Statement of Additional Information
If you
would like further information about the Fund, including how it invests, please see the SAI.
For a discussion of the Funds policies and procedures regarding the selective disclosure of its portfolio holdings, please see the SAI. The Fund makes its top ten holdings available on a monthly basis at
www.blackrock.com generally within 5 business days after the end of the month to which the information applies.
57
Glossary
This glossary contains an explanation of some of the common
terms used in this prospectus. For additional information about the Fund, please see the SAI.
Acquired Fund Fees and Expenses
fees and expenses charged by other investment companies in which the Fund invests a portion of its assets.
Annual Fund Operating Expenses
expenses that cover the costs of operating the Fund.
Barclays Global Real: U.S. TIPS Index
an unmanaged market index made up
of U.S. Treasury Inflation Linked Indexed securities.
Barclays GNMA MBS
Index
an unmanaged index comprised of mortgage-backed pass through securities of the Government National Mortgage Association (GNMA).
Barclays Long Government/Credit Index
an unmanaged index comprised of U.S. Government securities or investment grade credit securities from the more
comprehensive Barclays U.S. Aggregate Bond Index. This index concentrates on long maturity bonds and thus excludes all maturities from the broader index that are less than 10 years.
Barclays U.S. Credit Index
a rules-based index that measures the performance of investment grade corporate debt
(industrial, utility, and finance, including both U.S. and non-U.S. corporations) and non-corporate debt (sovereign, supranational, non-U.S. agencies, and non-U.S. local governments) that is U.S. dollar-denominated and has a remaining maturity of
greater than or equal to one year.
Barclays U.S.
Government/Mortgage Index
an unmanaged index that measures debt issued by the U.S. Government, and its agencies, as well as mortgage-backed pass-through securities of Ginnie Mae (GNMA), Fannie Mae and Freddie Mac.
Distribution Fees
fees used to support the Funds marketing and
distribution efforts, such as compensating financial professionals and other financial intermediaries, advertising and promotion.
Management Fee
a fee paid to BlackRock for managing the Fund.
Other Expenses
include accounting, transfer agency, custody,
professional fees and registration fees.
Service Fees
fees
used to compensate securities dealers and other financial intermediaries for certain shareholder servicing activities.
Shareholder Fees
these fees include sales charges that you may pay when you buy or sell shares of the Fund.
58
For More Information
Funds and Service Providers
FUNDS
BlackRock Funds II
BlackRock GNMA Portfolio
BlackRock Inflation Protected Bond Portfolio
BlackRock Investment Grade Bond Portfolio
BlackRock U.S. Government Bond Portfolio
100 Bellevue Parkway
Wilmington, Delaware 19809
Written
Correspondence:
P.O. Box 9819
Providence, Rhode
Island 02940-8019
Overnight Mail:
4400 Computer Drive
Westborough, Massachusetts 01588
(800) 441-7762
MANAGER
BlackRock Advisors, LLC
100 Bellevue Parkway
Wilmington, Delaware 19809
SUB-ADVISER
BlackRock Financial Management, Inc.
55 East 52nd Street
New York, New York 10055
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, Delaware 19809
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
[ ]
ACCOUNTING SERVICES PROVIDER
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, Delaware 19809
DISTRIBUTOR
BlackRock Investments, LLC
40 East 52nd Street
New York, New York 10022
CUSTODIAN
The Bank of New York Mellon
One Wall Street
New York, New York 10286
COUNSEL
Willkie Farr & Gallagher LLP
787 Seventh
Avenue
New York, New York 10019-6099
Additional Information
This prospectus contains important information you should know before investing, including information about risks.
Read it carefully and keep it for future reference. More information about the Fund is available at no charge upon request. This information includes:
Annual/Semi-Annual Reports
These reports contain additional
information about each of the Funds investments. The annual report describes the Funds performance, lists portfolio holdings, and discusses recent market conditions, economic trends and Fund investment strategies that significantly
affected the Funds performance for the last fiscal year.
Statement of Additional Information
A Statement of
Additional Information, dated [ ], 2013 has been filed with the Securities and Exchange Commission (SEC). The SAI, which includes additional information about the Fund, may be obtained free of charge, along with the
Funds annual and semi-annual reports, by calling (800) 441-7762. The SAI, as supplemented from time to time, is incorporated by reference into this prospectus.
BlackRock Investor Services
Representatives are available to discuss account balance information, mutual fund prospectuses, literature, programs and services available. Hours: 8:00 a.m. to
6:00 p.m. (Eastern time), on any business day. Call: (800) 441-7762.
Purchases and Redemptions
Call your financial professional
or BlackRock Investor Services at (800) 441-7762.
World Wide Web
General fund information and specific fund performance, including SAI and annual/semi-annual reports, can be accessed free of charge at
www.blackrock.com/prospectus. Mutual fund prospectuses and literature can also be requested via this website.
Written Correspondence
BlackRock Funds II
P.O. Box 9819
Providence, Rhode Island 02940-8019
Overnight Mail
BlackRock Funds II
4400 Computer Drive
Westborough, Massachusetts 01588
Internal Wholesalers/Broker Dealer Support
Available to
support investment professionals 8:30 a.m. to 6:00 p.m. (Eastern time), on any business day. Call: (800) 882-0052.
Portfolio Characteristics and Holdings
A description of the
Funds policies and procedures related to disclosure of portfolio characteristics and holdings is available in the SAI.
For information about portfolio holdings and characteristics, BlackRock fund shareholders and prospective investors may call (800) 882-0052.
Securities and Exchange Commission
You may also view and copy public information about the Fund, including the SAI, by visiting the EDGAR database on the SEC website (http://www.sec.gov) or the
SECs Public Reference Room in Washington, D.C. Information about the operation of the Public Reference Room can be obtained, for a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing to the
Public Reference Section of the SEC, Washington, D.C. 20549-1520. Information about obtaining documents on the SECs website without charge may be obtained by calling (800) SEC-0330.
You should rely only on the information contained in this prospectus. No one is authorized to provide you with information that is
different from information contained in this prospectus.
The
Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.
INVESTMENT COMPANY ACT FILE # 811-22061
©
BlackRock Advisors, LLC
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PRO-BD7-0113
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The information in this Prospectus is not complete and may be changed. We may not sell these
securities until the registration statement filed with the Securities and Exchange Commission is effective. This Prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the
offer or sale is not permitted.
SUBJECT TO
COMPLETION, DATED MAY 29, 2013
[ ], 2013
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PROSPECTUS
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BlackRock Funds II
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BlackRock Shares
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BlackRock Investment Grade Bond Portfolio
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BLDRX
This Prospectus contains information you should know before investing, including
information about risks. Please read it before you invest and keep it for future reference.
The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this Prospectus. Any representation to the contrary is a criminal offense.
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Not FDIC Insured May Lose Value No Bank Guarantee
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Table of Contents
Fund Overview
Key Facts about BlackRock Investment Grade Bond
Portfolio
Investment Objective
The investment objective of the BlackRock Investment Grade Bond Portfolio (the
Investment Grade Bond Portfolio or the Fund) is to seek to maximize total return, consistent with income generation and prudent investment management.
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy and hold
BlackRock Shares of the Fund.
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Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
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BlackRock
Shares
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Management Fee
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0.50%
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Distribution and/or Service (12b-1) Fees
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None
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Other Expenses
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0.19%
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Acquired Fund Fees and Expenses
1
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0.01%
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Total Annual Fund Operating Expenses
1
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0.70%
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Fee Waivers and/or Expense Reimbursements
2
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(0.24)%
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Total Annual Fund Operating Expenses After Fee Waivers and/or Expense Reimbursements
2
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0.46%
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1
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The Total Annual Fund Operating Expenses do not correlate to the ratio of expenses to average net assets given in the Funds most recent annual report which
does not include the Acquired Fund Fees and Expenses.
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2
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As described in the Management of the Funds section of the Funds prospectus on page [ ], BlackRock has contractually
agreed to waive and/or reimburse fees or expenses in order to limit Total Annual Fund Operating Expenses After Fee Waivers and/or Expense Reimbursements (excluding Dividend Expense, Interest Expense, Acquired Fund Fees and Expenses and certain other
Fund expenses) to 0.45% of average daily net assets until February 1, 2014. The Fund may have to repay some of these waivers and reimbursements to BlackRock in the following two years. The contractual agreement may be terminated upon 90 days
notice by a majority of the non-interested trustees of the Fund or by a vote of a majority of the outstanding voting securities of the Fund.
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Example:
This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Funds operating expenses remain the same. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
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1 Year
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3 Years
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5 Years
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10 Years
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BlackRock Shares
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$
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47
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$
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200
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$
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366
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$
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848
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Portfolio Turnover:
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or turns over its portfolio). A higher portfolio turnover may
indicate higher transaction costs and may result in higher taxes when shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the example, affect the Funds performance. During the most
recent fiscal year, the Funds portfolio turnover rate was 86% of the average value of its portfolio.
3
Principal Investment Strategies of the Fund
Under
normal circumstances, the Fund invests at least 80% of its net assets (plus any borrowings for investment purposes) in investment grade bonds and investments that are the economic equivalent of investment grade bonds. For purposes of the Funds
80% policy, these include, but are not limited to, corporate bonds, commercial and residential mortgage-backed securities, asset-backed securities, collateralized mortgage obligations (CMOs), municipal securities, preferred securities,
pass-throughs, U.S. Treasuries and agency securities, securities issued or guaranteed by foreign governments, their agencies or instrumentalities, and derivative instruments with similar economic characteristics.
The Fund invests primarily in fixed-income securities that are rated in the four
highest rating categories by at least one of the recognized rating agencies (including Baa or better by Moodys Investor Service, Inc. (Moodys) or BBB or better by Standard & Poors (S&P) or Fitch
Ratings (Fitch)). Securities rated in any of the four highest rating categories are known as investment grade securities.
The Fund maintains an average portfolio duration that is between 0 and 10 years.
The Fund may invest without limitation in investment grade U.S. dollar-denominated
instruments of issuers in each of U.S. and non-U.S. markets. The Fund may invest up to 20% of its net assets (plus any borrowings for investment purposes) in any combination of non-investment grade instruments (commonly known as high
yield or junk bonds) and non-U.S. dollar-denominated instruments. The Funds investment in non-U.S. dollar-denominated instruments may be on a currency hedged or unhedged basis. Non-investment grade instruments are instruments
that, at the time of acquisition, are rated in the lower rating categories of the major rating agencies (BB or lower by Standard & Poors (S&P) or Ba or lower by Moodys Investors Service, Inc.
(Moodys)) or are determined by the management team to be of similar quality. The Fund may invest in securities rated C and above or determined by the management team to be of comparable quality. Split rated instruments will be
considered to have the higher credit rating. Split rated instruments are instruments that receive different ratings from two or more rating agencies.
The Fund may buy or sell options or futures on a security or an index of securities, or enter into credit default swaps and interest rate or foreign currency
transactions, including swaps (collectively, commonly known as derivatives). The Fund may seek to obtain market exposure to the securities in which it primarily invests by entering into a series of purchase and sale contracts or by using other
investment techniques (such as repurchase agreements, reverse repurchase agreements or dollar rolls).
The Fund may engage in active and frequent trading of portfolio securities to achieve its primary investment strategies.
Principal Risks of Investing in the Fund
Risk is inherent in all investing. The value of your investment in the Fund, as well
as the amount of return you receive on your investment, may fluctuate significantly from day to day and over time. You may lose part or all of your investment in the Fund or your investment may not perform as well as other similar investments. The
following is a summary description of principal risks of investing in the Fund.
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Credit Risk
Credit risk refers to the possibility that the issuer of a security will not be able to make payments of interest and principal
when due. Changes in an issuers credit rating or the markets perception of an issuers creditworthiness may also affect the value of the Funds investment in that issuer.
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n
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Derivatives Risk
The Funds use of derivatives may reduce the Funds returns and/or increase volatility. Volatility
is defined as the characteristic of a security, an index or a market to fluctuate significantly in price within a short time period. A risk of the Funds use of derivatives is that the fluctuations in their values may not correlate perfectly
with the overall securities markets. The possible lack of a liquid secondary market for derivatives and the resulting inability of the Fund to sell or otherwise close a derivatives position could expose the Fund to losses and could make derivatives
more difficult for the Fund to value accurately. Valuation may be more difficult in times of market turmoil since many investors and market makers may be reluctant to purchase complex instruments or quote prices for them. Derivatives are also
subject to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. Derivatives also may expose the Fund to greater risk and increase its costs. Certain transactions in derivatives
involve substantial leverage risk and may expose the Fund to potential losses that exceed the amount originally invested by the Fund. Recent legislation calls for new regulation of the derivatives markets. The extent and impact of the regulation is
not yet known and may not be known for some time. New regulation may make derivatives more costly, may limit the availability of derivatives, or may otherwise adversely affect the value or performance of derivatives.
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Dollar Rolls Risk
Dollar rolls involve the risk that the market value of the securities that the Fund is committed to buy may decline below
the price of the securities the Fund has sold. These transactions may involve leverage.
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Emerging Markets Risk
Emerging markets are riskier than more developed markets because they tend to develop unevenly and may never fully
develop. Investments in emerging markets may be considered speculative.
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4
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Emerging markets are more likely to experience hyperinflation and currency devaluations, which adversely affect returns to U.S. investors. In addition, many emerging securities markets have far
lower trading volumes and less liquidity than developed markets.
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Extension Risk
When interest rates rise, certain obligations will be paid off by the obligor more slowly than anticipated,
causing the value of these securities to fall.
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Foreign Securities Risk
Foreign investments often involve special risks not present in U.S. investments that can increase the chances that
the Fund will lose money. These risks include:
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The Fund generally holds its foreign securities and cash in foreign banks and securities depositories, which may be recently organized or new to the foreign custody business and
may be subject to only limited or no regulatory oversight.
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Changes in foreign currency exchange rates can affect the value of the Funds portfolio.
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The economies of certain foreign markets may not compare favorably with the economy of the United States with respect to such issues as growth of gross national product,
reinvestment of capital, resources and balance of payments position.
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The governments of certain countries may prohibit or impose substantial restrictions on foreign investments in their capital markets or in certain industries.
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Many foreign governments do not supervise and regulate stock exchanges, brokers and the sale of securities to the same extent as does the United States and may not have laws to
protect investors that are comparable to U.S. securities laws.
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Settlement and clearance procedures in certain foreign markets may result in delays in payment for or delivery of securities not typically associated with settlement and
clearance of U.S. investments.
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High Portfolio Turnover Risk
The Fund may engage in active and frequent trading of its portfolio securities. High portfolio
turnover (more than 100%) may result in increased transaction costs to the Fund, including brokerage commissions, dealer mark-ups and other transaction costs on the sale of the securities and on reinvestment in other securities. The sale of Fund
portfolio securities may result in the realization and/or distribution to shareholders of higher capital gains or losses as compared to a fund with less active trading policies. These effects of higher than normal portfolio turnover may adversely
affect Fund performance. In addition, investment in mortgage dollar rolls and participation in TBA transactions may significantly increase the Funds portfolio turnover rate. A TBA transaction is a method of trading mortgage-backed securities
where the buyer and seller agree upon general trade parameters such as agency, settlement date, par amount, and price.
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Interest Rate Risk
Interest rate risk is the risk that prices of bonds and other fixed-income securities will increase as interest rates
fall, and decrease as interest rates rise.
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Leverage Risk
Some transactions may give rise to a form of economic leverage. These transactions may include, among others,
derivatives, and may expose the Fund to greater risk and increase its costs. The use of leverage may cause the Fund to liquidate portfolio positions when it may not be advantageous to do so to satisfy its obligations or to meet any required asset
segregation requirements. Increases and decreases in the value of the Funds portfolio will be magnified when the Fund uses leverage.
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Liquidity Risk
Liquidity risk exists when particular investments are difficult to purchase or sell. The Funds investments in illiquid
securities may reduce the returns of the Fund because it may be difficult to sell the illiquid securities at an advantageous time or price. To the extent that the Funds principal investment strategies involve derivatives or securities with
substantial market and/or credit risk, the Fund will tend to have the greatest exposure to liquidity risk. Liquid investments may become illiquid after purchase by the Fund, particularly during periods of market turmoil. Illiquid investments may be
harder to value, especially in changing markets, and if the Fund is forced to sell these investments to meet redemption requests or for other cash needs, the Fund may suffer a loss. In addition, when there is illiquidity in the market for certain
securities, the Fund, due to limitations on illiquid investments, may be subject to purchase and sale restrictions.
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Market Risk and Selection Risk
Market risk is the risk that one or more markets in which the Fund invests will go down in value, including
the possibility that the markets will go down sharply and unpredictably. Selection risk is the risk that the securities selected by Fund management will underperform the markets, the relevant indices or the securities selected by other funds with
similar investment objectives and investment strategies. This means you may lose money.
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Mortgage- and Asset-Backed Securities Risks
Mortgage- and asset-backed securities represent interests in pools of mortgages or
other assets, including consumer loans or receivables held in trust. Mortgage- and asset-backed securities are subject to credit, interest rate, prepayment and extension risks. These securities also are subject to risk of default on the underlying
mortgage or asset, particularly during periods of economic downturn. Small movements in interest rates (both increases and decreases) may quickly and significantly reduce the value of certain mortgage-backed securities.
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5
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Municipal Bonds Risk
Municipal bonds are subject to interest rate, credit and market risk. The ability of an issuer to make payments could
be affected by litigation, legislation or other political events or the bankruptcy of the issuer. Lower rated municipal bonds are subject to greater credit and market risk than higher quality municipal bonds. The market prices of residual interest
bonds may be highly sensitive to changes in market rates and may decrease significantly when market rates increase.
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Non-Investment Grade Securities Risk
Although non-investment grade securities generally pay higher rates of interest than investment grade
securities, non-investment grade securities are high risk investments that may cause income and principal losses for the Fund.
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Preferred Securities Risk
Preferred securities may pay fixed or adjustable rates of return. Preferred securities are subject to
issuer-specific and market risks applicable generally to equity securities. In addition, a companys preferred securities generally pay dividends only after the company makes required payments to holders of its bonds and other debt. For this
reason, the value of preferred securities will usually react more strongly than bonds and other debt to actual or perceived changes in the companys financial condition or prospects. Preferred securities of smaller companies may be more
vulnerable to adverse developments than preferred stock of larger companies.
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Prepayment Risk
When interest rates fall, certain obligations will be paid off by the obligor more quickly than originally anticipated, and
the Fund may have to invest the proceeds in securities with lower yields.
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Repurchase Agreements, Purchase and Sale Contracts Risks
If the other party to a repurchase agreement or purchase and sale contract defaults
on its obligation under the agreement, the Fund may suffer delays and incur costs or lose money in exercising its rights under the agreement. If the seller fails to repurchase the security in either situation and the market value of the security
declines, the Fund may lose money.
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Reverse Repurchase Agreements Risk
Reverse repurchase agreements involve the sale of securities held by the Fund with an agreement to
repurchase the securities at an agreed-upon price, date and interest payment. Reverse repurchase agreements involve the risk that the other party may fail to return the securities in a timely manner or at all. The Fund could lose money if it is
unable to recover the securities and the value of the collateral held by the Fund, including the value of the investments made with cash collateral, is less than the value of securities. These events could also trigger adverse tax consequences to
the Fund.
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U.S. Government Issuer Risk
Treasury obligations may differ in their interest rates, maturities, times of issuance and other
characteristics. Obligations of U.S. Government agencies and authorities are supported by varying degrees of credit but generally are not backed by the full faith and credit of the U.S. Government. No assurance can be given that the U.S. Government
will provide financial support to its agencies and authorities if it is not obligated by law to do so.
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6
Performance Information
The information shows you how the Funds performance has varied year by year
and provides some indication of the risks of investing in the Fund. The Funds Annual Total Returns prior to [ ], 2013 as reflected in the bar chart and the table are the returns of the Fund that followed different investment strategies under
the name BlackRock Long Duration Bond Portfolio. The benchmark against which the Fund measured its performance prior to [ ], 2013, the Barclays Long Government/Credit Index, was replaced with the Barclays U.S. Credit Index, a broad
measure of market performance. The Barclays U.S. Credit Index is a rules-based index that measures the performance of investment grade corporate debt (industrial, utility, and finance, including both U.S. and non-U.S. corporations) and non-corporate
debt (sovereign, supranational, non-U.S. agencies, and non-U.S. local governments) that is U.S. dollar-denominated and has a remaining maturity of greater than or equal to one year.
Fund management believes the Barclays U.S. Credit Index is
more relevant to the Funds new investment strategies. As with all such investments, past performance (before and after taxes) is not an indication of future results. Sales charges are not reflected in the bar chart. If they were, returns would
be less than those shown. However, the table includes all applicable fees and sales charges. If the Funds investment manager and its affiliates had not waived or reimbursed certain Fund expenses during these periods, the Funds returns
would have been lower. Updated information on the Funds performance can be obtained by visiting http://www.blackrock.com/funds or can be obtained by phone at 800-882-0052.
BlackRock Shares
ANNUAL TOTAL RETURNS
Investment Grade Bond Portfolio
As of 12/31
During the period shown in the bar chart, the
highest return for a quarter was 15.02% (quarter ended December 31, 2008) and the lowest return for a quarter was 6.36% (quarter ended March 31, 2009). The year-to-date return as of March 31, 2013 was [ ]%.
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As of 12/31/12
Average Annual Total Returns
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1 Year
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5 Years
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Since Inception
(October 19,
2007)
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Investment Grade Bond Portfolio BlackRock Shares
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Return Before Taxes
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11.36
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%
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11.09
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%
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10.92
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%
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Return After Taxes on Distributions
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7.80
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%
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8.44
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%
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8.31
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%
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Return After Taxes on Distributions and Sale of Shares
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8.22
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%
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8.14
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%
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8.01
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%
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Barclays U.S. Credit Index (Reflects no deduction for fees, expenses or taxes)
1
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9.37
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%
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7.65
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%
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7.47
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%
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Barclays Long Government/Credit Index (Reflects no deduction for fees, expenses or taxes)
1
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8.78
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%
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10.16
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%
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10.10
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%
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1
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Effective [ ], 2013, the Fund changed the benchmark against which it measures its performance from the Barclays Long Government/Credit
Index to the Barclays U.S. Credit Index. The Barclays U.S. Credit Index more accurately reflects the investment strategy of the Fund.
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After-tax returns are calculated using the historical highest individual Federal marginal income tax rates and do not reflect the impact of state and local taxes.
Actual after-tax returns depend on the investors tax situation and may differ from those shown, and the after-tax returns shown are not relevant to investors who hold their shares through tax-deferred arrangements such as 401(k) plans or
individual retirement accounts.
Investment Manager
The Funds investment manager is BlackRock Advisors, LLC (BlackRock).
The Funds sub-adviser is BlackRock Financial Management, Inc. Where applicable, the use of the term BlackRock also refers to the Funds sub-adviser.
7
Portfolio Manager
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Name
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Portfolio Manager of the Fund Since
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Title
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Jeffrey Cucunato
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2009
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Managing Director of BlackRock, Inc.
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Purchase and Sale of Fund Shares
You may
purchase or redeem shares of the Fund each day the New York Stock Exchange (NYSE) is open. To purchase or sell shares you should contact your financial intermediary or financial professional, or, if you hold your shares through the Fund,
you should contact the Fund by phone at (800) 537-4942, by mail (c/o BlackRock Funds, P.O. Box 9819, Providence, Rhode Island 02940-8019), or by the Internet at www.blackrock.com/funds. The Funds initial and subsequent investment minimums
generally are as follows, although the Fund may reduce or waive the minimums in some cases:
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BlackRock Shares
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Minimum Initial Investment
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$5,000,000 for institutions
and individuals;
There is no minimum initial investment requirement for fee-based programs with an annual fee of at least
0.50% or certain employer-sponsored retirement plans;
BlackRock Shares are available to clients of registered investment advisers who have $250,000 invested in the Fund.
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Minimum Additional Investment
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There is no minimum amount for additional investments.
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Tax Information
The
Funds dividends and distributions may be subject to Federal income taxes and may be taxed as ordinary income or capital gains, unless you are a tax-exempt investor or are investing through a retirement plan, in which case you may be subject to
Federal income tax upon withdrawal from such tax deferred arrangements.
Payments to Broker/Dealers and Other Financial Intermediaries
If you purchase shares of the Fund through a broker-dealer or other financial
intermediary, the Fund and BlackRock Investments, LLC, the Funds distributor, or its affiliates may pay the intermediary for the sale of Fund shares and other services. These payments may create a conflict of interest by influencing the
broker-dealer or other financial intermediary and your individual financial professional to recommend the Fund over another investment. Ask your individual financial professional or visit your financial intermediarys website for more
information.
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Details about the Funds
Included in this prospectus are sections that tell you about buying and selling
shares, management information, shareholder features of the BlackRock GNMA Portfolio (the GNMA Portfolio), BlackRock Inflation Protected Bond Portfolio (the Inflation Protected Bond Portfolio) and BlackRock Investment Grade
Bond Portfolio (the Investment Grade Bond Portfolio) (each a Fund and collectively the Funds) and your rights as a shareholder.
How each Fund Invests
Investment Process:
With respect to each Fund, BlackRock
considers a variety of factors when choosing investments, such as:
With respect to the Investment Grade Bond Portfolio, securities are purchased for the Fund when the management team determines that they have the potential for
above-average total return.
With respect to the Investment Grade Bond
Portfolio, a security will be sold if, in the opinion of the management team, the risk of continuing to hold the security is unacceptable when compared to its total return potential.
Each Fund may engage in active and frequent trading of portfolio securities to achieve its primary investment strategies.
BlackRock uses an internal model for calculating duration, which may result
in a different value for the duration of a benchmark compared to the duration calculated by the provider of the benchmark or another third party.
Investment Grade Bond Portfolio
Investment Objective
The investment
objective of the Investment Grade Bond Portfolio is to seek to maximize total return, consistent with income generation and prudent investment management. The investment objective is a non-fundamental policy of the Fund and may not be changed
without 30 days prior notice to shareholders.
Principal Investment Strategies
Under
normal circumstances, the Fund invests at least 80% of its net assets (plus any borrowings for investment purposes) in investment grade bonds and investments that are the economic equivalent of investment grade bonds. For purposes of the Funds
80% policy, these include, but are not limited to, corporate bonds, commercial and residential mortgage-backed securities, asset-backed securities, collateralized mortgage obligations (CMOs), municipal securities, preferred securities,
pass-throughs, U.S. Treasuries and agency securities, securities issued or guaranteed by foreign governments, their agencies or instrumentalities, and derivative instruments with similar economic characteristics. Asset-backed securities are bonds
that are backed by a pool of assets, usually loans such as installment sale contracts or credit card receivables. Mortgage-backed securities are asset-backed securities based on a particular type of asset, a mortgage. There is a wide variety of
mortgage backed securities involving commercial or residential, fixed rate or adjustable rate mortgages and mortgages issued by banks or government agencies. CMOs are bonds that are backed by cash flows from pools of mortgages. CMOs may have
multiple classes with different payment rights and protections.
The Fund
invests primarily in instruments that are rated in the four highest rating categories by at least one of the recognized rating agencies (including Baa or better by Moodys Investor Service, Inc. (Moodys) or BBB or better by
Standard & Poors (S&P) or Fitch Ratings (Fitch)). Securities rated in any of the four highest rating categories are known as investment grade securities.
The Fund maintains an average portfolio duration that is between 0 and 10 years.
Duration is a mathematical calculation of the average life of a bond (or bonds in a bond fund) that serves as a useful measure of its price risk. Each year of duration represents an expected 1% change in the net asset value of a bond fund for every
1% immediate change in interest rates. For example, if a bond fund has an average duration of four years, its net asset value will fall about 4% when interest rates rise by one percentage point. Conversely, the bond funds net asset value will
rise about 4% when interest rates fall by one percentage point. Duration, which measures price sensitivity to interest rate changes, is not necessarily equal to average maturity.
The Fund may invest without limitation in investment grade U.S. dollar-denominated
instruments of issuers in each of U.S. and non-U.S. markets. The Fund may invest up to 20% of its net assets in any combination of non-investment grade instruments (commonly known as high yield or junk bonds) and non-U.S.
dollar-denominated instruments. The Funds investment in non-U.S. dollar-denominated instruments may be on a currency hedged or unhedged basis. Non-investment grade instruments are instruments that, at the time of acquisition, are rated in the
lower rating
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categories of the major rating agencies (BB or lower by S&P or Ba or lower by Moodys) or are determined by the management team to be of similar quality. The Fund may invest in
securities rated C and above or determined by the management team to be of comparable quality. Split rated instruments will be considered to have the higher credit rating. Split rated instruments are instruments that receive different ratings from
two or more rating agencies.
The management team may, when consistent with
the Funds investment goal, buy or sell options or futures on a security or an index of securities, or enter into credit default swaps and interest rate or foreign currency transactions, including swaps (collectively, commonly known as
derivatives). In entering into a credit default swap, one party would pay a counterparty a periodic stream of payments over the term of the contract, provided that no event of default on a specific bond has occurred. In return, upon any event of
default on such bond, the first party would receive from the counterparty a payment equal to the par (or other agreed-upon) value of such bond. An option is the right to buy or sell a security or an index of securities at a specific price on or
before a specific date. A future is an agreement to buy or sell a security or an index of securities at a specific price on a specific date. A swap is an agreement whereby one party exchanges its right to receive or its obligation to pay one type of
interest or currency for another partys obligation to pay or its right to receive another type of interest or currency in the future or for a period of time. The Fund typically uses derivatives as a substitute for taking a position in the
underlying asset and/or as part of a strategy designed to reduce exposure to other risks, such as interest rate, currency risk or credit risk.
The Fund may also use derivatives to enhance returns, in which case their use would involve leveraging risk. The Fund may seek to obtain market exposure to the
securities in which it primarily invests by entering into a series of purchase and sale contracts or by using other investment techniques (such as repurchase agreements, reverse repurchase agreements or dollar rolls). A dollar roll transaction
involves a sale by the Fund of a mortgage-backed or other security concurrently with an agreement by the Fund to repurchase a similar security at a later date at an agreed-upon price. The securities that are repurchased will bear the same interest
rate and stated maturity as those sold, but pools of mortgages collateralizing those securities may have different prepayment histories than those sold.
The Fund may engage in active and frequent trading of portfolio securities to achieve its primary investment strategies.
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ABOUT THE PORTFOLIO MANAGEMENT OF
THE INVESTMENT GRADE BOND PORTFOLIO
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The Investment Grade Bond Portfolio is managed
by team of financial professionals. Jeffrey Cucunato is the
portfolio manager and is primarily responsible for the day-to-day management of the Fund. Please see
Management of the Funds Portfolio Manager Information for
additional information on the portfolio
management team.
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Other Strategies
In addition to the main strategies discussed above, each Fund may use certain other
investment strategies. The Funds may also invest or engage in the following investments/strategies:
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Investment Companies
Each Fund has the ability to invest in other investment companies, such as exchange-traded funds, unit investment
trusts, and open-end and closed-end funds. Each Fund may invest in affiliated investment companies, including affiliated money market funds and affiliated exchange-traded funds.
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Temporary Defensive Strategies
For temporary defensive purposes, each Fund may restrict the markets in which it invests and may invest
without limitation in cash, cash equivalents, money market securities, such as U.S. Treasury and agency obligations, other U.S. Government securities, short-term debt obligations of corporate issuers, certificates of deposit, bankers acceptances,
commercial paper (short term, unsecured, negotiable promissory notes of a domestic or foreign issuer) or other high quality fixed income securities.
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When-Issued Securities, Delayed Delivery Securities and Forward Commitments
Each Fund may invest in securities prior to their date of issue.
The purchase or sale of securities on a when-issued basis or on a delayed delivery basis or through a forward commitment involves the purchase or sale of securities by a Fund at an established price with payment and delivery taking place in the
future. A Fund enters into these transactions to obtain what is considered an advantageous price to the Fund at the time of entering into the transaction.
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Investment Risks
This
section contains a summary discussion of the general risks of investing in the Funds. Investment Objectives and Policies in the Statement of Additional Information (the SAI) also includes more information about each Fund, its
investments and the related risks. As with any fund, there can be no guarantee that any Fund will meet its objective or that any Funds performance will be positive for any period of time. An investment in a Fund is not insured or guaranteed by
the Federal Deposit Insurance Corporation or by any bank or governmental agency.
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Principal Risks of Investing in a Fund:
Credit Risk
Credit risk refers to the possibility that the issuer
of a security will not be able to make principal and interest payments when due. Changes in an issuers credit rating or the markets perception of an issuers creditworthiness may also affect the value of the Funds investment
in that issuer. The degree of credit risk depends on both the financial condition of the issuer and the terms of the obligation.
Deflation Risk (Inflation Protected Bond Portfolio)
Deflation risk is the possibility that prices throughout the economy decline over time
the opposite of inflation. If inflation is negative, the principal and income of an inflation-protected bond will decline and could result in losses for the Fund.
Derivatives Risk
The Funds use of derivatives may
reduce the Funds returns and/or increase volatility. Volatility is defined as the characteristic of a security, an index or a market to fluctuate significantly in price within a short time period. A risk of the Funds use of derivatives
is that the fluctuations in their values may not correlate perfectly with the overall securities markets. The possible lack of a liquid secondary market for derivatives and the resulting inability of the Fund to sell or otherwise close a derivatives
position could expose the Fund to losses and could make derivatives more difficult for the Fund to value accurately. Valuation may be more difficult in times of market turmoil since many investors and market makers may be reluctant to purchase
complex instruments or quote prices for them. Derivatives are also subject to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. In addition, some derivatives are more sensitive
to interest rate changes and market price fluctuations than other securities. Derivatives may also expose the Fund to greater risk and increase its costs. Certain transactions in derivatives involve substantial leverage risk and may expose the Fund
to potential losses that exceed the amount originally invested by the Fund. The Fund could also suffer losses related to its derivatives positions as a result of unanticipated market movements, which losses are potentially unlimited. Finally,
BlackRock may not be able to predict correctly the direction of securities prices, interest rates and other economic factors, which could cause the Funds derivatives positions to lose value. When a derivative is used as a hedge against a
position that the Fund holds, any loss generated by the derivative generally should be substantially offset by gains on the hedged investment, and vice versa. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains.
Hedges are sometimes subject to imperfect matching between the derivative and the underlying security, and there can be no assurance that the Funds hedging transactions will be effective. The use of hedging may invoke the application of the
mark-to-market and straddle provisions of the Internal Revenue Code. If such provisions are applicable, there could be an increase (or decrease) in the amount of taxable dividends paid by the Fund and may impact whether dividends paid by the Fund
are classified as capital gains or ordinary income. The use of derivatives increases the risk that the Fund will be unable to close out certain hedged positions to avoid adverse tax consequences.
Recent legislation calls for new regulation of the derivatives markets. The extent and
impact of the regulation is not yet known and may not be known for some time. In particular, the Dodd-Frank Wall Street Reform Act (the Reform Act) may make derivatives more costly, may limit the availability of derivatives, or may
otherwise adversely affect the value or performance of derivatives. The Reform Act substantially increases regulation of the over-the-counter derivatives market and participants in that market, including imposing clearing and reporting requirements
on transactions involving instruments that fall within the Reform Acts definition of swap and security-based swap, which terms generally include over-the-counter derivatives and imposing registration and potential
substantive requirements on certain swap and security-based swap market participants. In addition, under the Reform Act, the Fund may be subject to additional recordkeeping and reporting requirements.
Risks Specific to Certain Derivatives Used by the Fund
Swaps
Swap agreements are two-party contracts entered into for
periods ranging from a few weeks to more than one year. In a standard swap transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or
instruments, which can be adjusted for an interest factor. Swap agreements involve the risk that the party with whom the Fund has entered into the swap will default on its obligation to pay the Fund and the risk that the Fund will not be able to
meet its obligations to pay the other party to the agreement.
Credit
Default Swaps
Credit default swaps may have as reference obligations one or more securities that are not currently held by the Fund. The protection buyer may be obligated to pay the protection seller an
up-front payment or a periodic stream of payments over the term of the contract, provided generally that no credit event on a reference obligation has occurred. Credit default swaps involve special risks in addition to those mentioned above because
they are difficult to value, are highly susceptible to liquidity and credit risk, and generally pay a return to the party that has paid the premium only in the event of an actual default by the issuer of the underlying obligation (as opposed to a
credit downgrade or other indication of financial difficulty).
Forward Foreign Currency Exchange Contracts
Forward foreign exchange transactions are OTC contracts to purchase or sell a specified amount of a
specified currency or multinational currency unit at a price and future date set at the time of the contract. Forward foreign currency exchange contracts do not eliminate fluctuations in the value of non-U.S. securities but rather allow the Fund to
establish a fixed rate of exchange for a future point in time. This strategy can have the effect of reducing returns and minimizing opportunities for gain.
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Futures
Futures are standardized, exchange-traded contracts that obligate a purchaser to take
delivery, and a seller to make delivery, of a specific amount of an asset at a specified future date at a specified price. The primary risks associated with the use of futures contracts and options are (a) the imperfect correlation between the
change in market value of the instruments held by a Fund and the price of the futures contract or option; (b) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures contract when
desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; (d) the investment advisors inability to predict correctly the direction of securities prices, interest rates, currency exchange rates and
other economic factors; and (e) the possibility that the counterparty will default in the performance of its obligations.
Options
An option is an agreement that, for a premium payment or fee, gives the option holder (the purchaser) the right but not the obligation
to buy (a call option) or sell (a put option) the underlying asset (or settle for cash an amount based on an underlying asset, rate, or index) at a specified price (the exercise price) during a period of time or
on a specified date. Investments in options are considered speculative. When the Fund purchases an option, it may lose the premium paid for it if the price of the underlying security or other assets decreased or remained the same (in the case of a
call option) or increased or remained the same (in the case of a put option). If a put or call option purchased by the Fund were permitted to expire without being sold or exercised, its premium would represent a loss to the Fund. To the extent that
the Fund writes or sells an option, if the decline or increase in the underlying asset is significantly below or above the exercise price of the written option, the Fund could experience a substantial loss.
Dollar Rolls Risk
A dollar roll transaction involves a sale by
the Fund of a mortgage-backed or other security concurrently with an agreement by the Fund to repurchase a similar security at a later date at an agreed-upon price. Dollar roll transactions involve the risk that the market value of the securities
the Fund is required to purchase may decline below the agreed upon repurchase price of those securities. If the broker/dealer to whom the Fund sells securities becomes insolvent, the Funds right to purchase or repurchase securities may be
restricted. Successful use of mortgage dollar rolls may depend upon the advisers ability to correctly predict interest rates and prepayments. There is no assurance that dollar rolls can be successfully employed.
Emerging Markets Risk (Inflation Protected Bond Portfolio and Investment
Grade Bond Portfolio)
The risks of foreign investments are usually much greater for emerging markets. Investments in emerging markets may be considered speculative. Emerging markets include those in countries defined as emerging or
developing by the World Bank, the International Finance Corporation or the United Nations. Emerging markets are riskier than more developed markets because they tend to develop unevenly and may never fully develop. They are more likely to experience
hyperinflation and currency devaluations, which adversely affect returns to U.S. investors. In addition, many emerging markets have far lower trading volumes and less liquidity than developed markets. Since these markets are often small, they may be
more likely to suffer sharp and frequent price changes or long-term price depression because of adverse publicity, investor perceptions or the actions of a few large investors. In addition, traditional measures of investment value used in the United
States, such as price to earnings ratios, may not apply to certain small markets. Also, there may be less publicly available information about issuers in emerging markets than would be available about issuers in more developed capital markets, and
such issuers may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those to which U.S. companies are subject.
Many emerging markets have histories of political instability and abrupt changes in
policies. As a result, their governments are more likely to take actions that are hostile or detrimental to private enterprise or foreign investment than those of more developed countries, including expropriation of assets, confiscatory taxation,
high rates of inflation or unfavorable diplomatic developments. In the past, governments of such nations have expropriated substantial amounts of private property, and most claims of the property owners have never been fully settled. There is no
assurance that such expropriations will not reoccur. In such an event, it is possible that the Fund could lose the entire value of its investments in the affected market. Some countries have pervasiveness of corruption and crime that may hinder
investments. Certain emerging markets may also face other significant internal or external risks, including the risk of war, and ethnic, religious and racial conflicts. In addition, governments in many emerging market countries participate to a
significant degree in their economies and securities markets, which may impair investment and economic growth. National policies that may limit the Funds investment opportunities include restrictions on investment in issuers or industries
deemed sensitive to national interests.
Emerging markets may also have
differing legal systems and the existence or possible imposition of exchange controls, custodial restrictions or other foreign or U.S. governmental laws or restrictions applicable to such investments. Sometimes, they may lack or be in the relatively
early development of legal structures governing private and foreign investments and private property. In addition to withholding taxes on investment income, some countries with emerging markets may impose differential capital gains taxes on foreign
investors.
