MERRILL LYNCH
CONSULTS
INTERNATIONAL
PORTFOLIO
[GRAPHIC OMITTED]
STRATEGIC
Performance
Annual Report
October 31, 1998
<PAGE>
MERRILL LYNCH CONSULTS INTERNATIONAL PORTFOLIO
Worldwide Investments as of October 31, 1998
Ten Largest Industries Percent of
(Equity Investments) Net Assets
Banking............................................................... 8.1%
Oil & Related......................................................... 6.8
Foods................................................................. 6.7
Electronics........................................................... 5.9
Insurance............................................................. 5.4
Pharmaceuticals....................................................... 4.4
Telecommunications.................................................... 4.2
Natural Gas Utilities................................................. 4.1
Beverage.............................................................. 3.9
Household Appliances.................................................. 3.7
Nestle S.A. (Registered).............................................. 4.4
Novartis AG (Registered).............................................. 4.4
Diageo PLC............................................................ 3.9
Credit Suisse Group (Registered)...................................... 3.8
Electrolux AB (Series B).............................................. 3.7
Boots Company PLC..................................................... 3.7
Telecom Italia S.p.A.................................................. 3.1
Repsol, S.A........................................................... 3.1
BG PLC................................................................ 3.0
CGU PLC............................................................... 2.9
Officers and Trustees
Arthur Zeikel, President and Trustee
James H. Bodurtha, Trustee
Herbert I. London, Trustee
Robert R. Martin, Trustee
Joseph L. May, Trustee
Andre F. Perold, Trustee
Terry K. Glenn, Executive Vice President
Alan J. Albert, Senior Vice President
Donald C. Burke, Vice President
Christophe Velay, Vice President
Gerald M. Richard, Treasurer
Lorraine Mandel, Secretary
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
<PAGE>
Merrill Lynch Consults International Portfolio, October 31, 1998
DEAR SHAREHOLDER
Fiscal Year in Review
Our goal of enhancing performance through tactical asset allocation proved
extremely difficult to achieve during the past year. For the 12 months ended
October 31, 1998, Merrill Lynch Consults International Portfolio had a total
return of -2.79% compared to +9.65% for the unmanaged benchmark Morgan Stanley
Capital International (MSCI) Europe, Australia and Far East (EAFE) Index.
Detrimental to performance was the Fund's geographic representation. Our
decisions to invest in Latin America during the year, underweighting Europe
during the first two quarters of the fiscal year, and underweighting non-Japan
Asia during the fourth quarter all hurt the Fund's performance. Our security
selection benefited performance, and many of our top holdings were among the
best-performing stocks in their respective markets.
For the first half of the fiscal year, the Portfolio had a total return of
+13.43%, modestly underperforming the EAFE Index, which was up 15.44% over the
same period. This period was characterized by a strong recovery from the October
1997 declines. The second fiscal quarter saw the strongest markets of the year,
and was the best quarter for the Portfolio, which had a +12.59% total return to
outperform the benchmark by 2.00%. Our decisions to underweight Asia and Japan
in favor of Europe proved correct, while Latin America performed in line with
the Portfolio's benchmark. In terms of security selection, our concentration in
financial, telecommunications and pharmaceutical stocks also benefited the
Portfolio since these were some of the best-performing sectors.
The fiscal quarter ended July 31, 1998 witnessed the Portfolio give back the
lead it gained during the April quarter. The Portfolio lost 1.44%, trailing the
Index by 272 basis points (2.72%). As in the first fiscal quarter, asset
allocation was the reason. In spite of halving our positions in Japan, Asia and
Latin America, our allocations in these regions negatively impacted the
Portfolio's performance.
At the beginning of the critical fourth fiscal quarter, we had markedly reduced
the Portfolio's allocations to Asia and Latin America. Combined, these regions
accounted for 14.3% of the Portfolio's net assets as of August 1, 1998, whereas
the EAFE Index had no exposure to Latin America and 25.1% in Asia, including
Japan. Although our decision to underweight non-European markets proved
appropriate, the Portfolio lost 13.04% of its value between July 31, 1998 and
October 31, 1998 as compared to only 6.2% for the EAFE Index. The reason was the
considerable and unexpected price declines in Latin America, which amounted to a
negative total return of 22.43% in the MSCI Latin America Index, as compared to
a 1.44% loss in the MSCI Emerging Markets Asia Index. Our underweighted position
in Asia (ex-Japan) had a negative impact on performance relative to the EAFE
Index, since these markets ended the quarter on a positive note.
Throughout the year, we entered into various forward agreements to hedge
approximately 50% of the Portfolio's Japanese yen exposure. This served to
protect Portfolio performance during the depreciation of the Japanese currency
during the first three fiscal quarters, but we underestimated the yen's
resiliency when the yen rapidly appreciated in September. The net effect of
currency hedges during the year was not significant in relation to total return.
