THE BLACKROCK FUNDS
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
- --------------------------------------------------
SEMI-ANNUAL REPORT TO SHAREHOLDERS
MARCH 31, 1999
(UNAUDITED)
<PAGE>
<TABLE>
<CAPTION>
THE BLACKROCK FUNDS
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
STATEMENT OF NET ASSETS (UNAUDITED)
MARCH 31, 1999
- -------------------------------------------------------------------------------------------------------------------------------
RATINGS** PAR
(UNAUDITED) (000) DESCRIPTION VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL MORTGAGE - BACKED SECURITIES 98.5%
ASSET SECURITIZATION CORP.,
AA $1,000 7.36%, Series 1996-D2, Class A2 , 02/14/29 $1,043,159
CBA MORTGAGE CORP.,
BBB 415 7.76%, Series 1993-C1, Class D, 12/25/03 410,294
COMM,
AAA 425 6.46%, Series 1999-1, Class A2, 09/15/08 427,059
BBB 2,000 7.24%, Series 1999-1, Class E, 10/15/08 1,951,753
COMMERCIAL MORTGAGE ASSET TRUST,
AAA 1,000 6.59%, Series 1999-C1, Class A2, 07/17/08 1,008,125
CS FIRST BOSTON MORTGAGE SECURITIES CORP.,
A+ 2,000 7.34%, Series 1997-C1, Class C, 06/20/07 2,085,365
DLJ COMMERCIAL MORTGAGE CORP.,
BBB- 1,500 7.63%, Series 1998-CF2, Class B2, 11/12/31 1,367,286
A 2,000 6.77%, Series 1999-CG1, Class A3, 02/10/09 2,017,500
FDIC REAL ESTATE MORTGAGE INSURANCE CORP.,
AAA 1,000 8.45%, Series 1994-C1, Class 2C, 09/25/25 1,019,375
FDIC REAL ESTATE MORTGAGE INSURANCE CORP. TRUST,
BBB 500 7.25%, Series 1996-C1, Class 1D, 05/25/26 489,123
FIRST BOSTON MORTGAGE SECURITIES CORP.,
AAA 2,875 6.75%, Series 1993-M1, Class 1A, 09/25/06 2,893,290
FIRST UNION - LEHMAN BROTHERS COMMERCIAL MORTGAGE,
BB 2,000 7.00%, Series 1997-C1, Class F, 04/18/29 1,467,239
GMAC COMMERCIAL MORTGAGE SECURITIES, INC.,
BBB- 2,000 7.22%, Series 1997-C1, Class F, 11/15/11 1,784,527
LB COMMERCIAL CONDUIT MORTGAGE TRUST,
AAA 1,350 6.40%, Series 1998-C1, Class A2, 08/18/07 1,357,478
BBB 2,000 7.05%, Series 1995-C2, Class D, 09/25/25 1,967,382
AAA 2,953# 7.43%, Series 1996-C2, Class A, 10/25/26 3,087,501
LTC COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES,
AA+ 2,125 9.50%, Series 1994-1, Class C, 06/15/26 2,133,841
MORGAN STANLEY CAPITAL INVESTMENTS, INC., PASS-THROUGH CERTIFICATES,
AA 2,656 7.33%, Series 1997-HF1, Class B, 07/15/29 2,776,084
A 2,000 6.81%, Series 1999-RM1, Class B, 12/15/31 2,010,000
MORGAN STANLEY CAPITAL INVESTMENTS,
AAA 2,320 7.27%, Series 1997-HF1, Class A2, 01/15/07 2,437,821
AAA 4,000 6.48%, Series 1998-HF2, Class A2, 11/15/30 4,027,245
MORTGAGE CAPITAL FUNDING, INC.,
BB 1,000 7.15%, Series 1996, Class G, 06/15/06 832,699
A 2,000 7.41%, Series 1997, Class C, 07/20/27 2,089,779
NOMURA ASSET CAPITAL CORP.,
BBB+ 1,000 7.64%, Series 1993-M1, Class A1, 11/25/03 1,006,719
OREGON COMMERCIAL MORTGAGE, INC.,
A 1,548 7.60%, Series 1995-1, Class C, 06/01/23 1,540,638
PAINE WEBBER MORTGAGE ACCEPTANCE CORP.,
BBB 2,000 7.30%, Series 1995 MI, Class D, 01/15/07 2,018,091
RESOLUTION TRUST CORP.,
Baa1 320 7.10%, Series 1993-C3, Class D, 12/25/24 320,033
SALOMON BROTHERS MORTGAGE SECURITIES,
BBB 2,542 7.75%, Series 1996-C1, Class D, 01/20/28 2,572,960
</TABLE>
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
THE BLACKROCK FUNDS
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
STATEMENT OF NET ASSETS (UNAUDITED) (CONTINUED)
MARCH 31, 1999
- -------------------------------------------------------------------------------------------------------------------------------
RATINGS** PAR
(UNAUDITED) (000) DESCRIPTION VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SOUTHERN PACIFIC THRIFT AND LOAN ASSOCIATION,
BBB $1,000 7.47%, Series 1996-C1, Class D, 02/14/29 $993,750
STRUCTURED ASSET SECURITIES CORP.,
A+ 1,000 7.38%, Series 1995-C1, Class D, 09/25/24 1,004,375
A 1,900 7.00%, Series 1995-C4, Class C, 06/25/26 1,920,045
----------
TOTAL COMMERCIAL MORTGAGE - BACKED SECURITIES
(COST $52,353,613) 52,060,536
----------
SHORT-TERM INVESTMENTS 1.6%
FEDERAL HOME LOAN BANK DISCOUNT NOTES
865 4.80% DUE 4/01/99 (COST $865,000) 865,000
----------
TOTAL INVESTMENT IN SECURITIES (COST $53,218,613*) 100.1% 52,925,536
LIABILITIES IN EXCESS OF OTHER ASSETS (0.1%) (66,640)
-----------------------------
NET ASSETS (APPLICABLE TO 56,371 INSTITUTIONAL SHARES OUTSTANDING) 100.0% $52,858,896
=============================
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE
($52,858,896 / 56,371) $937.70
==========
<FN>
- -------------------------------------------------------------------------------------------------------------------------------