Practices in relation to settlement of securities transactions
in emerging markets involve higher risks than those in developed markets, in part because the Fund will need to use brokers and counterparties that are less well capitalized, and custody and registration of assets in some countries may be
unreliable. The possibility of fraud, negligence, undue influence being exerted by the issuer or refusal to recognize ownership exists in some emerging markets, and, along with other factors, could result in ownership registration being completely
lost. The Fund would absorb any loss resulting from such registration problems and may have no successful claim for compensation. In addition, communications between the United States and emerging market countries may be unreliable, increasing the
risk of delayed settlements or losses of security certificates.
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Extension Risk
When interest rates rise, certain obligations will be paid off by the obligor more
slowly than anticipated, causing the value of these securities to fall. Rising interest rates tend to extend the duration of securities, making them more sensitive to changes in interest rates. The value of longer-term securities generally changes
more in response to changes in interest rates than shorter-term securities. As a result, in a period of rising interest rates, securities may exhibit additional volatility and may lose value.
Foreign Securities Risk (Inflation Protected Portfolio and Investment Grade Bond Portfolio)
Securities traded in
foreign markets have often (though not always) performed differently from securities traded in the United States. However, such investments often involve special risks not present in U.S. investments that can increase the chances that the Fund will
lose money. In particular, the Fund is subject to the risk that because there may be fewer investors on foreign exchanges and a smaller number of securities traded each day, it may be more difficult for the Fund to buy and sell securities on those
exchanges. In addition, prices of foreign securities may go up and down more than prices of securities traded in the United States.
Certain Risks of Holding Fund Assets Outside the United States
The Fund generally holds its foreign securities and cash in foreign banks and
securities depositories. Some foreign banks and securities depositories may be recently organized or new to the foreign custody business. In addition, there may be limited or no regulatory oversight of their operations. Also, the laws of certain
countries limit the Funds ability to recover its assets if a foreign bank, depository or issuer of a security, or any of their agents, goes bankrupt. In addition, it is often more expensive for the Fund to buy, sell and hold securities in
certain foreign markets than in the United States. The increased expense of investing in foreign markets reduces the amount the Fund can earn on its investments and typically results in a higher operating expense ratio for the Fund than for
investment companies invested only in the United States.
Currency Risk
Securities and other instruments in which the Fund invests may be denominated or quoted in currencies other than the U.S. dollar. For this reason, changes in foreign currency exchange rates can affect the value of the Funds
portfolio.
Generally, when the U.S. dollar rises in value against a
foreign currency, a security denominated in that currency loses value because the currency is worth fewer U.S. dollars. Conversely, when the U.S. dollar decreases in value against a foreign currency, a security denominated in that currency gains
value because the currency is worth more U.S. dollars. This risk, generally known as currency risk, means that a strong U.S. dollar will reduce returns for U.S. investors while a weak U.S. dollar will increase those returns.
Foreign Economy Risk
The economies of certain foreign markets may not
compare favorably with the economy of the United States with respect to such issues as growth of gross national product, reinvestment of capital, resources and balance of payments position. Certain foreign economies may rely heavily on particular
industries or foreign capital and are more vulnerable to diplomatic developments, the imposition of economic sanctions against a particular country or countries, changes in international trading patterns, trade barriers and other protectionist or
retaliatory measures. Investments in foreign markets may also be adversely affected by governmental actions such as the imposition of capital controls, nationalization of companies or industries, expropriation of assets or the imposition of punitive
taxes. In addition, the governments of certain countries may prohibit or impose substantial restrictions on foreign investments in their capital markets or in certain industries. Any of these actions could severely affect securities prices or impair
the Funds ability to purchase or sell foreign securities or transfer the Funds assets or income back into the United States, or otherwise adversely affect the Funds operations.
Other potential foreign market risks include foreign exchange controls, difficulties
in pricing securities, defaults on foreign government securities, difficulties in enforcing legal judgments in foreign courts and political and social instability. Diplomatic and political developments, including rapid and adverse political changes,
social instability, regional conflicts, terrorism and war, could affect the economies, industries and securities and currency markets, and the value of the Funds investments, in non-U.S. countries. These factors are extremely difficult, if not
impossible, to predict and take into account with respect to the Funds investments.
Governmental Supervision and Regulation/Accounting Standards
Many foreign governments do not supervise and regulate stock exchanges, brokers and the sale of securities to the same extent as such
regulations exist in the United States. They also may not have laws to protect investors that are comparable to U.S. securities laws. For example, some foreign countries may have no laws or rules against insider trading. Insider trading occurs when
a person buys or sells a companys securities based on material non-public information about that company. In addition, some countries may have legal systems that may make it difficult for the Fund to vote proxies, exercise shareholder rights,
and pursue legal remedies with respect to its foreign investments. Accounting standards in other countries are not necessarily the same as in the United States. If the accounting standards in another country do not require as much detail as U.S.
accounting standards, it may be harder for Fund management to completely and accurately determine a companys financial condition.
Settlement Risk
Settlement and clearance procedures in certain foreign markets differ significantly from those in the United States. Foreign
settlement and clearance procedures and trade regulations also may involve certain risks (such as delays in payment for or delivery of securities) not typically associated with the settlement of U.S. investments.
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At times, settlements in certain foreign countries have not kept pace with the number of securities transactions.
These problems may make it difficult for the Fund to carry out transactions. If the Fund cannot settle or is delayed in settling a purchase of securities, it may miss attractive investment opportunities and certain of its assets may be uninvested
with no return earned thereon for some period. If the Fund cannot settle or is delayed in settling a sale of securities, it may lose money if the value of the security then declines or, if it has contracted to sell the security to another party, the
Fund could be liable for any losses incurred.
High Portfolio
Turnover Risk
The Fund may engage in active and frequent trading of its portfolio securities. High portfolio turnover (more than 100%) may result in increased transaction costs to the Fund, including brokerage commissions, dealer
mark-ups and other transaction costs on the sale of the securities and on reinvestment in other securities. The sale of Fund portfolio securities may result in the realization and/or distribution to shareholders of higher capital gains or losses as
compared to a fund with less active trading policies. These effects of higher than normal portfolio turnover may adversely affect Fund performance. In addition, investment in mortgage dollar rolls and participation in TBA transactions may
significantly increase the Funds portfolio turnover rate. A TBA transaction is a method of trading mortgage-backed securities where the buyer and seller agree upon general trade parameters such as agency, settlement date, par amount, and
price.
Inflation Indexed Bonds
(Inflation Protected
Bond Portfolio)
The principal value of an investment is not protected or otherwise guaranteed by virtue of the Funds investments in inflation-indexed bonds.
Inflation-indexed bonds are fixed-income securities whose principal value is
periodically adjusted according to the rate of inflation. If the index measuring inflation falls, the principal value of inflation-indexed bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with
respect to a smaller principal amount) will be reduced.
Repayment of the
original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds. For bonds that do not provide a similar guarantee, the adjusted principal value of the bond repaid at maturity may
be less than the original principal value.
The value of inflation-indexed
bonds is expected to change in response to changes in real interest rates. Real interest rates are tied to the relationship between nominal interest rates and the rate of inflation. If nominal interest rates increase at a faster rate than inflation,
real interest rates may rise, leading to a decrease in value of inflation-indexed bonds. Short-term increases in inflation may lead to a decline in value. Any increase in the principal amount of an inflation-indexed bond will be considered taxable
ordinary income, even though investors do not receive their principal until maturity.
Periodic adjustments for inflation to the principal amount of an inflation-indexed bond may give rise to original issue discount, which will be includable in the Funds gross income. Due to original issue
discount, the Fund may be required to make annual distributions to shareholders that exceed the cash received, which may cause the Fund to liquidate certain investments when it is not advantageous to do so. Also, if the principal value of an
inflation-indexed bond is adjusted downward due to deflation, amounts previously distributed in the taxable year may be characterized in some circumstances as a return of capital.
Interest Rate Risk
Interest rate risk is the risk that prices of
fixed-income securities generally increase when interest rates decline and decrease when interest rates increase. Prices of longer-term securities generally change more in response to interest rate changes than prices of shorter-term securities. The
Fund may lose money if short-term or long-term interest rates rise sharply or otherwise change in a manner not anticipated by Fund management.
Leverage Risk
Some transactions may give rise to a form of economic leverage. These transactions may include, among others, derivatives, and
may expose the Fund to greater risk and increase its costs. As an open-end investment company registered with the SEC, the Fund is subject to the federal securities laws, including the Investment Company Act, the rules thereunder, and various SEC
and SEC staff interpretive positions. In accordance with these laws, rules and positions, the Fund must set aside liquid assets (often referred to as asset segregation), or engage in other SEC- or staff-approved measures, to
cover open positions with respect to certain kinds of instruments. The use of leverage may cause the Fund to liquidate portfolio positions when it may not be advantageous to do so to satisfy its obligations or to meet any required asset
segregation requirements. Increases and decreases in the value of the Funds portfolio will be magnified when the Fund uses leverage.
Liquidity Risk
Liquidity risk exists when particular investments are difficult to purchase or sell. The Funds investments in illiquid
securities may reduce the returns of the Fund because it may be difficult to sell the illiquid securities at an advantageous time or price. To the extent that the Funds principal investment strategies involve derivatives or securities with
substantial market and/or credit risk, the Fund will tend to have the greatest exposure to liquidity risk. Liquid investments may become illiquid after purchase by the Fund, particularly during periods of market turmoil. Illiquid investments may be
harder to value, especially in changing markets, and if the Fund is forced to sell these investments to meet redemption requests or for other cash needs, the Fund may suffer a loss. In addition, when there is illiquidity in the market for certain
securities, the Fund, due to limitations on illiquid investments, may be subject to purchase and sale restrictions.
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Market Risk and Selection Risk
Market risk is the risk that one or more markets in which the Fund
invests will go down in value, including the possibility that the markets will go down sharply and unpredictably. Selection risk is the risk that the securities selected by Fund management will underperform the markets, the relevant indices or the
securities selected by other funds with similar investment objectives and investment strategies. This means you may lose money.
Mortgage- and Asset-Backed Securities Risks
Mortgage-backed securities (residential and commercial) and asset-backed securities represent
interests in pools of mortgages or other assets, including consumer loans or receivables held in trust. Although asset-backed and commercial mortgage-backed securities (CMBS) generally experience less prepayment than
residential mortgage-backed securities, mortgage-backed and asset-backed securities, like traditional fixed-income securities, are subject to credit, interest rate, prepayment and extension risks.
Small movements in interest rates (both increases and decreases) may quickly and
significantly reduce the value of certain mortgage-backed securities. The Funds investments in asset-backed securities are subject to risks similar to those associated with mortgage-related securities, as well as additional risks associated
with the nature of the assets and the servicing of those assets. These securities also are subject to the risk of default on the underlying mortgage or assets, particularly during periods of economic downturn. Certain CMBS are issued in several
classes with different levels of yield and credit protection. The Funds investments in CMBS with several classes may be in the lower classes that have greater risks than the higher classes, including greater interest rate, credit and
prepayment risks.
Mortgage-backed securities may be either pass-through
securities or collateralized mortgage obligations (CMOs). Pass-through securities represent a right to receive principal and interest payments collected on a pool of mortgages, which are passed through to security holders. CMOs are
created by dividing the principal and interest payments collected on a pool of mortgages into several revenue streams (tranches) with different priority rights to portions of the underlying mortgage payments. Certain CMO tranches may represent a
right to receive interest only (IOs), principal only (POs) or an amount that remains after floating-rate tranches are paid (an inverse floater). These securities are frequently referred to as mortgage derivatives
and may be extremely sensitive to changes in interest rates. Interest rates on inverse floaters, for example, vary inversely with a short-term floating rate (which may be reset periodically). Interest rates on inverse floaters will decrease when
short-term rates increase, and will increase when short-term rates decrease. These securities have the effect of providing a degree of investment leverage. In response to changes in market interest rates or other market conditions, the value of an
inverse floater may increase or decrease at a multiple of the increase or decrease in the value of the underlying securities. If the Fund invests in CMO tranches (including CMO tranches issued by government agencies) and interest rates move in a
manner not anticipated by Fund management, it is possible that the Fund could lose all or substantially all of its investment.
The mortgage market in the United States recently has experienced difficulties that may adversely affect the performance and market value of certain of the
Funds mortgage-related investments. Delinquencies and losses on mortgage loans (including subprime and second-lien mortgage loans) generally have increased recently and may continue to increase, and a decline in or flattening of real-estate
values (as has recently been experienced and may continue to be experienced in many housing markets) may exacerbate such delinquencies and losses. Also, a number of mortgage loan originators have recently experienced serious financial difficulties
or bankruptcy. Reduced investor demand for mortgage loans and mortgage-related securities and increased investor yield requirements have caused limited liquidity in the secondary market for mortgage-related securities, which can adversely affect the
market value of mortgage-related securities. It is possible that such limited liquidity in such secondary markets could continue or worsen.
Asset-backed securities entail certain risks not presented by mortgage-backed securities, including the risk that in certain states it may be difficult to perfect
the liens securing the collateral backing certain asset-backed securities. In addition, certain asset-backed securities are based on loans that are unsecured, which means that there is no collateral to seize if the underlying borrower defaults.
Certain mortgage-backed securities in which the Fund may invest may also provide a degree of investment leverage, which could cause the Fund to lose all or substantially all of its investment.
Municipal Bonds Risk
(Investment Grade Bond Portfolio)
Municipal bonds are subject to interest rate, credit and market risk. The ability of an issuer to make payments could be affected by litigation, legislation or other political events or the bankruptcy of the issuer. Lower rated municipal
bonds are subject to greater credit and market risk than higher quality municipal bonds. The market prices of residual interest bonds may be highly sensitive to changes in market rates and may decrease significantly when market rates increase.
Non-Diversification Risk (Inflation Protected Bond
Portfolio)
The Fund is a non-diversified fund. Because the Fund may invest in securities of a smaller number of issuers, it may be more exposed to the risks associated with and developments affecting an individual issuer than a fund
that invests more widely.
Non-Investment Grade Securities Risk
(Inflation Protected Bond Portfolio and Investment Grade Bond Portfolio)
Although non-investment grade securities generally pay higher rates of interest than investment grade securities, non-investment grade securities are high risk
investments that may cause income and principal losses for the Fund. The major risks of non-investment grade investments include:
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Non-investment grade securities
may be issued by less creditworthy issuers. Issuers of non-investment grade securities
may
have a larger amount of outstanding debt relative to their assets than issuers of investment grade
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15
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securities. In the event of an issuers bankruptcy, claims of other creditors may have priority over the claims of holders of non-investment grade securities, leaving few or no assets
available to repay holders of non-investment grade securities.
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Prices of non-investment grade securities are subject to extreme price fluctuations. Adverse changes in an issuers industry and general economic conditions
may have a greater impact on the prices of non-investment grade securities than on other higher rated fixed-income securities.
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Issuers of non-investment grade securities may be unable to meet their interest or principal payment obligations because of an economic downturn, specific issuer
developments, or the unavailability of additional financing.
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Non-investment grade securities
frequently have redemption features that permit an issuer to repurchase the security from the Fund before it
matures. If the issuer redeems non-investment grade securities, the Fund may have to invest the proceeds in bonds with lower yields and may lose income.
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Non-investment grade securities
may be less liquid than higher rated fixed-income securities, even under normal economic conditions. There
are fewer dealers in the non-investment grade securities market, and there may be significant differences in the prices quoted for junk bonds by the dealers. Because they are less liquid, judgment may play a greater role in valuing certain of the
Funds securities than is the case with securities trading in a more liquid market.
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The Fund may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting issuer.
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The credit rating of a high yield security does not
necessarily address its market value risk. Ratings and market value may change from time to time, positively or negatively, to reflect new developments regarding the issuer.
Preferred Securities Risk
Preferred securities may pay fixed
or adjustable rates of return. Preferred securities are subject to issuer-specific and market risks applicable generally to equity securities. In addition, a companys preferred securities generally pay dividends only after the company makes
required payments to holders of its bonds and other debt. For this reason, the value of preferred securities will usually react more strongly than bonds and other debt to actual or perceived changes in the companys financial condition or
prospects. Preferred securities of smaller companies may be more vulnerable to adverse developments than preferred stock of larger companies.
Prepayment Risk
When interest rates fall, certain obligations will be paid off by the obligor more quickly than originally anticipated, and the
Fund may have to invest the proceeds in securities with lower yields. In periods of falling interest rates, the rate of prepayments tends to increase (as does price fluctuation) as borrowers are motivated to pay off debt and refinance at new lower
rates. During such periods, reinvestment of the prepayment proceeds by the management team will generally be at lower rates of return than the return on the assets that were prepaid. Prepayment reduces the yield to maturity and the average life of
the security.
Repurchase Agreements, Purchase and Sale Contracts
Risks
If the other party to a repurchase agreement or purchase and sale contract defaults on its obligation under the agreement, the Fund may suffer delays and incur costs or lose money in exercising its rights under the agreement. If
the seller fails to repurchase the security in either situation and the market value of the security declines, the Fund may lose money.
Reverse Repurchase Agreements Risk
Reverse repurchase agreements involve the sale of securities held by the Fund with an
agreement to repurchase the securities at an agreed-upon price, date and interest payment. Reverse repurchase agreements involve the risk that the other party may fail to return the securities in a timely manner or at all. The Fund could lose money
if it is unable to recover the securities and the value of the collateral held by the Fund, including the value of the investments made with cash collateral, is less than the value of securities. These events could also trigger adverse tax
consequences to the Fund.
U.S. Government Issuer Risk
Treasury obligations may differ in their interest rates, maturities, times of issuance and other characteristics. Obligations of U.S. Government agencies and authorities are supported by varying degrees of credit but generally are not backed by the
full faith and credit of the U.S. Government. No assurance can be given that the U.S. Government will provide financial support to its agencies and authorities if it is not obligated by law to do so.
A Fund may also be subject to certain other risks associated with its investments
and investment strategies, including:
Expense Risk
Fund expenses are subject to a variety of factors, including fluctuations in the Funds net assets. Accordingly, actual expenses may be greater or less than those indicated. For example, to the extent that the Funds net assets
decrease due to market declines or redemptions, the Funds expenses will increase as a percentage of Fund net assets. During periods of high market volatility, these increases in the Funds expense ratio could be significant.
Investment in Other Investment Companies Risk
As with other
investments, investments in other investment companies are subject to market and selection risk. In addition, if the Fund acquires shares of investment companies,
16
including ones affiliated with the Fund, shareholders bear both their proportionate share of expenses in the Fund (including management and advisory fees) and, indirectly, the expenses of the
investment companies. To the extent the Fund is held by an affiliated fund, the ability of the Fund itself to hold other investment companies may be limited.
When-Issued and Delayed Delivery Securities and Forward Commitments Risks
When-issued and delayed delivery securities and forward commitments
involve the risk that the security the Fund buys will lose value prior to its delivery. There also is the risk that the security will not be issued or that the other party to the transaction will not meet its obligation. If this occurs, the Fund
loses both the investment opportunity for the assets it set aside to pay for the security and any gain in the securitys price.
17
Account Information
How to Choose the Share Class that Best Suits
Your Needs
Each Fund currently offers multiple share classes (BlackRock Shares in this prospectus), each with its own sales charge and expense structure, allowing you to
invest in the way that best suits your needs. Each share class represents the same ownership interest in the portfolio investments of the particular Fund. When you choose your class of shares, you should consider the size of your investment and how
long you plan to hold your shares. Either your financial professional or your financial institution (such as banks and brokerage firms) (financial intermediary) can help you determine which share class is best suited to your personal
financial goals.
Each Funds shares are distributed by BlackRock
Investments, LLC (the Distributor), an affiliate of BlackRock.
The table below summarizes key features of the BlackRock Share class of a Fund.
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BlackRock Shares
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Availability
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BlackRock Shares are offered without a sales charge to institutional investors, registered investment advisers and certain fee-based
programs and certain employer-sponsored retirement plans.
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Minimum Investment
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$5 million for institutions and individuals.
There is no minimum initial investment requirement for fee-based programs with an
annual fee of at least 0.50% or certain employer-sponsored retirement plans.
BlackRock Shares are available to clients of registered investment advisers who have $250,000 invested in the Fund.
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Initial Sales Charge?
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No. Entire purchase price is invested in shares of the Fund.
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Deferred Sales Charge?
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No.
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Service and Distribution Fees?
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No.
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Redemption Fees?
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No.
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Advantage
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No up-front sales charge so you start off owning more shares.
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Disadvantage
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Limited availability.
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Distribution and Service Payments
The Fund has adopted plans (the Plans) that allow the Fund to pay
distribution fees for the sale of its shares under Rule 12b-1 of the Investment Company Act of 1940, as amended (the Investment Company Act), and shareholder servicing fees for certain services provided to its shareholders. In
accordance with the Plans, BlackRock shares currently do not make such payments.
Plan Payments
In accordance with the Plans, BlackRock Shares currently do not make such payments.
Other Payments by the Funds
In addition to, rather than in lieu of, distribution and shareholder servicing fees that each Fund may pay to a Financial Intermediary pursuant to the Plans and
fees each Fund pays to its transfer agent, BNY Mellon Investment Servicing (US) Inc. (the Transfer Agent), BlackRock, on behalf of each Fund, may enter into non-Plan agreements with a Financial Intermediary pursuant to which each Fund
will pay a Financial Intermediary for administrative, networking, recordkeeping, sub-transfer agency and shareholder services. These non-Plan payments are generally based on either (1) a percentage of the average daily net assets of Fund
shareholders serviced by a Financial Intermediary or (2) a fixed dollar amount for each account serviced by a Financial Intermediary. The aggregate amount of these payments may be substantial.
Other Payments by BlackRock
The Plans permit BlackRock, the Distributor and their affiliates to make payments relating to distribution and sales support activities out of their past profits or
other sources available to them (and not as an additional charge to the Fund). From time to time, BlackRock, the Distributor or their affiliates also may pay a portion of the fees for administrative, networking, recordkeeping, sub-transfer agency
and shareholder services described above at its or their own expense and out of its or their profits. BlackRock, the Distributor and their affiliates may compensate affiliated and unaffiliated Financial Intermediaries for the sale and distribution
of shares of the Fund or for these other services
18
to the Fund and shareholders. These payments would be in addition to the Fund payments described in this prospectus and may be a fixed dollar amount, may be based on the number of customer
accounts maintained by the Financial Intermediary, or may be based on a percentage of the value of shares sold to, or held by, customers of the Financial Intermediary. The aggregate amount of these payments by BlackRock, the Distributor and their
affiliates may be substantial. Payments by BlackRock may include amounts that are sometimes referred to as revenue sharing payments. In some circumstances, these revenue sharing payments may create an incentive for a Financial
Intermediary, its employees or associated persons to recommend or sell shares of the Fund to you. Please contact your Financial Intermediary for details about payments it may receive from the Fund or from BlackRock, the Distributor or their
affiliates. For more information, see the SAI.
How to Buy, Sell and Transfer Shares
The chart on the following pages summarizes how to buy, sell and transfer shares
through your financial professional or other financial intermediary. You may also buy, sell and transfer shares through BlackRock, if your account is held directly with BlackRock. To learn more about buying, selling or transferring shares through
BlackRock, call (800) 537-4942. Because the selection of a mutual fund involves many considerations, your financial professional or other financial intermediary may help you with this decision.
The Fund may reject any purchase order, modify or waive the minimum initial or
subsequent investment requirements for any shareholders and suspend and resume the sale of any share class of the Fund at any time for any reason. In addition, the Fund may waive certain requirements regarding the purchase, sale or transfer of
shares described below.
Persons who were shareholders
of an investment portfolio of this Compass Capital Group of Funds at the time the portfolio combined with the PNC
®
Fund may purchase and redeem BlackRock Shares of the
same fund and for the same account which they held shares on that date through the procedures described in this section.
Under certain circumstances, if no activity occurs in an account within a time period specified by state law, a shareholders shares in a Fund may be
transferred to that state.
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How to Buy Shares
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Your Choices
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Important Information for You to Know
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Initial Purchase
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Determine the amount of your investment
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Refer to the minimum initial investment in the share class table of this
prospectus.
The Fund has lower investment minimums for other categories of
shareholders eligible to purchase BlackRock Shares, including selected fee-based programs.
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Have your financial intermediary submit your purchase order
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The price of your shares is based on the next calculation of the Funds net asset
value after your order is placed. Any purchase orders placed prior to the close of business on the NYSE (generally 4:00 p.m. (Eastern time)) will be priced at the net asset value determined that day. Purchase orders placed after the close of
business on the NYSE will be priced at the net asset value determined on the next business day. Certain financial intermediaries, however, may require submission of orders prior to that time. A broker-dealer or financial institution maintaining the
account in which you hold shares may charge a separate account, service or transaction fee on the purchase or sale of Fund shares that would be in addition to the fees and expenses shown in the Funds Fees and Expenses
table.
The Fund may reject any order to buy shares and may suspend the sale
of shares at any time. Financial intermediaries may charge a processing fee to confirm a purchase.
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Add to Your Investment
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Purchase additional shares
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There is no minimum amount for additional investments.
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Have your financial professional or financial intermediary submit your purchase order for additional shares
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To purchase additional shares you may contact your financial professional or financial intermediary.
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Or contact BlackRock (for accounts held directly with BlackRock)
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Purchase by Telephone:
Call the Fund at (800) 537-4942 and speak with one of our representatives. The Fund has the right
to reject any telephone request for any reason.
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19
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How to Buy Shares (continued)
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Your Choices
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Important Information for You to Know
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Add to Your Investment (continued)
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Or contact BlackRock (for accounts held directly with BlackRock) (continued)
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Purchase by Internet:
You may purchase your shares, and view activity in your account, by logging onto the BlackRock website at www.blackrock.com/funds. Purchases
made on the Internet using the Automated Clearing House (ACH) will have a trade date that is the day after the purchase is made. Certain institutional clients purchase orders placed by wire prior to the close of business on the
NYSE will be priced at the net asset value determined that day. Contact your financial intermediary or BlackRock for further information. Limits on amounts that may be purchased via Internet may vary. For additional information call BlackRock at
(800) 537-4942.
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Please read the On-Line Services Disclosure Statement and User Agreement, the Terms and
Conditions page and the Consent to Electronic Delivery Agreement (if you consent to electronic delivery), before attempting to transact online.
The Fund employs reasonable procedures to confirm that transactions entered over the Internet are genuine. By entering into the User Agreement with the Fund in
order to open an account through the website, the shareholder waives any right to reclaim any losses from the Fund or any of its affiliates, incurred through fraudulent activity.
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Acquire additional shares by reinvesting dividends and capital gains
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All dividends and capital gains distributions are automatically reinvested without a sales charge. To make any changes to your
dividend and/or capital gains distributions options, please call BlackRock at (800) 537-4942, or contact your financial intermediary (if your account is not held directly with BlackRock).
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How to Pay for Shares
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Making payment for purchases
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Payment for BlackRock Shares must normally be made in Federal funds or other immediately available funds by your financial
professional or other financial intermediary but in no event later than 4:00 p.m. (Eastern time) on the first business day following receipt of the order. Payment may also, at the discretion of the Fund, be made in the form of securities that
are permissible investments for the respective fund. If payment is not received by this time, the order will be canceled and you and your financial professional or other financial intermediary will be responsible for any loss to the
Fund.
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How to Sell Shares
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Your Choices
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Important Information for You to Know
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Full or Partial Redemption of Shares
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Have your financial intermediary submit your sales order
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You can also make redemption requests through your financial professional. The price of your shares is based on the next calculation of net asset value after your order is
placed. For your redemption request to be priced at the net asset value on the day of your request, you must submit your request to your financial intermediary prior to that days close of business on the NYSE (generally 4:00 p.m. (Eastern
time)). Certain financial intermediaries, however, may require submission of orders prior to that time. Any redemption request placed after that time will be priced at the net asset value at the close of business on the next business
day.
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Shareholders who hold more than one class should indicate which class of shares they are redeeming.
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The Fund may reject an order to sell shares under certain circumstances.
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Selling shares held directly with BlackRock
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Methods of Redeeming:
Redeem by
Telephone:
You may sell shares held at BlackRock by telephone request. Call (800) 537-4942 for details.
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The Fund, its administrators and the Distributor will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. The Fund and its service providers will not be liable for any loss, liability, cost or expense for acting upon telephone instructions that are reasonably believed to be genuine in accordance with such procedures. The Fund may
refuse a telephone redemption request if it believes it is advisable to do so.
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20
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How to Sell Shares (continued)
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Your Choices
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Important Information for You to Know
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Full or Partial Redemption of Shares (continued)
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Selling shares held directly with BlackRock (continued)
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During periods of substantial economic or market change, telephone redemptions may be difficult to complete. Please find below alternative redemption methods.
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Redeem by Internet:
You may redeem in your account, by logging onto the BlackRock website at www.blackrock.com/funds. Proceeds from Internet redemptions will be sent via wire to the
bank account of record.
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Redeem in Writing:
Redemption requests may be sent in proper form to BlackRock Funds, P.O. Box 9819, Providence, Rhode Island 02940-8019. Under certain circumstances, a
medallion signature guarantee will be required.
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Payment of Redemption Proceeds by Wire Transfer:
Payment for redeemed shares for which a redemption order is received before 4:00 p.m. (Eastern time) on a business day is
normally made in Federal funds wired to the redeeming shareholder on the next business day, provided that the Funds custodian is also open for business. Payment for redemption orders received after 4:00 p.m. (Eastern time) or on a day
when the Funds custodian is closed is normally wired in Federal funds on the next business day following redemption on which the Funds custodian is open for business. The Fund reserves the right to wire redemption proceeds within seven
days after receiving a redemption order if, in the judgment of the Fund, an earlier payment could adversely affect the Fund.
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Shares can be redeemed by Federal wire transfer to a single previously designated bank account. No charge for wiring redemption payments with respect to BlackRock Shares is imposed by the
Fund. You are responsible for any additional charges imposed by your bank for wire transfers.
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The Fund is not responsible for the efficiency of the Federal wire system or the shareholders firm
or bank. To change the name of the single, designated bank account to receive wire redemption proceeds, it is necessary to send a written request to the Fund at the address on the back cover of this prospectus.
* * *
If you make a redemption request before the Fund has collected payment
for the purchase of shares, the Fund may delay mailing your proceeds. This delay will usually not exceed ten days.
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How to Transfer your Account
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Your Choices
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Important Information for You to Know
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Transfer Shares to Another Securities Dealer or Other Financial Intermediary
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Transfer to a participating securities dealer or other financial intermediary
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You may transfer your shares of the Fund only to another securities dealer that has entered into an agreement with the Distributor.
Certain shareholder services may not be available for the transferred shares. All future trading of these assets must be coordinated by the receiving firm.
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Transfer to a non-participating securities dealer or other financial intermediary
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You must either:
Transfer your shares to an account with the Fund; or
Sell your shares, paying any applicable deferred sales charge.
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21
Funds Rights
Each Fund
may:
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Suspend the right of redemption if trading is halted or restricted on the NYSE or under other emergency conditions described in the Investment Company Act;
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Postpone date of payment upon redemption if trading is halted or restricted on the NYSE or under other emergency conditions described in the Investment Company
Act or if a redemption request is made before the Fund has collected payment for the purchase of shares;
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Redeem shares for property other than cash if conditions exist which make cash payments undesirable in accordance with its rights under the Investment Company
Act; and
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Redeem shares involuntarily in certain cases, such as when the value of a shareholder account falls below a specified level.
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Note on Low Balance Accounts.
Because of the high cost of maintaining smaller
shareholder accounts, BlackRock has set a minimum balance of $500 in each Fund position you hold within your account (Fund Minimum), and may take one of two actions if the balance in your Fund falls below the Fund Minimum.
First, the Fund may redeem the shares in your account (without charging any
deferred sales charge) if the net asset value of your account falls below $250 for any reason, including market fluctuation. You will be notified that the value of your account is less than $250 before the Fund makes an involuntary redemption. The
notification will provide you with a 90 calendar day period to make an additional investment in order to bring the value of your account to at least $250 before the Fund makes an involuntary redemption or to the Fund Minimum in order not to be
assessed an annual low balance fee of $20, as set forth below. This involuntary redemption may not apply to accounts of certain employer-sponsored retirement plans, selected fee-based programs, accounts established under the Uniform Gifts or
Transfers to Minors Acts, and certain intermediary accounts.
Second, the
Fund charges an annual $20 low balance fee on all Fund accounts that have a balance below the Fund Minimum for any reason, including market fluctuation. The fee will be deducted from the Fund account only once per calendar year. You will be notified
that the value of your account is less than the Fund Minimum before the fee is imposed. You will then have a 90 calendar day period to make an additional investment to bring the value of your account to the Fund Minimum before the Fund imposes the
low balance fee. This low balance fee does not apply to accounts of certain employer-sponsored retirement plans, selected fee-based programs, or, accounts established under the Uniform Gifts or Transfers to Minors Acts.
Short-Term Trading Policy
The Board
of Trustees (the Board) has determined that the interests of long-term shareholders and the Funds ability to manage its investments may be adversely affected when shares are repeatedly bought, sold or exchanged in response to
short-term market fluctuations also known as market timing. The Fund is not designed for market timing organizations or other entities using programmed or frequent purchases and sales or exchanges. The exchange privilege is not
intended as a vehicle for short-term trading. Excessive purchase and sale or exchange activity may interfere with portfolio management, increase expenses and taxes and may have an adverse effect on the performance of the Fund and its shareholders.
For example, large flows of cash into and out of the Fund may require the management team to allocate a significant amount of assets to cash or other short-term investments or sell securities, rather than maintaining such assets in securities
selected to achieve the Funds investment objective. Frequent trading may cause the Fund to sell securities at less favorable prices, and transaction costs, such as brokerage commissions, can reduce the Funds performance.
A Fund that invests in non-U.S. securities is subject to the risk that an investor may
seek to take advantage of a delay between the change in value of the Funds portfolio securities and the determination of the Funds net asset value as a result of different closing times of U.S. and non-U.S. markets by buying or selling
Fund shares at a price that does not reflect their true value. A similar risk exists for funds that invest in securities of small capitalization companies, securities of issuers located in emerging markets or high yield securities (junk
bonds) that are thinly traded and therefore may have actual values that differ from their market prices. This short-term arbitrage activity can reduce the return received by long-term shareholders. The Fund will seek to eliminate these
opportunities by using fair value pricing, as described in Valuation of Fund Investments below.
The Fund discourages market timing and seeks to prevent frequent purchases and sales or exchanges of Fund shares that it determines may be detrimental to the Fund or long-term shareholders. The Board has approved
the policies discussed below to seek to deter market timing activity. The Board has not adopted any specific numerical restrictions on purchases, sales and exchanges of Fund shares because certain legitimate strategies will not result in harm to the
Fund or shareholders.
22
If as a result of its own investigation, information provided by a financial intermediary or other third party, or
otherwise, the Fund believes, in its sole discretion, that your short-term trading is excessive or that you are engaging in market timing activity, it reserves the right to reject any specific purchase or exchange order. If the Fund rejects your
purchase or exchange order, you will not be able to execute that transaction, and the Fund will not be responsible for any losses you therefore may suffer. For transactions placed directly with the Fund, the Fund may consider the trading history of
accounts under common ownership or control for the purpose of enforcing these policies. Transactions placed through the same financial intermediary on an omnibus basis may be deemed part of a group for the purpose of this policy and may be rejected
in whole or in part by the Fund. Certain accounts, such as omnibus accounts and accounts at financial intermediaries, however, include multiple investors and such accounts typically provide the Fund with net purchase or redemption and exchange
requests on any given day where purchases, redemptions and exchanges of shares are netted against one another and the identity of individual purchasers, redeemers and exchangers whose orders are aggregated may not be known by the Fund. While the
Fund monitors for market timing activity, the Fund may be unable to identify such activities because the netting effect in omnibus accounts often makes it more difficult to locate and eliminate market timers from the Fund. The Distributor has
entered into agreements with respect to financial professionals, and other financial intermediaries that maintain omnibus accounts with the Transfer Agent pursuant to which such financial professionals and other financial intermediaries undertake to
cooperate with the Distributor in monitoring purchase, exchange and redemption orders by their customers in order to detect and prevent short-term or excessive trading in the Funds shares through such accounts. Identification of market timers
may also be limited by operational systems and technical limitations. In the event that a financial intermediary is determined by the Fund to be engaged in market timing or other improper trading activity, the Funds Distributor may terminate
such financial intermediarys agreement with the Distributor, suspend such financial intermediarys trading privileges or take other appropriate actions.
There is no assurance that the methods described above will prevent market timing or
other trading that may be deemed abusive.
The Fund may from time to time
use other methods that it believes are appropriate to deter market timing or other trading activity that may be detrimental to a fund or long-term shareholders.
23
Management of the Funds
BlackRock
BlackRock, each Funds investment adviser, manages each Funds investments
and its business operations subject to the oversight of the Board of the Fund. While BlackRock is ultimately responsible for the management of a Fund, it is able to draw upon the trading, research and expertise of its asset management affiliates for
portfolio decisions and management with respect to certain portfolio securities. BlackRock is an indirect, wholly owned subsidiary of BlackRock, Inc.
BlackRock, a registered investment adviser, was organized in 1994 to perform advisory services for investment companies. BlackRock Financial Management, Inc., each
Funds sub-adviser (the Sub-Adviser), is a registered investment adviser organized in 1994. BlackRock and its affiliates had approximately $3.792 trillion in investment company and other portfolio assets under management as of
December 31, 2012.
Each Fund has entered into a management agreement (the
Management Agreement) with BlackRock under which BlackRock receives for its services to each Fund a fee of each Funds average daily net assets. For the fiscal year ended September 30, 2012, the aggregate management fees, net
of any applicable waivers, paid by each Fund to BlackRock as a percentage of each Funds average daily net assets were:
|
|
|
|
|
GNMA Portfolio
|
|
|
0.39
|
%
|
Inflation Protected Bond Portfolio
|
|
|
0.24
|
%
|
Investment Grade Bond Portfolio
|
|
|
0.29
|
%
|
BlackRock has entered into a sub-advisory
agreement with the Sub-Adviser, an affiliate of BlackRock, under which BlackRock pays the Sub-Adviser for services it provides a fee equal to a percentage of the management fee paid to BlackRock under the Management Agreement. The Sub-Adviser is
responsible for the day-to-day management of each Funds portfolio.
Total Annual Management Fees (Before Waivers)
With respect
to each Fund, the maximum annual management fees that can be paid to BlackRock (as a percentage of average daily net assets) are calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate of Management Fee
|
|
Average Daily Net Assets
|
|
GNMA
Portfolio
|
|
|
Inflation
Protected
Bond
Portfolio
|
|
|
Investment
Grade
Bond
Portfolio
|
|
First $1 billion
|
|
|
0.550
|
%
|
|
|
0.400
|
%
|
|
|
0.500
|
%
|
$1 billion $2 billion
|
|
|
0.500
|
%
|
|
|
0.375
|
%
|
|
|
0.450
|
%
|
$2 billion $3 billion
|
|
|
0.475
|
%
|
|
|
0.350
|
%
|
|
|
0.425
|
%
|
Greater than $3 billion
|
|
|
0.450
|
%
|
|
|
0.325
|
%
|
|
|
0.400
|
%
|
BlackRock has agreed to cap net expenses
(excluding (i) interest, taxes, dividends tied to short sales, brokerage commissions, and other expenditures which are capitalized in accordance with generally accepted accounting principles; (ii) expenses incurred directly or indirectly
by the Fund as a result of investments in other investment companies and pooled investment vehicles; (iii) other expenses attributable to, and incurred as a result of, the Funds investments; and (iv) other extraordinary expenses
(including litigation expenses) not incurred in the ordinary course of the Funds business, if any), of each share class of certain Funds at the levels shown below (and in the case of contractual caps, at the levels shown both below and in a
Funds fees and expenses table in the Fund Overview section of this prospectus). (Items (i), (ii), (iii) and (iv) in the preceding sentence are referred to in this prospectus as Dividend Expense, Interest Expense, Acquired Fund
Fees and Expenses and certain other Fund expenses.) To achieve these expense caps, BlackRock has agreed to waive or reimburse fees or expenses if these operating expenses exceed a certain limit.
24
With respect to each Fund, BlackRock has agreed to contractually waive and/or reimburse fees or expenses in order to
limit Total Annual Fund Operating Expenses (for BlackRock Shares) to the amounts noted in the table below.
|
|
|
|
|
|
|
|
|
Contractual Caps on
Total Annual Fund
Operating Expenses*
(excluding Dividend Expense,
Interest Expense, Acquired Fund
Fees and Expenses
and
certain other Fund expenses)
1
|
|
GNMA Portfolio
|
|
|
0.52
|
%
|
Inflation Protected Bond Portfolio
|
|
|
0.32
|
%
|
Investment Grade Bond Portfolio
|
|
|
0.45
|
%
|
*
|
As a percentage of average daily net assets.
|
1
|
The contractual caps are in effect until February 1, 2014. The contractual agreement may be terminated upon 90 days notice by a majority of the
non-interested trustees of the Fund or by a vote of a majority of the outstanding voting securities of the Fund.
|
With respect to the contractual agreements described above, if during a Funds fiscal year the operating expenses of a share class, that at any time during the
prior two fiscal years received a waiver or reimbursement from BlackRock, are less than the expense limit for that share class, the share class is required to repay BlackRock up to the lesser of (a) the amount of fees waived or expenses
reimbursed during those prior two fiscal years under the agreement and (b) the amount by which the expense limit for that share class exceeds the operating expenses of the share class for the current fiscal year, provided that: (1) the
Fund of which the share class is a part has more than $50 million in assets and (2) BlackRock or an affiliate serves as the Funds manager or administrator.