Investment Outlook
During the month of October, global equities recovered approximately half of the
losses incurred since the summer. The rebound was induced by interest rate cuts
by the US Federal Reserve Board and some European central banks, Brazil's fiscal
austerity program, better-than-expected third quarter earnings releases in the
United States, and the approval of funding for the International Monetary Fund.
While the United States, Europe and emerging markets have seen significant
gains, Japan once more was lagging as investors remained skeptical of a
recovery. Japan's new banking bill does not provide any serious requirements for
the banks to restructure their loan portfolios when applying for public funds.
Additionally, the half-year earnings announcements turned out to be far below
the reduced expectations.
In the intermediate term, we are relatively more optimistic for Western equity
markets than we are in Asia. As the Japanese government struggles to break with
the traditional system and implement restructuring policies, the economic
situation may deteriorate further before it improves. Nevertheless, the
Portfolio maintains a commitment to this major market, albeit a substantially
reduced one. We will watch Japan closely since it is likely that the market will
finish its bottoming process in the not too distant future, from which it may
take off for a long-term bull phase. Considering the imminent risks, we are
focusing our investments in Japan on companies with strong and transparent
balance sheets and with the ability to compete globally. These are factors that
should increase the companies' long-term viability, while reducing risks in the
short term.
We do not see any fundamental improvement behind the strong rally in the Asian
emerging markets. Rather, the recent rise in share prices has been driven
primarily by external factors such as a temporarily stronger yen, lower interest
rates, and in no small part, government intervention in the Hong Kong stock
market. Therefore, we are skeptical about the longevity of the recovery in
financial markets in Asia (ex-Japan), and continue to hold an underweight
position there.
In Europe, we will continue to focus on companies that have visible earnings
growth, whether from a sustainable increase in revenues or from the benefits of
restructuring and consolidation. We continue to favor companies in the
pharmaceutical, telecommunications and consumer services industries. The
Portfolio has investments that are likely to benefit from the major demographic
and economic trends in Europe including aging of the population, increased
savings, greater focus on enhancing corporate shareholder value, cross-border
industry consolidation and selective increase in consumption. With the start of
European Monetary Union scheduled for January 1999, our investment strategy in
Europe will increasingly be based on sector, rather than country, analysis.
The risks to the emerging markets have not disappeared. Many of the factors
responsible for the market declines of August and September have not been
resolved. Predominant among these is the excess global capacity, which primarily
hurts the economies that rely on exports of undifferentiated, low-value-added
products. This situation has been made worse by the visible reduction in
investment and commercial lending to developing countries. Nevertheless, there
are positives. For example, valuations are extremely attractive. Many firms with
solid fundamentals have seen their prices fall drastically during the general
sell-off, presenting attractive buying opportunities. Second, governments in
Latin America have shown a strong commitment to adopting fiscal and monetary
measures to maintain price stability and financial order. This is in sharp
contrast to the Asian situation. This is a difficult stance, especially because
it is painful in the short term, but we believe it will pay off. The excellent
demographic and political trends in Latin America, combined with prudent
governments, will help the region overcome its present difficulties. We expect
to continue to invest in Latin America, focusing on companies that we believe
offer good value and diversified sources of revenues.
In Conclusion
We appreciate your continued interest in Merrill Lynch Consults International
Portfolio, and we look forward to reviewing our strategy with you again in our
next report to shareholders.
Sincerely,
/s/ Arthur Zeikel
Arthur Zeikel
President
/s/ Christophe Velay
Christophe Velay
Vice President and Portfolio Manager
December 7, 1998
2 & 3
<PAGE>
Merrill Lynch Consults International Portfolio, October 31, 1998
IMPORTANT TAX INFORMATION (unaudited)
The following information summarizes all per share distributions paid by Merrill
Lynch Consults International Portfolio during its fiscal year ended October 31,
1998.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Record Payable Domestic Ordinary Foreign Source Total Ordinary Foreign Taxes Long-Term
Date Date Income Income Income Paid or Withheld Capital Gains
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
12/11/97 12/19/97 $.112497 $.240904 $.353401 $.045518 $.401125*
- -----------------------------------------------------------------------------------------------------------
</TABLE>
* Of this distribution, 45.79% is subject to the 28% tax rate and 54.21% is
subject to the 20% tax rate.
The foreign taxes paid or withheld represent taxes incurred by the fund on
dividends received by the fund from foreign sources. Foreign taxes paid or
withheld should be included in taxable income with an offsetting deduction from
gross income or as a credit for taxes paid to foreign governments. You should
consult your tax adviser regarding the appropriate treatment of foreign taxes
paid.
Please retain this information for your records.
PERFORMANCE DATA
None of the past results shown should be considered a representation of future
performance. Investment return and principal value of shares will fluctuate so
that shares, when redeemed, may be worth more or less than their original cost.