* Also cost for Federal income tax purposes. The gross unrealized appreciation (depreciation) on a tax basis is as follows:
Gross unrealized appreciation $405,364
Gross unrealized depreciation (698,441)
----------
($293,077)
==========
** Using the higher of Standard & Poor's, Moody's or Fitch's rating.
# Principal amount of securities pledged as collateral of $2,953,000 on 50 long U.S. Treasury Notes future contracts, 31 long
U.S. Treasury Bond future contracts and 41 short U.S Treasury Notes future contracts expiring June 1999. The value of such
contracts on March 31, 1999 was $18,919,719, thereby resulting in an unrealized gain of $26,817.
</FN>
</TABLE>
<PAGE>
THE BLACKROCK FUNDS
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
STATEMENTS OF OPERATIONS
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For the Six
Months
Ended
3/31/99
------------
Investment Income: (Unaudited)
Interest $ 1,890,917
-----------
Expenses:
Investment advisory fee 64,034
Administration fee 58,912
Custodian fee 5,712
Transfer agent fee 7,745
Legal and audit 1,537
Printing 1,241
Trustees fees and officer's salary 881
Other 6,988
-----------
Total expenses 147,050
Less fees voluntarily waived (52,442)
-----------
Total expenses 94,608
-----------
Net investment income 1,796,309
-----------
Realized and unrealized gain (loss) on investments:
Realized gain from:
Investment transactions 156,335
Futures contracts 71,123
-----------
227,458
-----------
Change in unrealized depreciation from:
Investments (1,222,531)
Futures contracts (494,081)
-----------
(1,716,612)
-----------
Net loss on investments (1,489,154)
-----------
Net increase in net assets resulting from operations $ 307,155
===========
See accompanying notes to finacial statements
<PAGE>
<TABLE>
<CAPTION>
THE BLACKROCK FUNDS
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------------------------------
For the Six
Months For the Year
Ended Ended
Increase (decrease) in net assets: 3/31/99 9/30/98
------------- ------------
(Unaudited)
<S> <C> <C>
Operations:
Net investment income $ 1,796,309 $ 5,714,822
Net realized gain on investments and futures transactions 227,458 4,322,510
Net unrealized depreciation on investments and futures transactions (1,716,612) (3,353,002)
------------- -------------
Net increase in net assets resulting from operations 307,155 6,684,330
------------- -------------
Distributions to shareholders from:
Net investment income (1,796,309) (5,714,822)
Net realized gains (4,419,435) (1,765,966)
------------- -------------
(6,215,744) (7,480,788)
------------- -------------
Capital share transactions:
Proceeds from shares sold 6,000,000 --
Net asset value of shares issued in reinvestment
of dividends 6,167,033 7,985,972
Net asset value of shares redeemed -- (81,840,000)
------------- -------------
12,167,033 (73,854,028)
------------- -------------
Total increase (decrease) in net assets 6,258,444 (74,650,486)
------------- -------------
Net Assets:
Beginning of period 46,600,452 121,250,938
------------- -------------
End of period $ 52,858,896 $ 46,600,452
============= =============
</TABLE>
See accompanying notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
THE BLACKROCK FUNDS
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
FINANCIAL HIGHLIGHTS
- ----------------------------------------------------------------------------------------------------------------------------
For a share outstanding throughout the period: For the Six For the Year For the Year
Months Ended Ended Ended
3/31/99 9/30/98 9/30/97
------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period $ 1,056.37 $1,056.37 $1,016.08
---------- --------- ---------
Net investment income 34.69 74.41 73.74
Net realized and unrealized gain (loss) on investments (31.23) 15.26 49.82
---------- --------- ---------
Net increase from investment operations 3.46 89.67 123.56
---------- --------- ---------
Distributions from net investment income (34.69) (74.41) (73.74)
Distributions from net realized capital gains (87.44) (15.26) (9.53)
---------- --------- ---------
Total dividends and distributions (122.13) (89.67) (83.27)
---------- --------- ---------
Net asset value, end of period $937.70 $1,056.37 $1,056.37
========== ========= =========
TOTAL RETURN 0.47% 9.06% 12.67%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $52,859 $46,600 $121,251
Ratio of expenses to average net assets 0.37%(b) 0.37% 0.37%
Ratio of expenses to average net assets (excluding waivers) 0.57%(b) 0.61% 0.62%