As stated above, the waivers and reimbursements described in the table above do not
include Interest Expense. A Funds Interest Expense is required to be reported as part of operating expenses in such Funds expense table for accounting purposes. A Fund incurs Interest Expense when making certain investments (e.g., tender
option bonds) to seek to enhance the yield and total return of the portfolio. The amount of Interest Expense (if any) will fluctuate with the Funds use of those investments.
* * *
A discussion of the basis for the Boards approval of the Management Agreement with BlackRock and the sub-advisory agreement between
BlackRock and the Sub-Adviser is included in the Funds annual shareholder report for the fiscal year ended September 30, 2012.
From time to time, a manager, analyst, or other employee of BlackRock or its affiliates may express views regarding a particular asset class, company, security,
industry, or market sector. The views expressed by any such person are the views of only that individual as of the time expressed and do not necessarily represent the views of BlackRock or any other person within the BlackRock organization. Any such
views are subject to change at any time based upon market or other conditions and BlackRock disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for the Fund are
based on numerous factors, may not be relied on as an indication of trading intent on behalf of the Fund.
Portfolio Manager Information
Information regarding the portfolio managers of each Fund is set forth below. Further
information regarding the portfolio managers, including other accounts managed, compensation, ownership of Fund shares, and possible conflicts of interest, is available in the Funds SAI.
The GNMA Portfolio is managed by a team of financial professionals. Akiva Dickstein
and Matthew Kraeger are jointly and primarily responsible for the day-to-day management of the Fund.
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Manager
|
|
Primary Role
|
|
Since
|
|
|
Title and Recent Biography
|
Akiva Dickstein
|
|
Jointly and primarily responsible for the day-to-day management of the Funds portfolio, including setting the Funds overall investment
strategy and overseeing the management of the Fund.
|
|
|
2009
|
|
|
Managing Director of BlackRock, Inc. since 2009; Managing Director of Merrill Lynch from 2003 to 2009 and Head of the U.S. Rates & Structured
Credit Research Group.
|
Matthew Kraeger
|
|
Jointly and primarily responsible for the day-to-day management of the Funds portfolio, including setting the Funds overall investment
strategy and overseeing the management of the Fund.
|
|
|
2009
|
|
|
Director of BlackRock, Inc. since 2009; Vice President of BlackRock, Inc. from 2006 to 2008; Associate of BlackRock, Inc. from 2002 to
2005.
|
25
The Inflation Protected Bond Portfolio is managed by a team of financial professionals. Martin Hegarty and Brian
Weinstein are jointly and primarily responsible for the day-to-day management of the Fund.
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Manager
|
|
Primary Role
|
|
Since
|
|
|
Title and Recent Biography
|
Martin Hegarty
|
|
Jointly and primarily responsible for the day-to-day management of the Funds portfolio, including setting the Funds overall investment
strategy and overseeing the management of the Fund.
|
|
|
2010
|
|
|
Managing Director of BlackRock, Inc.
since 2010; Co-head of BlackRocks Global Inflation-Linked Portfolios since 2010; Director of Bank of America Merrill Lynch from 2005 to 2009; Vice of Bank of America Merrill from 2003 to
2005.
|
Brian Weinstein
|
|
Jointly and primarily responsible for the day-to-day management of the Funds portfolio, including setting the Funds overall investment
strategy and overseeing the management of the Fund.
|
|
|
2005
|
|
|
Managing Director of BlackRock, Inc. since 2008; Director of BlackRock, Inc. in 2007; Vice President of BlackRock, Inc. from 2005 to
2006.
|
The Investment Grade Bond Portfolio is managed by
a team of financial professionals. Jeffrey Cucunato is primarily responsible for the day-to-day management of the Fund.
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Manager
|
|
Primary Role
|
|
Since
|
|
|
Title and Recent Biography
|
Jeffrey Cucunato
|
|
Primarily responsible for the day-to-day management of the Funds portfolio, including setting the Funds overall investment strategy and
overseeing the management of the Fund.
|
|
|
2009
|
|
|
Managing Director of BlackRock, Inc. since 2005.
|
Conflicts of
Interest
The investment activities of BlackRock and its affiliates (including BlackRock, Inc. and PNC and their affiliates, directors, partners, trustees, managing members,
officers and employees (collectively, the Affiliates)) in the management of, or their interest in, their own accounts and other accounts they manage, may present conflicts of interest that could disadvantage the Fund and its
shareholders. BlackRock and its Affiliates provide investment management services to other funds and discretionary managed accounts that follow an investment program similar to that of the Fund. BlackRock and its Affiliates are involved worldwide
with a broad spectrum of financial services and asset management activities and may engage in the ordinary course of business in activities in which their interests or the interests of their clients may conflict with those of the Fund. One or more
Affiliates act or may act as an investor, investment banker, research provider, investment manager, financier, advisor, market maker, trader, prime broker, lender, agent and principal, and have other direct and indirect interests, in securities,
currencies and other instruments in which the Fund directly and indirectly invests. Thus, it is likely that the Fund will have multiple business relationships with and will invest in, engage in transactions with, make voting decisions with respect
to, or obtain services from entities for which an Affiliate performs or seeks to perform investment banking or other services. One or more Affiliates may engage in proprietary trading and advise accounts and funds that have investment objectives
similar to those of the Fund and/or that engage in and compete for transactions in the same types of securities, currencies and other instruments as the Fund. The trading activities of these Affiliates are carried out without reference to positions
held directly or indirectly by the Fund and may result in an Affiliate having positions that are adverse to those of the Fund. No Affiliate is under any obligation to share any investment opportunity, idea or strategy with the Fund. As a result, an
Affiliate may compete with the Fund for appropriate investment opportunities. The results of the Funds investment activities, therefore, may differ from those of an Affiliate and of other accounts managed by an Affiliate, and it is possible
that the Fund could sustain losses during periods in which one or more Affiliates and other accounts achieve profits on their trading for proprietary or other accounts. The opposite result is also possible. In addition, the Fund may, from time
to time, enter into transactions in which an Affiliate or its other clients have an adverse interest. Furthermore, transactions undertaken by Affiliate-advised clients may adversely impact the Fund. Transactions by one or more Affiliate-advised
clients or BlackRock may have the effect of diluting or otherwise disadvantaging the values, prices or investment strategies of the Fund. The Funds activities may be limited because of regulatory restrictions applicable to one or more
Affiliates, and/or their internal policies designed to comply with such restrictions. In addition, the Fund may invest in securities of companies with which an Affiliate has or is trying to develop investment banking relationships or in which an
Affiliate has significant debt or equity investments. The Fund also may invest in securities of companies for which an Affiliate provides or may some day provide research coverage. An Affiliate may have business relationships with and purchase or
distribute or sell services or products from or to distributors, consultants or others who recommend the Fund or who engage in transactions with or for the Fund, and may receive compensation for such services. The Fund may also make brokerage and
other payments to Affiliates in connection with the Funds portfolio investment transactions.
26
Under a securities lending program approved by the Board, the Fund has retained an Affiliate of BlackRock to serve as
the securities lending agent for the Fund to the extent that the Fund participates in the securities lending program. For these services, the lending agent will receive a fee from the Fund, including a fee based on the returns earned on the
Funds investment of the cash received as collateral for the loaned securities. In addition, one or more Affiliates may be among the entities to which the Fund may lend its portfolio securities under the securities lending program.
The activities of Affiliates may give rise to other conflicts of interest that could
disadvantage the Fund and its shareholders. BlackRock has adopted policies and procedures designed to address these potential conflicts of interest. See the SAI for further information.
Valuation of Fund Investments
When you
buy shares, you pay the net asset value, plus any applicable sales charge. This is the offering price. Shares are also redeemed at their net asset value, minus any applicable deferred sales charge. The Fund calculates the net asset value of each
class of its shares (generally by using market quotations) each day the NYSE is open as of the close of business on the NYSE, based on prices at the time of closing. The NYSE generally closes at 4:00 p.m. Eastern time. The net asset value used in
determining your share price is the next one calculated after your purchase or redemption order is placed.
The Funds assets and liabilities are valued primarily on the basis of market quotations. Equity investments and other instruments for which market quotations are readily available are valued at market value,
which is generally determined using the last reported sale price on the exchange or market on which the security is primarily traded at the time of valuation. The Fund values fixed income portfolio securities and non-exchange traded derivatives
using market prices provided directly from one or more broker-dealers, market makers, or independent third-party pricing services which may use matrix pricing and valuation models to derive values, each in accordance with valuation procedures
approved by the Board. Short-term debt securities with remaining maturities of sixty days or less are valued on the basis of amortized cost.
Foreign currency exchange rates are generally determined as of the close of business on the Exchange. Foreign securities owned by the Fund may trade on weekends or
other days when the Fund does not price its shares. As a result, the Funds net asset value may change on days when you will not be able to purchase or redeem the Funds shares.
Generally, trading in foreign securities, U.S. government securities and money market instruments and certain fixed income securities is
substantially completed each day at various times prior to the close of business on the NYSE. The values of such securities used in computing the net asset value of the Funds shares are determined as of such times.
When market quotations are not readily available or are not believed by BlackRock to
be reliable, the Funds investments are valued at fair value. Fair value determinations are made by BlackRock in accordance with procedures approved by the Board. BlackRock may conclude that a market quotation is not readily available or is
unreliable if a security or other asset or liability does not have a price source due to its lack of liquidity, if BlackRock believes a market quotation from a broker-dealer or other source is unreliable, where the security or other asset or other
liability is thinly traded (e.g., municipal securities, certain small cap and emerging growth companies, and certain non-U.S. securities) or where there is a significant event subsequent to the most recent market quotation. For this purpose, a
significant event is deemed to occur if BlackRock determines, in its business judgment prior to or at the time of pricing the Funds assets or liabilities, that it is likely that the event will cause a material change to the last
closing market price of one or more assets or liabilities held by the Fund. For instance, significant events may occur between the foreign market close and the close of business on the Exchange that may not be reflected in the computation of the
Funds net assets. If such event occurs, those instruments may be fair valued. Similarly, foreign securities whose values are affected by volatility that occurs in U.S. markets on a trading day after the close of foreign securities markets may
be fair valued.
For certain foreign securities, a third-party vendor
supplies evaluated, systematic fair value pricing based upon the movement of a proprietary multi-factor model after the relevant foreign markets have closed. This systematic fair value pricing methodology is designed to correlate the prices of
foreign securities following the close of the local markets to the price that might have prevailed as of a Funds pricing time.
Fair value represents a good faith approximation of the value of a security. The fair value of one or more securities may not, in retrospect, be the price at which
those assets could have been sold during the period in which the particular fair values were used in determining the Funds net asset value.
The Fund may accept orders from certain authorized Financial Intermediaries or their designees. The Fund will be deemed to receive an order when accepted by the
intermediary or designee and the order will receive the net asset value next computed by the Fund after such acceptance. If the payment for a purchase order is not made by a designated later time, the order will be canceled and the Financial
Intermediary could be held liable for any losses.
27
Dividends, Distributions and Taxes
|
BUYING A
DIVIDEND
|
|
Unless your investment is in a tax deferred
account, you may want to avoid buying shares shortly before a Fund
pays a dividend. The reason? If you buy shares when a fund has declared but not yet distributed ordinary income
or capital gains, you will pay the full price for the shares and
then receive a portion of the price back in the form of
a taxable dividend. Before investing you may want to consult your tax adviser.
|
Each Fund will distribute net investment income, if any, and net realized capital gain, if any, at least annually. Each Fund may also pay a special distribution at
the end of the calendar year to comply with Federal tax requirements. Dividends may be reinvested automatically in shares of a Fund at net asset value without a sales charge or may be taken in cash. If you would like to receive dividends in cash,
contact your financial professional, financial intermediary or the Fund. Although this cannot be predicted with any certainty, it is anticipated that the majority of a Funds dividends, if any, will consist of capital gains for GNMA Portfolio
and income for Inflation Protected Bond Portfolio and Investment Grade Bond Portfolio. Capital gains may be taxable to you at different rates depending on how long a Fund held the assets sold.
You will pay tax on dividends from a Fund whether you receive them in cash or
additional shares. If you redeem Fund shares or exchange them for shares of another fund, you generally will be treated as having sold your shares and any gain on the transaction may be subject to tax. Certain dividend income, including dividends
received from qualifying foreign corporations, and long-term capital gains are eligible for taxation at a maximum rate of 15% for non-corporate shareholders with incomes below $400,000 ($450,000 if married filing jointly) and 20% for individuals
with any income above those amounts that is long-term capital gain. To the extent a Fund makes any distributions derived from long-term capital gains and qualifying dividend income, such distributions will be eligible for taxation at the reduced
rate.
In addition, a 3.8% Medicare contribution tax will be imposed on the
net investment income (which includes interest, dividends and capital gain) of U.S. individuals with income exceeding $200,000 or $250,000 if married filing jointly, and of trusts and estates, for taxable years beginning after December 31, 2012.
Fund distributions from amounts other than current or accumulated earnings and profits will be treated as returns of capital for federal income tax purposes and will reduce your basis in your shares, with any distributed amount that exceeds your
remaining basis constituting capital gain to you. Fund distributions in excess of a Funds minimum distribution requirements but not in excess of the Funds remaining earnings and profits will not be returns of capital but will be taxable
dividends to shareholders. A Funds capital loss carryovers, if any, from the pre-2011 taxable years will not reduce current earnings and profits even if the Funds current year distribution requirement is offset by such carryovers.
If you are neither a lawful permanent resident nor a citizen of the United
States or if you are a foreign entity, a Funds ordinary income dividends (which include distributions of net short-term capital gain) will generally be subject to a 30% U.S. withholding tax, unless a lower treaty rate applies.
A 30% withholding tax will be imposed on dividends paid after December 31, 2013, and
redemption proceeds paid after December 31, 2016, to (i) certain foreign financial institutions and investment funds unless they agree to collect and disclose to the IRS information regarding their direct and indirect U.S. account holders and
(ii) certain other foreign entities unless they certify certain information regarding their direct and indirect U.S. owners. To avoid withholding, foreign financial institutions will need to (i) enter into agreements with the IRS that state that
they will provide the IRS information including the name, address and taxpayer identification number of direct and indirect U.S. account holders, comply with due diligence procedures with respect to the identification of U.S. accounts, report to the
IRS certain information with respect to U.S. accounts maintained, agree to withhold tax on certain payments made to non-compliant foreign financial institutions or to account holders who fail to provide the required information, and determine
certain other information as to their account holders, or (ii) in the event that an intergovernmental agreement and implementing legislation is adopted, provide local revenue authorities with similar account holder information for potential
information exchange with the IRS. Other foreign entities will need to provide the name, address, and taxpayer identification number of each substantial U.S. owner or certifications of no substantial U.S. ownership unless certain exceptions apply.
Dividends and interest received by a Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. You may be able to claim a credit or take a deduction for foreign taxes paid by a Fund if certain
requirements are met.
By law, your dividends and redemption proceeds will
be subject to a withholding tax if you have not provided a taxpayer identification number or social security number or the number you have provided is incorrect.
This Section summarizes some of the consequences under current Federal tax law of an
investment in a Fund. It is not a substitute for personal tax advice. Consult your personal tax adviser about the potential tax consequences of an investment in a Fund under all applicable tax laws.
28
Financial Highlights
The Financial Highlights table is intended to help you understand the Funds financial performance for the periods
shown. Certain information reflects the financial results for a single Fund share. The total returns in the table represent the rate an investor would have earned or lost on an investment in the Fund (assuming reinvestment of all dividends and/or
distributions). The information has been audited by [ ], whose report, along with the Funds financial statements, is included in the Funds Annual Report, which is
available upon request.
GNMA Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BlackRock
|
|
|
|
Year Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Per Share Operating Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of year
|
|
$
|
10.44
|
|
|
$
|
10.45
|
|
|
$
|
10.28
|
|
|
$
|
9.73
|
|
|
$
|
9.44
|
|
Net investment income
1
|
|
|
0.23
|
|
|
|
0.29
|
|
|
|
0.28
|
|
|
|
0.31
|
|
|
|
0.23
|
|
Net realized and unrealized gain
|
|
|
0.33
|
|
|
|
0.40
|
|
|
|
0.41
|
|
|
|
0.66
|
|
|
|
0.55
|
|
Net increase from investment operations
|
|
|
0.56
|
|
|
|
0.69
|
|
|
|
0.69
|
|
|
|
0.97
|
|
|
|
0.78
|
|
Dividends and distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.41
|
)
|
|
|
(0.34
|
)
|
|
|
(0.33
|
)
|
|
|
(0.42
|
)
|
|
|
(0.49
|
)
|
Net realized gain
|
|
|
(0.12
|
)
|
|
|
(0.36
|
)
|
|
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
Total dividends and distributions
|
|
|
(0.53
|
)
|
|
|
(0.70
|
)
|
|
|
(0.52
|
)
|
|
|
(0.42
|
)
|
|
|
(0.49
|
)
|
Net asset value, end of year
|
|
$
|
10.47
|
|
|
$
|
10.44
|
|
|
$
|
10.45
|
|
|
$
|
10.28
|
|
|
$
|
9.73
|
|
Total Investment
Return
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value
|
|
|
5.59
|
%
|
|
|
6.96
|
%
|
|
|
6.95
|
%
|
|
|
10.09
|
%
|
|
|
8.36
|
%
|
Ratios to Average Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
0.74
|
%
|
|
|
0.78
|
%
|
|
|
0.70
|
%
|
|
|
0.81
|
%
|
|
|
0.87
|
%
|
Total expenses after fees waived, reimbursed and paid indirectly
|
|
|
0.54
|
%
|
|
|
0.52
|
%
|
|
|
0.52
|
%
|
|
|
0.51
|
%
|
|
|
0.56
|
%
|
Total expenses after fees waived, reimbursed and paid indirectly excluding interest expense
|
|
|
0.52
|
%
|
|
|
0.52
|
%
|
|
|
0.52
|
%
|
|
|
0.51
|
%
|
|
|
0.45
|
%
|
Net investment income
|
|
|
2.18
|
%
|
|
|
2.82
|
%
|
|
|
2.85
|
%
|
|
|
2.91
|
%
|
|
|
4.98
|
%
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of year (000)
|
|
$
|
13,349
|
|
|
$
|
5,587
|
|
|
$
|
781
|
|
|
$
|
40,982
|
|
|
$
|
353
|
|
Portfolio turnover
|
|
|
741
|
%
3
|
|
|
743
|
%
4
|
|
|
847
|
%
5
|
|
|
1,435
|
%
6
|
|
|
2,637
|
%
7
|
1
|
Based on average shares outstanding.
|
2
|
Where applicable, total investment returns exclude the effects of any sales charges and include the reinvestment of dividends and distributions.
|
3
|
Includes mortgage dollar roll transactions; excluding these transactions the portfolio turnover would have been 247%.
|
4
|
Includes mortgage dollar roll transactions; excluding these transactions the portfolio
turnover would have been 213%.
|
5
|
Includes mortgage dollar roll transactions; excluding these transactions the portfolio turnover would have been 265%.
|
6
|
Includes mortgage dollar roll transactions; excluding these transactions the portfolio
turnover would have been 573%.
|
7
|
Includes TBA transactions; excluding these transactions the portfolio turnover would have been 868%.
|
29
Financial Highlights
(continued)
Inflation Protected Bond Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BlackRock
|
|
|
|
Year Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Per Share Operating Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of year
|
|
$
|
11.27
|
|
|
$
|
11.19
|
|
|
$
|
10.46
|
|
|
$
|
9.84
|
|
|
$
|
9.87
|
|
Net investment income
1
|
|
|
0.19
|
|
|
|
0.43
|
|
|
|
0.23
|
|
|
|
0.35
|
|
|
|
0.80
|
|
Net realized and unrealized gain (loss)
|
|
|
0.80
|
|
|
|
0.44
|
|
|
|
0.74
|
|
|
|
0.39
|
|
|
|
(0.10
|
)
|
Net increase from investment operations
|
|
|
0.99
|
|
|
|
0.87
|
|
|
|
0.97
|
|
|
|
0.74
|
|
|
|
0.70
|
|
Dividends and distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.21
|
)
|
|
|
(0.43
|
)
|
|
|
(0.21
|
)
|
|
|
(0.12
|
)
|
|
|
(0.69
|
)
|
Net realized gain
|
|
|
(0.05
|
)
|
|
|
(0.36
|
)
|
|
|
(0.03
|
)
|
|
|
(0.00
|
)
2
|
|
|
(0.04
|
)
|
Total dividends and distributions
|
|
|
(0.26
|
)
|
|
|
(0.79
|
)
|
|
|
(0.24
|
)
|
|
|
(0.12
|
)
|
|
|
(0.73
|
)
|
Net asset value, end of year
|
|
$
|
12.00
|
|
|
$
|
11.27
|
|
|
$
|
11.19
|
|
|
$
|
10.46
|
|
|
$
|
9.84
|
|
Total Investment
Return
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value
|
|
|
8.86
|
%
|
|
|
8.21
|
%
|
|
|
9.45
|
%
|
|
|
7.58
|
%
|
|
|
6.97
|
%
|
Ratios to Average Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
0.47
|
%
|
|
|
0.50
|
%
|
|
|
0.52
|
%
|
|
|
0.59
|
%
|
|
|
0.68
|
%
|
Total expenses excluding recoupment of past waived fees
|
|
|
0.47
|
%
|
|
|
0.50
|
%
|
|
|
0.52
|
%
|
|
|
0.59
|
%
|
|
|
0.68
|
%
|
Total expenses after fees waived, reimbursed and paid indirectly
|
|
|
0.32
|
%
|
|
|
0.32
|
%
|
|
|
0.32
|
%
|
|
|
0.32
|
%
|
|
|
0.34
|
%
|
Total expenses after fees waived, reimbursed and paid indirectly and excluding interest expense
|
|
|
0.32
|
%
|
|
|
0.32
|
%
|
|
|
0.32
|
%
|
|
|
0.31
|
%
|
|
|
0.30
|
%
|
Net investment income
|
|
|
1.64
|
%
|
|
|
3.94
|
%
|
|
|
2.08
|
%
|
|
|
3.43
|
%
|
|
|
7.62
|
%
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of year (000)
|
|
$
|
455,027
|
|
|
$
|
416,631
|
|
|
$
|
339,249
|
|
|
$
|
117,605
|
|
|
$
|
12,573
|
|
Portfolio turnover
|
|
|
120
|
%
|
|
|
131
|
%
|
|
|
213
|
%
|
|
|
193
|
%
4
|
|
|
249
|
%
5
|
1
|
Based on average shares outstanding.
|
2
|
Less than $(0.01) per share.
|
3
|
Where applicable, total investment returns exclude the effects of any sales charges
and include the reinvestment of dividends and distributions.
|
4
|
Includes mortgage dollar roll transactions; excluding these transactions the portfolio
turnover would have been 176%.
|
5
|
Includes TBA transactions; excluding these transactions the portfolio turnover would
have been 144%.
|
30
Financial Highlights
(concluded)
Investment Grade Bond
Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BlackRock
|
|
|
|
Year Ended September 30,
|
|
|
Period
October 19,
2007
1
to
September 30,
2008
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Per Share Operating Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
11.68
|
|
|
$
|
11.45
|
|
|
$
|
10.54
|
|
|
$
|
9.06
|
|
|
$
|
10.00
|
|
Net investment income
2
|
|
|
0.45
|
|
|
|
0.49
|
|
|
|
0.51
|
|
|
|
0.50
|
|
|
|
0.48
|
|
Net realized and unrealized gain (loss)
|
|
|
1.05
|
|
|
|
0.71
|
|
|
|
0.96
|
|
|
|
1.50
|
|
|
|
(0.95
|
)
|
Net increase (decrease) from investment operations
|
|
|
1.50
|
|
|
|
1.20
|
|
|
|
1.47
|
|
|
|
2.00
|
|
|
|
(0.47
|
)
|
Dividends and distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.44
|
)
|
|
|
(0.48
|
)
|
|
|
(0.52
|
)
|
|
|
(0.50
|
)
|
|
|
(0.47
|
)
|
Net realized gain
|
|
|
(0.53
|
)
|
|
|
(0.49
|
)
|
|
|
(0.04
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
Total dividends and distributions
|
|
|
(0.97
|
)
|
|
|
(0.97
|
)
|
|
|
(0.56
|
)
|
|
|
(0.52
|
)
|
|
|
(0.47
|
)
|
Net asset value, end of period
|
|
$
|
12.21
|
|
|
$
|
11.68
|
|
|
$
|
11.45
|
|
|
$
|
10.54
|
|
|
$
|
9.06
|
|
Total Investment
Return
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value
|
|
|
13.61
|
%
|
|
|
11.96
|
%
|
|
|
14.53
|
%
|
|
|
22.65
|
%
|
|
|
(4.97
|
)%
4
|
Ratios to Average Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
0.69
|
%
|
|
|
0.70
|
%
|
|
|
0.68
|
%
|
|
|
0.71
|
%
|
|
|
1.01
|
%
5
|
Total expenses excluding recoupment of past waived fees
|
|
|
0.69
|
%
|
|
|
0.70
|
%
|
|
|
0.68
|
%
|
|
|
0.71
|
%
|
|
|
1.01
|
%
5
|
Total expenses after fees waived, reimbursed and paid indirectly
|
|
|
0.45
|
%
|
|
|
0.45
|
%
|
|
|
0.45
|
%
|
|
|
0.42
|
%
|
|
|
0.53
|
%
5
|
Total expenses after fees waived, reimbursed and paid indirectly and excluding interest expense
|
|
|
0.45
|
%
|
|
|
0.45
|
%
|
|
|
0.45
|
%
|
|
|
0.41
|
%
|
|
|
0.40
|
%
5
|
Net investment income
|
|
|
3.83
|
%
|
|
|
4.59
|
%
|
|
|
4.86
|
%
|
|
|
5.16
|
%
|
|
|
5.11
|
%
5
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of period (000)
|
|
$
|
195,167
|
|
|
$
|
227,009
|
|
|
$
|
273,303
|
|
|
$
|
220,731
|
|
|
$
|
146,251
|
|
Portfolio turnover
|
|
|
86
|
%
6
|
|
|
104
|
%
7
|
|
|
137
|
%
8
|
|
|
166
|
%
9
|
|
|
652
|
%
10
|
1
|
Commencement of operations.
|
2
|
Based on average shares outstanding.
|
3
|
Where applicable, total investment returns exclude the effects of any sales charges
and include the reinvestment of dividends and distributions.
|
4
|
Aggregate total investment return.
|
6
|
Includes mortgage dollar roll transactions; excluding these transactions the portfolio
turnover would have been 84%.
|
7
|
Includes mortgage dollar roll transactions; excluding these transactions the portfolio
turnover would have been 83%.
|
8
|
Includes mortgage dollar roll transactions; excluding these transactions the portfolio
turnover would have been 128%.
|
9
|
Includes mortgage dollar roll transactions; excluding these transactions the portfolio
turnover would have been 105%.
|
10
|
Includes TBA transactions; excluding these transactions the portfolio turnover would
have been 287%.
|
31
General Information
Shareholder Documents
Electronic Access to Annual Reports, Semi-Annual Reports and Prospectuses
Electronic copies of most financial reports and prospectuses are available on BlackRocks website. Shareholders can sign up for e-mail notifications of quarterly statements, annual and semi-annual reports and
prospectuses by enrolling in the Funds electronic delivery program. To enroll:
Shareholders Who Hold Accounts with Investment Advisers, Banks or Brokerages:
Please contact your financial
professional. Please note that not all investment advisers, banks or brokerages may offer this service.
Shareholders Who Hold Accounts Directly With BlackRock:
n
|
|
Access the BlackRock website at http://www.blackrock.com/edelivery
|
Delivery of Shareholder Documents
The Fund delivers only one
copy of shareholder documents, including prospectuses, shareholder reports and proxy statements, to shareholders with multiple accounts at the same address. This practice is known as householding and is intended to eliminate duplicate
mailings and reduce expenses. Mailings of your shareholder documents may be householded indefinitely unless you instruct us otherwise. If you do not want the mailing of these documents to be combined with those for other members of your household,
please contact the Fund at (800) 537-4942.
Certain Fund Policies
Anti-Money Laundering Requirements
The Fund is subject to the USA PATRIOT Act (the Patriot Act). The Patriot Act is intended to prevent the use of the U.S. financial system in furtherance
of money laundering, terrorism or other illicit activities. Pursuant to requirements under the Patriot Act, the Fund may request information from shareholders to enable it to form a reasonable belief that it knows the true identity of its
shareholders. This information will be used to verify the identity of investors or, in some cases, the status of financial professionals; it will be used only for compliance with the requirements of the Patriot Act.
The Fund reserves the right to reject purchase orders from persons who have not
submitted information sufficient to allow the Fund to verify their identity. The Fund also reserves the right to redeem any amounts in the Fund from persons whose identity it is unable to verify on a timely basis. It is the Funds policy to
cooperate fully with appropriate regulators in any investigations conducted with respect to potential money laundering, terrorism or other illicit activities.
BlackRock Privacy Principles
BlackRock is committed to
maintaining the privacy of its current and former fund investors and individual clients (collectively, Clients) and to safeguarding their nonpublic personal information. The following information is provided to help you understand what
personal information BlackRock collects, how we protect that information and why in certain cases we share such information with select parties.
If you are located in a jurisdiction where specific laws, rules or regulations require BlackRock to provide you with additional or different privacy-related rights
beyond what is set forth below, then BlackRock will comply with those specific laws, rules or regulations.
BlackRock obtains or verifies personal nonpublic information from and about you from different sources, including the following: (i) information we receive from you or, if applicable, your Financial
Intermediary, on applications, forms or other documents; (ii) information about your transactions with us, our affiliates, or others; (iii) information we receive from a consumer reporting agency; and (iv) from visits to our website.
BlackRock does not sell or disclose to nonaffiliated third parties any
nonpublic personal information about its Clients, except as permitted by law, or as is necessary to respond to regulatory requests or to service Client accounts. These nonaffiliated third parties are required to protect the confidentiality and
security of this information and to use it only for its intended purpose.
We may share information with our affiliates to service your account or to provide you with information about other BlackRock products or services that may be of
interest to you. In addition, BlackRock restricts access to nonpublic personal information about its Clients to those BlackRock employees with a legitimate business need for the information. BlackRock maintains physical, electronic and procedural
safeguards that are designed to protect the nonpublic personal information of its Clients, including procedures relating to the proper storage and disposal of such information.
32
Statement of Additional Information
If you
would like further information about the Fund, including how it invests, please see the SAI.
For a discussion of the Funds policies and procedures regarding the selective disclosure of its portfolio holdings, please see the SAI. The Fund makes its top ten holdings available on a monthly basis at
www.blackrock.com generally within 5 business days after the end of the month to which the information applies.
33
Glossary
This glossary contains an explanation of some of the common
terms used in this prospectus. For additional information about the Fund, please see the SAI.
Acquired Fund Fees and Expenses
fees and expenses charged by other investment companies in which the Fund invests a portion of its assets.
Annual Fund Operating Expenses
expenses that cover the costs of operating the Fund.
Barclays Global Real: U.S. TIPS Index
an unmanaged market index made up
of U.S. Treasury Inflation Linked Indexed securities.
Barclays GNMA MBS
Index
an unmanaged index comprised of mortgage-backed pass through securities of the Government National Mortgage Association (GNMA).
Barclays Long Government/Credit Index
an unmanaged index comprised of U.S. Government securities or investment grade credit securities from the more
comprehensive Barclays U.S. Aggregate Bond Index. This index concentrates on long maturity bonds and thus excludes all maturities from the broader index that are less than 10 years.
Barclays U.S. Credit Index
a rules-based index that measures the performance of investment grade corporate debt
(industrial, utility, and finance, including both U.S. and non-U.S. corporations) and non-corporate debt (sovereign, supranational, non-U.S. agencies, and non-U.S. local governments) that is U.S. dollar-denominated and has a remaining maturity of
greater than or equal to one year.
Distribution Fees
fees used to support the Funds marketing and distribution efforts, such as compensating financial professionals and other financial intermediaries, advertising and promotion.
Management Fee
a fee paid to BlackRock for managing the Fund.
Other Expenses
include accounting, transfer agency, custody, professional fees and registration fees.
Service Fees
fees used to compensate securities dealers and other
financial intermediaries for certain shareholder servicing activities.
Shareholder Fees
these fees include sales charges that you may pay when you buy or sell shares of the Fund.
34
For More Information
Funds and Service Providers
FUNDS
BlackRock Funds II
BlackRock GNMA Portfolio
BlackRock Inflation Protected Bond Portfolio
BlackRock Investment Grade Bond Portfolio
100 Bellevue Parkway
Wilmington, Delaware 19809
Written Correspondence:
P.O. Box 9819
Providence, Rhode Island 02940-8019
Overnight Mail:
4400 Computer Drive
Westborough, Massachusetts 01588
(800) 537-4942
MANAGER
BlackRock Advisors, LLC
100 Bellevue Parkway
Wilmington, Delaware 19809
SUB-ADVISER
BlackRock Financial Management, Inc.
55 East 52nd Street
New York, New York 10055
TRANSFER
AGENT
BNY Mellon Investment Servicing (US) Inc.
301
Bellevue Parkway
Wilmington, Delaware 19809
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
[ ]
ACCOUNTING SERVICES PROVIDER
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, Delaware 19809
DISTRIBUTOR
BlackRock Investments, LLC
40 East 52nd Street
New York, New York 10022
CUSTODIAN
The Bank of New York Mellon
One Wall Street
New York, New York 10286
COUNSEL
Willkie Farr & Gallagher LLP
787 Seventh
Avenue
New York, New York 10019-6099
Additional Information
This prospectus contains important information you should know before investing, including information about risks.
Read it carefully and keep it for future reference. More information about the Fund is available at no charge upon request. This information includes:
Annual/Semi-Annual Reports
These reports contain additional
information about each of the Funds investments. The annual report describes the Funds performance, lists portfolio holdings, and discusses recent market conditions, economic trends and Fund investment strategies that significantly
affected the Funds performance for the last fiscal year.
Statement of Additional Information
A Statement of
Additional Information, dated [ ], 2013, has been filed with the Securities and Exchange Commission (SEC). The SAI, which
includes additional information about the Fund, may be obtained free of charge, along with the Funds annual and semi-annual reports, by calling (800) 537-4942. The SAI, as supplemented from time to time, is incorporated by reference
into this prospectus.
BlackRock Investor Services
Representatives are available to discuss account balance information, mutual fund prospectuses, literature, programs and services available. Hours: 8:00 a.m. to
6:00 p.m. (Eastern time), on any business day. Call: (800) 537-4942.
Purchases and Redemptions
Call your financial professional or BlackRock Investor Services at
(800) 537-4942.
World Wide Web
General fund information and specific fund performance, including SAI and annual/semi-annual reports, can be accessed free of charge at
www.blackrock.com/prospectus. Mutual fund prospectuses and literature can also be requested via this website.
Written Correspondence
BlackRock Funds II
P.O. Box 9819
Providence, Rhode Island 02940-8019
Overnight Mail
BlackRock Funds II
4400 Computer Drive
Westborough, Massachusetts 01588
Internal Wholesalers/Broker Dealer Support
Available to
support investment professionals 8:30 a.m. to 6:00 p.m. (Eastern time), on any business day. Call: (800) 882-0052.
Portfolio Characteristics and Holdings
A description of the
Funds policies and procedures related to disclosure of portfolio characteristics and holdings is available in the SAI.
For information about portfolio holdings and characteristics, BlackRock fund shareholders and prospective investors may call (800) 882-0052.
Securities and Exchange Commission
You may also view and copy public information about the Fund, including the SAI, by visiting the EDGAR database on the SEC website (http://www.sec.gov) or the
SECs Public Reference Room in Washington, D.C. Information about the operation of the Public Reference Room can be obtained, for a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing to the
Public Reference Section of the SEC, Washington, D.C. 20549-1520. Information about obtaining documents on the SECs website without charge may be obtained by calling (800) SEC-0330.
You should rely only on the information contained in this Prospectus. No one is authorized to provide you with information that is
different from information contained in this Prospectus.
The
Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.
INVESTMENT COMPANY ACT FILE # 811-22061
©
BlackRock Advisors, LLC
|
|
|
Code # PRO-BD7-BLK-0113
|
|
|
The information in this Prospectus is not complete and may be changed. We may not sell these
securities until the registration statement filed with the Securities and Exchange Commission is effective. This Prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the
offer or sale is not permitted.
SUBJECT TO
COMPLETION, DATED MAY 29, 2013
[ ], 2013
|
|
|
|
|
PROSPECTUS
|
|
|
|
|
BlackRock Funds II
|
Class R Shares
Ø
|
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BlackRock Investment Grade Bond Portfolio
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This Prospectus contains information you should know before investing, including information about risks. Please read it before you invest and keep
it for future reference.
The Securities and Exchange
Commission has not approved or disapproved these securities or passed upon the adequacy of this Prospectus. Any representation to the contrary is a criminal offense.
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Not FDIC Insured May Lose Value No Bank Guarantee
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Table of Contents
Fund Overview
Key Facts about BlackRock Investment Grade Bond
Portfolio
Investment Objective
The investment objective of the BlackRock Investment Grade Bond Portfolio (the
Investment Grade Bond Portfolio or the Fund) is to seek to maximize total return, consistent with income generation and prudent investment management.
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy and hold Class
R Shares of the Fund.
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Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
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Class R
Shares
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Management Fee
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0.50%
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Distribution and/or Service (12b-1) Fees
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0.50%
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Other Expenses
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0.32%
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Acquired Fund Fees and Expenses
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0.01%
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Total Annual Fund Operating Expenses
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1.33%
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Fee Waivers and/or Expense Reimbursements
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Total Annual Fund Operating Expenses After Fee Waivers and/or Expense Reimbursements
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1.33%
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1
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Other Expenses are based on estimated amounts for the current fiscal year.
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As described in the Management of the Funds section of the Funds prospectus on page [ ], BlackRock has contractually
agreed to waive or reimburse fees or expenses in order to limit Total Annual Fund Operating Expenses After Fee Waivers and/or Expense Reimbursements (excluding Dividend Expense, Interest Expense, Acquired Fund Fees and Expenses and certain other
Fund expenses) to 2.22% of average daily net assets until February 1, 2014. The Fund may have to repay some of these waivers and reimbursements to BlackRock in the following two years. The contractual agreement may be terminated upon 90 days
notice by a majority of the non-interested trustees of the Fund or by a vote of a majority of the outstanding voting securities of the Fund.
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Example:
This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return each year and that the Funds operating expenses remain the same. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
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1 Year
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3 Years
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5 Years
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10 Years
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Class R Shares
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$
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135
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$
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421
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$
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729
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$
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1,601
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Portfolio Turnover:
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or turns over its portfolio). A higher portfolio turnover may
indicate higher transaction costs and may result in higher taxes when shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the example, affect the Funds performance. During the most
recent fiscal year, the Funds portfolio turnover rate was 86% of the average value of its portfolio.
Principal Investment Strategies of the Fund
Under
normal circumstances, the Fund invests at least 80% of its net assets (plus any borrowings for investment purposes) in investment grade bonds and investments that are the economic equivalent of investment grade bonds. For purposes of the Funds
80% policy, these include, but are not limited to, corporate bonds, commercial and residential mortgage-backed securities, asset-backed securities, collateralized mortgage obligations (CMOs), municipal securities, preferred securities,
pass-throughs, U.S. Treasuries and agency securities, securities issued or guaranteed by foreign governments, their agencies or instrumentalities, and derivative instruments with similar economic characteristics.
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The Fund invests primarily in fixed-income securities that are rated in the four highest rating categories by at
least one of the recognized rating agencies (including Baa or better by Moodys Investor Service, Inc. (Moodys) or BBB or better by Standard & Poors (S&P) or Fitch Ratings (Fitch)).
Securities rated in any of the four highest rating categories are known as investment grade securities.
The Fund maintains an average portfolio duration that is between 0 and 10 years.
The Fund may invest without limitation in investment grade U.S. dollar-denominated
instruments of issuers in each of U.S. and non-U.S. markets. The Fund may invest up to 20% of its net assets (plus any borrowings for investment purposes) in any combination of non-investment grade instruments (commonly known as high
yield or junk bonds) and non-U.S. dollar-denominated instruments. The Funds investment in non-U.S. dollar-denominated instruments may be on a currency hedged or unhedged basis.
Non-investment grade instruments are
instruments that, at the time of acquisition, are rated in the lower rating categories of the major rating agencies (BB or lower by Standard & Poors (S&P) or Ba or lower by Moodys Investors Service, Inc.
(Moodys)) or are determined by the management team to be of similar quality. The Fund may invest in securities rated C and above or determined by the management team to be of comparable quality. Split rated instruments will be
considered to have the higher credit rating. Split rated instruments are instruments that receive different ratings from two or more rating agencies.