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the ML Consults
International Portfolio compared to growth of an investment in the Morgan
Stanley Capital International EAFE Index. Beginning and ending values are:
9/14/92** 10/98
ML Consults International Portfolio*+ ............... $10,000 $14,250
Morgan Stanley Capital International EAFE Index++ ... $10,000 $18,105
* Assuming transaction costs and other operating expenses, including
advisory fees.
** Commencement of Operations.
+ ML Consults International Portfolio invests in a diversified international
portfolio of equity securities, other than US securities.
++ This unmanaged Index measures the total returns of developed foreign stock
markets in Europe, Asia and the Far East. The starting date for the Index
in the line graph is from September 30, 1992.
Average Annual Total Return
Period Covered % Return
================================================================================
Year Ended 9/30/98 -18.04%
- --------------------------------------------------------------------------------
Five Years Ended 9/30/98 + 2.91
- --------------------------------------------------------------------------------
Inception (9/14/92) through 9/30/98 + 4.80
- --------------------------------------------------------------------------------
Recent Performance Results*
12 Month 3 Month Since Inception
Total Return Total Return Total Return
================================================================================
ML Consults International Portfolio -2.79% -13.04% +42.50%
- --------------------------------------------------------------------------------
* Total investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital gains
distributions at net asset value on the ex-dividend date. The Fund
commenced operations on 9/14/92.
4 & 5
<PAGE>
Merrill Lynch Consults International Portfolio, October 31, 1998
SCHEDULE OF INVESTMENTS (in US dollars)
<TABLE>
<CAPTION>
LATIN Shares Held/ Value Percent of
AMERICA Industries Face Amount Investments Cost (Note 1a) Net Assets
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Argentina Banking 38,662 Banco de Galicia y Buenos Aires S.A. (ADR)* $ 607,996 $ 652,421 1.1%
--------------------------------------------------------------------------------------------------------------------
Oil & Related 25,000 YPF S.A. (ADR)* 640,679 723,438 1.2
--------------------------------------------------------------------------------------------------------------------
Total Investments in Argentina 1,248,675 1,375,859 2.3
====================================================================================================================================
Brazil Mining US$ 44,000 Companhia Vale do Rio Doce S.A., 0.00%
due 12/31/2049(a) 0 0 0.0
--------------------------------------------------------------------------------------------------------------------
Telecommunications 9,000 +Telecomunicacoes Brasileiras S.A.--
Telebras (ADR)* 1,008,563 683,438 1.1
--------------------------------------------------------------------------------------------------------------------
Total Investments in Brazil 1,008,563 683,438 1.1
====================================================================================================================================
Total Investments in Latin America 2,257,238 2,059,297 3.4
====================================================================================================================================
PACIFIC
BASIN
====================================================================================================================================
Japan Electrical Equipment 140,000 Hitachi, Ltd. 1,260,692 712,863 1.2
--------------------------------------------------------------------------------------------------------------------
Electronics 100,000 Fujitsu Limited 1,326,973 1,064,743 1.8
14,500 Sony Corporation 1,174,991 921,346 1.5
----------- ----------- ------
2,501,964 1,986,089 3.3
--------------------------------------------------------------------------------------------------------------------
Merchandising 19,000 Ito-Yokado Co., Ltd. 1,004,019 1,109,394 1.8
--------------------------------------------------------------------------------------------------------------------
Tire & Rubber 40,000 Bridgestone Corporation 905,159 880,989 1.4
--------------------------------------------------------------------------------------------------------------------
Total Investments in the Pacific Basin 5,671,834 4,689,335 7.7
====================================================================================================================================
WESTERN
EUROPE
====================================================================================================================================
France Consumer--Goods 8,000 LVMH (Louis Vuitton Moet Hennessy) 1,727,390 1,483,081 2.4
--------------------------------------------------------------------------------------------------------------------
Foods 5,300 Groupe Danone 879,482 1,401,314 2.3
--------------------------------------------------------------------------------------------------------------------
Health/Personal Care 8,000 Sanofi S.A. 690,834 1,252,700 2.1
--------------------------------------------------------------------------------------------------------------------
Insurance 13,400 AXA-UAP 951,487 1,514,615 2.5
--------------------------------------------------------------------------------------------------------------------
Machinery & Equipment 60,000 +Alstom 2,044,888 1,494,600 2.5
--------------------------------------------------------------------------------------------------------------------
Oil & Related 13,000 Elf Aquitaine S.A. 973,037 1,504,500 2.5
--------------------------------------------------------------------------------------------------------------------
Total Investments in France 7,267,118 8,650,810 14.3
====================================================================================================================================
Germany Apparel 14,000 Adidas--Salomon AG 2,430,705 1,641,088 2.7
--------------------------------------------------------------------------------------------------------------------
Auto & Truck 18,000 Daimler-Chrysler AG 1,795,336 1,397,583 2.3
--------------------------------------------------------------------------------------------------------------------
Banking 22,000 Deutsche Bank AG 1,629,930 1,369,184 2.3
--------------------------------------------------------------------------------------------------------------------