Ratio of net investment income to average net assets 7.01%(b) 7.28% 7.13%
Ratio of net investment income to average net assets (excluding waivers) 6.81%(b) 7.04% 6.88%
Portfolio turnover rate 62% 11% 52%
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</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
For a share outstanding throughout the period: For the Period For the Period For the Period
4/1/96 through 7/1/95 through 10/6/94 (a) through
9/30/96 3/31/96 6/30/95
-------------- -------------- -------------------
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period $1,019.41 $1,068.11 $1,000.00
--------- --------- ---------
Net investment income 38.33 61.37 55.81
Net realized and unrealized gain (loss) on investments (3.33) (9.06) 68.11
--------- --------- ---------
Net increase from investment operations 35.00 52.31 123.92
--------- --------- ---------
Distributions from net investment income (38.33) (61.37) (55.81)
Distributions from net realized capital gains -- (39.64) --
--------- --------- ---------
Total dividends and distributions (38.33) (101.01) (55.81)
--------- --------- ---------
Net asset value, end of period $1,016.08 $1,019.41 $1,068.11
========= ========= =========
TOTAL RETURN 3.53% 5.02% 12.78%
RATIOS / SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $121,738 $117,569 $112,810
Ratio of expenses to average net assets 0.37%(b) 0.37%(b) 0.37%(b)
Ratio of expenses to average net assets (excluding waivers) 0.51%(b) 0.37%(b) 0.45%(b)
Ratio of net investment income to average net assets 7.60%(b) 7.77%(b) 7.54%(b)
Ratio of net investment income to average net assets (excluding waivers) 7.45%(b) 7.76%(b) 7.46%(b)
Portfolio turnover rate 24% 119% 215%
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<FN>
(a) Commencement of investment operations.
(b) Annualized.
</FN>
</TABLE>
See accompanying notes to financial statements
<PAGE>
BLACKROCK FUNDS
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
(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 36 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, 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.
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 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.
<PAGE>
BLACKROCK FUNDS
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
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.
(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 period ended March 31, 1999, advisory fees
and waiver for the Portfolio were as follows:
GROSS NET
ADVISORY ADVISORY
FEE WAIVER FEE
--- ------ ---
Multi-Sector Mortgage
Securities Portfolio III $64,034 $9,703 $54,331
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: .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,
1999, administration fees and waivers for the Portfolio were as follows:
GROSS NET
ADMINISTRATION ADMINISTRATION
FEE WAIVER FEE
--- ------ ---
Multi-Sector Mortgage
Securities Portfolio III $58,912 $42,739 $16,173
In addition, PFPC Trust Co. (formerly PNC Bank, National Association)
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, 1999.
<PAGE>
BLACKROCK FUNDS
THE MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO III
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
(C) PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term
investments and government securities, for the period ended March 31, 1999, were
$47,300,631 and $29,252,142, respectively. Purchases and sales of government
securities for the period ended March 31, 1999 were $4,665,820 and $5,079,285,
respectively.
(D) CAPITAL SHARES
Transactions in capital shares were as follows:
For the Six For the Year
Months Ended Ended
03/31/99 09/30/98
-------- --------
Shares sold .................................... 5,819 --
Shares issued in reinvestment of dividends ..... 6,438 7,633
Shares redeemed ................................ -- (78,300)
------ -------
Net increase (decrease) ........................ 12,257 (70,257)
====== =======
(E) AT MARCH 31, 1999, NET ASSETS CONSISTED OF:
Capital paid-in ................................ $ 53,364,695
Accumulated net realized loss on investment
transactions and futures contracts ......... (239,848)
Net unrealized depreciation on investment
transactions and futures contracts ......... (265,951)
------------
$ 52,858,896
============
<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 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.
- --------------------------------------------------------------------------------