The Fund may buy or sell options or futures on a security or an index of securities, or enter into credit default swaps and interest rate or foreign currency
transactions, including swaps (collectively, commonly known as derivatives). The Fund may seek to obtain market exposure to the securities in which it primarily invests by entering into a series of purchase and sale contracts or by using other
investment techniques (such as repurchase agreements, reverse repurchase agreements or dollar rolls).
The Fund may engage in active and frequent trading of portfolio securities to achieve its primary investment strategies.
Principal Risks of Investing in the Fund
Risk is inherent in all investing. The value of your investment in the Fund, as well
as the amount of return you receive on your investment, may fluctuate significantly from day to day and over time. You may lose part or all of your investment in the Fund or your investment may not perform as well as other similar investments. The
following is a summary description of principal risks of investing in the Fund.
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Credit Risk
Credit risk refers to the possibility that the issuer of a security will not be able to make
payments of interest and principal when due. Changes in an issuers credit rating or the markets perception of an issuers creditworthiness may also affect the value of the Funds investment in that issuer.
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Derivatives Risk
The Funds use of derivatives may reduce the Funds returns and/or increase volatility. Volatility is defined as
the characteristic of a security, an index or a market to fluctuate significantly in price within a short time period. A risk of the Funds use of derivatives is that the fluctuations in their values may not correlate perfectly with the overall
securities markets. The possible lack of a liquid secondary market for derivatives and the resulting inability of the Fund to sell or otherwise close a derivatives position could expose the Fund to losses and could make derivatives more difficult
for the Fund to value accurately. Valuation may be more difficult in times of market turmoil since many investors and market makers may be reluctant to purchase complex instruments or quote prices for them. Derivatives are also subject to
counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. Derivatives also may expose the Fund to greater risk and increase its costs. Certain transactions in derivatives involve
substantial leverage risk and may expose the Fund to potential losses that exceed the amount originally invested by the Fund. Recent legislation calls for new regulation of the derivatives markets. The extent and impact of the regulation is not yet
known and may not be known for some time. New regulation may make derivatives more costly, may limit the availability of derivatives, or may otherwise adversely affect the value or performance of derivatives.
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Dollar Rolls Risk
Dollar rolls involve the risk that the market value of the securities that the Fund is committed to buy may decline below
the price of the securities the Fund has sold. These transactions may involve leverage.
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Emerging Markets Risk
Emerging markets are riskier than more developed markets because they tend to develop unevenly and may never
fully develop. Investments in emerging markets may be considered speculative. Emerging markets are more likely to experience hyperinflation and currency devaluations, which adversely affect returns to U.S. investors. In addition, many emerging
securities markets have far lower trading volumes and less liquidity than developed markets.
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Extension Risk
When interest rates rise, certain obligations will be paid off by the obligor more slowly than anticipated, causing the value
of these securities to fall.
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Foreign Securities Risk
Foreign investments often involve special risks not present in U.S. investments that can increase the chances that
the Fund will lose money. These risks include:
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The Fund generally holds its foreign securities and cash in foreign banks and securities depositories, which may be recently organized or new to the foreign custody business and
may be subject to only limited or no regulatory oversight.
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Changes in foreign currency exchange rates can affect the value of the Funds portfolio.
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The economies of certain foreign markets may not compare favorably with the economy of the United States with respect to such issues as growth of gross national product,
reinvestment of capital, resources and balance of payments position.
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The governments of certain countries may prohibit or impose substantial restrictions on foreign investments in their capital markets or in certain industries.
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Many foreign governments do not supervise and regulate stock exchanges, brokers and the sale of securities to the same extent as does the United States and may not have laws to
protect investors that are comparable to U.S. securities laws.
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Settlement and clearance procedures in certain foreign markets may result in delays in payment for or delivery of securities not typically associated with settlement and
clearance of U.S. investments.
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High Portfolio Turnover Risk
The Fund may engage in active and frequent trading of its portfolio securities. High portfolio turnover (more
than 100%) may result in increased transaction costs to the Fund, including brokerage commissions, dealer mark-ups and other transaction costs on the sale of the securities and on reinvestment in other securities. The sale of Fund portfolio
securities may result in the realization and/or distribution to shareholders of higher capital gains or losses as compared to a fund with less active trading policies. These effects of higher than normal portfolio turnover may adversely affect Fund
performance. In addition, investment in mortgage dollar rolls and participation in TBA transactions may significantly increase the Funds portfolio turnover rate. A TBA transaction is a method of trading mortgage-backed securities where the
buyer and seller agree upon general trade parameters such as agency, settlement date, par amount, and price.
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Interest Rate Risk
Interest rate risk is the risk that prices of bonds and other fixed-income securities will increase as interest rates
fall, and decrease as interest rates rise.
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Leverage Risk
Some transactions may give rise to a form of economic leverage. These transactions may include, among others, derivatives, and
may expose the Fund to greater risk and increase its costs. The use of leverage may cause the Fund to liquidate portfolio positions when it may not be advantageous to do so to satisfy its obligations or to meet any required asset segregation
requirements. Increases and decreases in the value of the Funds portfolio will be magnified when the Fund uses leverage.
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Liquidity Risk
Liquidity risk exists when particular investments are difficult to purchase or sell. The Funds investments in illiquid
securities may reduce the returns of the Fund because it may be difficult to sell the illiquid securities at an advantageous time or price. To the extent that the Funds principal investment strategies involve derivatives or securities with
substantial market and/or credit risk, the Fund will tend to have the greatest exposure to liquidity risk. Liquid investments may become illiquid after purchase by the Fund, particularly during periods of market turmoil. Illiquid investments may be
harder to value, especially in changing markets, and if the Fund is forced to sell these investments to meet redemption requests or for other cash needs, the Fund may suffer a loss. In addition, when there is illiquidity in the market for certain
securities, the Fund, due to limitations on illiquid investments, may be subject to purchase and sale restrictions.
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Market Risk and Selection Risk
Market risk is the risk that one or more markets in which the Fund invests will go down in value, including
the possibility that the markets will go down sharply and unpredictably. Selection risk is the risk that the securities selected by Fund management will underperform the markets, the relevant indices or the securities selected by other funds with
similar investment objectives and investment strategies. This means you may lose money.
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Mortgage- and Asset-Backed Securities Risks
Mortgage- and asset-backed securities represent interests in pools of mortgages or
other assets, including consumer loans or receivables held in trust. Mortgage- and asset-backed securities are subject to credit, interest rate, prepayment and extension risks. These securities also are subject to risk of default on the underlying
mortgage or asset, particularly during periods of economic downturn. Small movements in interest rates (both increases and decreases) may quickly and significantly reduce the value of certain mortgage-backed securities.
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Municipal Bonds Risk
Municipal bonds are subject to interest rate, credit and market risk. The ability of an issuer to make payments could
be affected by litigation, legislation or other political events or the bankruptcy of the issuer. Lower rated municipal bonds are subject to greater credit and market risk than higher quality municipal bonds. The market prices of residual interest
bonds may be highly sensitive to changes in market rates and may decrease significantly when market rates increase.
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Non-Investment Grade Securities Risk
Although non-investment grade securities generally pay higher rates of interest than investment grade
securities, non-investment grade securities are high risk investments that may cause income and principal losses for the Fund.
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Preferred Securities Risk
Preferred securities may pay fixed or adjustable rates of return. Preferred securities are subject to
issuer-specific and market risks applicable generally to equity securities. In addition, a companys preferred securities generally pay dividends only after the company makes required payments to holders of its bonds and other debt. For this
reason, the value of preferred securities will usually react more strongly than bonds and other debt to actual or perceived changes in the companys financial condition or prospects. Preferred securities of smaller companies may be more
vulnerable to adverse developments than preferred stock of larger companies.
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Prepayment Risk
When interest rates fall, certain obligations will be paid off by the obligor more quickly than originally anticipated, and
the Fund may have to invest the proceeds in securities with lower yields.
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Repurchase Agreements, Purchase and Sale Contracts Risks
If the other party to a repurchase agreement or purchase and sale contract defaults
on its obligation under the agreement, the Fund may suffer delays and incur costs or lose money in exercising its rights under the agreement. If the seller fails to repurchase the security in either situation and the market value of the security
declines, the Fund may lose money.
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Reverse Repurchase Agreements Risk
Reverse repurchase agreements involve the sale of securities held by the Fund with an agreement to
repurchase the securities at an agreed-upon price, date and interest payment. Reverse repurchase agreements involve the risk that the other party may fail to return the securities in a timely manner or at all. The Fund could lose money if it is
unable to recover the securities and the value of the collateral held by the Fund, including the value of the investments made with cash collateral, is less than the value of securities. These events could also trigger adverse tax consequences to
the Fund.
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U.S. Government Issuer Risk
Treasury obligations may differ in their interest rates, maturities, times of issuance and other
characteristics. Obligations of U.S. Government agencies and authorities are supported by varying degrees of credit but generally are not backed by the full faith and credit of the U.S. Government. No assurance can be given that the U.S. Government
will provide financial support to its agencies and authorities if it is not obligated by law to do so.
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Performance Information
The information shows you how the Funds performance has varied year by year
and provides some indication of the risks of investing in the Fund. The Funds Annual Total Returns prior to [ ], 2013 as reflected in the bar chart and the table are the returns of the Fund that followed different
investment strategies under the name BlackRock Long Duration Bond Portfolio. Since Class R Shares of the Investment Grade Bond Portfolio have no performance history, the chart and table below give you a picture of the Funds
long-term performance for Investor A Shares. Although the chart and table show returns for the Investor A Shares which are not offered in this Prospectus, the Investor A Shares would have substantially similar annual returns as the Class R Shares
offered in this Prospectus because the Investor A Shares and the Class R Shares are invested in the same portfolio of securities and the annual returns would differ only to the extent that the Investor A Shares and the Class R Shares do not have the
same expenses. The actual return of Class R Shares would have been lower than that of Investor A Shares because Class R Shares have higher expenses than Investor A Shares. Investor A Shares of the Fund are estimated to have expenses of 0.91% of
average daily net assets (after waivers and reimbursements) for the current fiscal year and Class R Shares of the Fund are expected to have expenses of 1.33% of average daily net assets (after waivers and reimbursements) for the current fiscal year.
The benchmark against which the Fund measured its performance prior to
[ ], 2013, the Barclays Long Government/Credit Index, was replaced with the Barclays U.S. Credit Index, a broad measure of market performance. The Barclays U.S. Credit Index is a rules-based index that measures the performance
of investment grade corporate debt (industrial, utility, and finance, including both U.S. and non-U.S. corporations) and non-corporate debt (sovereign, supranational, non-U.S. agencies, and non-U.S. local governments) that is U.S. dollar-denominated
and has a remaining maturity of greater than or equal to one year. Fund management believes the Barclays U.S. Credit Index is more relevant to the Funds new investment strategies. As with all such investments, past performance (before and
after taxes) is not an indication of future results. Sales charges are not reflected in the bar chart. If they were, returns would be less than those shown. However, the table includes all applicable fees and sales charges. If the Funds
investment manager and its affiliates had not waived or reimbursed certain Fund expenses during these periods, the Funds returns would have been lower. Updated information on the Funds performance can be obtained by visiting
http://www.blackrock.com/funds or can be obtained by phone at 800-882-0052.
Investor A Shares
ANNUAL TOTAL RETURNS
Investment Grade Bond Portfolio
As of 12/31
During the period shown in the bar chart, the
highest return for a quarter was 14.93% (quarter ended December 31, 2008) and the lowest return for a quarter was 6.42% (quarter ended March 31, 2009). The year-to-date return as of March 31, 2013 was [ ]%.
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As of 12/31/12
Average Annual Total Returns
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1 Year
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5 Years
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Since
Inception
(October 19,
2007)
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Investment Grade Bond Portfolio Investor A
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Return Before Taxes
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6.41
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%
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9.74
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%
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9.61
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Return After Taxes on Distributions
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3.16
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%
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7.27
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%
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7.16
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Return After Taxes on Distributions and Sale of Shares
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4.97
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%
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7.06
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%
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6.96
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Barclays U.S. Credit Index (Reflects no deduction for fees, expenses or taxes)
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9.37
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%
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7.65
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%
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7.47
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%
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Barclays Long Government/Credit Index (Reflects no deduction for fees, expenses or taxes)
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8.78
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%
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10.16
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%
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10.10
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%
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Effective [ ], 2013, the Fund changed the benchmark against which it measures its performance from the Barclays Long Government/Credit
Index to the Barclays U.S. Credit Index. The Barclays U.S. Credit Index more accurately reflects the investment strategy of the Fund.
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After-tax returns are calculated using the historical highest individual Federal marginal income tax rates and do not
reflect the impact of state and local taxes. Actual after-tax returns depend on the investors tax situation and may differ from those shown, and the after-tax returns shown are not relevant to investors who hold their shares through
tax-deferred arrangements such as 401(k) plans or individual retirement accounts.
Investment Manager
The Funds investment manager is BlackRock Advisors, LLC (BlackRock).
The Funds sub-adviser is BlackRock Financial Management, Inc. Where applicable, the use of the term BlackRock also refers to the Funds sub-adviser.
Portfolio Manager
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Name
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Portfolio Manager of the Fund Since
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Title
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Jeffrey Cucunato
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2009
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Managing Director of BlackRock, Inc.
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Purchase and Sale of Fund Shares
You may
purchase or redeem shares of the Fund each day the New York Stock Exchange (NYSE) is open. To purchase or sell shares you should contact your financial intermediary or financial professional, or, if you hold your shares through the Fund,
you should contact the Fund by phone at (800) 441-7762, by mail (c/o BlackRock Funds, P.O. Box 9819, Providence, Rhode Island 02940-8019), or by the Internet at www.blackrock.com/funds. The Funds initial and subsequent investment minimums
generally are as follows, although the Fund may reduce or waive the minimums in some cases:
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Class R Shares
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Minimum Initial Investment
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$100 for all accounts
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Minimum Additional Investment
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No subsequent minimum
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Tax Information
The
Funds dividends and distributions may be subject to Federal income taxes and may be taxed as ordinary income or capital gains, unless you are a tax-exempt investor or are investing through a retirement plan, in which case you may be subject to
Federal income tax upon withdrawal from such tax deferred arrangements.
Payments to Broker/Dealers and Other Financial Intermediaries
If you purchase shares of the Fund through a broker-dealer or other financial
intermediary, the Fund and BlackRock Investments, LLC, the Funds distributor, or its affiliates may pay the intermediary for the sale of Fund shares and other services. These payments may create a conflict of interest by influencing the
broker-dealer or other financial intermediary and your individual financial professional to recommend the Fund over another investment. Ask your individual financial professional or visit your financial intermediarys website for more
information.
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Details about the Funds
Included in this prospectus are sections that tell you about buying and selling
shares, management information, shareholder features of the BlackRock GNMA Portfolio (the GNMA Portfolio), BlackRock Inflation Protected Bond Portfolio (the Inflation Protected Bond Portfolio) and BlackRock Investment Grade
Bond Portfolio (the Investment Grade Bond Portfolio) (each, a Fund, and collectively, the Funds) and your rights as a shareholder.
How the Fund Invests
Investment Process:
With respect to each Fund, BlackRock considers a variety of factors when choosing investments, such as:
With respect to the Investment Grade Bond Portfolio, securities are purchased for
the Fund when the management team determines that they have the potential for above-average total return.
With respect to the Investment Grade Bond Portfolio, a security will be sold if, in the opinion of the management team, the risk of continuing to hold the security is unacceptable when compared to its total return
potential.
Each Fund may engage in active and frequent trading of
portfolio securities to achieve its primary investment strategies.
BlackRock uses an internal model for calculating duration, which may result in a different value for the duration of a benchmark compared to the duration calculated
by the provider of the benchmark or another third party.
Investment Grade Bond Portfolio
Investment Objective
The investment
objective of the Investment Grade Bond Portfolio is to seek to maximize total return, consistent with income generation and prudent investment management. The investment objective is a non-fundamental policy of the Fund and may not be changed
without 30 days prior notice to shareholders.
Principal Investment Strategies
Under
normal circumstances, the Fund invests at least 80% of its net assets (plus any borrowings for investment purposes) in investment grade bonds and investments that are the economic equivalent of investment grade bonds. For purposes of the Funds
80% policy, these include, but are not limited to, corporate bonds, commercial and residential mortgage-backed securities, asset-backed securities, collateralized mortgage obligations (CMOs), municipal securities, preferred securities,
pass-throughs, U.S. Treasuries and agency securities, securities issued or guaranteed by foreign governments, their agencies or instrumentalities, and derivative instruments with similar economic characteristics. Asset-backed securities are bonds
that are backed by a pool of assets, usually loans such as installment sale contracts or credit card receivables. Mortgage-backed securities are asset-backed securities based on a particular type of asset, a mortgage. There is a wide variety of
mortgage backed securities involving commercial or residential, fixed rate or adjustable rate mortgages and mortgages issued by banks or government agencies. CMOs are bonds that are backed by cash flows from pools of mortgages. CMOs may have
multiple classes with different payment rights and protections.
The Fund
invests primarily in instruments that are rated in the four highest rating categories by at least one of the recognized rating agencies (including Baa or better by Moodys Investor Service, Inc. (Moodys) or BBB or better by
Standard & Poors (S&P) or Fitch Ratings (Fitch)). Securities rated in any of the four highest rating categories are known as investment grade securities.
The Fund maintains an average portfolio duration that is between 0 and 10 years.
Duration is a mathematical calculation of the average life of a bond (or bonds in a bond fund) that serves as a useful measure of its price risk. Each year of duration represents an expected 1% change in the net asset value of a bond fund for every
1% immediate change in interest rates. For example, if a bond fund has an average duration of four years, its net asset value will fall about 4% when interest rates rise by one percentage point. Conversely, the bond funds net asset value will
rise about 4% when interest rates fall by one percentage point. Duration, which measures price sensitivity to interest rate changes, is not necessarily equal to average maturity.
The Fund may invest without limitation in investment grade U.S. dollar-denominated
instruments of issuers in each of U.S. and non-U.S. markets. The Fund may invest up to 20% of its net assets in any combination of non-investment grade instruments (commonly known as high yield or junk bonds) and non-U.S.
dollar-denominated instruments. The Funds investment in non-U.S. dollar-denominated instruments may be on a currency hedged or unhedged basis. Non-investment grade instruments are instruments that, at the time of acquisition, are rated in the
lower rating categories of the major rating agencies (BB or lower by S&P or Ba or lower by Moodys) or are determined by the
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management team to be of similar quality. The Fund may invest in securities rated C and above or determined by the management team to be of comparable quality. Split rated instruments will be
considered to have the higher credit rating. Split rated instruments are instruments that receive different ratings from two or more rating agencies.
The management team may, when consistent with the Funds investment goal, buy or sell options or futures on a security or an index of securities, or enter into
credit default swaps and interest rate or foreign currency transactions, including swaps (collectively, commonly known as derivatives). In entering into a credit default swap, one party would pay a counterparty a periodic stream of payments over the
term of the contract, provided that no event of default on a specific bond has occurred. In return, upon any event of default on such bond, the first party would receive from the counterparty a payment equal to the par (or other agreed-upon) value
of such bond. An option is the right to buy or sell a security or an index of securities at a specific price on or before a specific date. A future is an agreement to buy or sell a security or an index of securities at a specific price on a specific
date. A swap is an agreement whereby one party exchanges its right to receive or its obligation to pay one type of interest or currency for another partys obligation to pay or its right to receive another type of interest or currency in the
future or for a period of time. The Fund typically uses derivatives as a substitute for taking a position in the underlying asset and/or as part of a strategy designed to reduce exposure to other risks, such as interest rate, currency risk or credit
risk.
The Fund may also use derivatives to enhance returns, in which case
their use would involve leveraging risk. The Fund may seek to obtain market exposure to the securities in which it primarily invests by entering into a series of purchase and sale contracts or by using other investment techniques (such as repurchase
agreements, reverse repurchase agreements or dollar rolls). A dollar roll transaction involves a sale by the Fund of a mortgage-backed or other security concurrently with an agreement by the Fund to repurchase a similar security at a later date at
an agreed-upon price. The securities that are repurchased will bear the same interest rate and stated maturity as those sold, but pools of mortgages collateralizing those securities may have different prepayment histories than those sold.
The Fund may engage in active and frequent trading of portfolio securities
to achieve its primary investment strategies.
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ABOUT THE PORTFOLIO MANAGEMENT OF
THE INVESTMENT GRADE BOND PORTFOLIO
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The Investment Grade Bond Portfolio is managed
by a team of financial professionals. Jeffrey Cucunato is the
portfolio manager and is primarily responsible for the day-to-day management of the Fund. Please see
Management of the Funds Portfolio Manager Information for
additional information on the portfolio
management team.
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Other Strategies
In addition to the main strategies discussed above, each Fund may use certain other
investment strategies. The Funds may also invest or engage in the following investments/strategies:
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Investment Companies
Each Fund has the ability to invest in other investment companies, such as exchange-traded funds, unit investment
trusts, and open-end and closed-end funds.
Each Fund may invest in affiliated investment companies, including affiliated money market funds and affiliated exchange-traded funds.
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Temporary Defensive Strategies
For temporary defensive purposes, each Fund may restrict the markets in which it invests and may invest
without limitation in cash, cash equivalents, money market securities, such as U.S. Treasury and agency obligations, other U.S. Government securities, short-term debt obligations of corporate issuers, certificates of deposit, bankers acceptances,
commercial paper (short term, unsecured, negotiable promissory notes of a domestic or foreign issuer) or other high quality fixed income securities.
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When-Issued Securities, Delayed Delivery Securities and Forward Commitments
Each Fund may invest in securities prior to their date of issue.
The purchase or sale of securities on a when-issued basis or on a delayed delivery basis or through a forward commitment involves the purchase or sale of securities by the Fund at an established price with payment and delivery taking place in the
future. A Fund enters into these transactions to obtain what is considered an advantageous price to the Fund at the time of entering into the transaction.
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Investment Risks
This
section contains a summary discussion of the general risks of investing in the Funds. Investment Objectives and Policies in the Statement of Additional Information (the SAI) also includes more information about each Fund, its
investments and the related risks. As with any fund, there can be no guarantee that any Fund will meet its objective or that any Funds performance will be positive for any period of time. An investment in a Fund is not insured or guaranteed by
the Federal Deposit Insurance Corporation or by any bank or governmental agency.
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Principal Risks of Investing in a Fund:
Credit Risk
Credit risk refers to the possibility that the issuer
of a security will not be able to make principal and interest payments when due. Changes in an issuers credit rating or the markets perception of an issuers creditworthiness may also affect the value of the Funds investment
in that issuer. The degree of credit risk depends on both the financial condition of the issuer and the terms of the obligation.
Deflation Risk (Inflation Protected Bond Portfolio)
Deflation risk is the possibility that prices throughout the economy decline over time
the opposite of inflation. If inflation is negative, the principal and income of an inflation protected bond will decline and could result in losses for the Fund.
Derivatives Risk
The Funds use of derivatives may
reduce the Funds returns and/or increase volatility. Volatility is defined as the characteristic of a security, an index or a market to fluctuate significantly in price within a short time period. A risk of the Funds use of derivatives
is that the fluctuations in their values may not correlate perfectly with the overall securities markets. The possible lack of a liquid secondary market for derivatives and the resulting inability of the Fund to sell or otherwise close a derivatives
position could expose the Fund to losses and could make derivatives more difficult for the Fund to value accurately. Valuation may be more difficult in times of market turmoil since many investors and market makers may be reluctant to purchase
complex instruments or quote prices for them. Derivatives are also subject to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. In addition, some derivatives are more sensitive
to interest rate changes and market price fluctuations than other securities. Derivatives may also expose the Fund to greater risk and increase its costs. Certain transactions in derivatives involve substantial leverage risk and may expose the Fund
to potential losses that exceed the amount originally invested by the Fund. The Fund could also suffer losses related to its derivatives positions as a result of unanticipated market movements, which losses are potentially unlimited. Finally,
BlackRock may not be able to predict correctly the direction of securities prices, interest rates and other economic factors, which could cause the Funds derivatives positions to lose value. When a derivative is used as a hedge against a
position that the Fund holds, any loss generated by the derivative generally should be substantially offset by gains on the hedged investment, and vice versa. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains.
Hedges are sometimes subject to imperfect matching between the derivative and the underlying security, and there can be no assurance that the Funds hedging transactions will be effective. The use of hedging may invoke the application of the
mark-to-market and straddle provisions of the Internal Revenue Code. If such provisions are applicable, there could be an increase (or decrease) in the amount of taxable dividends paid by the Fund and may impact whether dividends paid by the Fund
are classified as capital gains or ordinary income. The use of derivatives increases the risk that the Fund will be unable to close out certain hedged positions to avoid adverse tax consequences.
Recent legislation calls for new regulation of the derivatives markets. The extent and
impact of the regulation is not yet known and may not be known for some time. In particular, the Dodd-Frank Wall Street Reform Act (the Reform Act) may make derivatives more costly, may limit the availability of derivatives, or may
otherwise adversely affect the value or performance of derivatives. The Reform Act substantially increases regulation of the over-the-counter derivatives market and participants in that market, including imposing clearing and reporting requirements
on transactions involving instruments that fall within the Reform Acts definition of swap and security-based swap, which terms generally include over-the-counter derivatives and imposing registration and potential
substantive requirements on certain swap and security-based swap market participants. In addition, under the Reform Act, the Fund may be subject to additional recordkeeping and reporting requirements.
Risks Specific to Certain Derivatives Used by the Fund
Swaps
Swap agreements are two-party contracts entered into for
periods ranging from a few weeks to more than one year. In a standard swap transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or
instruments, which can be adjusted for an interest factor. Swap agreements involve the risk that the party with whom the Fund has entered into the swap will default on its obligation to pay the Fund and the risk that the Fund will not be able to
meet its obligations to pay the other party to the agreement.
Credit
Default Swaps
Credit default swaps may have as reference obligations one or more securities that are not currently held by the Fund. The protection buyer may be obligated to pay the protection seller an
up-front payment or a periodic stream of payments over the term of the contract, provided generally that no credit event on a reference obligation has occurred. Credit default swaps involve special risks in addition to those mentioned above because
they are difficult to value, are highly susceptible to liquidity and credit risk, and generally pay a return to the party that has paid the premium only in the event of an actual default by the issuer of the underlying obligation (as opposed to a
credit downgrade or other indication of financial difficulty).
Forward Foreign Currency Exchange Contracts
Forward foreign exchange transactions are OTC contracts to purchase or sell a specified amount of a
specified currency or multinational currency unit at a price and future date set at the time of the contract. Forward foreign currency exchange contracts do not eliminate fluctuations in the value of non-U.S. securities but rather allow the Fund to
establish a fixed rate of exchange for a future point in time. This strategy can have the effect of reducing returns and minimizing opportunities for gain.
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Futures
Futures are standardized, exchange-traded contracts that obligate a purchaser to take
delivery, and a seller to make delivery, of a specific amount of an asset at a specified future date at a specified price. The primary risks associated with the use of futures contracts and options are (a) the imperfect correlation between the
change in market value of the instruments held by a Fund and the price of the futures contract or option; (b) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures contract when
desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; (d) the investment advisors inability to predict correctly the direction of securities prices, interest rates, currency exchange rates and
other economic factors; and (e) the possibility that the counterparty will default in the performance of its obligations.
Options
An option is an agreement that, for a premium payment or fee, gives the option holder (the purchaser) the right but not the obligation
to buy (a call option) or sell (a put option) the underlying asset (or settle for cash an amount based on an underlying asset, rate, or index) at a specified price (the exercise price) during a period of time or
on a specified date. Investments in options are considered speculative. When the Fund purchases an option, it may lose the premium paid for it if the price of the underlying security or other assets decreased or remained the same (in the case of a
call option) or increased or remained the same (in the case of a put option). If a put or call option purchased by the Fund were permitted to expire without being sold or exercised, its premium would represent a loss to the Fund. To the extent that
the Fund writes or sells an option, if the decline or increase in the underlying asset is significantly below or above the exercise price of the written option, the Fund could experience a substantial loss.
Dollar Rolls Risk
A dollar roll transaction involves a sale
by the Fund of a mortgage-backed or other security concurrently with an agreement by the Fund to repurchase a similar security at a later date at an agreed-upon price. Dollar roll transactions involve the risk that the market value of the securities
the Fund is required to purchase may decline below the agreed upon repurchase price of those securities. If the broker/dealer to whom the Fund sells securities becomes insolvent, the Funds right to purchase or repurchase securities may be
restricted. Successful use of mortgage dollar rolls may depend upon the advisers ability to correctly predict interest rates and prepayments. There is no assurance that dollar rolls can be successfully employed.
Emerging Markets Risk (Inflation Protected Bond Portfolio and Investment
Grade Bond Portfolio)
The risks of foreign investments are usually much greater for emerging markets. Investments in emerging markets may be considered speculative. Emerging markets include those in countries defined as emerging or
developing by the World Bank, the International Finance Corporation or the United Nations. Emerging markets are riskier than more developed markets because they tend to develop unevenly and may never fully develop. They are more likely to experience
hyperinflation and currency devaluations, which adversely affect returns to U.S. investors. In addition, many emerging markets have far lower trading volumes and less liquidity than developed markets. Since these markets are often small, they may be
more likely to suffer sharp and frequent price changes or long-term price depression because of adverse publicity, investor perceptions or the actions of a few large investors. In addition, traditional measures of investment value used in the United
States, such as price to earnings ratios, may not apply to certain small markets. Also, there may be less publicly available information about issuers in emerging markets than would be available about issuers in more developed capital markets, and
such issuers may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those to which U.S. companies are subject.
Many emerging markets have histories of political instability and abrupt changes in
policies. As a result, their governments are more likely to take actions that are hostile or detrimental to private enterprise or foreign investment than those of more developed countries, including expropriation of assets, confiscatory taxation,
high rates of inflation or unfavorable diplomatic developments. In the past, governments of such nations have expropriated substantial amounts of private property, and most claims of the property owners have never been fully settled. There is no
assurance that such expropriations will not reoccur. In such an event, it is possible that the Fund could lose the entire value of its investments in the affected market. Some countries have pervasiveness of corruption and crime that may hinder
investments. Certain emerging markets may also face other significant internal or external risks, including the risk of war, and ethnic, religious and racial conflicts. In addition, governments in many emerging market countries participate to a
significant degree in their economies and securities markets, which may impair investment and economic growth. National policies that may limit the Funds investment opportunities include restrictions on investment in issuers or industries
deemed sensitive to national interests.
Emerging markets may also have
differing legal systems and the existence or possible imposition of exchange controls, custodial restrictions or other foreign or U.S. governmental laws or restrictions applicable to such investments. Sometimes, they may lack or be in the relatively
early development of legal structures governing private and foreign investments and private property. In addition to withholding taxes on investment income, some countries with emerging markets may impose differential capital gains taxes on foreign
investors.
Practices in relation to settlement of securities transactions
in emerging markets involve higher risks than those in developed markets, in part because the Fund will need to use brokers and counterparties that are less well capitalized, and custody and registration of assets in some countries may be
unreliable. The possibility of fraud, negligence, undue influence being exerted by the issuer or refusal to recognize ownership exists in some emerging markets, and, along with other factors, could result in ownership registration being completely
lost. The Fund would absorb any loss resulting from such registration problems and may have no successful claim for compensation. In addition, communications between the United States and emerging market countries may be unreliable, increasing the
risk of delayed settlements or losses of security certificates.
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Extension Risk
When interest rates rise, certain obligations will be paid off by the obligor more
slowly than anticipated, causing the value of these securities to fall. Rising interest rates tend to extend the duration of securities, making them more sensitive to changes in interest rates. The value of longer-term securities generally changes
more in response to changes in interest rates than shorter-term securities. As a result, in a period of rising interest rates, securities may exhibit additional volatility and may lose value.
Foreign Securities Risk (Inflation Protected Portfolio and Investment Grade Bond Portfolio)
Securities traded in
foreign markets have often (though not always) performed differently from securities traded in the United States. However, such investments often involve special risks not present in U.S. investments that can increase the chances that the Fund will
lose money. In particular, the Fund is subject to the risk that because there may be fewer investors on foreign exchanges and a smaller number of securities traded each day, it may be more difficult for the Fund to buy and sell securities on those
exchanges. In addition, prices of foreign securities may go up and down more than prices of securities traded in the United States.
Certain Risks of Holding Fund Assets Outside the United States
The Fund generally holds its foreign securities and cash in foreign banks and
securities depositories. Some foreign banks and securities depositories may be recently organized or new to the foreign custody business. In addition, there may be limited or no regulatory oversight of their operations. Also, the laws of certain
countries limit the Funds ability to recover its assets if a foreign bank, depository or issuer of a security, or any of their agents, goes bankrupt. In addition, it is often more expensive for the Fund to buy, sell and hold securities in
certain foreign markets than in the United States. The increased expense of investing in foreign markets reduces the amount the Fund can earn on its investments and typically results in a higher operating expense ratio for the Fund than for
investment companies invested only in the United States.
Currency
Risk
Securities and other instruments in which the Fund invests may be denominated or quoted in currencies other than the U.S. dollar. For this reason, changes in foreign currency exchange rates can affect the value of the Funds
portfolio.
Generally, when the U.S. dollar rises in value against a
foreign currency, a security denominated in that currency loses value because the currency is worth fewer U.S. dollars. Conversely, when the U.S. dollar decreases in value against a foreign currency, a security denominated in that currency gains
value because the currency is worth more U.S. dollars. This risk, generally known as currency risk, means that a strong U.S. dollar will reduce returns for U.S. investors while a weak U.S. dollar will increase those returns.
Foreign Economy Risk
The economies of certain foreign markets may not
compare favorably with the economy of the United States with respect to such issues as growth of gross national product, reinvestment of capital, resources and balance of payments position. Certain foreign economies may rely heavily on particular
industries or foreign capital and are more vulnerable to diplomatic developments, the imposition of economic sanctions against a particular country or countries, changes in international trading patterns, trade barriers and other protectionist or
retaliatory measures. Investments in foreign markets may also be adversely affected by governmental actions such as the imposition of capital controls, nationalization of companies or industries, expropriation of assets or the imposition of punitive
taxes. In addition, the governments of certain countries may prohibit or impose substantial restrictions on foreign investments in their capital markets or in certain industries. Any of these actions could severely affect securities prices or impair
the Funds ability to purchase or sell foreign securities or transfer the Funds assets or income back into the United States, or otherwise adversely affect the Funds operations.
Other potential foreign market risks include foreign exchange controls, difficulties
in pricing securities, defaults on foreign government securities, difficulties in enforcing legal judgments in foreign courts and political and social instability. Diplomatic and political developments, including rapid and adverse political changes,
social instability, regional conflicts, terrorism and war, could affect the economies, industries and securities and currency markets, and the value of the Funds investments, in non-U.S. countries. These factors are extremely difficult, if not
impossible, to predict and take into account with respect to the Funds investments.
Governmental Supervision and Regulation/Accounting Standards
Many foreign governments do not supervise and regulate stock exchanges, brokers and the sale of securities to the same extent as such
regulations exist in the United States. They also may not have laws to protect investors that are comparable to U.S. securities laws. For example, some foreign countries may have no laws or rules against insider trading. Insider trading occurs when
a person buys or sells a companys securities based on material non-public information about that company. In addition, some countries may have legal systems that may make it difficult for the Fund to vote proxies, exercise shareholder rights,
and pursue legal remedies with respect to its foreign investments. Accounting standards in other countries are not necessarily the same as in the United States. If the accounting standards in another country do not require as much detail as U.S.
accounting standards, it may be harder for Fund management to completely and accurately determine a companys financial condition.
Settlement Risk
Settlement and clearance procedures in certain foreign markets differ significantly from those in the United States. Foreign
settlement and clearance procedures and trade regulations also may involve certain risks (such as delays in payment for or delivery of securities) not typically associated with the settlement of U.S. investments.
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At times, settlements in certain foreign countries have not kept pace with the number of securities transactions.
These problems may make it difficult for the Fund to carry out transactions. If the Fund cannot settle or is delayed in settling a purchase of securities, it may miss attractive investment opportunities and certain of its assets may be uninvested
with no return earned thereon for some period. If the Fund cannot settle or is delayed in settling a sale of securities, it may lose money if the value of the security then declines or, if it has contracted to sell the security to another party, the
Fund could be liable for any losses incurred.
High Portfolio
Turnover Risk
The Fund may engage in active and frequent trading of its portfolio securities. High portfolio turnover (more than 100%) may result in increased transaction costs to the Fund, including brokerage commissions, dealer
mark-ups and other transaction costs on the sale of the securities and on reinvestment in other securities. The sale of Fund portfolio securities may result in the realization and/or distribution to shareholders of higher capital gains or losses as
compared to a fund with less active trading policies. These effects of higher than normal portfolio turnover may adversely affect Fund performance. In addition, investment in mortgage dollar rolls and participation in TBA transactions may
significantly increase the Funds portfolio turnover rate. A TBA transaction is a method of trading mortgage-backed securities where the buyer and seller agree upon general trade parameters such as agency, settlement date, par amount, and
price.
Inflation Indexed Bonds (Inflation Protected Bond
Portfolio)
The principal value of an investment is not protected or otherwise guaranteed by virtue of the Funds investments in inflation-indexed bonds.
Inflation-indexed bonds are fixed-income securities whose principal value is
periodically adjusted according to the rate of inflation. If the index measuring inflation falls, the principal value of inflation-indexed bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with
respect to a smaller principal amount) will be reduced.
Repayment of the
original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds. For bonds that do not provide a similar guarantee, the adjusted principal value of the bond repaid at maturity may
be less than the original principal value.
The value of inflation-indexed
bonds is expected to change in response to changes in real interest rates. Real interest rates are tied to the relationship between nominal interest rates and the rate of inflation. If nominal interest rates increase at a faster rate than inflation,
real interest rates may rise, leading to a decrease in value of inflation-indexed bonds. Short-term increases in inflation may lead to a decline in value. Any increase in the principal amount of an inflation-indexed bond will be considered taxable
ordinary income, even though investors do not receive their principal until maturity.
Periodic adjustments for inflation to the principal amount of an inflation-indexed bond may give rise to original issue discount, which will be includable in the Funds gross income. Due to original issue
discount, the Fund may be required to make annual distributions to shareholders that exceed the cash received, which may cause the Fund to liquidate certain investments when it is not advantageous to do so. Also, if the principal value of an
inflation-indexed bond is adjusted downward due to deflation, amounts previously distributed in the taxable year may be characterized in some circumstances as a return of capital.
Interest Rate Risk
Interest rate risk is the risk that prices of
fixed-income securities generally increase when interest rates decline and decrease when interest rates increase. Prices of longer-term securities generally change more in response to interest rate changes than prices of shorter-term securities. The
Fund may lose money if short-term or long-term interest rates rise sharply or otherwise change in a manner not anticipated by Fund management.
Leverage Risk
Some transactions may give rise to a form of economic leverage. These transactions may include, among others, derivatives, and
may expose the Fund to greater risk and increase its costs. As an open-end investment company registered with the SEC, the Fund is subject to the federal securities laws, including the Investment Company Act, the rules thereunder, and various SEC
and SEC staff interpretive positions. In accordance with these laws, rules and positions, the Fund must set aside liquid assets (often referred to as asset segregation), or engage in other SEC- or staff-approved measures, to
cover open positions with respect to certain kinds of instruments. The use of leverage may cause the Fund to liquidate portfolio positions when it may not be advantageous to do so to satisfy its obligations or to meet any required asset
segregation requirements. Increases and decreases in the value of the Funds portfolio will be magnified when the Fund uses leverage.
Liquidity Risk
Liquidity risk exists when particular investments are difficult to purchase or sell. The Funds investments in illiquid
securities may reduce the returns of the Fund because it may be difficult to sell the illiquid securities at an advantageous time or price. To the extent that the Funds principal investment strategies involve derivatives or securities with
substantial market and/or credit risk, the Fund will tend to have the greatest exposure to liquidity risk. Liquid investments may become illiquid after purchase by the Fund, particularly during periods of market turmoil. Illiquid investments may be
harder to value, especially in changing markets, and if the Fund is forced to sell these investments to meet redemption requests or for other cash needs, the Fund may suffer a loss. In addition, when there is illiquidity in the market for certain
securities, the Fund, due to limitations on illiquid investments, may be subject to purchase and sale restrictions.
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Market Risk and Selection Risk
Market risk is the risk that one or more markets in which the Fund
invests will go down in value, including the possibility that the markets will go down sharply and unpredictably. Selection risk is the risk that the securities selected by Fund management will underperform the markets, the relevant indices or the
securities selected by other funds with similar investment objectives and investment strategies. This means you may lose money.
Mortgage- and Asset-Backed Securities Risks
Mortgage-backed securities (residential and commercial) and asset-backed securities represent
interests in pools of mortgages or other assets, including consumer loans or receivables held in trust. Although asset-backed and commercial mortgage-backed securities (CMBS) generally experience less prepayment than
residential mortgage-backed securities, mortgage-backed and asset-backed securities, like traditional fixed-income securities, are subject to credit, interest rate, prepayment and extension risks.