Chemicals 40,000 BASF AG 1,132,319 1,696,677 2.8
--------------------------------------------------------------------------------------------------------------------
Utilities 31,000 VEBA AG 2,063,699 1,732,628 2.9
--------------------------------------------------------------------------------------------------------------------
Total Investments in Germany 9,051,989 7,837,160 13.0
====================================================================================================================================
Italy Banking 100,000 Unicredito Italiano S.p.A. 140,795 537,503 0.9
--------------------------------------------------------------------------------------------------------------------
Natural Gas Utilities 140,000 Italgas S.p.A. 476,677 641,766 1.1
--------------------------------------------------------------------------------------------------------------------
Telecommunications 260,000 Telecom Italia S.p.A. 1,652,716 1,881,872 3.1
--------------------------------------------------------------------------------------------------------------------
Tires & Rubber 460,000 Pirelli S.p.A. 1,019,656 1,320,547 2.2
--------------------------------------------------------------------------------------------------------------------
Total Investments in Italy 3,289,844 4,381,688 7.3
====================================================================================================================================
Netherlands Electronics 30,000 Koninklijke (Royal) Philips Electronics N.V. 1,540,158 1,596,958 2.6
--------------------------------------------------------------------------------------------------------------------
Publishing 30,000 VNU NV 1,026,754 1,037,862 1.7
--------------------------------------------------------------------------------------------------------------------
Total Investments in the Netherlands 2,566,912 2,634,820 4.3
====================================================================================================================================
Portugal Electric Utilities 53,120 EDP-Electricidade de Portugal, S.A. 982,087 1,337,000 2.2
--------------------------------------------------------------------------------------------------------------------
Total Investments in Portugal 982,087 1,337,000 2.2
====================================================================================================================================
Spain Oil & Related 37,500 Repsol, S.A. 1,156,793 1,880,186 3.1
--------------------------------------------------------------------------------------------------------------------
Total Investments in Spain 1,156,793 1,880,186 3.1
====================================================================================================================================
Sweden Household Appliances 150,000 Electrolux AB (Series B) 1,365,221 2,255,105 3.7
--------------------------------------------------------------------------------------------------------------------
Total Investments in Sweden 1,365,221 2,255,105 3.7
====================================================================================================================================
Switzerland Banking 15,000 Credit Suisse Group (Registered) 1,554,232 2,311,150 3.8
--------------------------------------------------------------------------------------------------------------------
Foods 1,250 Nestle S.A. (Registered) 1,396,560 2,663,510 4.4
--------------------------------------------------------------------------------------------------------------------
Pharmaceuticals 1,456 Novartis AG (Registered) 778,218 2,628,470 4.4
--------------------------------------------------------------------------------------------------------------------
Total Investments in Switzerland 3,729,010 7,603,130 12.6
====================================================================================================================================
United Kingdom Automobile Parts 400,000 LucasVarity PLC 1,331,705 1,366,310 2.3
--------------------------------------------------------------------------------------------------------------------
Beverage 216,000 Diageo PLC 2,540,684 2,332,774 3.9
--------------------------------------------------------------------------------------------------------------------
Entertainment 150,000 EMI Group PLC 1,360,813 889,734 1.5
--------------------------------------------------------------------------------------------------------------------
Financial Services 75,000 +Allied Zurich AG 1,025,269 896,641 1.5
--------------------------------------------------------------------------------------------------------------------
Insurance 110,000 CGU PLC 1,374,814 1,743,302 2.9
--------------------------------------------------------------------------------------------------------------------
Machinery 400,000 Siebe PLC (Ordinary) 805,619 1,640,912 2.7
--------------------------------------------------------------------------------------------------------------------
Natural Gas Utilities 280,058 BG PLC 928,384 1,835,858 3.0
--------------------------------------------------------------------------------------------------------------------
Retail 150,000 Boots Company PLC 1,317,274 2,252,905 3.7
--------------------------------------------------------------------------------------------------------------------
Tobacco 75,000 +British American Tobacco PLC 707,878 677,504 1.1
--------------------------------------------------------------------------------------------------------------------
Total Investments in the United Kingdom 11,392,440 13,635,940 22.6
====================================================================================================================================
Total Investments in Western Europe 40,801,414 50,215,839 83.1
====================================================================================================================================
Total Investments $48,730,486 56,964,471 94.2
===========
Unrealized Depreciation on Forward Foreign Exchange Contracts** (633,216) (1.0)
Other Assets Less Liabilities 4,110,542 6.8
----------- ------
Net Assets $60,441,797 100.0%
=========== ======
====================================================================================================================================
</TABLE>
+ Non-income producing security.
(a) Received through a bonus issue from Companhia Vale do Rio Doce S.A.
As of October 31, 1998, the bonds have not commenced trading and the
coupon rate has not been determined.
* American Depositary Receipts (ADR).
