FEE
--- ------ ---
Multi-Sector Mortgage
Securities Portfolio III $130,294 $14,951 $115,343
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 these 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: .085% of the first $500 million, .075% of the next $500
million and .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: .145% of the first $500 million, .135% of the
next %500 million and .125% of assets in excess of $1 billion.
PFPC and BDI may, at their discretion, voluntarily 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
--- ------ ---
Multi-Sector Mortgage
Securities Portfolio III $119,869 $87,795 $32,074
In addition, PFPC Trust Co. (formerly PNC Bank, National Association) serves
as custodian for the Portfolio. PFPC serves as transfer and dividend disbursing
agent.
7
<PAGE>
BLACKROCK FUNDS
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------
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 year
ended September 30, 1999.
(C) PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term
investments and government securities, for the year ended September 30, 1999,
were $53,821,747 and $30,733,941, respectively. Purchases and sales of
government securities for the year ended September 30, 1999 were $7,901,757 and
$6,083,035, respectively.
(D) CAPITAL SHARES
Transactions in capital shares were as follows:
For the Year For the Year
Ended Ended
09/30/99 09/30/98
------------ ------------
Shares sold 5,819 -
Shares issued in reinvestment of dividends 8,424 7,633
Shares redeemed -- (78,300)
------ --------
Net increase (decrease) 14,243 (70,667)
====== =======
(E) AT SEPTEMBER 30, 1999, NET ASSETS CONSISTED OF:
Capital paid-in....................................... $55,192,364
Accumulated net realized loss on investment
transactions and futures contracts................... (726,012)
Net unrealized depreciation on investment
transactions and futures contracts................... (1,611,039)
-----------
$52,855,313
===========
(F) CAPITAL LOSS CARRYOVERS
At September 30, 1999, a capital loss carryover of $46,008, which expires
September 30, 2007, was available to offset possible future realized capital
gains. At September 30, 1999, the deferred post-October loss for the Portfolio
was $720,233.
8
<PAGE>
PRICEWATERHOUSECOOPERS
[LOGO OMITTED]
PRICEWATERHOUSECOOPERS LLP
2400 Eleven Penn Center
Philadelphia PA 19103-2962
Telephone (215)963 8000
Facsimile (215)963 8700
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 Multi-Sector Mortgage Securities Portfolio III 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
(except for the period ended March 31, 1996 and prior periods which were audited
by other auditors, whose reports dated May 22, 1996 expressed an unqualified
opinion thereon), 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 Advisor, 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 Advisor, Inc.
Philadelphia, Pennsylvania 19101 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.
BlackRock Funds
103 Bellevue Parkway
Wilmington, Delaware 19809
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSEDBY 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.