Small movements in interest rates (both increases and decreases) may quickly and
significantly reduce the value of certain mortgage-backed securities. The Funds investments in asset-backed securities are subject to risks similar to those associated with mortgage-related securities, as well as additional risks associated
with the nature of the assets and the servicing of those assets. These securities also are subject to the risk of default on the underlying mortgage or assets, particularly during periods of economic downturn. Certain CMBS are issued in several
classes with different levels of yield and credit protection. The Funds investments in CMBS with several classes may be in the lower classes that have greater risks than the higher classes, including greater interest rate, credit and
prepayment risks.
Mortgage-backed securities may be either pass-through
securities or collateralized mortgage obligations (CMOs). Pass-through securities represent a right to receive principal and interest payments collected on a pool of mortgages, which are passed through to security holders. CMOs are
created by dividing the principal and interest payments collected on a pool of mortgages into several revenue streams (tranches) with different priority rights to portions of the underlying mortgage payments. Certain CMO tranches may represent a
right to receive interest only (IOs), principal only (POs) or an amount that remains after floating-rate tranches are paid (an inverse floater). These securities are frequently referred to as mortgage derivatives
and may be extremely sensitive to changes in interest rates. Interest rates on inverse floaters, for example, vary inversely with a short-term floating rate (which may be reset periodically). Interest rates on inverse floaters will decrease when
short-term rates increase, and will increase when short-term rates decrease. These securities have the effect of providing a degree of investment leverage. In response to changes in market interest rates or other market conditions, the value of an
inverse floater may increase or decrease at a multiple of the increase or decrease in the value of the underlying securities. If the Fund invests in CMO tranches (including CMO tranches issued by government agencies) and interest rates move in a
manner not anticipated by Fund management, it is possible that the Fund could lose all or substantially all of its investment.
The mortgage market in the United States recently has experienced difficulties that may adversely affect the performance and market value of certain of the
Funds mortgage-related investments. Delinquencies and losses on mortgage loans (including subprime and second-lien mortgage loans) generally have increased recently and may continue to increase, and a decline in or flattening of real-estate
values (as has recently been experienced and may continue to be experienced in many housing markets) may exacerbate such delinquencies and losses. Also, a number of mortgage loan originators have recently experienced serious financial difficulties
or bankruptcy. Reduced investor demand for mortgage loans and mortgage-related securities and increased investor yield requirements have caused limited liquidity in the secondary market for mortgage-related securities, which can adversely affect the
market value of mortgage-related securities. It is possible that such limited liquidity in such secondary markets could continue or worsen.
Asset-backed securities entail certain risks not presented by mortgage-backed securities, including the risk that in certain states it may be difficult to perfect
the liens securing the collateral backing certain asset-backed securities. In addition, certain asset-backed securities are based on loans that are unsecured, which means that there is no collateral to seize if the underlying borrower defaults.
Certain mortgage-backed securities in which the Fund may invest may also provide a degree of investment leverage, which could cause the Fund to lose all or substantially all of its investment.
Municipal Bonds Risk
(Investment Grade Bond Portfolio)
Municipal bonds are subject to interest rate, credit and market risk. The ability of an issuer to make payments could be affected by litigation, legislation or other political events or the bankruptcy of the issuer. Lower rated municipal
bonds are subject to greater credit and market risk than higher quality municipal bonds. The market prices of residual interest bonds may be highly sensitive to changes in market rates and may decrease significantly when market rates increase.
Non-Diversification Risk (Inflation Protected Bond
Portfolio)
The Fund is a non-diversified fund. Because the Fund may invest in securities of a smaller number of issuers, it may be more exposed to the risks associated with and developments affecting an individual issuer than a fund
that invests more widely.
Non-Investment Grade Securities Risk
(Inflation Protected Bond Portfolio and Investment Grade Bond Portfolio)
Although non-investment grade securities generally pay higher rates of interest than investment grade securities, non-investment grade securities are high risk
investments that may cause income and principal losses for the Fund. The major risks of non-investment grade investments include:
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Non-investment grade securities may be issued by less creditworthy issuers. Issuers of non-investment grade securities may have a larger amount of outstanding
debt relative to their assets than issuers of investment grade
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securities. In the event of an issuers bankruptcy, claims of other creditors may have priority over the claims of holders of non-investment grade securities, leaving few or no assets
available to repay holders of non-investment grade securities.
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Prices of non-investment grade securities are subject to extreme price fluctuations. Adverse changes in an issuers industry and general economic conditions
may have a greater impact on the prices of non-investment grade securities than on other higher rated fixed-income securities.
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Issuers of non-investment grade securities may be unable to meet their interest or principal payment obligations because of an economic downturn, specific issuer
developments, or the unavailability of additional financing.
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Non-investment grade securities frequently have redemption features that permit an issuer to repurchase the security from the Fund before it matures. If the
issuer redeems non-investment grade securities, the Fund may have to invest the proceeds in bonds with lower yields and may lose income.
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Non-investment grade securities may be less liquid than higher rated fixed-income securities, even under normal economic conditions. There are fewer dealers in
the non-investment grade securities market, and there may be significant differences in the prices quoted for junk bonds by the dealers. Because they are less liquid, judgment may play a greater role in valuing certain of the Funds securities
than is the case with securities trading in a more liquid market.
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The Fund may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting issuer.
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The credit rating of a high yield security does not
necessarily address its market value risk. Ratings and market value may change from time to time, positively or negatively, to reflect new developments regarding the issuer.
Preferred Securities Risk
Preferred securities may pay fixed
or adjustable rates of return. Preferred securities are subject to issuer-specific and market risks applicable generally to equity securities. In addition, a companys preferred securities generally pay dividends only after the company makes
required payments to holders of its bonds and other debt. For this reason, the value of preferred securities will usually react more strongly than bonds and other debt to actual or perceived changes in the companys financial condition or
prospects. Preferred securities of smaller companies may be more vulnerable to adverse developments than preferred stock of larger companies.
Prepayment Risk
When interest rates fall, certain obligations will be paid off by the obligor more quickly than originally anticipated, and the
Fund may have to invest the proceeds in securities with lower yields. In periods of falling interest rates, the rate of prepayments tends to increase (as does price fluctuation) as borrowers are motivated to pay off debt and refinance at new lower
rates. During such periods, reinvestment of the prepayment proceeds by the management team will generally be at lower rates of return than the return on the assets that were prepaid. Prepayment reduces the yield to maturity and the average life of
the security.
Repurchase Agreements, Purchase and Sale Contracts
Risks
If the other party to a repurchase agreement or purchase and sale contract defaults on its obligation under the agreement, the Fund may suffer delays and incur costs or lose money in exercising its rights under the agreement. If
the seller fails to repurchase the security in either situation and the market value of the security declines, the Fund may lose money.
Reverse Repurchase Agreements Risk (GNMA Portfolio, Inflation Protected Bond Portfolio and Investment Grade Bond Portfolio)
Reverse repurchase
agreements involve the sale of securities held by the Fund with an agreement to repurchase the securities at an agreed-upon price, date and interest payment. Reverse repurchase agreements involve the risk that the other party may fail to return the
securities in a timely manner or at all. The Fund could lose money if it is unable to recover the securities and the value of the collateral held by the Fund, including the value of the investments made with cash collateral, is less than the value
of securities. These events could also trigger adverse tax consequences to the Fund.
U.S. Government Issuer Risk
Treasury obligations may differ in their interest rates, maturities, times of issuance and other characteristics. Obligations of U.S. Government agencies and
authorities are supported by varying degrees of credit but generally are not backed by the full faith and credit of the U.S. Government. No assurance can be given that the U.S. Government will provide financial support to its agencies and
authorities if it is not obligated by law to do so.
A Fund may also be
subject to certain other risks associated with its investments and investment strategies, including:
Expense Risk
Fund expenses are subject to a variety of factors, including fluctuations in the Funds net assets. Accordingly, actual expenses may be greater or less than those indicated.
For example, to the extent that the Funds net assets decrease due to market declines or redemptions, the Funds expenses will increase as a percentage of Fund net assets. During periods of high market volatility, these increases in the
Funds expense ratio could be significant.
Investment in Other
Investment Companies Risk
As with other investments, investments in other investment companies are subject to market and selection risk. In addition, if the Fund acquires shares of investment companies,
16
including ones affiliated with the Fund, shareholders bear both their proportionate share of expenses in the Fund (including management and advisory fees) and, indirectly, the expenses of the
investment companies. To the extent the Fund is held by an affiliated fund, the ability of the Fund itself to hold other investment companies may be limited.
When-Issued and Delayed Delivery Securities and Forward Commitments Risks
When-issued and delayed delivery securities and forward commitments
involve the risk that the security the Fund buys will lose value prior to its delivery. There also is the risk that the security will not be issued or that the other party to the transaction will not meet its obligation. If this occurs, the Fund
loses both the investment opportunity for the assets it set aside to pay for the security and any gain in the securitys price.
17
Account Information
How to Choose the Share Class that Best Suits
Your Needs
Each Fund currently offers multiple share classes (Class R Shares in this prospectus), each with its own sales charge and expense structure, allowing you to invest
in the way that best suits your needs. Each share class represents the same ownership interest in the portfolio investments of the particular Fund. When you choose your class of shares, you should consider the size of your investment and how long
you plan to hold your shares. Either your financial professional or your financial institution (such as banks and brokerage firms) (financial intermediary) can help you determine which share class is best suited to your personal
financial goals.
Class R Shares are available only to certain
employer-sponsored retirement. For this purpose, employer-sponsored retirement plans do not include SEP IRAs, SIMPLE IRAs or SARSEPs. If you buy Class R Shares, you will pay neither an initial sales charge nor a contingent deferred sales charge.
However, Class R Shares are subject to a distribution fee of 0.25% per year and a service fee of 0.25% per year. Because these fees are paid out of a Funds assets on an ongoing basis, over time these fees increase the cost of your
investment and may cost you more than paying other types of sales charges. Class R Shares do not offer a conversion privilege.
Each Funds shares are distributed by BlackRock Investments, LLC (the Distributor), an affiliate of BlackRock.
The Distributor currently pays the annual Class R Shares distribution fee and annual
Class R Shares service fee to dealers as an ongoing concession and as a shareholder servicing fee, respectively, on a monthly basis.
The table below summarizes key features of the Class R Share class of a Fund.
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Class R Shares
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Availability
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Available only to certain employer-sponsored retirement plans.
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Minimum Investment
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$100 for all accounts.
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Initial Sales Charge?
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No. Entire purchase price is invested in shares of the Fund.
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Deferred Sales Charge?
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No.
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Service and Distribution Fees?
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0.25% Distribution Fee, 0.25% Annual Service Fee.
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Redemption Fees?
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No.
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Conversion to Investor A Shares?
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No.
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Advantage
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No up-front sales charge so you start off owning more shares.
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Disadvantage
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You pay ongoing distribution fees each year you own shares, which means that you can expect lower total performance per share than if
you owned Investor A Shares. Unlike Investor B Shares, Class R Shares do not convert to Investor A Shares, so you will continue paying the ongoing distribution fees as long as you hold Class R Shares. Over the long term, this can add up to higher
total fees than either Investor A Shares or Investor B Shares. There is limited availability of these shares.
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Distribution and Service Payments
The Funds have adopted plans (the Plans) that allow the Funds to pay
distribution fees for the sale of its shares under Rule 12b-1 of the Investment Company Act and shareholder servicing fees for certain services provided to its shareholders.
Plan Payments
Under the Plans, Investor B, Investor C and Class R Shares pay a distribution fee to the Distributor, and/or its affiliates including PNC and its affiliates, for distribution and sales support services. The
distribution fees may be used to pay the Distributor for distribution services and to pay the Distributor and affiliates of BlackRock and PNC for sales support services provided in connection with the sale of Investor B, Investor C and Class R
Shares. The distribution fees may also be used to pay brokers, dealers, financial institutions and industry professionals (including BlackRock, PNC and their respective affiliates) (each a Financial Intermediary) for sales support
services and related expenses. All Investor B, Investor C and Class R Shares pay a maximum distribution fee per year that is a percentage of the average daily net asset value of the Fund attributable to Investor B, Investor C and Class R Shares, as
applicable. Institutional and Investor A Shares do not pay a distribution fee.
18
Under the Plans, the Funds also pay shareholder servicing fees (also referred to as shareholder liaison services fees)
to Financial Intermediaries for providing support services to their customers who own Class R Shares. The shareholder servicing fee payment is calculated as a percentage of the average daily net asset value of Class R Shares of a Fund. All Class R
Shares pay this shareholder servicing fee.
In return for the shareholder
servicing fee, Financial Intermediaries (including BlackRock) may provide one or more of the following services to their customers who own Class R Shares:
n
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Responding to customer questions on the services performed by the Financial Intermediary and investments in Class R Shares;
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n
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Assisting customers in choosing and changing dividend options, account designations and addresses; and
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n
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Providing other similar shareholder liaison services.
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The shareholder servicing fees payable pursuant to the Plans are paid to compensate Financial Intermediaries for the administration and servicing of shareholder
accounts and are not costs which are primarily intended to result in the sale of a Funds shares. Because the fees paid by the Fund under the Plans are paid out of Fund assets on an ongoing basis, over time these fees will increase the cost of
your investment and may cost you more than paying other types of sales charges. For more information on the Plans, including a complete list of services provided thereunder, see the SAI.
Other Payments by the Funds
In
addition to, rather than in lieu of, distribution and shareholder servicing fees that a Fund may pay to a Financial Intermediary pursuant to the Plans and fees the Fund pays to its transfer agent, BNY Mellon Investment Servicing (US) Inc. (the
Transfer Agent) BlackRock, on behalf of the Fund, may enter into non-Plan agreements with a Financial Intermediary pursuant to which the Fund will pay a Financial Intermediary for administrative, networking, recordkeeping, sub-transfer
agency and shareholder services. These non-Plan payments are generally based on either (1) a percentage of the average daily net assets of Fund shareholders serviced by a Financial Intermediary or (2) a fixed dollar amount for each account
serviced by a Financial Intermediary. The aggregate amount of these payments may be substantial.
Other Payments by BlackRock
The Plans permit BlackRock, the Distributor and their affiliates to make payments
relating to distribution and sales support activities out of their past profits or other sources available to them (and not as an additional charge to the Fund). From time to time, BlackRock, the Distributor or their affiliates also may pay a
portion of the fees for administrative, networking, recordkeeping, sub-transfer agency and shareholder services described above at its or their own expense and out of its or their profits. BlackRock, the Distributor and their affiliates may
compensate affiliated and unaffiliated Financial Intermediaries for the sale and distribution of shares of the Fund or for these other services to the Fund and shareholders. These payments would be in addition to the Fund payments described in this
prospectus and may be a fixed dollar amount, may be based on the number of customer accounts maintained by the Financial Intermediary, or may be based on a percentage of the value of shares sold to, or held by, customers of the Financial
Intermediary. The aggregate amount of these payments by BlackRock, the Distributor and their affiliates may be substantial. Payments by BlackRock may include amounts that are sometimes referred to as revenue sharing payments. In some
circumstances, these revenue sharing payments may create an incentive for a Financial Intermediary, its employees or associated persons to recommend or sell shares of a Fund to you. Please contact your Financial Intermediary for details about
payments it may receive from the Fund or from BlackRock, the Distributor or their affiliates. For more information, see the SAI.
How to Buy, Sell and Transfer Shares
The chart on the following pages summarizes how to buy, sell and transfer Class R
Shares through your financial professional or other financial intermediary. You may also buy, sell and transfer Class R Shares through BlackRock, if your account is held directly with BlackRock. To learn more about buying, selling or transferring
shares through BlackRock, call (800) 441-7762. Because the selection of a mutual fund involves many considerations, your financial professional or financial intermediary may help you with this decision.
Each Fund may reject any purchase order, modify or waive the minimum initial or
subsequent investment requirements for any shareholders and suspend and resume the sale of any share class of the Fund at any time for any reason. In addition, the Funds may waive certain requirements regarding the purchase, sale or transfer of
shares described below.
Persons who were shareholders
of an investment portfolio of this Compass Capital Group of Funds at the time the portfolio combined with the PNC
®
Fund may purchase and redeem Class R Shares of the same
fund and for the same account which they held shares on that date through the procedures described in this section.
Under certain circumstances, if no activity occurs in an account within a time period specified by state law, a shareholders shares in a Fund may be
transferred to that state.
19
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How to Buy Shares
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Your Choices
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Important Information for You to Know
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Initial Purchase
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Determine the amount of your investment
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$100 for all accounts.
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Have your financial intermediary submit your purchase order
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The price of Class R Shares is based on the next calculation of a Funds net asset
value after your order is placed. Any purchase orders placed prior to the close of business on the New York Stock Exchange (Exchange or NYSE) (generally 4:00 p.m. (Eastern time)) will be priced at the net asset value
determined that day. Purchase orders placed after the close of business on the NYSE will be priced at the net asset value determined on the next business day. Certain financial intermediaries, however, may require submission of orders prior to that
time. A broker-dealer or financial institution maintaining the account in which you hold shares may charge a separate account, service or transaction fee on the purchase or sale of Fund shares that would be in addition to the fees and expenses shown
in the Funds Fees and Expenses table.
The Funds may
reject any order to buy shares and may suspend the sale of shares at any time. Financial intermediaries may charge a processing fee to confirm a purchase.
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Or contact BlackRock (for accounts held directly with BlackRock)
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To purchase shares directly with BlackRock, call (800) 441-7762 and request a new account application. Mail the completed application
along with a check payable to BlackRock Funds or to the Transfer Agent at the address on the application.
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Add to Your Investment
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Purchase additional shares
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The minimum investment for additional purchases is generally $50 for all accounts except that certain retirement plans may have a
lower minimum for additional purchases and certain programs, such as the automatic investment plans, may have higher minimums. (The minimums for additional purchases may be waived under certain circumstances.)
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Have your financial professional or financial intermediary submit your purchase order for additional shares
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To purchase additional shares you may contact your financial professional or financial intermediary.
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Or contact BlackRock (for accounts held directly with BlackRock)
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Purchase by Telephone:
Call the Fund at (800) 441-7762 and speak with one of our
representatives. The Funds have the right to reject any telephone request for any reason.
Purchase in Writing:
You may send a written request to BlackRock at the address on the back cover of this prospectus.
Purchase by Internet:
You may purchase your shares, and view activity in your account, by logging onto the BlackRock website at www.blackrock.com/funds.
Purchases made on the Internet using the Automated Clearing House (ACH) will have a trade date that is the day after the purchase is made. Certain institutional clients purchase orders placed by wire prior to the close of business
on the NYSE will be priced at the net asset value determined that day. Contact your financial intermediary or BlackRock for further information. Limits on amounts that may be purchased via Internet may vary. For additional information call BlackRock
at (800) 441-7762. Please read the On-Line Services Disclosure Statement and User Agreement, the Terms and Conditions page and the Consent to Electronic Delivery Agreement (if you consent to electronic delivery), before attempting to transact
online.
The Funds employ reasonable procedures to confirm that transactions
entered over the Internet are genuine. By entering into the User Agreement with a Fund in order to open an account through the website, the shareholder waives any right to reclaim any losses from the Fund or any of its affiliates, incurred through
fraudulent activity.
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Acquire additional shares by reinvesting dividends and capital gains
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All dividends and capital gains distributions are automatically reinvested without a sales charge. To make any changes to your
dividend and/or capital gains distributions options, please call BlackRock at (800) 441-7762, or contact your financial intermediary (if your account is not held directly with BlackRock).
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20
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How to Sell Shares
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Your Choices
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Important Information for You to Know
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How to Pay for Shares
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Making payment for purchases
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Payment for an order must be made in Federal funds or other immediately available funds
by your financial professional or other financial intermediary but in no event later than 4:00 p.m. (Eastern time) on the first business day following receipt of the order. Payment may also, at the discretion of the Fund, be made in the form of
securities that are permissible investments for the respective fund. If payment is not received by this time, the order will be canceled and you and your financial professional or other financial intermediary will be responsible for any loss to the
Funds.
For Class R Shares purchased directly from the Fund, a check payable
to BlackRock Funds which bears the name of the fund you are purchasing must accompany a completed purchase application.
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Full or Partial Redemption of Shares
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Have your financial intermediary submit your sales order
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You can also make redemption requests through your financial professional or financial
intermediary in accordance with the procedures applicable to your accounts. These procedures may vary according to the type of account and the financial intermediary involved and customers should consult their financial intermediary in this regard.
Financial intermediaries are responsible for transmitting redemption orders and crediting their customers accounts with redemption proceeds on a timely basis. Information relating to such redemption services and charges to process a redemption
of shares, if any, should be obtained by customers from their financial intermediaries. Financial intermediaries may place redemption orders by telephoning (800) 441-7762. The price of your shares is based on the next calculation of net asset value
after your order is placed. For your redemption request to be priced at the net asset value on the day of your request, you must submit your request to your financial intermediary prior to that days close of business on the New York Stock
Exchange (generally 4:00 p.m. (Eastern time)). Certain financial intermediaries, however, may require submission of orders prior to that time. Any redemption request placed after that time will be priced at the net asset value at the close of
business on the next business day.
Shareholders who hold more than one
class should indicate which class of shares they are redeeming.
The Fund
may reject an order to sell shares under certain circumstances.
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Selling shares held directly with BlackRock
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Methods of Redeeming:
Redeem by Telephone:
Institutions may place redemption orders by telephoning (800) 441-7762.
The Funds, their administrators and the Distributor will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. The Funds
and their service providers will not be liable for any loss, liability, cost or expense for acting upon telephone instructions that are reasonably believed to be genuine in accordance with such procedures. The Funds may refuse a telephone redemption
request if they believe it is advisable to do so.
Redeem by Internet:
You may redeem in your account, by logging onto the BlackRock website at www.blackrock.com/funds. Proceeds from Internet redemptions will be sent via wire to the bank account of record.
Redeem in Writing:
You may sell shares held at BlackRock by writing to BlackRock, P.O. Box 9819, Providence, Rhode Island
02940-8019 or for overnight delivery, 4400 Computer Drive, Westborough, Massachusetts 01588. All shareholders on the account must sign the letter. A medallion signature guarantee will generally be required but may be waived in certain limited
circumstances. You can obtain a medallion signature guarantee stamp from a bank, securities dealer, securities broker, credit union, savings and loan association, national securities exchange or registered securities association. A notary public
seal will not be acceptable. If you hold stock certificates, return the certificates with the letter. Proceeds from redemptions may be sent via check, ACH or wire to the bank account of record.
Payment of Redemption Proceeds:
Redemption proceeds may be paid by check or, if
the Fund has verified banking information on file, through ACH or by wire transfer.
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21
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How to Sell Shares (continued)
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Your Choices
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Important Information for You to Know
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Full or Partial Redemption of Shares (continued)
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Selling shares held directly with BlackRock (continued)
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Payment by Check:
BlackRock will normally mail redemption proceeds within seven
days following receipt of a properly completed request. Shares can be redeemed by telephone and the proceeds sent by check to the shareholder at the address on record. Shareholders will pay $15 for redemption proceeds sent by check via overnight
mail. You are responsible for any additional charges imposed by your bank for this service.
Payment of Redemption Proceeds by Wire Transfer:
Payment for redeemed shares for which a redemption order is received before 4:00 p.m. (Eastern time) on a business day is normally made in Federal funds
wired to the redeeming shareholder on the next business day, provided that the Funds custodian is also open for business. Payment for redemption orders received after 4:00 p.m. (Eastern time) or on a day when the Funds custodian is
closed is normally wired in Federal funds on the next business day following redemption on which the Funds custodian is open for business. Each Fund reserves the right to wire redemption proceeds within seven days after receiving a redemption
order if, in the judgment of the Fund, an earlier payment could adversely affect the Fund.
Shares can be redeemed by Federal wire transfer to a single previously designated bank account. No charge for wiring redemption payments with respect to Class R Shares is imposed by the Fund, although financial
intermediaries may charge their customers for redemption services. Information relating to such redemption services and charges, if any, should be obtained by customers from their financial intermediaries. You are responsible for any additional
charges imposed by your bank for wire transfers.
The Fund is not
responsible for the efficiency of the Federal wire system or the shareholders firm or bank. To change the name of the single, designated bank account to receive wire redemption proceeds, it is necessary to send a written request to the Fund at
the address on the back cover of this prospectus.
* *
*
If you make a redemption request before a Fund has collected
payment for the purchase of shares, the Fund may delay mailing your proceeds. This delay will usually not exceed ten days.
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How to Transfer your Account
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Your Choices
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Important Information for You to Know
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Transfer Shares to Another Securities Dealer or Other Financial Intermediary
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Transfer to a participating securities dealer or other financial intermediary
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You may transfer your Class R Shares of a Fund only to another securities dealer that
has entered into an agreement with the Distributor. Certain shareholder services may not be available for the transferred shares. All future trading of these assets must be coordinated by the receiving firm.
If your account is held directly with BlackRock, you may call (800) 441-7762 with
any questions; otherwise please contact your financial intermediary to accomplish the transfer of shares.
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Transfer to a non-participating securities dealer or other financial intermediary
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You must either:
Transfer your Class R Shares to an account with the Fund; or
Sell your Class R Shares, paying any applicable deferred sales charge.
If your account is held directly with BlackRock, you may call (800) 441-7762 with
any questions; otherwise please contact your financial intermediary to accomplish the transfer of shares.
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22
Funds Rights
Each Fund
may:
n
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Suspend the right of redemption if trading is halted or restricted on the NYSE or under other emergency conditions described in the Investment Company Act;
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n
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Postpone date of payment upon redemption if trading is halted or restricted on the NYSE or under other emergency conditions described in the Investment Company
Act or if a redemption request is made before the Fund has collected payment for the purchase of shares;
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Redeem shares for property other than cash if conditions exist which make cash payments undesirable in accordance with its rights under the Investment Company
Act; and
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Redeem shares involuntarily in certain cases, such as when the value of a shareholder account falls below a specified level.
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Note on Low Balance Accounts.
Because of the high cost of maintaining smaller
shareholder accounts, BlackRock has set a minimum balance of $500 in each Fund position you hold within your account (Fund Minimum), and may take one of two actions if the balance in your Fund falls below the Fund Minimum.
First, the Fund may redeem the shares in your account (without charging any
deferred sales charge) if the net asset value of your account falls below $250 for any reason, including market fluctuation. You will be notified that the value of your account is less than $250 before the Fund makes an involuntary redemption. The
notification will provide you with a 90 calendar day period to make an additional investment in order to bring the value of your account to at least $250 before the Fund makes an involuntary redemption or to the Fund Minimum in order not to be
assessed an annual low balance fee of $20, as set forth below. This involuntary redemption may not apply to accounts of certain employer-sponsored retirement plans, selected fee-based programs, accounts established under the Uniform Gifts or
Transfers to Minors Acts, and certain intermediary accounts.
Second, the
Fund charges an annual $20 low balance fee on all Fund accounts that have a balance below the Fund Minimum for any reason, including market fluctuation. The fee will be deducted from the Fund account only once per calendar year. You will be notified
that the value of your account is less than the Fund Minimum before the fee is imposed. You will then have a 90 calendar day period to make an additional investment to bring the value of your account to the Fund Minimum before the Fund imposes the
low balance fee. This low balance fee does not apply to accounts of certain employer-sponsored retirement plans, selected fee-based programs, or, accounts established under the Uniform Gifts or Transfers to Minors Acts.
Short-Term Trading Policy
The Board
of Trustees (the Board) has determined that the interests of long-term shareholders and each Funds ability to manage its investments may be adversely affected when shares are repeatedly bought, sold or exchanged in response to
short-term market fluctuations also known as market timing. The Funds are not designed for market timing organizations or other entities using programmed or frequent purchases and sales or exchanges. The exchange privilege is not
intended as a vehicle for short-term trading. Excessive purchase and sale or exchange activity may interfere with portfolio management, increase expenses and taxes and may have an adverse effect on the performance of a Fund and its shareholders. For
example, large flows of cash into and out of the Fund may require the management team to allocate a significant amount of assets to cash or other short-term investments or sell securities, rather than maintaining such assets in securities selected
to achieve the Funds investment objective. Frequent trading may cause a Fund to sell securities at less favorable prices, and transaction costs, such as brokerage commissions, can reduce a Funds performance.
A Fund that invests in non-U.S. securities is subject to the risk that an investor may
seek to take advantage of a delay between the change in value of the Funds portfolio securities and the determination of the Funds net asset value as a result of different closing times of U.S. and non-U.S. markets by buying or selling
Fund shares at a price that does not reflect their true value. A similar risk exists for funds that invest in securities of small capitalization companies, securities of issuers located in emerging markets or high yield securities (junk
bonds) that are thinly traded and therefore may have actual values that differ from their market prices. This short-term arbitrage activity can reduce the return received by long-term shareholders. Each Fund will seek to eliminate these
opportunities by using fair value pricing, as described in Valuation of Fund Investments below.
The Funds discourage market timing and seek to prevent frequent purchases and sales or exchanges of Fund shares that they determine may be detrimental to a Fund or long-term shareholders. The Board has approved the
policies discussed below to seek to deter market timing activity. The Board has not adopted any specific numerical restrictions on purchases, sales and exchanges of Fund shares because certain legitimate strategies will not result in harm to the
Fund or shareholders.
23
If as a result of its own investigation, information provided by a financial intermediary or other third party, or
otherwise, a Fund believes, in its sole discretion, that your short-term trading is excessive or that you are engaging in market timing activity, it reserves the right to reject any specific purchase or exchange order. If a Fund rejects your
purchase or exchange order, you will not be able to execute that transaction, and the Fund will not be responsible for any losses you therefore may suffer. For transactions placed directly with a Fund, the Fund may consider the trading history of
accounts under common ownership or control for the purpose of enforcing these policies. Transactions placed through the same financial intermediary on an omnibus basis may be deemed part of a group for the purpose of this policy and may be rejected
in whole or in part by the Fund. Certain accounts, such as omnibus accounts and accounts at financial intermediaries, however, include multiple investors and such accounts typically provide the Fund with net purchase or redemption and exchange
requests on any given day where purchases, redemptions and exchanges of shares are netted against one another and the identity of individual purchasers, redeemers and exchangers whose orders are aggregated may not be known by the Funds. While the
Funds monitor for market timing activity, the Funds may be unable to identify such activities because the netting effect in omnibus accounts often makes it more difficult to locate and eliminate market timers from the Funds. The Distributor has
entered into agreements with respect to financial professionals, and other financial intermediaries that maintain omnibus accounts with the Transfer Agent pursuant to which such financial professionals and other financial intermediaries undertake to
cooperate with the Distributor in monitoring purchase, exchange and redemption orders by their customers in order to detect and prevent short-term or excessive trading in the Funds shares through such accounts.
Identification of market timers may also be limited by operational systems and
technical limitations. In the event that a financial intermediary is determined by a Fund to be engaged in market timing or other improper trading activity, the Funds Distributor may terminate such financial intermediarys agreement with the
Distributor, suspend such financial intermediarys trading privileges or take other appropriate actions.
There is no assurance that the methods described above will prevent market timing or other trading that may be deemed abusive.
The Funds may from time to time use other methods that it believes are appropriate to
deter market timing or other trading activity that may be detrimental to a fund or long-term shareholders.
24
Management of the Funds
BlackRock
BlackRock, each Funds investment adviser, manages each Funds investments
and its business operations subject to the oversight of the Board of the Fund. While BlackRock is ultimately responsible for the management of a Fund, it is able to draw upon the trading, research and expertise of its asset management affiliates for
portfolio decisions and management with respect to certain portfolio securities. BlackRock is an indirect, wholly owned subsidiary of BlackRock, Inc.
BlackRock, a registered investment adviser, was organized in 1994 to perform advisory services for investment companies. BlackRock Financial Management, Inc.,
sub-adviser (the Sub-Adviser), is a registered investment adviser organized in 1994. BlackRock and its affiliates had approximately $3.792 trillion in investment company and other portfolio assets under management as of December 31,
2012.
Each Fund has entered into a management agreement (the
Management Agreement) with BlackRock under which BlackRock receives for its services to each Fund a fee as a percentage of each Funds average daily net assets. For the fiscal year ended September 30, 2012, the aggregate
management fees, net of any applicable waivers, paid by each Fund to BlackRock as a percentage of each Funds average daily net assets were:
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GNMA Portfolio
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0.39
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%
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Inflation Protected Bond Portfolio
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0.24
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%
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Investment Grade Bond Portfolio
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0.29
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%
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BlackRock has entered into a sub-advisory
agreement with the Sub-Adviser, an affiliate of BlackRock, under which BlackRock pays the Sub-Adviser for services it provides a fee equal to a percentage of the management fee paid to BlackRock under the Management Agreement. The Sub-Adviser is
responsible for the day-to-day management of each Funds portfolio.
Total Annual Management Fees (Before Waivers)
With respect
to each Fund, the maximum annual management fees that can be paid to BlackRock (as a percentage of average daily net assets) are calculated as follows:
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Average Daily Net Assets
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GNMA
Portfolio
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Inflation
Protected
Bond
Portfolio
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Investment
Grade
Bond
Portfolio
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First $1 billion
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0.550
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%
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0.400
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%
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0.500
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%
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$1 billion $2 billion
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0.500
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%
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0.375
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%
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0.450
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%
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$2 billion $3 billion
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0.475
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%
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0.350
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%
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0.425
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%
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Greater than $3 billion
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0.450
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%
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0.325
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%
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0.400
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%
|
BlackRock has agreed to cap net expenses
(excluding (i) interest, taxes, dividends tied to short sales, brokerage commissions, and other expenditures which are capitalized in accordance with generally accepted accounting principles; (ii) expenses incurred directly or indirectly
by the Fund as a result of investments in other investment companies and pooled investment vehicles; (iii) other expenses attributable to, and incurred as a result of, the Funds investments; and (iv) other extraordinary expenses
(including litigation expenses) not incurred in the ordinary course of the Funds business, if any), of each share class of certain Funds at the levels shown below (and in the case of contractual caps, at the levels shown both below and in a
Funds fees and expenses table in the Fund Overview section of this prospectus). (Items (i), (ii), (iii) and (iv) in the preceding sentence are referred to in this prospectus as Dividend Expense, Interest Expense, Acquired Fund
Fees and Expenses and certain other Fund expenses.) To achieve these expense caps, BlackRock has agreed to waive or reimburse fees or expenses if these operating expenses exceed a certain limit.
25
With respect to each Fund, BlackRock has agreed to contractually waive and/or reimburse fees or expenses in order to
limit Total Annual Fund Operating Expenses (for Class R Shares) to the amounts noted in the table below.
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Contractual Caps on
Total Annual Fund
Operating Expenses*
(excluding Dividend Expense,
Interest Expense,
Acquired Fund
Fees and Expenses and
certain other Fund expenses)
1
|
|
GNMA Portfolio
|
|
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1.93
|
%
|
Inflation Protected Bond Portfolio
|
|
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1.79
|
%
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Investment Grade Bond Portfolio
|
|
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2.22
|
%
|
*
|
As a percentage of average daily net assets.
|
1
|
The contractual caps are in effect until February 1, 2014. The contractual agreement may be terminated upon 90 days notice by a majority of the
non-interested trustees of the Fund or by a vote of a majority of the outstanding voting securities of the Fund.
|
With respect to the contractual agreements described above, if during a Funds fiscal year the operating expenses of a share class, that at any time during the
prior two fiscal years received a waiver or reimbursement from BlackRock, are less than the expense limit for that share class, the share class is required to repay BlackRock up to the less of (a) the amount of fees waived or expenses
reimbursed during those prior two fiscal years under the agreement and (b) the amount by which the expense limit for that share class exceeds the operating expenses of the share class for the current fiscal year, provided that: (1) the Fund of
which the share class is a part has more than $50 million in assets and (2) BlackRock or an affiliate serves as the Funds manager or administrator.
As stated above, the waivers and reimbursements described in the table above do not include Interest Expense. A Funds Interest Expense is required to be
reported as part of operating expenses in such Funds expense table for accounting purposes. A Fund incurs Interest Expense when making certain investments (e.g., tender option bonds) to seek to enhance the yield and total return of the
portfolio. The amount of Interest Expense (if any) will fluctuate with the Funds use of those investments.
* * *
A discussion of the basis for the Boards approval of the Management Agreement with BlackRock and the sub-advisory agreement between BlackRock and the Sub-Adviser is included in the Funds annual
shareholder report for the fiscal year ended September 30, 2012.
From
time to time, a manager, analyst, or other employee of BlackRock or its affiliates may express views regarding a particular asset class, company, security, industry, or market sector. The views expressed by any such person are the views of only that
individual as of the time expressed and do not necessarily represent the views of BlackRock or any other person within the BlackRock organization. Any such views are subject to change at any time based upon market or other conditions and BlackRock
disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for the Fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf
of the Fund.
Portfolio Manager
Information
Information regarding the portfolio managers of each Fund is set forth below. Further information regarding the portfolio managers, including other accounts
managed, compensation, ownership of Fund shares, and possible conflicts of interest, is available in the Funds SAI.
The GNMA Portfolio is managed by a team of financial professionals. Akiva Dickstein and Matthew Kraeger are jointly and primarily responsible for the
day-to-day management of the Fund.
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Portfolio Manager
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Primary Role
|
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Since
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|
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Title and Recent Biography
|
Akiva Dickstein
|
|
Jointly and primarily responsible for the day-to-day management of the Funds portfolio including setting the Funds overall investment
strategy and overseeing the management of the Fund.
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|
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2009
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|
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Managing Director of BlackRock, Inc. since 2009; Managing Director of Merrill Lynch from 2003 to 2009 and Head of the U.S. Rates & Structured
Credit Research Group.
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Matthew Kraeger
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|
Jointly and primarily responsible for the day-to-day management of the Funds portfolio including setting the Funds overall investment
strategy and overseeing the management of the Fund.
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2009
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|
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Director of BlackRock, Inc. since 2009; Vice President of BlackRock, Inc. from 2006 to 2008; Associate of BlackRock, Inc. from 2002 to
2005.
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26
The Inflation Protected Bond Portfolio is managed by a team of financial professionals. Martin Hegarty and Brian
Weinstein are jointly and primarily responsible for the day-to-day management of the Fund.
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Portfolio Manager
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Primary Role
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Since
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Title and Recent Biography
|
Martin Hegarty
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Jointly and primarily responsible for the day-to-day management of the Funds portfolio including setting the Funds overall investment
strategy and overseeing the management of the Fund.
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2010
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Managing Director of BlackRock, Inc. since 2010; Co-head of BlackRocks Global Inflation-Linked Portfolios since 2010; Director of Bank of America
Merrill Lynch from 2005 to 2009; Vice President of Bank of America Merrill Lynch from 2003 to 2005.
|
Brian Weinstein
|
|
Jointly and primarily responsible for the day-to-day management of the Funds portfolio including setting the Funds overall investment
strategy and overseeing the management of the Fund.
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2005
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Managing Director of BlackRock Financial Management Inc. since 2008; Director of BlackRock, Inc. in 2007; Vice President of BlackRock, Inc. from 2005
to 2006.
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The Investment Grade Bond Portfolio is managed by
a team of financial professionals. Jeffrey Cucunato is primarily responsible for the day-to-day management of the Fund.
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Portfolio Manager
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|
Primary Role
|
|
Since
|
|
|
Title and Recent Biography
|
Jeffrey Cucunato
|
|
Primarily responsible for the day-to-day management of the Funds portfolio including setting the Funds overall investment strategy and
overseeing the management of the Fund.
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|
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2009
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|
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Managing Director of BlackRock, Inc. since 2005.
|
Conflicts of
Interest
The investment activities of BlackRock and its affiliates (including BlackRock, Inc. and PNC and their affiliates, directors, partners, trustees, managing members,
officers and employees (collectively, the Affiliates)) in the management of, or their interest in, their own accounts and other accounts they manage, may present conflicts of interest that could disadvantage the Fund and its
shareholders. BlackRock and its Affiliates provide investment management services to other funds and discretionary managed accounts that follow an investment program similar to that of the Fund. BlackRock and its Affiliates are involved worldwide
with a broad spectrum of financial services and asset management activities and may engage in the ordinary course of business in activities in which their interests or the interests of their clients may conflict with those of the Fund. One or more
Affiliates act or may act as an investor, investment banker, research provider, investment manager, financier, advisor, market maker, trader, prime broker, lender, agent and principal, and have other direct and indirect interests, in securities,
currencies and other instruments in which the Fund directly and indirectly invests. Thus, it is likely that the Fund will have multiple business relationships with and will invest in, engage in transactions with, make voting decisions with respect
to, or obtain services from entities for which an Affiliate performs or seeks to perform investment banking or other services. One or more Affiliates may engage in proprietary trading and advise accounts and funds that have investment objectives
similar to those of the Fund and/or that engage in and compete for transactions in the same types of securities, currencies and other instruments as the Fund. The trading activities of these Affiliates are carried out without reference to positions
held directly or indirectly by the Fund and may result in an Affiliate having positions that are adverse to those of the Fund. No Affiliate is under any obligation to share any investment opportunity, idea or strategy with the Fund. As a result, an
Affiliate may compete with the Fund for appropriate investment opportunities. The results of the Funds investment activities, therefore, may differ from those of an Affiliate and of other accounts managed by an Affiliate, and it is possible
that the Fund could sustain losses during periods in which one or more Affiliates and other accounts achieve profits on their trading for proprietary or other accounts. The opposite result is also possible. In addition, the Fund may, from time
to time, enter into transactions in which an Affiliate or its other clients have an adverse interest. Furthermore, transactions undertaken by Affiliate-advised clients may adversely impact the Fund. Transactions by one or more Affiliate-advised
clients or BlackRock may have the effect of diluting or otherwise disadvantaging the values, prices or investment strategies of the Fund. The Funds activities may be limited because of regulatory restrictions applicable to one or more
Affiliates, and/or their internal policies designed to comply with such restrictions. In addition, the Fund may invest in securities of companies with which an Affiliate has or is trying to develop investment banking relationships or in which an
Affiliate has significant debt or equity investments. The Fund also may invest in securities of companies for which an Affiliate provides or may some day provide research coverage. An Affiliate may have business relationships with and purchase or
distribute or sell services or products from or to distributors, consultants or others who recommend the Fund or who engage in transactions with or for the Fund, and may receive
27
compensation for such services. The Fund may also make brokerage and other payments to Affiliates in connection with the Funds portfolio investment transactions.