** Forward foreign exchange contracts sold as of October 31, 1998 were
as follows:
--------------------------------------------------------------------
Unrealized
Foreign Expiration Depreciation
Currency Sold Date (Note 1c)
--------------------------------------------------------------------
(Yen)421,860,000 November 1998 $(633,216)
--------------------------------------------------------------------
Total Unrealized Depreciation on Forward Foreign
Exchange Contracts (US$ Commitment--$3,000,000) $(633,216)
=========
--------------------------------------------------------------------
See Notes to Financial Statements.
6 & 7
<PAGE>
Merrill Lynch Consults International Portfolio, October 31, 1998
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
As of October 31, 1998
===========================================================================================================================
<S> <C> <C> <C>
Assets: Investments, at value (identified cost--$48,730,486) (Note 1a) ................. $ 56,964,471
Cash ........................................................................... 147,250
Foreign cash (Note 1b) ......................................................... 458
Receivables:
Securities sold .............................................................. $ 4,058,709
Dividends .................................................................... 295,093
Beneficial interest sold ..................................................... 235,340 4,589,142
------------
Prepaid registration fees and other assets (Note 1f) ........................... 16,026
------------
Total assets ................................................................... 61,717,347
------------
===========================================================================================================================
Liabilities: Unrealized depreciation on forward foreign exchange contracts (Note 1c) ........ 633,216
Payables:
Beneficial interest redeemed ................................................. 362,575
Distributor (Note 2) ......................................................... 51,027
Investment adviser (Note 2) .................................................. 38,271
Commissions .................................................................. 14,542
Administration fee (Note 2) .................................................. 12,757 479,172
------------
Accrued expenses ............................................................... 163,162
------------
Total liabilities .............................................................. 1,275,550
------------
===========================================================================================================================
Net Assets: Net assets ..................................................................... $ 60,441,797
============
===========================================================================================================================
Net Assets Common shares of beneficial interest, $.10 par value, unlimited number of
Consist of: shares authorized .............................................................. $ 536,074
Paid-in capital in excess of par ............................................... 51,822,282
Undistributed investment income--net (Note 1g) ................................. 1,557,351
Accumulated realized capital losses on investments and foreign currency
transactions--net .............................................................. (1,091,910)
Unrealized appreciation on investments and foreign currency transactions--net .. 7,618,000
------------
Net assets--Equivalent to $11.27 per share based on 5,360,740 shares of
beneficial interest outstanding ................................................ $ 60,441,797
============
===========================================================================================================================
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended October 31, 1998
===========================================================================================================================
<S> <C> <C> <C>
Investment Dividends (net of $226,702 foreign withholding tax) ......................... $ 2,692,982
Income Interest and discount earned ................................................ 124,847
(Notes 1d & 1e): ------------
Total income ................................................................ 2,817,829
------------
===========================================================================================================================
Expenses: Account maintenance and distribution fees (Note 2) .......................... $ 911,697
Investment advisory fees (Note 2) ........................................... 683,792
Administration fees (Note 2) ................................................ 227,924
Stamp tax fee ............................................................... 156,078
Accounting services (Note 2) ................................................ 150,624
Custodian fees .............................................................. 85,971
Professional fees ........................................................... 83,082
Printing and shareholder reports ............................................ 60,708
Transfer agent fees (Note 2) ................................................ 34,506
Registration fees (Note 1f) ................................................. 29,106
Trustees' fees .............................................................. 22,761
Pricing fees ................................................................ 6,598
Other ....................................................................... 13,180
------------
Total expenses .............................................................. 2,466,027
------------
Investment income--net ...................................................... 351,802
------------
===========================================================================================================================
Realized & Realized gain (loss) from:
Unrealized Gain Investments--net .......................................................... (1,091,909)
(Loss) On Foreign currency transactions--net ........................................ 2,488,873 1,396,964
Investments & ------------
Foreign Currency Change in unrealized appreciation/depreciation on:
Transactions-- Investments--net .......................................................... (1,153,114)
Net (Notes 1b, Foreign currency transactions--net ........................................ (1,448,987) (2,602,101)
1c, 1e & 3): ------------ ------------
Net realized and unrealized loss on investments and foreign currency
transactions ................................................................ (1,205,137)
------------
Net Decrease in Net Assets Resulting from Operations ........................ $ (853,335)
============
===========================================================================================================================
</TABLE>
See Notes to Financial Statements.