Under a securities lending program approved by the Board, the Fund has retained an
Affiliate of BlackRock to serve as the securities lending agent for the Fund to the extent that the Fund participates in the securities lending program. For these services, the lending agent will receive a fee from the Fund, including a fee based on
the returns earned on the Funds investment of the cash received as collateral for the loaned securities. In addition, one or more Affiliates may be among the entities to which the Fund may lend its portfolio securities under the securities
lending program.
The activities of Affiliates may give rise to other
conflicts of interest that could disadvantage the Fund and its shareholders. BlackRock has adopted policies and procedures designed to address these potential conflicts of interest. See the SAI for further information.
Valuation of Fund Investments
When you
buy shares, you pay the net asset value, plus any applicable sales charge. This is the offering price. Shares are also redeemed at their net asset value, minus any applicable deferred sales charge. The Fund calculates the net asset value of each
class of its shares (generally by using market quotations) each day the NYSE is open as of the close of business on the NYSE, based on prices at the time of closing. The NYSE generally closes at 4:00 p.m. Eastern time. The net asset value used in
determining your share price is the next one calculated after your purchase or redemption order is placed.
The Funds assets and liabilities are valued primarily on the basis of market quotations. Equity investments and other instruments for which market quotations are readily available are valued at market value,
which is generally determined using the last reported sale price on the exchange or market on which the security is primarily traded at the time of valuation. The Fund values fixed income portfolio securities and non-exchange traded derivatives
using market prices provided directly from one or more broker-dealers, market makers, or independent third-party pricing services which may use matrix pricing and valuation models to derive values, each in accordance with valuation procedures
approved by the Board. Short-term debt securities with remaining maturities of sixty days or less are valued on the basis of amortized cost. Foreign currency exchange rates are generally determined as of the close of business on the Exchange.
Foreign securities owned by the Fund may trade on weekends or other days when the Fund does not price its shares. As a result, the Funds net asset value may change on days when you will not be able to purchase or redeem the Funds shares.
Generally, trading in foreign securities, U.S. government securities and
money market instruments and certain fixed income securities is substantially completed each day at various times prior to the close of business on the NYSE. The values of such securities used in computing the net asset value of the Funds
shares are determined as of such times.
When market quotations are not
readily available or are not believed by BlackRock to be reliable, the Funds investments are valued at fair value. Fair value determinations are made by BlackRock in accordance with procedures approved by the Board. BlackRock may conclude that
a market quotation is not readily available or is unreliable if a security or other asset or liability does not have a price source due to its lack of liquidity, if BlackRock believes a market quotation from a broker-dealer or other source is
unreliable, where the security or other asset or other liability is thinly traded (e.g., municipal securities, certain small cap and emerging growth companies, and certain non-U.S. securities) or where there is a significant event subsequent to the
most recent market quotation. For this purpose, a significant event is deemed to occur if BlackRock determines, in its business judgment prior to or at the time of pricing the Funds assets or liabilities, that it is likely that the
event will cause a material change to the last closing market price of one or more assets or liabilities held by the Fund. For instance, significant events may occur between the foreign market close and the close of business on the Exchange that may
not be reflected in the computation of the Funds net assets. If such event occurs, those instruments may be fair valued. Similarly, foreign securities whose values are affected by volatility that occurs in U.S. markets on a trading day after
the close of foreign securities markets may be fair valued.
For certain
foreign securities, a third-party vendor supplies evaluated, systematic fair value pricing based upon the movement of a proprietary multi-factor model after the relevant foreign markets have closed. This systematic fair value pricing methodology is
designed to correlate the prices of foreign securities following the close of the local markets to the price that might have prevailed as of a Funds pricing time.
Fair value represents a good faith approximation of the value of a security. The fair
value of one or more securities may not, in retrospect, be the price at which those assets could have been sold during the period in which the particular fair values were used in determining the Funds net asset value.
The Fund may accept orders from certain authorized Financial Intermediaries or their
designees. The Fund will be deemed to receive an order when accepted by the intermediary or designee and the order will receive the net asset value next computed by the Fund after such acceptance. If the payment for a purchase order is not made by a
designated later time, the order will be canceled and the Financial Intermediary could be held liable for any losses.
28
Dividends, Distributions and Taxes
|
BUYING A
DIVIDEND
|
|
Unless your investment is in a tax deferred
account, you may want to avoid buying shares shortly before a Fund
pays a dividend. The reason? If you buy shares when a fund has declared but not yet distributed ordinary income
or capital gains, you will pay the full price for the shares and
then receive a portion of the price back in the form of
a taxable dividend. Before investing you may want to consult your tax adviser.
|
Each Fund will distribute net investment income, if any, and net realized capital gain, if any, at least annually. Each Fund may also pay a special distribution at
the end of the calendar year to comply with Federal tax requirements. Dividends may be reinvested automatically in shares of a Fund at net asset value without a sales charge or may be taken in cash. If you would like to receive dividends in cash,
contact your financial professional, financial intermediary or the Fund. Although this cannot be predicted with any certainty, it is anticipated that the majority of a Funds dividends, if any, will consist of capital gains for GNMA Portfolio
and income for Inflation Protected Bond Portfolio and Investment Grade Bond Portfolio. Capital gains may be taxable to you at different rates depending on how long a Fund held the assets sold.
You will pay tax on dividends from a Fund whether you receive them in cash or
additional shares. If you redeem Fund shares or exchange them for shares of another fund, you generally will be treated as having sold your shares and any gain on the transaction may be subject to tax. Certain dividend income, including dividends
received from qualifying foreign corporations, and long-term capital gains are eligible for taxation at a maximum rate of 15% for non-corporate shareholders with incomes below $400,000 ($450,000 if married filing jointly) and 20% for individuals
with any income above those amounts that is long-term capital gain. To the extent a Fund makes any distributions derived from long-term capital gains and qualifying dividend income, such distributions will be eligible for taxation at the reduced
rate.
In addition, a 3.8% Medicare contribution tax will be imposed on the
net investment income (which includes interest, dividends and capital gain) of U.S. individuals with income exceeding $200,000 or $250,000 if married filing jointly, and of trusts and estates, for taxable years beginning after December 31, 2012.
Fund distributions from amounts other than current or accumulated earnings
and profits will be treated as returns of capital for federal income tax purposes and will reduce your basis in your shares, with any distributed amount that exceeds your remaining basis constituting capital gain to you. Fund distributions in excess
of a Funds minimum distribution requirements but not in excess of the Funds remaining earnings and profits will not be returns of capital but will be taxable dividends to shareholders. A Funds capital loss carryovers, if any, from
the pre-2011 taxable years will not reduce current earnings and profits even if the Funds current year distribution requirement is offset by such carryovers.
If you are neither a lawful permanent resident nor a citizen of the United States or
if you are a foreign entity, a Funds ordinary income dividends (which include distributions of net short-term capital gain) will generally be subject to a 30% U.S. withholding tax, unless a lower treaty rate applies.
A 30% withholding tax will be imposed on dividends paid after December 31, 2013 and
redemption proceeds paid after December 31, 2016, to (i) certain foreign financial institutions and investment funds unless they agree to collect and disclose to the IRS information regarding their direct and indirect U.S. account holders and
(ii) certain other foreign entities unless they certify certain information regarding their direct and indirect U.S. owners. To avoid withholding, foreign financial institutions will (i) need to enter into agreements with the IRS that state that
they will provide the IRS information including the name, address and taxpayer identification number of direct and indirect U.S. account holders, comply with due diligence procedures with respect to the identification of U.S. accounts, report to the
IRS certain information with respect to U.S. accounts maintained, agree to withhold tax on certain payments made to non-compliant foreign financial institutions or to account holders who fail to provide the required information, and determine
certain other information as to their account holders, or (ii) in the event that an intergovernmental agreement and implementing legislation is adopted, provide local revenue authorities with similar account holder information for potential
information exchange with the IRS. Other foreign entities will need to provide the name, address, and taxpayer identification number of each substantial U.S. owner or certifications of no substantial U.S. ownership unless certain exceptions apply.
Dividends and interest received by the Fund may give rise to withholding
and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. You may be able to claim a credit or take a deduction for foreign taxes paid by the Fund if certain
requirements are met.
By law, your dividends and redemption proceeds will
be subject to a withholding tax if you have not provided a taxpayer identification number or social security number or the number you have provided is incorrect.
This Section summarizes some of the consequences under current Federal tax law of an
investment in the Fund. It is not a substitute for personal tax advice. Consult your personal tax adviser about the potential tax consequences of an investment in the Fund under all applicable tax laws.
29
Financial Highlights
The Financial Highlights table is intended to help you understand the Funds financial performance for the periods
shown. Certain information reflects the financial results for a single Fund share. The total returns in the table represent the rate an investor would have earned or lost on an investment in the Fund (assuming reinvestment of all dividends and/or
distributions). The information has been audited by [ ], whose report, along with the Funds financial statements, is
included in the Funds Annual Report, which is available upon request.
Financial Highlights of BlackRock GNMA Portfolio
Since Class R Shares of the GNMA Portfolio have no performance history, the financial
information in the tables below shows the Funds financial performance for the periods indicated for Investor A Shares of the Fund. Although Investor A Shares are not offered in this Prospectus, the Investor A Shares would have substantially
similar performance as the Class R Shares offered in this Prospectus because the Investor A Shares and the Class R Shares are invested in the same portfolio of securities and performance would differ only to the extent that the Investor A Shares and
the Class R Shares do not have the same expenses. The actual return of Class R Shares would have been lower than that of Investor A Shares because Class R Shares have higher expenses than Investor A Shares. Investor A Shares of the Fund are
estimated to have expenses of 1.06% of average daily net assets (after waivers and reimbursements) for the current fiscal year and Class R Shares of the Fund are expected to have expenses of 1.31% of average daily net assets (after waivers and
reimbursements) for the current fiscal year.
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Investor A
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|
|
|
Year Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Per Share Operating Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of year
|
|
$
|
10.51
|
|
|
$
|
10.51
|
|
|
$
|
10.34
|
|
|
$
|
9.78
|
|
|
$
|
9.49
|
|
Net investment income
1
|
|
|
0.20
|
|
|
|
0.24
|
|
|
|
0.26
|
|
|
|
0.33
|
|
|
|
0.53
|
|
Net realized and unrealized gain
|
|
|
0.32
|
|
|
|
0.42
|
|
|
|
0.39
|
|
|
|
0.61
|
|
|
|
0.21
|
|
Net increase from investment operations
|
|
|
0.52
|
|
|
|
0.66
|
|
|
|
0.65
|
|
|
|
0.94
|
|
|
|
0.74
|
|
Dividends and distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.37
|
)
|
|
|
(0.30
|
)
|
|
|
(0.29
|
)
|
|
|
(0.38
|
)
|
|
|
(0.45
|
)
|
Net realized gain
|
|
|
(0.12
|
)
|
|
|
(0.36
|
)
|
|
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
Total dividends and distributions
|
|
|
(0.49
|
)
|
|
|
(0.66
|
)
|
|
|
(0.48
|
)
|
|
|
(0.38
|
)
|
|
|
(0.45
|
)
|
Net asset value, end of year
|
|
$
|
10.54
|
|
|
$
|
10.51
|
|
|
$
|
10.51
|
|
|
$
|
10.34
|
|
|
$
|
9.78
|
|
Total Investment
Return
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value
|
|
|
5.18
|
%
|
|
|
6.62
|
%
|
|
|
6.50
|
%
|
|
|
9.74
|
%
|
|
|
7.91
|
%
|
Ratios to Average Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1.06
|
%
|
|
|
1.07
|
%
|
|
|
1.06
|
%
|
|
|
1.09
|
%
|
|
|
1.21
|
%
|
Total expenses excluding recoupment of past waived fees
|
|
|
1.06
|
%
|
|
|
1.07
|
%
|
|
|
1.06
|
%
|
|
|
1.09
|
%
|
|
|
1.21
|
%
|
Total expenses after fees waived, reimbursed and paid indirectly
|
|
|
0.91
|
%
|
|
|
0.91
|
%
|
|
|
0.90
|
%
|
|
|
0.85
|
%
|
|
|
0.89
|
%
|
Total expenses after fees waived, reimbursed and paid indirectly excluding interest expense
|
|
|
0.90
|
%
|
|
|
0.91
|
%
|
|
|
0.90
|
%
|
|
|
0.85
|
%
|
|
|
0.81
|
%
|
Net investment income
|
|
|
1.90
|
%
|
|
|
2.36
|
%
|
|
|
2.47
|
%
|
|
|
3.22
|
%
|
|
|
4.20
|
%
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of year (000)
|
|
$
|
457,537
|
|
|
$
|
323,201
|
|
|
$
|
370,680
|
|
|
$
|
312,343
|
|
|
$
|
61,896
|
|
Portfolio turnover
|
|
|
741
|
%
3
|
|
|
743
|
%
4
|
|
|
847
|
%
5
|
|
|
1,435
|
%
6
|
|
|
2,637
|
%
7
|
1
|
Based on average shares outstanding.
|
2
|
Where applicable, total investment returns exclude the effects of any sales charges and include the reinvestment of dividends and distributions.
|
3
|
Includes mortgage dollar roll transactions; excluding these transactions the portfolio turnover would have been 247%.
|
4
|
Includes mortgage dollar roll transactions; excluding these transactions the portfolio turnover would have been 213%.
|
5
|
Includes mortgage dollar roll transactions; excluding these transactions the portfolio turnover would have been 265%.
|
6
|
Includes mortgage dollar roll transactions; excluding these transactions the portfolio turnover would have been 573%.
|
7
|
Includes TBA transactions; excluding these transactions the portfolio turnover would have been 868%.
|
30
Financial Highlights of BlackRock Inflation Protected Bond Portfolio
Since
Class R Shares of the Inflation Protected Bond Portfolio have no performance history, the financial information in the tables below shows the Funds financial performance for the periods indicated for Investor A Shares of the Fund. Although
Investor A Shares are not offered in this Prospectus, the Investor A Shares would have substantially similar performance as the Class R Shares offered in this Prospectus because the Investor A Shares and the Class R Shares are invested in the same
portfolio of securities and performance would differ only to the extent that the Investor A Shares and the Class R Shares do not have the same expenses. The actual return of Class R Shares would have been lower than that of Investor A Shares because
Class R Shares have higher expenses than Investor A Shares. Investor A Shares of the Fund are estimated to have expenses of 0.86% of average daily net assets (after waivers and reimbursements) for the current fiscal year and Class R Shares of the
Fund are expected to have expenses of 1.21% of average daily net assets (after waivers and reimbursements) for the current fiscal year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investor A
|
|
|
|
Year Ended September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Per Share Operating Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of year
|
|
$
|
11.39
|
|
|
$
|
11.30
|
|
|
$
|
10.57
|
|
|
$
|
9.97
|
|
|
$
|
10.00
|
|
Net investment income
1
|
|
|
0.13
|
|
|
|
0.39
|
|
|
|
0.18
|
|
|
|
0.17
|
|
|
|
0.84
|
|
Net realized and unrealized gain (loss)
|
|
|
0.81
|
|
|
|
0.45
|
|
|
|
0.76
|
|
|
|
0.53
|
|
|
|
(0.18
|
)
|
Net increase from investment operations
|
|
|
0.94
|
|
|
|
0.84
|
|
|
|
0.94
|
|
|
|
0.70
|
|
|
|
0.66
|
|
Dividends and distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.19
|
)
|
|
|
(0.39
|
)
|
|
|
(0.18
|
)
|
|
|
(0.10
|
)
|
|
|
(0.65
|
)
|
Net realized gain
|
|
|
(0.05
|
)
|
|
|
(0.36
|
)
|
|
|
(0.03
|
)
|
|
|
(0.00
|
)
2
|
|
|
(0.04
|
)
|
Total dividends and distributions
|
|
|
(0.24
|
)
|
|
|
(0.75
|
)
|
|
|
(0.21
|
)
|
|
|
(0.10
|
)
|
|
|
(0.69
|
)
|
Net asset value, end of year
|
|
$
|
12.09
|
|
|
$
|
11.39
|
|
|
$
|
11.30
|
|
|
$
|
10.57
|
|
|
$
|
9.97
|
|
Total Investment
Return
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value
|
|
|
8.33
|
%
|
|
|
7.83
|
%
|
|
|
9.03
|
%
|
|
|
7.11
|
%
|
|
|
6.52
|
%
|
Ratios to Average Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
0.95
|
%
|
|
|
0.98
|
%
|
|
|
0.95
|
%
|
|
|
1.02
|
%
|
|
|
0.99
|
%
|
Total expenses excluding recoupment of past waived fees
|
|
|
0.95
|
%
|
|
|
0.98
|
%
|
|
|
0.95
|
%
|
|
|
1.02
|
%
|
|
|
0.99
|
%
|
Total expenses after fees waived, reimbursed and paid indirectly
|
|
|
0.76
|
%
|
|
|
0.76
|
%
|
|
|
0.74
|
%
|
|
|
0.70
|
%
|
|
|
0.66
|
%
|
Total expenses after fees waived, reimbursed and paid indirectly and excluding interest expense
|
|
|
0.76
|
%
|
|
|
0.76
|
%
|
|
|
0.74
|
%
|
|
|
0.69
|
%
|
|
|
0.63
|
%
|
Net investment income
|
|
|
1.12
|
%
|
|
|
3.50
|
%
|
|
|
1.69
|
%
|
|
|
1.70
|
%
|
|
|
7.89
|
%
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of year (000)
|
|
$
|
2,089,999
|
|
|
$
|
1,542,505
|
|
|
$
|
1,427,762
|
|
|
$
|
775,914
|
|
|
$
|
209,192
|
|
Portfolio turnover
|
|
|
120
|
%
|
|
|
131
|
%
|
|
|
213
|
%
|
|
|
193
|
%
4
|
|
|
249
|
%
5
|
1
|
Based on average shares outstanding.
|
2
|
Less than $(0.01) per share.
|
3
|
Where applicable, total investment returns exclude the effects of any sales charges and include the reinvestment of dividends and distributions.
|
4
|
Includes mortgage dollar roll transactions; excluding these transactions the portfolio turnover would have been 176%.
|
5
|
Includes TBA transactions; excluding these transactions the portfolio turnover would have been 144%.
|
31
Financial Highlights of BlackRock Investment Grade Bond Portfolio
Since
Class R Shares of the Investment Grade Bond Portfolio have no performance history, the financial information in the tables below shows the Funds financial performance for the periods indicated for Investor A Shares of the Fund. Although
Investor A Shares are not offered in this Prospectus, the Investor A Shares would have substantially similar performance as the Class R Shares offered in this Prospectus because the Investor A Shares and the Class R Shares are invested in the same
portfolio of securities and performance would differ only to the extent that the Investor A Shares and the Class R Shares do not have the same expenses. The actual return of Class R Shares would have been lower than that of Investor A Shares because
Class R Shares have higher expenses than Investor A Shares. Investor A Shares of the Fund are estimated to have expenses of 0.91% of average daily net assets (after waivers and reimbursements) for the current fiscal year and Class R Shares of the
Fund are expected to have expenses of 1.33% of average daily net assets (after waivers and reimbursements) for the current fiscal year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investor A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
October 19,
2007
1
to
September 30,
2008
|
|
|
|
Year Ended September 30,
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Per Share Operating Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
$
|
11.68
|
|
|
$
|
11.45
|
|
|
$
|
10.54
|
|
|
$
|
9.02
|
|
|
$
|
10.00
|
|
Net investment income
2
|
|
|
0.39
|
|
|
|
0.44
|
|
|
|
0.47
|
|
|
|
0.47
|
|
|
|
0.44
|
|
Net realized and unrealized gain (loss)
|
|
|
1.05
|
|
|
|
0.71
|
|
|
|
0.95
|
|
|
|
1.54
|
|
|
|
(0.98
|
)
|
Net increase (decrease) from investment operations
|
|
|
1.44
|
|
|
|
1.15
|
|
|
|
1.42
|
|
|
|
2.01
|
|
|
|
(0.54
|
)
|
Dividends and distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.39
|
)
|
|
|
(0.43
|
)
|
|
|
(0.47
|
)
|
|
|
(0.47
|
)
|
|
|
(0.44
|
)
|
Net realized gain
|
|
|
(0.53
|
)
|
|
|
(0.49
|
)
|
|
|
(0.04
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
Total dividends and distributions
|
|
|
(0.92
|
)
|
|
|
(0.92
|
)
|
|
|
(0.51
|
)
|
|
|
(0.49
|
)
|
|
|
(0.44
|
)
|
Net asset value, end of period
|
|
$
|
12.20
|
|
|
$
|
11.68
|
|
|
$
|
11.45
|
|
|
$
|
10.54
|
|
|
$
|
9.02
|
|
Total Investment Return
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value
|
|
|
13.07
|
%
|
|
|
11.47
|
%
|
|
|
14.05
|
%
|
|
|
22.81
|
%
|
|
|
(5.70
|
)%
4
|
Ratios to Average Net Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1.07
|
%
|
|
|
1.12
|
%
|
|
|
1.09
|
%
|
|
|
1.02
|
%
|
|
|
1.26
|
%
5
|
Total expenses excluding recoupment of past waived fees
|
|
|
1.07
|
%
|
|
|
1.11
|
%
|
|
|
1.09
|
%
|
|
|
1.02
|
%
|
|
|
1.26
|
%
5
|
Total expenses after fees waived, reimbursed and paid indirectly
|
|
|
0.85
|
%
|
|
|
0.90
|
%
|
|
|
0.88
|
%
|
|
|
0.74
|
%
|
|
|
0.81
|
%
5
|
Total expenses after fees waived, reimbursed and paid indirectly and excluding interest expense
|
|
|
0.85
|
%
|
|
|
0.90
|
%
|
|
|
0.87
|
%
|
|
|
0.74
|
%
|
|
|
0.73
|
%
5
|
Net investment income
|
|
|
3.33
|
%
|
|
|
4.16
|
%
|
|
|
4.42
|
%
|
|
|
4.64
|
%
|
|
|
4.59
|
%
5
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of period (000)
|
|
$
|
25,195
|
|
|
$
|
14,626
|
|
|
$
|
14,043
|
|
|
$
|
13,218
|
|
|
$
|
391
|
|
Portfolio turnover
|
|
|
86
|
%
6
|
|
|
104
|
%
7
|
|
|
137
|
%
8
|
|
|
166
|
%
9
|
|
|
652
|
%
10
|
1
|
Commencement of operations.
|
2
|
Based on average shares outstanding.
|
3
|
Where applicable, total investment returns exclude the effects of any sales charges and include the reinvestment of dividends and distributions.
|
4
|
Aggregate total investment return.
|
6
|
Includes mortgage dollar roll transactions; excluding these transactions the portfolio turnover would have been 84%.
|
7
|
Includes mortgage dollar roll transactions; excluding these transactions the portfolio turnover would have been 83%.
|
8
|
Includes mortgage dollar roll transactions; excluding these transactions the portfolio turnover would have been 128%.
|
9
|
Includes mortgage dollar roll transactions; excluding these transactions the portfolio turnover would have been 105%.
|
10
|
Includes TBA transactions; excluding these transactions the portfolio turnover would have been 287%.
|
32
General Information
Shareholder Documents
Electronic Access to Annual Reports, Semi-Annual Reports and Prospectuses
Electronic copies of most financial reports and prospectuses are available on BlackRocks website. Shareholders can sign up for e-mail notifications of quarterly statements, annual and semi-annual reports and
prospectuses by enrolling in the Funds electronic delivery program. To enroll:
Shareholders Who Hold Accounts with Investment Advisers, Banks or Brokerages:
Please contact your financial
professional. Please note that not all investment advisers, banks or brokerages may offer this service.
Shareholders Who Hold Accounts Directly With BlackRock:
n
|
|
Access the BlackRock website at http://www.blackrock.com/edelivery
|
Delivery of Shareholder Documents
The Fund delivers only one
copy of shareholder documents, including prospectuses, shareholder reports and proxy statements, to shareholders with multiple accounts at the same address. This practice is known as householding and is intended to eliminate duplicate
mailings and reduce expenses. Mailings of your shareholder documents may be householded indefinitely unless you instruct us otherwise. If you do not want the mailing of these documents to be combined with those for other members of your household,
please contact the Fund at (800) 441-7762.
Certain Fund Policies
Anti-Money Laundering Requirements
The Fund is subject to the USA PATRIOT Act (the Patriot Act). The Patriot Act is intended to prevent the use of the U.S. financial system in furtherance
of money laundering, terrorism or other illicit activities. Pursuant to requirements under the Patriot Act, the Fund may request information from shareholders to enable it to form a reasonable belief that it knows the true identity of its
shareholders. This information will be used to verify the identity of investors or, in some cases, the status of financial professionals; it will be used only for compliance with the requirements of the Patriot Act.
The Fund reserves the right to reject purchase orders from persons who have not
submitted information sufficient to allow the Fund to verify their identity. The Fund also reserves the right to redeem any amounts in the Fund from persons whose identity it is unable to verify on a timely basis. It is the Funds policy to
cooperate fully with appropriate regulators in any investigations conducted with respect to potential money laundering, terrorism or other illicit activities.
BlackRock Privacy Principles
BlackRock is committed to
maintaining the privacy of its current and former fund investors and individual clients (collectively, Clients) and to safeguarding their nonpublic personal information. The following information is provided to help you understand what
personal information BlackRock collects, how we protect that information and why in certain cases we share such information with select parties.
If you are located in a jurisdiction where specific laws, rules or regulations require BlackRock to provide you with additional or different privacy-related rights
beyond what is set forth below, then BlackRock will comply with those specific laws, rules or regulations.
BlackRock obtains or verifies personal nonpublic information from and about you from different sources, including the following: (i) information we receive from you or, if applicable, your Financial
Intermediary, on applications, forms or other documents; (ii) information about your transactions with us, our affiliates, or others; (iii) information we receive from a consumer reporting agency; and (iv) from visits to our website.
BlackRock does not sell or disclose to nonaffiliated third parties any
nonpublic personal information about its Clients, except as permitted by law, or as is necessary to respond to regulatory requests or to service Client accounts. These nonaffiliated third parties are required to protect the confidentiality and
security of this information and to use it only for its intended purpose.
We may share information with our affiliates to service your account or to provide you with information about other BlackRock products or services that may be of
interest to you. In addition, BlackRock restricts access to nonpublic personal information about its Clients to those BlackRock employees with a legitimate business need for the information. BlackRock maintains physical, electronic and procedural
safeguards that are designed to protect the nonpublic personal information of its Clients, including procedures relating to the proper storage and disposal of such information.
33
STATEMENT
OF ADDITIONAL INFORMATION
B
LACK
R
OCK
F
UNDS
II
100 Bellevue Parkway, Wilmington, Delaware 19809 Phone No. (800) 441-7762
This Statement of Additional Information of the BlackRock GNMA
Portfolio, BlackRock Inflation Protected Bond Portfolio, BlackRock Investment Grade Bond Portfolio and BlackRock U.S. Government Bond Portfolio (collectively, the Funds and each, a Fund), each a series of BlackRock Funds II
(the Trust), is not a prospectus and should be read in conjunction with the Prospectuses of the Funds, dated [ ], 2013, which have been filed with the Securities and Exchange Commission (the Commission)
and can be obtained, without charge, by calling (800) 441-7762 or by writing to the Funds at the above address. Each Funds Prospectus is incorporated by reference into this Statement of Additional Information, and Part I of this Statement
of Additional Information and the portions of Part II of this Statement of Additional Information that relate to the Fund have been incorporated by reference into each Funds Prospectus. The portions of Part II of this Statement of Additional
Information that do not relate to a Fund do not form a part of the Funds Statement of Additional Information, have not been incorporated by reference into the Funds Prospectus and should not be relied upon by investors in the Fund. The
audited financial statements of the Funds are incorporated into this Statement of Additional Information by reference to the Funds Annual Report to Shareholders for the fiscal year ended September 30, 2012 (the Annual Report).
You may request a copy of the Annual Report at no charge by calling (800) 441-7762 between 8:00 a.m. and 6:00 p.m. Eastern time on any business day.
References to the Investment Company Act of 1940, as amended (the Investment Company Act or the 1940 Act), or other applicable
law, will include any rules promulgated thereunder and any guidance, interpretations or modifications by the Commission, Commission staff or other authority with appropriate jurisdiction, including court interpretations, and exemptive, no-action or
other relief or permission from the Commission, Commission staff or other authority.
B
LACK
R
OCK
A
DVISORS,
LLC
M
ANAGER
B
LACK
R
OCK
I
NVESTMENTS,
LLC
D
ISTRIBUTOR
The date of this Statement of Additional Information is [ ], 2013.
|
|
|
|
|
|
|
|
|
Class
|
|
BlackRock
GNMA
Portfolio
Ticker Symbol
|
|
BlackRock
Inflation
Protected Bond
Portfolio
Ticker Symbol
|
|
BlackRock
Investment Grade
Bond Portfolio
Ticker Symbol
|
|
BlackRock
U.S.
Government
Bond Portfolio
Ticker Symbol
|
|
|
|
|
|
Investor A Shares
|
|
BGPAX
|
|
BPRAX
|
|
BLADX
|
|
CIGAX
|
|
|
|
|
|
Investor B Shares
|
|
BGPBX
|
|
BPIBX
|
|
|
|
BIGBX
|
|
|
|
|
|
Investor B1 Shares
|
|
|
|
|
|
|
|
BIGEX
|
|
|
|
|
|
Investor C Shares
|
|
BGPCX
|
|
BPRCX
|
|
|
|
BIGCX
|
|
|
|
|
|
Investor C1 Shares
|
|
|
|
|
|
|
|
BIGHX
|
|
|
|
|
|
Institutional Shares
|
|
BGNIX
|
|
BPRIX
|
|
BLDIX
|
|
PNIGX
|
|
|
|
|
|
BlackRock Shares
|
|
BBGPX
|
|
BPLBX
|
|
BLDRX
|
|
BIGLX
|
|
|
|
|
|
Service Shares
|
|
BGPSX
|
|
BPRSX
|
|
|
|
PIGSX
|
|
|
|
|
|
Class R Shares
|
|
|
|
|
|
|
|
BGBRX
|
TABLE OF CONTENTS
P
ART
I: I
NFORMATION
A
BOUT
T
HE
P
ORTFOLIOS
Part
I of this Statement of Additional Information sets forth information about the BlackRock GNMA Portfolio (GNMA Portfolio), BlackRock Inflation Protected Bond Portfolio (Inflation Protected Bond Portfolio), BlackRock
Investment Grade Bond Portfolio (Investment Grade Bond Portfolio) and BlackRock U.S. Government Bond Portfolio (U.S. Government Bond Portfolio) (collectively, the Funds and each, a Fund),
each a series of BlackRock Funds II (the Trust). It also includes information about the Trusts Board of Trustees (the Board or the Board of Trustees), the advisory services provided to and the management
fees applicable to the Funds and information about other fees applicable to and services provided to the Funds. This Part I should be read in conjunction with the Funds Prospectuses and those portions of Part II of this Statement of Additional
Information that pertain to the specific Fund.
I.
|
|
Investment Objectives and Policies
|
Set forth below are descriptions of some of the types of investments and investment strategies that a Fund and, if applicable, its underlying funds may
use, and the risks and considerations associated with those investments and investment strategies. Please see the Part II of this Statement of Additional Information for further information on these investments and investment strategies. Information
contained in Part II about the risks and considerations associated with investments and/or investment strategies applies only to the extent a Fund makes each type of investment or uses each investment strategy. Information that does not apply to a
Fund does not form a part of the Funds Statement of Additional Information and should not be relied on by investors in Fund.
Only information that is clearly identified as applicable to a Fund is considered to form a part of Funds Statement of Additional Information.
|
|
|
|
|
|
|
|
|
|
|
GNMA
Portfolio
|
|
Inflation Protected
Bond
Portfolio
|
|
Investment Grade
Bond
Portfolio
|
|
U.S. Government
Bond
Portfolio
|
144A Securities
|
|
X
|
|
X
|
|
X
|
|
X
|
Asset-Backed Securities
|
|
X
|
|
X
|
|
X
|
|
X
|
Asset-Based Securities
|
|
X
|
|
X
|
|
X
|
|
X
|
Precious Metal-Related Securities
|
|
X
|
|
X
|
|
X
|
|
X
|
Bank Loans
|
|
X
|
|
X
|
|
X
|
|
X
|
Borrowing and Leverage
|
|
X
|
|
X
|
|
X
|
|
X
|
Cash Flows; Expenses
|
|
X
|
|
X
|
|
X
|
|
X
|
Cash Management
|
|
X
|
|
X
|
|
X
|
|
X
|
Collateralized Debt Obligations
|
|
|
|
|
|
|
|
|
Collateralized Bond Obligations
|
|
X
|
|
X
|
|
X
|
|
X
|
Collateralized Loan Obligations
|
|
X
|
|
X
|
|
X
|
|
X
|
Commercial Paper
|
|
X
|
|
X
|
|
X
|
|
X
|
Commodity-Linked Derivative Instruments and Hybrid Instruments
|
|
|
|
|
|
X
|
|
|
Convertible Securities
|
|
X
|
|
X
|
|
X
|
|
X
|
Debt Securities
|
|
X
|
|
X
|
|
X
|
|
X
|
Depositary Receipts (ADRs, EDRs and GDRs)
|
|
X
|
|
X
|
|
X
|
|
X
|
Derivatives
|
|
X
|
|
X
|
|
X
|
|
X
|
Hedging
|
|
X
|
|
X
|
|
X
|
|
X
|
Indexed and Inverse Floating Rate
|
|
X
|
|
X
|
|
X
|
|
X
|
Swap Agreements
|
|
X
|
|
X
|
|
X
|
|
X
|
Interest Rate Swaps, Caps and Floors
|
|
X
|
|
X
|
|
X
|
|
X
|
I-2
|
|
|
|
|
|
|
|
|
|
|
GNMA
Portfolio
|
|
Inflation Protected
Bond
Portfolio
|
|
Investment Grade
Bond
Portfolio
|
|
U.S. Government
Bond
Portfolio
|
Credit Default Swap Agreements
|
|
X
|
|
X
|
|
X
|
|
X
|
Credit Linked Securities
|
|
X
|
|
X
|
|
X
|
|
X
|
Interest Rate Transactions and Swaptions
|
|
See
note 1 below
|
|
See
note 1
below
|
|
See
note 1
below
|
|
See
note 1
below
|
Total Return Swap Agreements
|
|
X
|
|
X
|
|
X
|
|
X
|
Options on Securities and Securities Indices
|
|
|
|
|
|
X
|
|
|
Types of Options
|
|
See notes 1 and 2 below
|
|
See
note 1
below
|
|
See
notes 1
and 2
below
|
|
See
notes 1
and 2
below
|
Call Options
|
|
See notes 1 and 2 below
|
|
See
note 1
below
|
|
See
notes 1
and 2
below
|
|
See
notes 1
and 2
below
|
Put Options
|
|
See notes 1 and 2 below
|
|
See
note 1
below
|
|
See
notes 1
and 2
below
|
|
See
notes 1
and 2
below
|
Options on Government National Mortgage Association (GNMA) Certificates
|
|
X
|
|
X
|
|
X
|
|
X
|
Futures
|
|
X
|
|
X
|
|
X
|
|
X
|
Foreign Exchange Transactions
|
|
|
|
X
|
|
X
|
|
X
|
Forward Foreign Exchange Transactions
|
|
|
|
X
|
|
X
|
|
X
|
Currency Futures
|
|
|
|
X
|
|
X
|
|
X
|
Currency Options
|
|
|
|
X
|
|
See
note 2
below
|
|
See
note 2
below
|
Limitations on Currency Transactions
|
|
|
|
X
|
|
X
|
|
X
|
Risk Factors in Hedging Foreign Currency Risks
|
|
|
|
X
|
|
X
|
|
X
|
Risk Factors in Derivatives
|
|
X
|
|
X
|
|
X
|
|
X
|
Credit Risk
|
|
X
|
|
X
|
|
X
|
|
X
|
Currency Risk
|
|
|
|
X
|
|
X
|
|
X
|
Leverage Risk
|
|
X
|
|
X
|
|
X
|
|
X
|
Liquidity Risk
|
|
X
|
|
X
|
|
X
|
|
X
|
Correlation Risk
|
|
X
|
|
X
|
|
X
|
|
X
|
Index Risk
|
|
X
|
|
X
|
|
X
|
|
X
|
Additional Risk Factors of OTC Transactions; Limitations on the use of OTC Derivatives
|
|
X
|
|
X
|
|
X
|
|
X
|
Distressed Securities
|
|
|
|
|
|
|
|
|
Dollar Rolls
|
|
X
|
|
X
|
|
X
|
|
X
|
Equity Securities
|
|
|
|
|
|
X
|
|
|
Exchange Traded Notes
|
|
|
|
|
|
X
|
|
|
Foreign Investment Risks
|
|
|
|
X
|
|
X
|
|
X
|
Foreign Market Risk
|
|
|
|
X
|
|
X
|
|
X
|
Foreign Economy Risk
|
|
|
|
X
|
|
X
|
|
X
|
Currency Risk and Exchange Risk
|
|
|
|
X
|
|
X
|
|
X
|
Governmental Supervision and Regulation/Accounting Standards
|
|
|
|
X
|
|
X
|
|
X
|
I-3
|
|
|
|
|
|
|
|
|
|
|
GNMA
Portfolio
|
|
Inflation Protected
Bond
Portfolio
|
|
Investment Grade
Bond
Portfolio
|
|
U.S. Government
Bond
Portfolio
|
Certain Risks of Holding Fund Assets Outside the United States
|
|
|
|
X
|
|
X
|
|
X
|
Settlement Risk
|
|
|
|
X
|
|
X
|
|
X
|
Funding Agreements
|
|
X
|
|
X
|
|
X
|
|
X
|
Guarantees
|
|
X
|
|
X
|
|
X
|
|
X
|
Illiquid or Restricted Securities
|
|
X
|
|
X
|
|
X
|
|
X
|
Inflation-Indexed Bonds
|
|
|
|
X
|
|
X
|
|
|
Inflation Risk
|
|
|
|
X
|
|
X
|
|
|
Investment Grade Debt Obligations
|
|
X
|
|
X
|
|
X
|
|
X
|
Investment in Emerging Markets
|
|
|
|
X
|
|
X
|
|
|
Brady Bonds
|
|
|
|
X
|
|
X
|
|
|
Investment in Other Investment Companies
|
|
X
|
|
X
|
|
X
|
|
X
|
Restriction on Certain Investments
|
|
X
|
|
X
|
|
X
|
|
X
|
Junk Bonds
|
|
|
|
X
|
|
X
|
|
|
Lease Obligations
|
|
X
|
|
X
|
|
X
|
|
X
|
Liquidity Management
|
|
|
|
|
|
|
|
|
Master Limited Partnerships
|
|
|
|
|
|
X
|
|
|
Mezzanine Investments
|
|
|
|
X
|
|
|
|
|
Money Market Obligations of Domestic Banks, Foreign Banks and Foreign Branches of U.S. Banks
|
|
X
|
|
X
|
|
X
|
|
X
|
Money Market Securities
|
|
X
|
|
X
|
|
X
|
|
X
|
Mortgage-Related Securities
|
|
X
|
|
X
|
|
X
|
|
X
|
Mortgage-Backed Securities
|
|
X
|
|
X
|
|
X
|
|
X
|
Collateralized Mortgage Obligations (CMOs)
|
|
X
|
|
X
|
|
X
|
|
X
|
Adjustable Rate Mortgage Securities
|
|
X
|
|
X
|
|
X
|
|
X
|
CMO Residuals
|
|
X
|
|
X
|
|
X
|
|
X
|
Stripped Mortgage-Backed Securities
|
|
X
|
|
X
|
|
X
|
|
X
|
Tiered Index Bonds
|
|
X
|
|
X
|
|
X
|
|
X
|
Municipal Investments
|
|
X
|
|
X
|
|
X
|
|
X
|
Risk Factors and Special Considerations Relating to Municipal Bonds
|
|
X
|
|
X
|
|
X
|
|
X
|
Description of Municipal Bonds
|
|
X
|
|
X
|
|
X
|
|
X
|
General Obligation Bonds
|
|
X
|
|
X
|
|
X
|
|
X
|
Revenue Bonds
|
|
X
|
|
X
|
|
X
|
|
X
|
Private Activity Bonds (PABs)
|
|
X
|
|
X
|
|
X
|
|
X
|
Moral Obligation Bonds
|
|
X
|
|
X
|
|
X
|
|
X
|
Municipal Notes
|
|
X
|
|
X
|
|
X
|
|
X
|
Municipal Commercial Paper
|
|
X
|
|
X
|
|
X
|
|
X
|
Municipal Lease Obligations
|
|
X
|
|
X
|
|
X
|
|
X
|
Tender Option Bonds
|
|
X
|
|
X
|
|
X
|
|
X
|
Yields
|
|
X
|
|
X
|
|
X
|
|
X
|
Variable Rate Demand Obligations (VRDOs) and Participating VRDOs
|
|
X
|
|
X
|
|
X
|
|
X
|
Transactions in Financial Futures Contracts
|
|
X
|
|
X
|
|
X
|
|
X
|
I-4
|
|
|
|
|
|
|
|
|
|
|
GNMA
Portfolio
|
|
Inflation Protected
Bond
Portfolio
|
|
Investment Grade
Bond
Portfolio
|
|
U.S. Government
Bond
Portfolio
|
Call Rights
|
|
X
|
|
X
|
|
X
|
|
X
|
Municipal Interest Rate Swap Transactions
|
|
X
|
|
X
|
|
X
|
|
X
|
Insured Municipal Bonds
|
|
X
|
|
X
|
|
X
|
|
X
|
Participation Notes
|
|
|
|
|
|
|
|
|
Pay-in-kind-Bonds
|
|
X
|
|
X
|
|
X
|
|
X
|
Portfolio Turnover Rates
|
|
X
|
|
X
|
|
X
|
|
X
|
Preferred Stock
|
|
|
|
|
|
X
|
|
X
|
Real Estate Related Securities
|
|
|
|
|
|
|
|
|
Real Estate Investment Trusts (REITs)
|
|
X
|
|
X
|
|
X
|
|
X
|
Repurchase Agreements and Purchase and Sale Contracts
|
|
X
|
|
X
|
|
X
|
|
X
|
Reverse Repurchase Agreements
|
|
X
|
|
X
|
|
X
|
|
X
|
Rights Offerings and Warrants to Purchase
|
|
X
|
|
X
|
|
X
|
|
X
|
Securities Lending
|
|
X
|
|
X
|
|
X
|
|
X
|
Short Sales
|
|
See
note 3 below
|
|
See
note 3
below
|
|
See
note 3
below
|
|
See
note 3
below
|
Sovereign Debt
|
|
|
|
X
|
|
X
|
|
X
|
Standby Commitment Agreements
|
|
X
|
|
X
|
|
X
|
|
X
|
Stripped Securities
|
|
X
|
|
X
|
|
X
|
|
X
|
Structured Notes
|
|
|
|
|
|
X
|
|
|
Supranational Entities
|
|
|
|
X
|
|
X
|
|
X
|
Tax-Exempt Derivatives
|
|
|
|
X
|
|
X
|
|
|
Tax-Exempt Preferred Shares
|
|
|
|
X
|
|
X
|
|
|
Taxability Risk
|
|
X
|
|
X
|
|
X
|
|
X
|
Trust Preferred Securities
|
|
|
|
|
|
X
|
|
|
U.S. Government Obligations
|
|
X
|
|
X
|
|
X
|
|
X
|
When Issued Securities, Delayed Delivery Securities and Forward Commitments
|
|
X
|
|
X
|
|
X
|
|
X
|
Yields and Ratings
|
|
X
|
|
X
|
|
X
|
|
X
|
Zero Coupon Securities
|
|
X
|
|
X
|
|
X
|
|
X
|
1
|
|
Fund may purchase (but not write) interest rate options.
|
2
|
|
Fund may purchase (but not write) currency options.
|
3
|
|
Fund may only make short sales against the box and with respect to futures contracts and related options.
|
Additional Information on Investment Strategies
Each Fund.
Each Fund will normally invest at least 80% of the value of its total assets
in debt securities.
The Funds that are subject to Rule 35d-1
under the Investment Company Act will not change their investment policies required by the Rule without giving shareholders 60 days prior written notice.
Each of the Funds, except the Inflation Protected Bond Portfolio, is a diversified open-end investment company under the Investment Company Act. The
Inflation Protected Bond Portfolio is a non-diversified open-end investment company under the Investment Company Act.
Inflation Protected Bond Portfolio
The Inflation Protected Bond Portfolio will, and other Funds may, invest in inflation-indexed bonds, which are fixed income securities whose
principal value is periodically adjusted according to the rate of inflation.
I-5
Two structures are common. The U.S. Treasury and some other issuers use a structure that accrues inflation into the principal value of the bond. Most other issuers pay out the Consumer Price
Index (CPI) accruals as part of a semiannual coupon.
Inflation-indexed securities issued by the U.S. Treasury have maturities of five, ten or thirty years, although it is possible that securities with other
maturities will be issued in the future. The U.S. Treasury securities pay interest on a semi-annual basis, equal to a fixed percentage of the inflation-adjusted principal amount. For example, if a Fund purchased an inflation-indexed bond with a par
value of $1,000 and a 3% real rate of return coupon (payable 1.5% semi-annually), and inflation over the first six months were 1%, the mid-year par value of the bond would be $1,010 and the first semi-annual interest payment would be $15.15 ($1,010
times 1.5%). If inflation during the second half of the year resulted in the whole years inflation equaling 3%, the end-of-year par value of the bond would be $1,030 and the second semi-annual interest payment would be $15.45 ($1,030 times
1.5%).
If the periodic adjustment rate measuring inflation
falls, the principal value of inflation-indexed bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of the original bond
principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds, even during a period of deflation. However, the current market value of the bonds is not guaranteed, and will fluctuate. The
Inflation Protected Bond Portfolio may also invest in other inflation related bonds which may or may not provide a similar guarantee. If a guarantee of principal is not provided, the adjusted principal value of the bond repaid at maturity may be
less than the original principal.
The value of inflation-indexed
bonds is expected to change in response to changes in real interest rates. Real interest rates in turn are tied to the relationship between nominal interest rates and the rate of inflation. Therefore, if inflation were to rise at a faster rate than
nominal interest rates, real interest rates might decline, leading to an increase in value of inflation-indexed bonds. In contrast, if nominal interest rates increased at a faster rate than inflation, real interest rates might rise, leading to a
decrease in value of inflation-indexed bonds.
While these
securities are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If interest rates rise due to reasons other than inflation (for example, due to changes in currency
exchange rates), investors in these securities may not be protected to the extent that the increase is not reflected in the bonds inflation measure.
The periodic adjustment of U.S. inflation-indexed bonds is tied to the Consumer Price Index for Urban Consumers (CPI-U), which is calculated
monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in the cost of living, made up of components such as housing, food, transportation and energy. Inflation-indexed bonds issued by a foreign government are generally
adjusted to reflect a comparable inflation index, calculated by that government. There can be no assurance that the CPI-U or any foreign inflation index will accurately measure the real rate of inflation in the prices of goods and services.
Moreover, there can be no assurance that the rate of inflation in a foreign country will be correlated to the rate of inflation in the United States.
Any increase in the principal amount of an inflation-indexed bond will be considered taxable ordinary income, even though investors do not receive their
principal until maturity.
The Inflation Protected Bond Portfolio
may invest in securities rated in the category C and above or determined by the sub-adviser to be of comparable quality. Securities rated C are considered highly speculative and may be used to cover a situation where the
issuer has filed a bankruptcy petition but debt service payments are continued. While such debt will likely have some quality and protective characteristics, those are outweighed by large uncertainties or major risk exposure to adverse conditions.
The Inflation Protected Bond Portfolio may acquire stand-by
commitments with respect to Municipal Obligations held by it. The acquisition of a stand-by commitment may increase the cost, and thereby reduce the yield, of the Municipal Obligations to which the commitment relates.
I-6
GNMA Portfolio
The GNMA Portfolio may acquire several types of mortgage-related securities.
The GNMA Portfolio will invest primarily in GNMA Mortgage Pass-Through Certificates (also known as Ginnie Maes), and may make significant investments in other residential and commercial mortgage-related and other asset-backed securities
(i.e., securities backed by home equity loans, installment sale contracts, credit card receivables or other assets) issued by governmental entities and private issuers. Ginnie Maes are typically mortgage pass-through certificates, which provide the
holder with a pro rata interest in the underlying mortgages.
Regulation Regarding Derivatives.
Effective December 31, 2012, the Commodity Futures Trading Commission (CFTC) adopted certain
regulatory changes that subject registered investment companies and advisers to registered investment companies to regulation by the CFTC if a fund invests more than a prescribed level of its liquidation value in CFTC-regulated futures, options and
swaps, or if the fund markets itself as providing investment exposure to such instruments. Due to each Funds potential use of CFTC-regulated futures, options and swaps above the prescribed levels, each Fund will be considered a commodity
pool under the Commodity Exchange Act. Accordingly, the Funds investment adviser will be required to register as a commodity pool operator and will be subject to CFTC regulation with respect to each Fund.
II.
|
|
Investment Restrictions
|
Each Fund is subject to the investment limitations enumerated in this subsection which may be changed with respect to a particular Fund only by a vote of
the holders of a majority of such Funds outstanding shares.
Each of the Funds (other than the Inflation Protected Bond Portfolio) may not:
Purchase securities of any one issuer (other than securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities or
certificates of deposit for any such securities) if more than 5% of the value of the Funds total assets would (taken at current value) be invested in the securities of such issuer, or more than 10% of the issuers outstanding voting
securities would be owned by the Fund or the Trust, except that up to 25% of the value of the Funds total assets may (taken at current value) be invested without regard to these limitations. For purposes of this limitation, a security is
considered to be issued by the entity (or entities) whose assets and revenues back the security. A guarantee of a security shall not be deemed to be a security issued by the guarantors when the value of all securities issued and guaranteed by the
guarantor, and owned by the Fund, does not exceed 10% of the value of the Funds total assets.
All Funds may not:
1. Purchase any securities which would cause 25% or more of the value of the Funds total assets at the time of purchase to be invested in the securities of one or more issuers conducting their
principal business activities in the same industry, provided that (a) there is no limitation with respect to (i) instruments issued or guaranteed by the United States and tax exempt instruments issued by any state, territory or possession
of the United States, the District of Columbia or any of their authorities, agencies, instrumentalities or political subdivisions, and (ii) repurchase agreements secured by the instruments described in clause (i); (b) wholly-owned finance
companies will be considered to be in the industries of their parents if their activities are primarily related to financing the activities of the parents; and (c) utilities will be divided according to their services; for example, gas, gas
transmission, electric and gas, electric and telephone will each be considered a separate industry.
2. Issue senior securities, borrow money or pledge its assets, except that a Fund may borrow from banks or enter into reverse
repurchase agreements or dollar rolls in amounts aggregating not more than 33
1
/
3
% of the value of its total assets (calculated when the loan is made) to take advantage of investment opportunities and may
pledge up to 33
1
/
3
% of the value of its total assets to secure such borrowings. Each Fund is also authorized to borrow an additional 5% of its total assets without regard to the foregoing limitations for temporary purposes
such as clearance of portfolio transactions and share redemptions. For purposes of these restrictions, the purchase or sale of securities on a when-issued, delayed delivery or forward commitment
I-7
basis, the purchase and sale of options and futures contracts and collateral arrangements with respect thereto are not deemed to be the issuance of a senior security, a borrowing or a pledge of
assets.
3. Purchase or sell real estate, except that each Fund
may purchase securities of issuers which deal in real estate and may purchase securities which are secured by interests in real estate.
4. Acquire any other investment company or investment company security except in connection with a merger, consolidation, reorganization or acquisition of
assets or where otherwise permitted by the Investment Company Act.
5. Act as an underwriter of securities within the meaning of the Securities Act of 1933 except to the extent that the purchase of obligations directly
from the issuer thereof, or the disposition of securities, in accordance with the Funds investment objective, policies and limitations may be deemed to be underwriting.
6. Write or sell put options, call options, straddles, spreads, or any
combination thereof, except for transactions in options on securities and securities indices, futures contracts and options on futures contracts and, in the case of the Inflation Protected Bond Portfolio, currencies.
7. Purchase securities of companies for the purpose of exercising control.
8. Purchase securities on margin, make short sales of securities
or maintain a short position, except that (a) this investment limitation shall not apply to a Funds transactions in futures contracts and related
options or a Funds sale of securities short against the box, and (b) a Fund may obtain short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities.
9. Purchase or sell commodity contracts, or invest in oil, gas
or mineral exploration or development programs, except that each Fund may, to the extent appropriate to its investment policies, purchase securities of companies engaging in whole or in part in such activities and may enter into futures contracts
and related options.
10. Make loans, except that each Fund may
purchase and hold debt instruments and enter into repurchase agreements in accordance with its investment objective and policies and may lend portfolio securities. See Securities Lending in Part II of this SAI.
11. Purchase or sell commodities except that each Fund may, to the extent
appropriate to its investment policies, purchase securities of companies engaging in whole or in part in such activities, may engage in currency transactions and may enter into futures contracts and related options.
Unless otherwise indicated, all limitations apply only at the time that a
transaction is undertaken. Any change in the percentage of a Funds assets invested in certain securities or other instruments resulting from market fluctuations or other changes in the Funds total assets will not require the Fund to
dispose of an investment until the adviser or sub-adviser determines that it is practicable to sell or close out the investment without undue market or tax consequences.
III.
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Information on Trustees and Officers
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The Board of Trustees of the Trust consists of thirteen individuals (each a Trustee), ten of whom are not interested persons of the Trust as
defined in the Investment Company Act (the Independent Trustees). The registered investment companies advised by the Manager or its affiliates (the BlackRock-advised Funds) are organized into one complex of closed-end funds,
two complexes of open-end funds (the Equity-Liquidity Complex and the Equity-Bond Complex) and one complex of exchange-traded funds (each a BlackRock Fund Complex). The Trust is included in the BlackRock Fund Complex referred to as the
Equity-Bond Complex. The Trustees also oversee as Board members the operations of the other open-end registered investment companies included in the Equity-Bond Complex.
The Board of Trustees has overall responsibility for the oversight of the
Trust and each Fund. The Chairman of the Board is an Independent Trustee, and the Chairman of each Board committee (each, a Committee) is an Independent Trustee. The Board has five standing Committees: an Audit Committee, a Governance
and Nominating Committee, a Compliance Committee, a Performance Oversight Committee and an Executive
I-8
Committee. The Chairman of the Boards role is to preside at all meetings of the Board, and to act as a liaison with service providers, officers, attorneys, and other Trustees generally
between meetings. The Chairman of each Committee performs a similar role with respect to the Committee. The Chairman of the Board or a Committee may also perform such other functions as may be delegated by the Board or the Committee from time to
time. The Independent Trustees meet regularly outside the presence of Fund management, in executive session or with other service providers to the Funds. The Board has regular meetings five times a year, and may hold special meetings if required
before its next regular meeting. Each Committee meets regularly to conduct the oversight functions delegated to that Committee by the Board and reports its findings to the Board. The Board and each standing Committee conduct annual assessments of
their oversight function and structure. The Board has determined that the Boards leadership structure is appropriate because it allows the Board to exercise independent judgment over management and to allocate areas of responsibility among
Committees and the full Board to enhance effective oversight.
The Board has engaged the Manager to manage each Fund on a day-to day basis. The Board is responsible for overseeing the Manager, other service providers,
the operations of each Fund and associated risk in accordance with the provisions of the Investment Company Act, state law, other applicable laws, the Trusts charter, and each Funds investment objectives and strategies. The Board
reviews, on an ongoing basis, each Funds performance, operations, and investment strategies and techniques. The Board also conducts reviews of the Manager and its role in running the operations of each Fund.
Day-to-day risk management with respect to each Fund is the responsibility
of the Manager or of sub-advisers or other service providers (depending on the nature of the risk), subject to the supervision of the Manager. Each Fund is subject to a number of risks, including investment, compliance, operational and valuation
risks, among others. While there are a number of risk management functions performed by the Manager and the sub-advisers or other service providers, as applicable, it is not possible to eliminate all of the risks applicable to each Fund. Risk
oversight forms part of the Boards general oversight of each Fund and is addressed as part of various Board and Committee activities. The Board, directly or through a Committee, also reviews reports from, among others, management, the
independent registered public accounting firm for each Fund, sub-advisers, and internal auditors for the investment adviser or its affiliates, as appropriate, regarding risks faced by each Fund and managements or the service providers
risk functions. The Committee system facilitates the timely and efficient consideration of matters by the Trustees, and facilitates effective oversight of compliance with legal and regulatory requirements and of each Funds activities and
associated risks. The Board has appointed a Chief Compliance Officer, who oversees the implementation and testing of each Funds compliance program and reports to the Board regarding compliance matters for each Fund and their service providers.
The Independent Trustees have engaged independent legal counsel to assist them in performing their oversight responsibilities.
The members of the Audit Committee are Fred G. Weiss (Chair), Robert M. Hernandez and the Honorable Stuart E. Eizenstat, all of whom are Independent
Trustees. The principal responsibilities of the Audit Committee are to approve the selection, retention, termination and compensation of the Trusts independent registered public accounting firm (the independent auditors) and to
oversee the independent auditors work. The Audit Committees responsibilities include, without limitation, to (1) evaluate the qualifications and independence of the independent auditors; (2) approve all audit engagement terms
and fees for each Fund; (3) review the conduct and results of each audit and discuss each Funds audited financial statements; (4) review any issues raised by the independent auditor or Fund management regarding the accounting for
financial reporting policies and practices of each Fund and the internal controls of each Fund and certain service providers; (5) oversee the performance of (a) each Funds internal audit function provided by its investment adviser
and (b) the independent auditor; (6) oversee policies, procedures and controls regarding valuation of each Funds investments; (7) discuss with Fund management its policies regarding risk assessment and risk management as such
matters relate to each Funds financial reporting and controls; and (8) resolve any disagreements between Fund management and the independent auditors regarding financial reporting. The Board has adopted a written charter for the Audit
Committee. During the fiscal year ended September 30, 2012, the Audit Committee met eight times.
I-9
The members of the Governance and Nominating Committee (the Governance Committee) are the
Honorable Stuart E. Eizenstat (Chair), Robert M. Hernandez and Fred G. Weiss, all of whom are Independent Trustees. The principal responsibilities of the Governance Committee are to (1) identify individuals qualified to serve as Independent
Trustees of the Trust and recommend Independent Trustee nominees for election by shareholders or appointment by the Board; (2) advise the Board with respect to Board composition, procedures and committees (other than the Audit Committee);
(3) oversee periodic self-assessments of the Board and committees of the Board (other than the Audit Committee); (4) review and make recommendations regarding Independent Trustee compensation; and (5) monitor corporate governance
matters and develop appropriate recommendations to the Board. The Governance Committee may consider nominations for the office of Trustee made by Fund shareholders as it deems appropriate. Fund shareholders who wish to recommend a nominee should
send nominations to the Secretary of the Trust that include biographical information and set forth the qualifications of the proposed nominee. The Board has adopted a written charter for the Governance Committee. During the fiscal year ended
September 30, 2012, the Governance Committee met four times.
The members of the Compliance Committee are James H. Bodurtha (Chair), Bruce R. Bond and Roberta Cooper Ramo, all of whom are Independent Trustees. The
Compliance Committees purpose is to assist the Board in fulfilling its responsibility to oversee regulatory and fiduciary compliance matters involving the Trust, the fund-related activities of BlackRock and the Trusts third party service
providers. The Compliance Committees responsibilities include, without limitation, to (1) oversee the compliance policies and procedures of the Trust and its service providers; (2) review information on and, where appropriate,
recommend policies concerning the Trusts compliance with applicable law; and (3) review reports from and make certain recommendations and determinations regarding the Trusts Chief Compliance Officer. The Board has adopted a written
charter for the Compliance Committee. During the fiscal year ended September 30, 2012, the Compliance Committee met twelve times.
The members of the Performance Oversight Committee (the Performance Committee) are David H. Walsh (Chair), Donald W. Burton, Kenneth A. Froot
and John F. OBrien, all of whom are Independent Trustees, and Paul L. Audet, who is an interested Trustee. The Performance Committees purpose is to assist the Board in fulfilling its responsibility to oversee each Funds investment
performance relative to its agreed-upon performance objectives. The Performance Committees responsibilities include, without limitation, to (1) review each Funds investment objectives, policies and practices, (2) recommend to
the Board specific investment tools and techniques employed by BlackRock, (3) recommend to the Board appropriate investment performance objectives based on its review of appropriate benchmarks and competitive universes, (4) review each
Funds investment performance relative to agreed-upon performance objectives and (5) review information on unusual or exceptional investment matters. The Board has adopted a written charter for the Performance Committee. During the fiscal
year ended September 30, 2012, the Performance Committee met five times.
The members of the Executive Committee are James H. Bodurtha, Honorable Stuart E. Eizenstat, Robert M. Hernandez, David H. Walsh and Fred G. Weiss, all of whom are Independent Trustees, and Paul L. Audet,
who serves as an interested Trustee. The principal responsibilities of the Executive Committee are to (1) act on routine matters between meetings of the Board; (2) act on such matters as may require urgent action between meetings of the
Board; and (3) exercise such other authority as may from time to time be delegated to the Executive Committee by the Board. The Board has adopted a written charter for the Executive Committee. The Executive Committee was constituted
December 9, 2008, and during the fiscal year ended September 30, 2012, the Executive Committee did not meet.
The Independent Trustees have adopted a statement of policy that describes the experience, qualifications, skills and attributes that are necessary and
desirable for potential Independent Trustee candidates (the Statement of Policy). The Board believes that each Independent Trustee satisfied, at the time he or she was initially elected or appointed a Trustee, and continues to satisfy,
the standards contemplated by the Statement of Policy. Furthermore, in determining that a particular Trustee was and continues to be qualified to serve as a Trustee, the Board has considered a variety of criteria, none of which, in isolation, was
controlling. The Board
I-10
believes that, collectively, the Trustees have balanced and diverse experience, skills, attributes and qualifications, which allow the Board to operate effectively in governing the Trust and
protecting the interests of shareholders. Among the attributes common to all Trustees are their ability to review critically, evaluate, question and discuss information provided to them, to interact effectively with the Funds investment
adviser, sub-advisers, other service providers, counsel and independent auditors, and to exercise effective business judgment in the performance of their duties as Trustees. Each Trustees ability to perform his or her duties effectively is
evidenced by his or her educational background or professional training; business, consulting, public service or academic positions; experience from service as a board member of each Fund and the other funds in the BlackRock Fund Complex (and any
predecessor funds), other investment funds, public companies, or non-profit entities or other organizations; ongoing commitment and participation in Board and committee meetings, as well as their leadership of standing and ad hoc committees
throughout the years; or other relevant life experiences.
The
table below discusses some of the experiences, qualifications and skills of each of our Trustees that support the conclusion that each board member should serve (or continue to serve) on the Boards.
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Trustee
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Experience, Qualifications and Skills
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|
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Independent Trustees
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James H. Bodurtha
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James H. Bodurtha has served for more than 20 years on the boards of registered investment companies, most recently as a member of the Board of the Equity-Bond Complex and its
predecessor funds, including as Chairman of the Board of certain of the legacy-Merrill Lynch Investment Managers, L.P. (MLIM) funds. Prior thereto, Mr. Bodurtha was counsel to and a member of the Board of a smaller bank-sponsored mutual
funds group. In addition, Mr. Bodurtha is a member of, and previously served as Chairman of, the Independent Directors Council and currently serves as an independent director on the Board of Governors of the Investment Company Institute. He also has
more than 30 years of executive management and business experience through his work as a consultant and as the chairman of the board of a privately-held company. In addition, Mr. Bodurtha has more than 20 years of legal experience as a corporate
attorney and partner in a law firm, where his practice included counseling registered investment companies and their boards.
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Bruce R. Bond
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|
Bruce R. Bond has served for approximately 15 years on the board of registered investment companies, having served as a member of the Board of the Equity-Bond Complex and its
predecessor funds, including the legacy-BlackRock funds and the State Street Research Mutual Funds. He also has executive management and business experience, having served as president and chief executive officer of several communications networking
companies. Mr. Bond also has corporate governance experience from his service as a director of a computer equipment company.
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Donald W. Burton
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Donald W. Burton has served for approximately 25 years on the board of registered investment companies, having served as a member of the Board of the Equity-Bond Complex and its
predecessor funds, including the legacy-MLIM and Raymond James funds. He also has more than 30 years of investment management business experience, having served as the managing general partner of an investment partnership, and a member of the
Investment Advisory Council of the Florida State Board of Administration. In addition, Mr. Burton has corporate governance experience, having served as a board member of publicly-held financial, health-care, and telecommunications
companies.
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The Honorable Stuart E. Eizenstat
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|
The Honorable Stuart E. Eizenstat has served for approximately 11 years on the board of registered investment companies, having served as a member of the Board of the Equity-Bond
Complex and its predecessor funds, including the legacy-BlackRock funds. He served as U.S. Ambassador to the European Union Under Secretary of Commerce for International Trade, Under Secretary of State for Economic, Business & Agricultural
Affairs, and Deputy Secretary of the U.S. Treasury during the Clinton Administration. He was Director of the White House Domestic Policy Staff and Chief Domestic Policy Adviser to President Carter. In addition, Mr. Eizenstat is a practicing attorney
and Head of the International Practice at a major international law firm. Mr. Eizenstat has business and executive management experience and corporate governance experience through his service on the advisory boards and corporate boards of
publicly-held consumer, energy, environmental delivery, metallurgical and telecommunications companies. Mr. Eizenstat has been determined by the Audit Committee to be an audit committee financial expert, as such term is defined in the applicable SEC
rules.
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Kenneth A. Froot
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Kenneth A. Froot has served for approximately 17 years on the boards of registered investment companies, having served as a member of the Board of the Equity-Bond Complex and its
predecessor funds, including the legacy-MLIM funds. The Equity-Bond Board benefits from Mr. Froots years of academic experience, having served as a professor of finance at Harvard University since 1992 and teaching courses on capital markets,
international finance, and risk management. Mr. Froot has published numerous articles and books on a range of topics, including, among others, the financing of risk, risk management, the global financial system, currency analysis, foreign investing,
and investment style strategies. He has served as a director of research for Harvard Business School for approximately 7 years, and as a managing partner of an investment partnership. In addition, Mr. Froot has served as a consultant to the
International Monetary Fund, the World Bank, and the Board of Governors of the Federal Reserve, and served on the staff of the US Presidents Council of Economic Advisers and the Economic Advisory Board of the Export-Import Bank of the United
States.
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I-11
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Trustee
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Experience, Qualifications and Skills
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Robert M. Hernandez
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Robert M. Hernandez has served for approximately 18 years on the board of registered investment companies, having served as Chairman of the Board of the Equity-Bond Complex and as
Vice Chairman and Chairman of the Audit and Nominating/Governance Committees of its predecessor funds, including certain legacy-BlackRock funds. Mr. Hernandez has business and executive experience through his service as group president, chief
financial officer, Chairman and vice chairman, among other positions, of publicly-held energy, steel, and metal companies. He has served as a director of other public companies in various industries throughout his career. He also has broad corporate
governance experience, having served as a board member of publicly-held energy, insurance, chemicals, metals and electronics companies. Mr. Hernandez has been determined by the Audit Committee to be an audit committee financial expert, as such
term is defined in the applicable SEC rules.
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John F. OBrien
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John F. OBrien has served for approximately 7 years on the board of registered investment companies, having served as a member of the Board of the Equity-Bond Complex and its
predecessor funds, including the legacy-MLIM funds. He also has investment management experience, having served as the president, director, and chairman of the board of an investment management firm and a life insurance company.
Mr. OBrien also has broad corporate governance and audit committee experience, having served as a board member and audit committee member of publicly-held financial, medical, energy, chemical, retail, life insurance, and auto parts
manufacturing companies, and as a director of a not-for-profit organization.
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Roberta Cooper Ramo
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Roberta Cooper Ramo has served for approximately 12 years on the board of registered investment companies, having served as a member of the Board of the Equity-Bond Complex and its
predecessor funds, including the legacy-MLIM funds. She is a practicing attorney and shareholder in a law firm for more than 30 years. Ms. Ramo has oversight experience through her service as chairman of the board of a retail company and as
president of the American Bar Association and the American Law Institute and as President, for 2 years, and Member of the Board of Regents, for 8 years, of the University of New Mexico. She also has corporate governance experience, having served on
the Boards of United New Mexico Bank and the First National Bank of New Mexico and on the Boards of non-profit organizations.
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David H. Walsh
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David H. Walsh has served for approximately 9 years on the board of registered investment companies, having served as a member of the Board of the Equity-Bond Complex and its
predecessor funds, including the legacy-MLIM funds. Mr. Walsh has investment management experience, having served as a consultant with Putnam Investments (Putnam) from 1993 to 2003, and employed in various capacities at Putnam from 1971
to 1992. He has oversight experience, serving as the director of an academic institute, and a board member of various not-for-profit organizations.
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Fred G. Weiss
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Fred G. Weiss has served for approximately 14 years on the board of registered investment companies, having served as a member of the Board of the Equity-Bond Complex and its
predecessor funds, including as Chairman of the board of certain of the legacy-MLIM funds. He also has more than 30 years of business and executive management experience, having served in senior executive positions of two public companies where he
was involved in both strategic planning and corporate development, as Chairman of the Committee on Investing Employee Assets (CIBA) and as a managing director of an investment consulting firm. Mr. Weiss also has corporate governance experience,
having served as a board member of a publicly-held global technology company and a pharmaceutical company, and as a director of a not-for-profit foundation. Mr. Weiss has been determined by the Audit Committee to be an audit committee financial
expert, as such term is defined in the applicable SEC rules.
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Interested Trustees
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Paul L. Audet
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Paul L. Audet has a wealth of experience in the investment management industry, including more than 14 years with BlackRock and over 30 years in finance and asset management.
His expertise in finance is demonstrated by his positions as Chief Financial Officer of BlackRock and head of BlackRocks Global Cash Management business. Mr. Audet currently is a member of BlackRocks Global Operating and Corporate Risk
Management Committees, the BlackRock Alternative Investors Executive Committee and the Investment Committee for the Private Equity Fund of Funds. Prior to joining BlackRock, Mr. Audet was the Senior Vice President of Finance at PNC Bank Corp. and
Chief Financial Officer of the investment management and mutual fund processing businesses and head of PNCs Mergers & Acquisitions unit.
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Laurence D. Fink
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Laurence D. Fink has served for approximately 12 years on the Board of registered investment companies, having served as a member of the Board of the Equity-Bond Complex and its
predecessor funds. He serves as Chairman of the Board and Chief Executive Officer of BlackRock, Inc. since its formation in 1998 and of BlackRock, Inc.s predecessor entities since 1988 and Chairman of the Executive and Management Committees.
Mr. Fink served as a managing director of The First Boston Corporation, Member of its Management Committee, Co-head of its Taxable Fixed Income Division and Head of its Mortgage and Real Estate Products Group. He also is Chairman of the Board
of several of BlackRocks alternative investment vehicles, Director of several of BlackRocks offshore funds, a Member of the Board of Trustees of New York University, Chair of the Financial Affairs Committee and a member of the Executive
Committee, the Ad Hoc Committee on Board Governance, and the Committee on Trustees. Mr. Fink serves as Co-Chairman of the NYU Hospitals Center Board of Trustees, Chairman of the Development/Trustee Stewardship Committee and Chairman of the Finance
Committee, and a Trustee of The Boys Club of New York.
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I-12
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Trustee
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Experience, Qualifications and Skills
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Henry Gabbay
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Mr. Gabbays many years of experience in finance provides the Board with a wealth of practical business knowledge and leadership. In particular, Mr. Gabbays experience as
a Consultant for and Managing Director of BlackRock, Inc., Chief Administration Officer of BlackRock Advisors, LLC and President of BlackRock Funds provides the BlackRock-advised Funds with greater insight into the analysis and evaluation of both
its existing investment portfolios and potential future investments as well as enhanced oversight of their investment decisions and investment valuation processes. In addition, Mr. Gabbays former positions as Chief Administrative Officer of
the BlackRock Advisors, LLC and as Treasurer of certain closed-end funds in the BlackRock fund complex provides the Board with direct knowledge of the operations of the BlackRock-advised Funds and their investment advisers, respectively. Mr.
Gabbays previous service on and long-standing relationship with the Board also provides him with a specific understanding of the BlackRock-advised Funds, their operations, and the business and regulatory issues facing the BlackRock-advised
Funds.
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Biographical Information
Certain biographical and other information relating to the
Trustees is set forth below, including their address and year of birth, their principal occupations for at least the last five years, the length of time served, the total number of investment companies and portfolios overseen in the
BlackRock-advised Funds and any public directorships.
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Name, Address
and Year of Birth
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Position(s)
Held with
Trust
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Length of
Time Served
as a Trustee
1,2
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Principal Occupation(s)
During Past Five
Years
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Registered
Investment
Companies
(RICs)
Consisting
of
Investment
Portfolios
(Portfolios)
Overseen
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|
Public Company or
Investment
Company
Directorships
Held
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Independent Trustees
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James H. Bodurtha
3
55 East 52
nd
Street New York, NY 10055
1944
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Trustee
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2007 to present
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Director, The China Business Group, Inc. (consulting and investing firm) since 1996 and Executive Vice President thereof from 1996 to 2003; Chairman of the Board, Berkshire Holding
Corporation since 1980.
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29 RICs consisting of 82 Portfolios
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None
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Bruce R. Bond
55 East 52
nd
Street
New York, NY 10055
1946
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Trustee
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2007 to present
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Trustee and Member of the Governance Committee, State Street Research Mutual Funds from 1997 to 2005; Board Member of Governance, Audit and Finance Committee, Avaya Inc. (computer
equipment) from 2003 to 2007.
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29 RICs consisting of 82 Portfolios
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None
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Donald W. Burton
55 East 52
nd
Street
New York, NY 10055
1944
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Trustee
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2007 to present
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Managing General Partner, The Burton Partnership, LP (an investment partnership) since 1979; Managing General Partner, The South Atlantic Venture Funds from 1983 to 2012 ; Director,
IDology, Inc. (technology solutions) since 2006; Director, Knology, Inc. (telecommunications) from 1996 to 2012; Director, Capital Southwest (financial) from 2006 to 2012.
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29 RICs consisting of 82 Portfolios
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None
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Honorable Stuart E. Eizenstat
4
55 East 52
nd
Street
New York, NY 10055
1943
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Trustee
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2007 to present
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Partner and Head of International Practice, Covington and Burling LLP (law firm) since 2001; International Advisory Board Member, The Coca Cola Company from 2002 to 2011; Advisory
Board Member, Veracity Worldwide, LLC (risk management) since 2007; Member of the International Advisory Board GML (energy) since 2003; Advisory Board Member, BT Americas (telecommunications) from 2004 to 2010.
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29 RICs consisting of 82 Portfolios
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Alcatel-Lucent (telecommunications); Global Specialty Metallurgical; UPS Corporation (delivery service)
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Kenneth A. Froot
55 East 52
nd
Street
New York, NY 10055
1957
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Trustee
|
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2007 to present
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Professor, Harvard University since 1992.
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29 RICs consisting of 82 Portfolios
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None
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I-13
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Name, Address
and Year of Birth
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|
Position(s)
Held with
Trust
|
|
Length of
Time Served
as a Trustee
1,2
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|
Principal Occupation(s)
During Past Five
Years
|
|
Registered
Investment
Companies
(RICs)
Consisting
of
Investment
Portfolios
(Portfolios)
Overseen
|
|
Public Company or
Investment
Company
Directorships Held
|
|
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|
|
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Robert M. Hernandez
5
55 East 52
nd
Street
New York, NY 10055
1944
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Trustee
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2007 to present
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Director, Vice Chairman and Chief Financial Officer of USX Corporation (energy and steel business) from 1991 to 2001; Director, TE Connectivity (electronics) from 2006 to
2012.
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29 RICs consisting of 82 Portfolios
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ACE Limited (insurance company); Eastman Chemical Company; RTI International Metals, Inc.
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John F. OBrien
55 East
52
nd
Street
New York, NY 10055
1943
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Trustee
|
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2007 to present
|
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Chairman of the Corporation, Woods Hole Oceanographic Institute since 2009 and Trustee thereof from 2003 to 2009; Director, Ameresco, Inc. (energy solutions company) from 2006 to
2007.
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29 RICs consisting of 82 Portfolios
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Cabot Corporation (chemicals); LKQ Corporation (auto parts manufacturing); TJX Companies, Inc. (retailer)
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Roberta Cooper Ramo
55 East 52
nd
Street
New York, NY 10055
1942
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Trustee
|
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2007 to present
|
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Shareholder and Attorney, Modrall, Sperling, Roehl, Harris & Sisk, P.A. (law firm) since 1993; Chairman of the Board, Coopers Inc. (retail) since 1999; Director, ECMC
Group (service provider to students, schools and lenders) since 2001; President, The American Law Institute (non-profit) since 2008.
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29 RICs consisting of 82 Portfolios
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None
|
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|
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David H. Walsh
6
55 East 52
nd
Street
New York, NY 10055
1941
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Trustee
|
|
2007 to present
|
|
Director, National Museum of Wildlife Art since 2007; Trustee, University of Wyoming Foundation since 2008; Director, Ruckelshaus Institute and Haub School of Natural Resources at
the University of Wyoming from 2006 to 2008; Director, The American Museum of Fly Fishing since 1997; Director, The National Audubon Society from 1998 to 2005.
|
|
29 RICs consisting of 82 Portfolios
|
|
None
|
|
|
|
|
|
|
Fred G. Weiss
7
55 East 52
nd
Street
New York, NY 10055
1941
|
|
Trustee
|
|
2007 to present
|
|
Managing Director, FGW Associates (consulting and investment company) since 1997; Director, Michael J. Fox Foundation for Parkinsons Research since 2000; Director, BTG
International PLC (medical technology commercialization company) from 2001 to 2007.
|
|
29 RICs consisting of 82 Portfolios
|
|
Actavis, Inc. (Pharmaceuticals)
|
|
|
|
|
|
|
Interested Trustees
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul L. Audet
55 East 52
nd
Street New York,
NY 10055
1953
|
|
Trustee
|
|
2011 to present
|
|
Senior Managing Director of BlackRock and Head of U.S. Mutual Funds since 2011; Chair of the U.S. Mutual Funds Committee reporting to the Global Executive Committee since 2011; Head
of BlackRocks Real Estate business from 2008 to 2011; Member of BlackRocks Global Operating and Corporate Risk Management Committees and of the BlackRock Alternative Investors Executive Committee and Investment Committee for the Private
Equity Fund of Funds business since 2008; Head of BlackRocks Global Cash Management business from 2005 to 2010; Acting Chief Financial Officer of BlackRock from 2007 to 2008; Chief Financial Officer of BlackRock from 1998 to 2005.
|
|
158 RICs consisting of 280 Portfolios
|
|
None
|
I-14
|
|
|
|
|
|
|
|
|
|
|
Name, Address
and Year of Birth
|
|
Position(s)
Held with
Trust
|
|
Length of
Time Served
as a Trustee
1,2
|
|
Principal Occupation(s)
During Past Five
Years
|
|
Registered
Investment
Companies
(RICs)
Consisting
of
Investment
Portfolios
(Portfolios)
Overseen
|
|
Public Company or
Investment
Company
Directorships Held
|
|
|
|
|
|
|
Laurence D. Fink
55 East 52
nd
Street New York, NY 10055
1952
|
|
Trustee
|
|
2007 to present
|
|
Chairman and Chief Executive Officer of BlackRock, Inc. since its formation in 1998 and of BlackRock, Inc.s predecessor entities since 1988 and Chairman of the Executive and
Management Committees; Formerly Managing Director, The First Boston Corporation, Member of its Management Committee, Co-head of its Taxable Fixed Income Division and Head of its Mortgage and Real Estate Products Group; Chairman of the Board of
several of BlackRocks alternative investment vehicles; Director of several of BlackRocks offshore funds; Member of the Board of Trustees of New York University, Chair of the Financial Affairs Committee and a member of the Executive
Committee, the Ad Hoc Committee on Board Governance, and the Committee on Trustees; Co-Chairman of the NYU Hospitals Center Board of Trustees, Chairman of the Development/Trustee Stewardship Committee and Chairman of the Finance Committee; Trustee,
The Boys Club of New York.
|
|
29 RICs consisting of 82 Portfolios
|
|
BlackRock, Inc.
|
|
|
|
|
|
|
Henry Gabbay
55 East 52
nd
Street
New York, NY 10055
1947
|
|
Trustee
|
|
2007 to present
|
|
Consultant, BlackRock, Inc. from 2007 to 2008; Managing Director, BlackRock, Inc. from 1989 to 2007; Chief Administrative Officer, BlackRock Advisors, LLC from 1998 to 2007;
President of BlackRock Funds and BlackRock Bond Allocation Target Shares from 2005 to 2007 and Treasurer of certain closed-end funds in the BlackRock fund complex from 1989 to 2006.
|
|
158 RICs consisting of 280 Portfolios
|
|
None
|
1
|
|
Each Trustee holds office until his or her successor is duly elected and qualifies or until his or her earlier death, resignation, retirement or
removal as provided by the Trusts by-laws or charter or statute. In no event may an Independent Trustee hold office beyond December 31 of the year in which he or she turns 74. In no event may an Interested Trustee hold office beyond December
31 of the year in which he or she turns 72.
|
2
|
|
Following the combination of Merrill Lynch Investment Managers, L.P. (MLIM) and BlackRock, Inc. in September 2006, the various legacy MLIM
and legacy BlackRock Fund boards were realigned and consolidated into three new Fund boards in 2007. As a result, although the chart shows certain Trustees as joining the Trusts board in 2007, each Trustee first became a member of the Board of
Directors/Trustees of other legacy MLIM or legacy BlackRock Funds as follows: James H. Bodurtha, 1995; Bruce R. Bond, 2005; Donald W. Burton, 2002; Honorable Stuart E. Eizenstat, 2001; Kenneth A. Froot, 2005; Robert M. Hernandez, 1996; John F.