8 & 9
<PAGE>
Merrill Lynch Consults International Portfolio, October 31, 1998
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year Ended October 31,
-----------------------------
Increase (Decrease) in Net Assets: 1998 1997
==================================================================================================================================
<S> <C> <C> <C>
Operations: Investment income--net ....................................................... $ 351,802 $ 1,201,465
Realized gain on investments and foreign currency transactions--net .......... 1,396,964 4,831,529
Change in unrealized appreciation/depreciation on investments and foreign
currency transactions--net ................................................... (2,602,101) 9,042,849
------------ ------------
Net increase (decrease) in net assets resulting from operations .............. (853,335) 15,075,843
------------ ------------
==================================================================================================================================
Dividends & Investment income--net ....................................................... (1,584,173) --
Distributions to In excess of investment income--net .......................................... (931,508) (5,862,557)
Shareholders Realized gain on investments--net ............................................ (3,930,011) (4,613,274)
(Note 1g): ------------ ------------
Net decrease in net assets resulting from dividends and distributions to
shareholders ................................................................. (6,445,692) (10,475,831)
------------ ------------
==================================================================================================================================
Beneficial Interest Net decrease in net assets derived from beneficial interest transactions ..... (40,209,743) (71,570,166)
Transactions ------------ ------------
(Note 4):
==================================================================================================================================
Net Assets: Total decrease in net assets ................................................. (47,508,770) (66,970,154)
Beginning of year ............................................................ 107,950,567 174,920,721
------------ ------------
End of year* ................................................................. $ 60,441,797 $107,950,567
============ ============
==================================================================================================================================
*Undistributed investment income--net (Note 1h) ............................... $ 1,557,351 $ 1,232,371
============ ============
==================================================================================================================================
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. For the Year Ended October 31,
--------------------------------------------------
Increase (Decrease) in Net Asset Value: 1998+ 1997+ 1996+ 1995+ 1994+
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year ........................ $ 12.37 $ 12.09 $ 12.28 $ 12.83 $ 11.74
Operating ------- -------- -------- -------- --------
Performance: Investment income (loss)--net ........................... .05 .10 (.05) (.05) (.12)
Realized and unrealized gain (loss) on investments and
foreign currency transactions--net ...................... (.40) .97 .76 (.18) 1.26
------- -------- -------- -------- --------
Total from investment operations .......................... (.35) 1.07 .71 (.23) 1.14
------- -------- -------- -------- --------
Less dividends and distributions:
Investment income--net .................................. (.18) -- -- -- --
In excess of investment income--net ..................... (.11) (.44) (.44) -- --
Realized gain on investments--net ....................... (.46) (.35) (.46) (.32) (.05)
------- -------- -------- -------- --------
Total dividends and distributions ......................... (.75) (.79) (.90) (.32) (.05)
------- -------- -------- -------- --------
Net asset value, end of year .............................. $ 11.27 $ 12.37 $ 12.09 $ 12.28 $ 12.83
======= ======== ======== ======== ========
==================================================================================================================================
Total Investment Based on net asset value per share ........................ (2.79%) 9.26% 5.93% (1.68%) 9.74%
Return: ======= ======== ======== ======== ========
==================================================================================================================================
Ratios to Average Expenses .................................................. 2.70% 2.44% 2.37% 2.35% 2.27%
Net Assets: ======= ======== ======== ======== ========
Investment income (loss)--net ............................. .39% .84% (.42%) (.41%) (.56%)
======= ======== ======== ======== ========
==================================================================================================================================
Supplemental Net assets, end of year (in thousands) .................... $60,442 $107,951 $174,921 $197,077 $272,487
Data: ======= ======== ======== ======== ========
Portfolio turnover ........................................ 48.78% 28.62% 38.16% 17.31% 24.64%
======= ======== ======== ======== ========
==================================================================================================================================
</TABLE>
+ Based on average shares outstanding.
See Notes to Financial Statements.
10 & 11
<PAGE>
Merrill Lynch Consults International Portfolio, October 31, 1998
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Consults International Portfolio (the "Fund") is registered under
the Investment Company Act of 1940 as a diversified, open-end management
investment company. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Portfolio securities, including depositary
receipts, which are traded on stock exchanges are valued at the last sale price
on the exchange on which such securities are traded, as of the close of business
on the day the securities are being valued or, lacking any sales, at the last
available bid price. Securities traded in the over-the-counter market are valued
at the last available bid price prior to the time of valuation. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Trustees as
the primary market. Securities which are traded both in the over-the-counter
market and on a stock exchange are valued according to the broadest and most
representative market. Options written or purchased are valued at the last sale
price in the case of exchange-traded options. In the case of options traded in
the over-the-counter market, valuation is the last asked price (options written)
or the last bid price (options purchased). Short-term securities are valued at
amortized cost, which approximates market value. Other investments, including
futures contracts and related options, are stated at market value. Securities
and assets for which market quotations are not available are valued at fair
value as determined in good faith by or under the direction of the Fund's Board
of Trustees.
(b) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Realized and unrealized gains/losses on foreign
currency transactions are the result of settling (realized) or valuing
(unrealized) assets or liabilities expressed in foreign currencies into US
dollars. Realized and unrealized gains or losses from investments include the
effects of foreign exchange rates on investments.
(c) Derivative financial instruments--The Fund may engage in various portfolio
strategies to seek to increase its return by hedging its portfolio against
adverse movements in the equity, debt and currency markets. Losses may arise due
to changes in the value of the contract or if the counterparty does not perform
under the contract.
o Forward foreign exchange contracts--The Fund is authorized to enter into
forward foreign exchange contracts as a hedge against either specific
transactions or portfolio positions. Such contracts are not entered on the
Fund's records. However, the effect on operations is recorded from the date the
Fund enters into such contracts. Premium or discount is amortized over the life
of the contract.
o Foreign currency options and futures--The Fund may purchase or sell listed or
over-the-counter foreign currency options, foreign currency futures and related
options on foreign currency futures as a short or long hedge against possible
variations in foreign exchange rates. Such transactions may be effected with
respect to hedges on non-US dollar denominated securities owned by the Fund,
sold by the Fund but not yet delivered, or committed or anticipated to be
purchased by the Fund.
o Financial futures contracts--The Fund may purchase or sell financial futures
contracts and options on such futures contracts for the purpose of hedging the
market risk on existing securities or the intended purchase of securities.
Futures contracts are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a contract, the
Fund deposits and maintains as collateral such initial margin as required by the
exchange on which the transaction is effected. Pursuant to the contract, the
Fund agrees to receive from or pay to the broker an amount of cash equal to the
daily fluctuation in value of the contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.
o Options--The Fund is authorized to write covered call options and purchase put
options. When the Fund writes an option, an amount equal to the premium received
by the Fund is reflected as an asset and an equivalent liability. The amount of
the liability is subsequently marked to market to reflect the current market
value of the option written. When a security is purchased or sold through an
exercise of an option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from (or added to)
the proceeds of the security sold. When an option expires (or the Fund enters
into a closing transaction), the Fund realizes a gain or loss on the option to
the extent of the premiums received or paid (or gain or loss to the extent the
cost of the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
(d) Income taxes--It is the Fund's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends, and
capital gains at various rates.
(e) Security transactions and investment income-- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Dividend income is recorded on the ex-dividend dates. Dividends from foreign
securities where the ex-dividend date may have passed are subsequently recorded
when the Fund has determined the ex-dividend date. Interest income (including
amortization of discount) is recognized on the accrual basis. Realized gains and
losses on security transactions are determined on the identified cost basis.
(f) Prepaid registration fees--Prepaid registration fees are charged to expense
as the related shares are issued.
(g) Dividends and distributions--Dividends and distributions paid by the Fund
are recorded on the ex-dividend date. Distributions in excess of net investment
income are due primarily to differing tax treatments for foreign currency
transactions.
(h) Reclassification--Generally accepted accounting principles require that
certain components of net assets be adjusted to reflect permanent differences
between financial and tax reporting. Accordingly, current year's permanent
book/tax differences of $2,488,859 have been reclassified between accumulated
net realized capital losses and undistributed net investment income. These
reclassifications have no effect on net assets or net asset value per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Merrill Lynch
(Suisse) Investment Management S.A. (the "Investment Adviser"). The Investment
Adviser is a subsidiary of Merrill Lynch Bank (Suisse) S.A. which is, in turn,
an indirect subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."). Fund Asset
Management, L.P. ("FAM") and Merrill Lynch Asset Management U.K. Limited ("MLAM
U.K.") have been retained as sub-advisers (the "Sub-Advisers") to the Fund.
Pursuant to sub-advisory agreements, the Sub-Advisers will provide investment
advisory services with respect to the management of the Fund's cash position.
As compensation for its services to the Fund, the Investment Adviser receives
monthly compensation at the annual rate of 0.75% of the average daily net assets
of the Fund. The Fund will not pay any incremental fee to the Sub-Advisers for
their services.
The Fund has an Administrative Agreement with Princeton Administrators, L.P.
(the "Administrator"), an indirect subsidiary of ML & Co. The Administrator
performs or arranges for the performance of certain administrative services
(i.e., services other than investment advice and related portfolio activities)
necessary for the operation of the Fund, including maintaining the books and
records of the Fund, preparing reports and other documents required by United
States Federal, state and other applicable laws and regulations to maintain the
registration of the Fund and its shares and providing the Fund with
administrative office facilities. For the services rendered to the Fund and the
facilities furnished, the Fund pays the Administrator a monthly fee equal to
0.25% of the Fund's average daily net assets. Also, accounting services are
provided to the Fund by the Administrator, and the Fund reimburses the
Administrator for its costs in connection with such services on a semi-annual
basis.
12 & 13
<PAGE>
Merrill Lynch Consults International Portfolio, October 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
The Fund has adopted a Plan of Distribution (the "Plan") pursuant to Rule 12b-1
under the Investment Company Act of 1940 pursuant to which Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a division of Princeton Funds
Distributor, Inc. ("PFD"), which is a wholly-owned subsidiary of Merrill Lynch
Group, Inc., receives ongoing distribution and account maintenance fees, which
are accrued daily and paid monthly at the annual rates of 0.75% and 0.25%,
respectively, of the average daily net assets of the Fund. Pursuant to a
sub-agreement with the Distributor, Merrill Lynch, Pierce, Fenner & Smith Inc.
("MLPF&S"), a subsidiary of ML & Co., also provides account maintenance
activities and distribution services to the Fund. The ongoing account
maintenance fee compensates the Distributor and MLPF&S for providing account
maintenance activities to the Fund's shareholders. The ongoing distribution fee
compensates the Distributor and MLPF&S for providing shareholder and
distribution services and bearing distribution-related expenses of the Fund,
including payments to financial consultants for selling shares of the Fund.
As authorized by the Plan, the Distributor has entered into an agreement with
MLPF&S, an affiliate of the Investment Adviser, which provides for the
compensation of MLPF&S for providing account maintenance and
distribution-related services to the Fund. For the year ended October 31, 1998,
MLFD earned $911,697 under the Plan, all of which was paid to MLPF&S pursuant to
the agreement.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co.,
acts as the Fund's transfer agent.
In addition, MLPF&S received $30,933 in commissions on the execution of
portfolio security transactions for the Fund for the year ended October 31,
1998.
Certain officers and/or trustees of the Fund are officers and/or directors of
FAM, the Investment Adviser (including their affiliated companies), FDS, PFD,
and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended October 31, 1998 were $42,009,001 and $85,872,129, respectively.
Net realized gains (losses) for the year ended October 31, 1998 and net
unrealized gains (losses) as of October 31, 1998 were as follows:
- --------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
- --------------------------------------------------------------------------------
Long-term investments .................... $(1,092,181) $ 8,233,985
Short-term investments ................... 272 --
Foreign currency transactions ............ (57,709) 17,231
Forward foreign exchange
contracts ................................ 2,546,582 (633,216)
----------- -----------
Total .................................... $ 1,396,964 $ 7,618,000
=========== ===========
- --------------------------------------------------------------------------------
As of October 31, 1998, net unrealized appreciation for Federal income tax
purposes aggregated $8,233,985, of which $13,058,758 related to appreciated
securities and $4,824,773 related to depreciated securities. The aggregate cost
of investments at October 31, 1998 for Federal income tax purposes was
$48,730,486.
4. Beneficial Interest Transactions:
Transactions in shares of beneficial interest were as follows:
- --------------------------------------------------------------------------------
For the Year Ended Dollar
October 31, 1998 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 856,874 $ 10,569,673
Shares issued to shareholders
in reinvestment of dividends
and distributions ........................ 537,886 6,056,591
---------- ------------
Total issued ............................. 1,394,760 16,626,264
Shares redeemed .......................... (4,761,563) (56,836,007)
---------- ------------
Net decrease ............................. (3,366,803) $(40,209,743)
========== ============
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
For the Year Ended Dollar
October 31, 1997 Shares Amount
- --------------------------------------------------------------------------------
Shares sold .............................. 1,189,803 $ 15,058,939
Shares issued to shareholders in
reinvestment of dividends
and distributions ........................ 829,254 9,652,518
---------- ------------
Total issued ............................. 2,019,057 24,711,457
Shares redeemed .......................... (7,759,006) (96,281,623)
---------- ------------
Net decrease ............................. (5,739,949) $(71,570,166)
========== ============
- --------------------------------------------------------------------------------
5. Commitments:
At October 31, 1998, the Fund entered into forward exchange contracts, in
addition to the contracts listed on the Schedule of Investments, under which it
had agreed to sell various foreign currencies with an approximate value of
$4,054,000.
6. Capital Loss Carryforward:
At October 31, 1998, the Fund had a net capital loss carry forward of
approximately $1,092,000, all of which expires in 2006. This amount will be
available to offset like amounts of any future taxable gains.
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees,
Merrill Lynch Consults International Portfolio
We have audited the accompanying statement of assets and liabilities of Merrill
Lynch Consults International Portfolio, including the schedule of investments,
as of October 31, 1998, and the related statement of operations for the year
then ended, the statements of changes in net assets for each of the two years in
the period then ended and financial highlights for each of the years indicated
therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of October 31, 1998, by correspondence with the custodian.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Merrill Lynch Consults International Portfolio at October 31, 1998, 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 financial highlights for each
of the indicated years, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Princeton, New Jersey
December 3, 1998
14 & 15
<PAGE>
This report is not authorized for use as an offer of sale or a solicitation of
an offer to buy shares of the Fund unless accompanied or preceded by the Fund's
current prospectus. Past performance results shown in this report should not be
considered a representation of future performance. Investment return and
principal value of shares will fluctuate so that shares, when redeemed, may be
worth more or less than their original cost. Statements and other information
herein are as dated and are subject to change.
Merrill Lynch Consults
International Portfolio
Box 9011
Princeton, NJ
08543-9011 #16566-10/98
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