OBrien, 2005; Roberta Cooper Ramo, 1999; David H. Walsh, 2003; and Fred G. Weiss, 1998.
|
3
|
|
Chairman of the Compliance Committee.
|
4
|
|
Chairman of the Governance Committee.
|
5
|
|
Chairman of the Board of Trustees.
|
6
|
|
Chairman of the Performance Committee.
|
7
|
|
Vice-Chairman of the Board of Trustees and Chairman of the Audit Committee.
|
8
|
|
Messrs. Audet and Fink are both interested persons, as defined in the Investment Company Act, of the Trust based on their positions at
BlackRock, Inc. and its affiliates. Mr. Gabbay is an interested person of the Trust due to his former position at BlackRock, Inc. and to his ownership of BlackRock, Inc. and PNC Financial Services Group, Inc. (PNC)
securities.
|
I-15
Certain biographical and other information relating to the officers of the Trust is set forth below,
including their year of birth, their principal occupations for at least the last five years, the length of time served, the total number of BlackRock-advised Funds overseen and any public directorships:
|
|
|
|
|
|
|
|
|
|
|
Name, Address
and Year of Birth
|
|
Position(s)
Held with
Trust
|
|
Length of
Time Served
as a Officer
1
|
|
Principal Occupation(s)
During Past Five
Years
|
|
Registered
Investment
Companies
(RICs)
Consisting
of
Investment
Portfolios
(Portfolios)
Overseen
|
|
Public Company
or
Investment
Company
Directorships Held
|
|
|
|
|
|
|
Trust Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John M. Perlowski
55 East 52
nd
Street
New York, NY 10055
1964
|
|
President and Chief Executive Officer
|
|
2010 to present
|
|
Managing Director of BlackRock, Inc. since 2009; Global Head of BlackRock Fund Administration since 2009; Managing Director and Chief Operating Officer of the Global Product Group
at Goldman Sachs Asset Management, L.P. from 2003 to 2009; Treasurer of Goldman Sachs Mutual Funds from 2003 to 2009 and Senior Vice President thereof from 2007 to 2009; Director of Goldman Sachs Offshore Funds from 2002 to 2009. Director of Family
Resource Network (charitable foundation) since 2009.
|
|
62 RICs consisting of 188 Portfolios
|
|
None
|
|
|
|
|
|
|
Brendan Kyne
55 East 52
nd
Street
New York, NY 10055
1977
|
|
Vice President
|
|
2009 to present
|
|
Managing Director of BlackRock, Inc. since 2010; Director of BlackRock, Inc. from 2008 to 2009; Head of Product Development and Management for BlackRocks U.S. Retail Group
since 2009 and Co-head thereof from 2007 to 2009; Vice President of BlackRock, Inc. from 2005 to 2008.
|
|
158 RICs consisting of 280 Portfolios
|
|
None
|
|
|
|
|
|
|
Neal J. Andrews
55 East 52
nd
Street
New York, NY 10055
1966
|
|
Chief Financial Officer
|
|
2007 to present
|
|
Managing Director of BlackRock, Inc. since 2006; Senior Vice President and Line of Business Head of Fund Accounting and Administration at PNC Global Investment Servicing (U.S.) Inc.
from 1992 to 2006.
|
|
158 RICs consisting of 280 Portfolios
|
|
None
|
|
|
|
|
|
|
Jay M. Fife
55 East 52
nd
Street
New York, NY 10055
1970
|
|
Treasurer
|
|
2007 to present
|
|
Managing Director of BlackRock, Inc. since 2007; Director of BlackRock, Inc. in 2006; Assistant Treasurer of the MLIM and Fund Asset Management, L.P. advised funds from 2005 to
2006; Director of MLIM Fund Services Group from 2001 to 2006.
|
|
158 RICs consisting of 280 Portfolios
|
|
None
|
|
|
|
|
|
|
Brian P. Kindelan
55 East 52
nd
Street
New York,
NY 10055
1959
|
|
Chief Compliance Officer and Anti-Money Laundering Officer
|
|
2007 to present
|
|
Chief Compliance Officer of the BlackRock-advised Funds since 2007; Managing Director and Senior Counsel of BlackRock, Inc. since 2005.
|
|
158 RICs consisting of 280 Portfolios
|
|
None
|
|
|
|
|
|
|
Benjamin Archibald
55 East 52
nd
Street
New York, NY 10055
1975
|
|
Secretary
|
|
2012 to present
|
|
Director of BlackRock, Inc. since 2010; Assistant Secretary to the BlackRock-advised Funds from 2010 to 2012; General Counsel and Chief Operating Officer of Uhuru Capital Management
from 2009 to 2010; Executive Director and Counsel of Goldman Sachs Asset Management from 2005 to 2009.
|
|
62 RICs consisting of 188 Portfolios
|
|
None
|
1
|
|
Officers of the Trust serve at the pleasure of the Board of Trustees.
|
I-16
Share Ownership
Information relating to each Trustees share ownership in the Funds and
in all BlackRock-advised Funds that are overseen by the respective Trustee as of December 31, 2012 is set forth in the chart below:
|
|
|
|
|
|
|
|
|
|
|
Name of Trustee
1
|
|
Aggregate
Dollar Range
of Equity
Securities in
the
GNMA
Portfolio
|
|
Aggregate
Dollar Range
of Equity
Securities in
the
Inflation
Protected
Bond
Portfolio
|
|
Aggregate
Dollar Range
of Equity
Securities
in
the U.S. Government
Bond
Portfolio
|
|
Aggregate
Dollar Range
of Equity
Securities
in
the Investment
Grade Bond
Portfolio
|
|
Aggregate
Dollar Range
of Equity Securities
in
BlackRock-
Advised
Funds
|
|
|
|
|
|
|
Interested Trustees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul L. Audet
|
|
None
|
|
None
|
|
None
|
|
None
|
|
Over $100,000
|
|
|
|
|
|
|
Laurence D. Fink
|
|
None
|
|
None
|
|
None
|
|
None
|
|
$50,001 - $100,000
2
|
|
|
|
|
|
|
Henry Gabbay
|
|
None
|
|
None
|
|
None
|
|
None
|
|
Over $100,000
|
|
|
|
|
|
|
Independent Trustees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James H. Bodurtha
|
|
Over $100,000
|
|
None
|
|
None
|
|
None
|
|
Over $100,000
|
|
|
|
|
|
|
Bruce R. Bond
|
|
None
|
|
None
|
|
None
|
|
None
|
|
Over $100,000
|
|
|
|
|
|
|
Donald W. Burton
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
|
|
|
|
|
Honorable Stuart E. Eizenstat
|
|
None
|
|
None
|
|
None
|
|
None
|
|
Over $100,000
|
|
|
|
|
|
|
Kenneth A. Froot
|
|
None
|
|
None
|
|
None
|
|
None
|
|
Over $100,000
|
|
|
|
|
|
|
Robert M. Hernandez
|
|
None
|
|
None
|
|
None
|
|
None
|
|
Over $100,000
|
|
|
|
|
|
|
John F. OBrien
|
|
None
|
|
None
|
|
None
|
|
None
|
|
Over $100,000
|
|
|
|
|
|
|
Roberta Cooper Ramo
|
|
None
|
|
None
|
|
None
|
|
None
|
|
Over $100,000
|
|
|
|
|
|
|
David H. Walsh
|
|
None
|
|
None
|
|
None
|
|
None
|
|
Over $100,000
|
|
|
|
|
|
|
Fred G. Weiss
|
|
None
|
|
None
|
|
None
|
|
None
|
|
Over $100,000
|
1
|
|
Trustees of the Fund are eligible to purchase Institutional Shares of each Fund.
|
2
|
|
As of December 31, 2012, Mr. Fink had invested, in the aggregate, over $100,000 in BlackRock-advised Funds, including Funds not overseen by him as a
Trustee or Director.
|
As of
[ ], 2013, the Trustees and officers of the Trust as a group owned an aggregate of less than 1% of the outstanding shares of each Fund. As of December 31, 2012, none of the Independent Trustees of the Trust or their
immediate family members owned beneficially or of record any securities in affiliates of the Manager, the Distributor, or any person directly or indirectly controlling, controlled by, or under common control with the Manager or the Distributor.
Compensation of Trustees
Each Trustee who is an Independent Trustee is paid as compensation an annual
retainer of $175,000 per year for his or her services as a Board member of the BlackRock-advised Funds, including the Funds, and a $25,000 Board meeting fee to be paid for each Board meeting up to five Board meetings held in a calendar year
(compensation for meetings in excess of this number to be determined on a case-by-case basis), together with out-of-pocket expenses in accordance with a Board policy on travel and other business expenses relating to attendance at meetings. In
addition, the Chairman and Vice-Chairman of the Board are paid as compensation an additional annual retainer of $115,000 and $35,000, respectively, per year. The Chairmen of the Audit Committee, Compliance Committee, Governance Committee and
Performance Committee are paid as compensation an additional annual retainer of $35,000, respectively.
Mr. Gabbay is an interested Trustee of the Trust and serves as an interested Board member of the other BlackRock-advised Funds which comprise the Equity-Liquidity, the Equity-Bond and the Closed-End
BlackRock Fund Complexes. Mr. Gabbay receives as compensation for his services as a Board member of each of the three BlackRock Fund Complexes, (i) an annual retainer of $550,000 allocated to the funds in
I-17
these three BlackRock Fund Complexes, including the Funds and (ii) with respect to each of the two open-end BlackRock Fund Complexes, a Board meeting fee of $3,750 (with respect to meetings
of the Equity-Liquidity Complex) and $18,750 (with respect to meetings of the Equity-Bond Complex) to be paid for attendance at each Board meeting up to five Board meetings held in a calendar year by each such Complex (compensation for meetings in
excess of this number to be determined on a case-by-case basis). Mr. Gabbay will also be reimbursed for out-of-pocket expenses in accordance with a Board policy on travel and other business expenses relating to attendance at meetings.
Mr. Gabbays compensation for serving on the boards of funds in these BlackRock Fund Complexes (including the Funds) is equal to 75% of each Board Member retainer and, as applicable, of each Board meeting fee (without regard to additional
fees paid to Board and Committee chairs) received by the Independent Board members serving on such boards. The Board of the Trust or of any other fund in a BlackRock Fund Complex may modify the Board members compensation from time to time
depending on market conditions and Mr. Gabbays compensation would be impacted by those modifications.
The following table sets forth the compensation earned by each of the Trustees from the Fund for the fiscal year ending September 30, 2012 and the aggregate compensation paid to them by all
BlackRock-advised Funds for the calendar year ended December 31, 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
1
|
|
Aggregate
Compensation
from the
GNMA
Portfolio
|
|
Aggregate
Compensation
from
the
Inflation
Protected
Bond
Portfolio
|
|
Aggregate
Compensation
from the Investment
Grade
Bond
Portfolio
|
|
Aggregate
Compensation
from
the
U.S. Government
Bond
Portfolio
|
|
Estimated
Annual
Benefits
Upon
Retirement
|
|
Aggregate
Compensation
from the
Funds
and
Other
BlackRock-
Advised
Funds
|
|
|
|
|
|
|
|
Interested Trustees:
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul L. Audet
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
|
|
|
|
|
|
Laurence D. Fink
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
|
|
|
|
|
|
Henry Gabbay
|
|
$2,611
|
|
$6,339
|
|
$1,491
|
|
$2,532
|
|
None
|
|
$641,250
|
|
|
|
|
|
|
|
Independent Trustees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James H. Bodurtha
3
|
|
$3,616
|
|
$8,805
|
|
$2,113
|
|
$3,673
|
|
None
|
|
$340,000
|
|
|
|
|
|
|
|
Bruce R. Bond
|
|
$3,297
|
|
$7,621
|
|
$2,045
|
|
$3,345
|
|
None
|
|
$305,000
|
|
|
|
|
|
|
|
Donald W. Burton
|
|
$3,297
|
|
$7,621
|
|
$2,045
|
|
$3,345
|
|
None
|
|
$305,000
|
|
|
|
|
|
|
|
Honorable Stuart E. Eizenstat
4
|
|
$3,616
|
|
$8,805
|
|
$2,113
|
|
$3,673
|
|
None
|
|
$340,000
|
|
|
|
|
|
|
|
Kenneth A. Froot
|
|
$3,297
|
|
$7,621
|
|
$2,045
|
|
$3,345
|
|
None
|
|
$305,000
|
|
|
|
|
|
|
|
Robert M. Hernandez
5
|
|
$4,344
|
|
$11,510
|
|
$2,268
|
|
$4,423
|
|
None
|
|
$420,000
|
|
|
|
|
|
|
|
John F. OBrien
|
|
$3,297
|
|
$7,621
|
|
$2,045
|
|
$3,345
|
|
None
|
|
$305,000
|
|
|
|
|
|
|
|
Roberta Cooper Ramo
|
|
$3,297
|
|
$7,621
|
|
$2,045
|
|
$3,345
|
|
None
|
|
$305,000
|
|
|
|
|
|
|
|
David H. Walsh
6
|
|
$3,616
|
|
$8,805
|
|
$2,113
|
|
$3,673
|
|
None
|
|
$340,000
|
|
|
|
|
|
|
|
Fred G. Weiss
7
|
|
$3,935
|
|
$9,988
|
|
$2,181
|
|
$4,001
|
|
None
|
|
$375,000
|
1
|
|
For the number of BlackRock-advised Funds from which each Trustee receives compensation see the Biographical Information Chart beginning on page I-13.
|
2
|
|
Mr. Gabbay began receiving compensation from the BlackRock-advised Funds for his service as a Trustee/Director effective January 1, 2009. Mr. Audet and
Mr. Fink receive no compensation from the BlackRock-advised Funds for their service as a Trustee/Director.
|
3
|
|
Chairman of the Compliance Committee.
|
4
|
|
Chairman of the Governance Committee.
|
5
|
|
Chairman of the Board of Trustees.
|
6
|
|
Chairman of the Performance Committee.
|
7
|
|
Vice Chairman of the Board of Trustees and Chairman of the Audit Committee.
|
I-18
IV.
|
|
Management and Advisory Arrangements
|
The Trust, on behalf of each Fund, has entered into an investment advisory agreement with the Manager (the Management Agreement), pursuant to
which the Manager receives as compensation for its services to each Fund, a fee with respect to each Fund at the end of each month at the rates described below.
MAXIMUM ANNUAL CONTRACTUAL FEE RATE
FOR THE FUNDS (BEFORE WAIVERS)
|
|
|
|
|
|
|
|
|
U.S. Government Bond Portfolio
and
Investment Grade Bond Portfolio
|
|
GNMA Portfolio
|
|
Inflation Protected Bond
Portfolio
|
Average Daily Net Assets
|
|
Management Fee
|
|
Management Fee
|
|
Management Fee
|
|
|
|
|
First $1 billion
|
|
.500%
|
|
.550%
|
|
.400%
|
|
|
|
|
$1 billion $2 billion
|
|
.450%
|
|
.500%
|
|
.375%
|
|
|
|
|
$2 billion $3 billion
|
|
.425%
|
|
.475%
|
|
.350%
|
|
|
|
|
Greater than $3 billion
|
|
.400%
|
|
.450%
|
|
.325%
|
For the fiscal year ended
September 30, 2012, the Trust paid BlackRock management fees, and BlackRock waived management fees and reimbursed expenses, as follows:
|
|
|
|
|
|
|
Funds
|
|
Fees Paid
|
|
Waivers
|
|
Reimbursements
|
|
|
|
|
GNMA Portfolio
|
|
$6,914,845
|
|
$1,935,785
|
|
$414,630
|
|
|
|
|
Inflation Protected Bond Portfolio
|
|
$17,023,079
|
|
$5,762,134
|
|
$946,143
|
|
|
|
|
Investment Grade Bond Portfolio
|
|
$1,342,404
|
|
$574,140
|
|
$23,566
|
|
|
|
|
U.S. Government Bond Portfolio
|
|
$6,125,050
|
|
$931,304
|
|
$545,804
|
For the fiscal year ended September 30,
2011, the Trust paid BlackRock management fees, and BlackRock waived management fees and reimbursed expenses, as follows:
|
|
|
|
|
|
|
Funds
|
|
Fees Paid
|
|
Waivers
|
|
Reimbursements
|
|
|
|
|
GNMA Portfolio
|
|
$6,321,035
|
|
$1,844,161
|
|
$419,630
|
|
|
|
|
Inflation Protected Bond Portfolio
|
|
$13,916,000
|
|
$5,810,801
|
|
$738,369
|
|
|
|
|
Investment Grade Bond Portfolio
|
|
$1,250,125
|
|
$547,078
|
|
$16,344
|
|
|
|
|
U.S. Government Bond Portfolio
|
|
$3,189,633
|
|
$818,717
|
|
$274,041
|
For the fiscal year ended September 30,
2010, the Trust paid BlackRock management fees, and BlackRock waived management fees and reimbursed expenses, as follows:
|
|
|
|
|
|
|
Funds
|
|
Fees Paid
|
|
Waivers
|
|
Reimbursements
|
|
|
|
|
GNMA Portfolio
|
|
$7,071,418
|
|
$2,048,416
|
|
$428,273
|
|
|
|
|
Inflation Protected Bond Portfolio
|
|
$10,329,542
|
|
$4,653,929
|
|
$401,155
|
|
|
|
|
Investment Grade Bond Portfolio
|
|
$1,353,570
|
|
$544,966
|
|
$1,520
|
|
|
|
|
U.S. Government Bond Portfolio
|
|
$2,568,263
|
|
$266,292
|
|
$303,682
|
Pursuant to the Management Agreement,
the Manager may from time to time, in its sole discretion to the extent permitted by applicable law, appoint one or more sub-advisers, including, without limitation, affiliates of the Manager, to perform investment advisory services with respect to
the Funds. In addition, the Manager may delegate certain of its investment advisory functions under the Management Agreement to one or more of its affiliates to the extent permitted by applicable law. The Manager may terminate any or all
sub-advisers or such delegation arrangements in its sole discretion at any time to the extent permitted by applicable law.
The Manager has entered into a sub-advisory agreement (the Sub-Advisory Agreement) with BlackRock Financial Management, Inc. (BFM
or the Sub-Adviser), pursuant to which the Sub-Adviser receives for the services it provides a monthly fee at an annual rate equal to a percentage of the fee the Manager receives under the Management Agreement. The Sub-Adviser is
responsible for the day-to-day management of the Funds.
I-19
Set forth below are the sub-advisory fees paid by the Manager to the Sub-Adviser for the periods indicated:
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
GNMA Portfolio
|
|
Inflation
Protected Bond
Portfolio
|
|
Investment Grade
Bond Portfolio
|
|
U.S.
Government
Bond Portfolio
|
|
|
|
|
|
2012
|
|
$1,891,892
|
|
$4,277,074
|
|
$292,032
|
|
$1,972,772
|
|
|
|
|
|
2011
|
|
$1,709,457
|
|
$3,077,148
|
|
$266,830
|
|
$905,574
|
|
|
|
|
|
2010
|
|
$1,907,008
|
|
$2,156,592
|
|
$306,916
|
|
$874,120
|
Administration
Agreement.
BlackRock and BNY Mellon Investment Servicing (US) Inc. (BNY Mellon) (the Administrators) serve as the Trusts co-administrators pursuant to an administration agreement (the Administration
Agreement). BNY Mellon has agreed to maintain office facilities for the Trust; furnish the Trust with statistical and research data, clerical, accounting, and bookkeeping services; provide and supervise the operation of an automated data
processing system to process purchase and redemption orders; prepare and file certain reports required by regulatory authorities; prepare and file federal and state tax returns; prepare and file material requested by state securities regulators;
calculate various contractual expenses; compute each Funds net asset value, net income and net capital gain or loss; and serve as a liaison with the Trusts independent public accountants. The Administrators may from time to time
voluntarily waive administration fees with respect to each Fund and may voluntarily reimburse each Fund for expenses.
Under the Administration Agreement, the Trust pays to BlackRock and BNY Mellon on behalf of each Fund a fee, computed daily and payable monthly, at an
aggregate annual rate of (i) 0.075% of the first $500 million of each Funds average daily net assets, 0.065% of the next $500 million of each Funds average daily net assets and 0.055% of the average daily net assets of each Fund in
excess of $1 billion and (ii) 0.025% of the first $500 million of average daily net assets allocated to each class of shares of each Fund, 0.015% of the next $500 million of such average daily net assets and 0.005% of the average daily net
assets allocated to each class of shares of each Fund in excess of $1 billion.
Under the Administration Agreement, BlackRock is responsible for: (i) the supervision and coordination of the performance of the Trusts service providers; (ii) the negotiation of service
contracts and arrangements between the Trust and its service providers; (iii) acting as liaison between the trustees of the Trust and the Trusts service providers; and (iv) providing ongoing business management and support services
in connection with the Trusts operations.
The
Administration Agreement provides that BlackRock and BNY Mellon will not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust or each Fund in connection with the performance of the Administration Agreement,
except a loss resulting from willful misfeasance, bad faith or gross negligence in the performance of their respective duties or from reckless disregard of their respective duties and obligations thereunder. In addition, the Trust will indemnify
each of BlackRock and BNY Mellon and their affiliates against any loss arising in connection with their provision of services under the Administration Agreement, except that neither BlackRock nor BNY Mellon nor their affiliates shall be indemnified
against any loss arising out of willful misfeasance, bad faith, gross negligence or reckless disregard of their respective duties under the Administration Agreement.
The Trust and its service providers may engage third party plan
administrators who provide trustee, administrative and recordkeeping services for certain employee benefit, profit-sharing and retirement plans as agents for the Trust with respect to such plans, for the purpose of accepting orders for the purchase
and redemption of shares of each Fund.
In addition, pursuant to
a Shareholders Administrative Services Agreement, BlackRock provides certain shareholder liaison services in connection with the Trusts investor service center. Each Fund reimburses BlackRock for its costs in maintaining the service
center, which costs include, among other things, employee salaries, leasehold expenses, and other out-of-pocket expenses.
I-20
For the fiscal year ended September 30, 2012, the Trust paid the Administrators combined administration
fees, and the Administrators waived combined administration fees and reimbursed expenses, as follows:
|
|
|
|
|
Funds
|
|
Fees Paid
|
|
Waivers
|
|
|
|
GNMA Portfolio
|
|
$1,172,480
|
|
$144,772
|
|
|
|
Inflation Protected Bond Portfolio
|
|
$3,549,016
|
|
$370,256
|
|
|
|
Investment Grade Bond Portfolio
|
|
$268,464
|
|
$61,635
|
|
|
|
U.S. Government Bond Portfolio
|
|
$1,124,470
|
|
$146,851
|
For the fiscal year ended
September 30, 2011, the Trust paid the Administrators combined administration fees, and the Administrators waived combined administration fees and reimbursed expenses, as follows:
|
|
|
|
|
Portfolios
|
|
Fees Paid
|
|
Waivers
|
|
|
|
GNMA Portfolio
|
|
$1,079,358
|
|
$125,925
|
|
|
|
Inflation Protected Bond Portfolio
|
|
$2,953,081
|
|
$429,353
|
|
|
|
Investment Grade Bond Portfolio
|
|
$250,001
|
|
$59,517
|
|
|
|
U.S. Government Bond Portfolio
|
|
$615,152
|
|
$54,445
|
For the fiscal year ended
September 30, 2010, the Trust paid the Administrators combined administration fees, and the Administrators waived combined administration fees and reimbursed expenses, as follows:
|
|
|
|
|
Portfolios
|
|
Fees Paid
|
|
Waivers
|
|
|
|
GNMA Portfolio
|
|
$1,195,306
|
|
$142,688
|
|
|
|
Inflation Protected Bond Portfolio
|
|
$2,229,230
|
|
146,295
|
|
|
|
Investment Grade Bond Portfolio
|
|
$270,777
|
|
64,509
|
|
|
|
U.S. Government Bond Portfolio
|
|
$512,343
|
|
48,387
|
The Trust and its service providers may
engage third party plan administrators who provide trustee, administrative and recordkeeping services for certain employee benefit, profit-sharing and retirement plans as agent for the Trust with respect to such plans, for the purpose of accepting
orders for the purchase and redemption of shares of the Portfolios.
In addition, pursuant to a Shareholders Administrative Services Agreement, BlackRock provides certain shareholder liaison services in connection with the Trusts investor service center. Each
Portfolio reimburses BlackRock for its costs in maintaining the service center, which costs include, among other things, employee salaries, leasehold expenses, and other out-of-pocket expenses.
Set forth below are the amounts each Fund reimbursed BlackRock pursuant to
the Shareholders Administrative Services Agreement for the periods indicated:
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
GNMA
Portfolio
|
|
Inflation
Protected Bond
Portfolio
|
|
Investment
Grade Bond
Portfolio
|
|
U.S.
Government Bond
Portfolio
|
|
|
|
|
|
2012
|
|
$28,300
|
|
$60,012
|
|
$1,312
|
|
$34,373
|
|
|
|
|
|
2011
|
|
$32,171
|
|
$137,209
|
|
$1,061
|
|
$20,195
|
|
|
|
|
|
2010
|
|
$31,159
|
|
$131,212
|
|
$1,044
|
|
$14,202
|
I-21
Information Regarding the Portfolio Managers
Other Funds and Accounts Managed
The following table sets forth information about funds and accounts other
than the GNMA Portfolio Inflation Protected Bond Portfolio, Investment Grade Bond Portfolio and U.S. Government Bond Portfolio, as applicable, for which the portfolio managers are primarily responsible for the day-to-day portfolio management as of
each Funds fiscal year ended September 30, 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Other Accounts Managed
and
Assets by Account Type
|
|
Number of Other Accounts and
Assets for Which Advisory Fee is
Performance-Based
|
Name of Portfolio Manager
|
|
Other
Registered
Investment
Companies
|
|
Other Pooled
Investment
Vehicles
|
|
Other
Accounts
|
|
Other
Registered
Investment
Companies
|
|
Other Pooled
Investment
Vehicles
|
|
Other
Accounts
|
|
|
|
|
|
|
|
GNMA Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Akiva Dickstein
|
|
5
|
|
22
|
|
18
|
|
0
|
|
2
|
|
0
|
|
|
$1.86 Billion
|
|
$6.34 Billion
|
|
$7.46 Billion
|
|
$0
|
|
$629.5 Million
|
|
$0
|
|
|
|
|
|
|
|
Mathew Kraeger
|
|
6
|
|
21
|
|
19
|
|
0
|
|
1
|
|
0
|
|
|
$1.93 Billion
|
|
$2.91 Billion
|
|
$7.46 Billion
|
|
$0
|
|
$259.6 Million
|
|
$0
|
|
|
|
|
|
|
Inflation Protected Bond Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Martin Hegarty
|
|
10
|
|
3
|
|
29
|
|
0
|
|
0
|
|
0
|
|
|
$4.45 Billion
|
|
$323.8 Million
|
|
$14.3 Billion
|
|
$0
|
|
$0
|
|
$0
|
|
|
|
|
|
|
|
Brian Weinstein
|
|
14
|
|
25
|
|
171
|
|
0
|
|
0
|
|
6
|
|
|
$5.64 Billion
|
|
$7.16 Billion
|
|
$77.42 Billion
|
|
$0
|
|
$0
|
|
$1.41 Billion
|
|
|
|
|
|
|
Investment Grade Bond Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffry Cucunato
|
|
5
|
|
13
|
|
73
|
|
0
|
|
1
|
|
2
|
|
|
$2.04 Billion
|
|
$11.38 Billion
|
|
$37.83 Billion
|
|
$0
|
|
$412.4 Million
|
|
$807.6 Million
|
|
|
|
|
|
|
U.S. Government Bond Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bob Miller
|
|
17
|
|
2
|
|
0
|
|
0
|
|
0
|
|
0
|
|
|
$19.37 Billion
|
|
$783.3 Million
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
|
|
|
|
|
|
|
Mathew Kraeger
|
|
6
|
|
21
|
|
19
|
|
0
|
|
1
|
|
0
|
|
|
$2.23 Billion
|
|
$2.91 Billion
|
|
$7.46 Billion
|
|
$0
|
|
$259.6 Million
|
|
$0
|
Portfolio Manager
Compensation Overview
BlackRocks financial arrangements
with its portfolio managers, its competitive compensation and its career path emphasis at all levels reflect the value senior management places on key resources. Compensation may include a variety of components and may vary from year to year based
on a number of factors. The principal components of compensation include a base salary, a performance-based discretionary bonus, participation in various benefits programs and one or more of the incentive compensation programs established by
BlackRock.
Base compensation.
Generally, portfolio
managers receive base compensation based on their position with the firm.
Discretionary Incentive Compensation
Discretionary incentive compensation is a function of several components: the performance of BlackRock, Inc., the performance of the portfolio managers group within BlackRock, the investment
performance, including risk-adjusted returns, of the firms assets under management or supervision by that portfolio manager relative to predetermined benchmarks, and the individuals performance and contribution to the overall performance
of these portfolios and BlackRock. In most cases, these benchmarks are the same as the benchmark or benchmarks against which the performance of the Fund or other accounts managed by the portfolio managers are measured. Among other things,
BlackRocks Chief Investment Officers make a subjective determination with respect to each portfolio managers compensation based on the performance of the Funds and other accounts managed by each portfolio manager relative to the various
benchmarks.
I-22
Performance of fixed income funds is measured on a pre-tax and/or after-tax basis over various time periods including 1-, 3- and 5- year periods, as applicable. With respect to these portfolio
managers, such benchmarks for the Fund and other accounts are:
|
|
|
Portfolio Manager
|
|
Applicable Benchmarks
|
|
|
Akiva Dickstein
Mathew Kraeger
|
|
A combination of market-based indices (e.g. Citigroup Mortgage Index, Barclays GNMA MBS Index), certain customized indices and certain fund industry peer groups.
|
|
|
Martin Hegarty
|
|
A combination of market-based indices (e.g., Barclays US TIPS Index), certain customized indices and certain fund industry peer groups.
|
|
|
Brian Weinstein
Bob
Miller
|
|
A combination of market-based indices (e.g., Barclays U.S. Aggregate Bond Index), certain customized indices and certain fund industry peer groups.
|
|
|
Jeffrey Cucunato
|
|
A combination of market-based indices (e.g., Barclays U.S. Credit Index), certain customized indices and certain fund industry peer groups.
|
Distribution of
Discretionary Incentive Compensation
Discretionary incentive
compensation is distributed to portfolio managers in a combination of cash and BlackRock, Inc. restricted stock units which vest ratably over a number of years. For some portfolio managers, discretionary incentive compensation is also distributed in
deferred cash awards that notionally track the returns of select BlackRock investment products they manage and that vest ratably over a number of years. The BlackRock, Inc. restricted stock units, upon vesting, will be settled in BlackRock, Inc.
common stock. Typically, the cash portion of the discretionary incentive compensation, when combined with base salary, represents more than 60% of total compensation for the portfolio managers. Paying a portion of discretionary incentive
compensation in BlackRock stock puts compensation earned by a portfolio manager for a given year at risk based on BlackRocks ability to sustain and improve its performance over future periods. Providing a portion of discretionary
incentive compensation in deferred cash awards that notionally track the BlackRock investment products they manage provides direct alignment with investment product results.
Long-Term Incentive Plan Awards
From time to time long-term
incentive equity awards are granted to certain key employees to aid in retention, align their interests with long-term shareholder interests and motivate performance. Equity awards are generally granted in the form of BlackRock, Inc. restricted
stock units that, once vested, settle in BlackRock, Inc. common stock. Messrs. Dickstein, Weinstein and Cucunato have each received long-term incentive awards.
Deferred Compensation Program
A portion of the compensation paid to eligible BlackRock employees may be voluntarily deferred at their
election for defined periods of time into an account that tracks the performance of certain of the firms investment products. All of the eligible portfolio managers have participated in the deferred compensation program.
Other compensation benefits.
In addition to base compensation and
discretionary incentive compensation, portfolio managers may be eligible to receive or participate in one or more of the following:
Incentive Savings Plans
BlackRock, Inc. has created a variety of incentive savings plans in which BlackRock employees are eligible to
participate, including a 401(k) plan, the BlackRock Retirement Savings Plan (RSP), and the BlackRock Employee Stock Purchase Plan (ESPP). The employer contribution components of the RSP include a company match equal to 50% of the first 8% of
eligible pay contributed to the plan capped at $5,000 per year, and a company retirement contribution equal to 3-5% of eligible compensation up to the IRS limit ($250,000 for 2012). The RSP offers a range of investment options, including
registered investment companies and collective investment funds managed by the firm. BlackRock contributions follow the investment direction set by participants for their own contributions or, absent participant investment direction, are invested
into an index target date fund that corresponds to, or is closest to, the year in which the participant attains age 65. The ESPP allows for investment in BlackRock common stock at a 5% discount on the fair market value of the stock on the
purchase date. Annual participation in the ESPP is limited to the purchase of 1,000 shares of common stock or a dollar value of $25,000 based on its fair market value on the Purchase Date. Messrs. Dickstein, Kraeger, Hegarty, Weinstein,
Cucunato and Miller are each eligible to participate in these plans.
I-23
Portfolio Manager Beneficial Holdings
As of September 30, 2012, the end of each Funds most recently
completed fiscal year, the dollar range of securities beneficially owned by each portfolio manager in the Funds is shown below:
|
|
|
|
|
Portfolio Manager
|
|
Portfolio Managed
|
|
Dollar Range of Equity
Securities Beneficially Owned
1
|
|
|
|
Bob Miller
|
|
U.S. Government Bond Portfolio
|
|
None
|
|
|
|
Akiva Dickstein
|
|
GNMA Portfolio
|
|
$100,001-$500,000
|
|
|
|
Matthew Kraeger
|
|
GNMA Portfolio
|
|
None
|
|
|
|
|
|
U.S. Government Bond Portfolio
|
|
None
|
|
|
|
Brian Weinstein
|
|
Inflation Protected Portfolio
|
|
$100,001-$500,000
|
|
|
|
Martin Hegarty
|
|
Inflation Protected Portfolio
|
|
$50,001-$100,000
|
|
|
|
Jeff Cucunato
|
|
Investment Grade Portfolio
|
|
None
|
1
|
|
Includes securities attributable to the portfolio managers participation in certain deferred compensation and retirement programs.
|
Potential Material Conflicts
of Interest
BlackRock has built a professional working
environment, firm-wide compliance culture and compliance procedures and systems designed to protect against potential incentives that may favor one account over another. BlackRock has adopted policies and procedures that address the allocation of
investment opportunities, execution of portfolio transactions, personal trading by employees and other potential conflicts of interest that are designed to ensure that all client accounts are treated equitably over time. Nevertheless, BlackRock
furnishes investment management and advisory services to numerous clients in addition to the Fund, and BlackRock may, consistent with applicable law, make investment recommendations to other clients or accounts (including accounts which are hedge
funds or have performance or higher fees paid to BlackRock, or in which portfolio managers have a personal interest in the receipt of such fees), which may be the same as or different from those made to the Fund. In addition, BlackRock, its
affiliates and significant shareholders and any officer, director, shareholder or employee may or may not have an interest in the securities whose purchase and sale BlackRock recommends to the Fund. BlackRock, or any of its affiliates or
significant shareholders, or any officer, director, shareholder, employee or any member of their families may take different actions than those recommended to the Fund by BlackRock with respect to the same securities. Moreover, BlackRock may refrain
from rendering any advice or services concerning securities of companies of which any of BlackRocks (or its affiliates or significant shareholders) officers, directors or employees are directors or officers, or companies as to
which BlackRock or any of its affiliates or significant shareholders or the officers, directors and employees of any of them has any substantial economic interest or possesses material non-public information. Certain portfolio managers also may
manage accounts whose investment strategies may at times be opposed to the strategy utilized for a fund. It should also be noted that Messrs. Dickstein, Kraeger, Hegarty, Weinstein and Cucunato may be managing hedge fund and/or long only
accounts, or may be part of a team managing hedge fund and/or long only accounts, subject to incentive fees. Messrs. Dickstein, Kraeger, Hegarty, Weinstein and Cucunato may therefore be entitled to receive a portion of any incentive fees earned on
such accounts.
As a fiduciary, BlackRock owes a duty of loyalty
to its clients and must treat each client fairly. When BlackRock purchases or sells securities for more than one account, the trades must be allocated in a manner consistent with its fiduciary duties. BlackRock attempts to allocate
investments in a fair and equitable manner among client accounts, with no account receiving preferential treatment. To this end, BlackRock has adopted policies that are intended to ensure reasonable efficiency in client transactions and provide
BlackRock with sufficient flexibility to allocate investments in a manner that is consistent with the particular investment discipline and client base, as appropriate.
Custodian and Transfer Agency Agreements.
Pursuant to the terms of a
custodian agreement (the Custodian Agreement) between the Trust and The Bank of New York Mellon (the Custodian), the Custodian or a
I-24
sub-custodian (i) maintains a separate account or accounts in the name of each Fund, (ii) holds and transfers portfolio securities on account of each Fund, (iii) accepts receipts
and makes disbursements of money on behalf of each Fund, (iv) collects and receives all income and other payments and distributions on account of each Funds securities and (v) makes periodic reports to the Board of Trustees
concerning each Funds operations. The Custodian is authorized to select one or more banks or trust companies to serve as sub-custodian on behalf of each Fund, provided that, with respect to sub-custodians other than sub-custodians for non-U.S.
securities, the custodian remains responsible for the performance of all its duties under the Custodian Agreement and holds the Trust harmless from the acts and omissions of any sub-custodian. Citibank, N.A. serves as the international sub-custodian
for various portfolios of the Trust and has been appointed by the Board of Trustees as the Trusts foreign custody manager under Rule 17f-5 of the 1940 Act. As foreign custody manager, Citibank, N.A. selects and monitors
foreign sub-custodian banks and furnishes information relevant to the selection of foreign depositories. Prior to July 1, 2010, PFPC Trust Company (PTC), an affiliate of BlackRock, served as the Trusts custodian. Effective July 1,
2010, PTC was sold to The Bank of New York Mellon and is no longer considered an affiliate of BlackRock.
The following table sets forth the fees paid by each Fund to PTC for the periods indicated:
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
GNMA
Portfolio
|
|
Inflation
Protected Bond
Portfolio
|
|
Investment
Grade Bond
Portfolio
|
|
U.S.
Government Bond
Portfolio
|
|
|
|
|
|
2012
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
|
|
|
2011
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
|
|
|
2010
1
|
|
$274,901
|
|
$184,828
|
|
$38,202
|
|
$183,975
|
1
|
|
For the period October 1, 2009 to June 30, 2010 (date on which PTC ceased being an affiliate).
|
PNC Global Investment Servicing (U.S.) Inc. (PNC GIS), an
affiliate of the Manager, served as transfer agent and dividend disbursing agent. Effective July 1, 2010, PNC GIS was sold to The Bank of New York Mellon Corporation and is no longer considered an affiliate of the Manager. At the close of sale, PNC
GIS changed its name to BNY Mellon Investment Servicing (US) Inc.
The following table sets forth the fees paid by each Fund to PNC GIS for the periods indicated.
|
|
|
|
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
GNMA
Portfolio
|
|
Inflation
Protected Bond
Portfolio
|
|
Investment
Grade Bond
Portfolio
|
|
U.S.
Government Bond
Portfolio
|
|
|
|
|
|
2012
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
|
|
|
2011
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
|
|
|
2010
1
|
|
$284,070
|
|
$1,004,266
|
|
$881
|
|
$164,463
|
1
|
|
For the period October 1, 2009 to June 30, 2010 (date on which PNC GIS ceased being an affiliate).
|
Credit Agreement.
The Funds, along with certain other funds
managed by the Manager and its affiliates, is a party to a $500 million credit agreement with a group of lenders, which is renewed annually (the Credit Agreement). The Funds may borrow under the Credit Agreement to meet shareholder
redemptions and for other lawful purposes. The Funds may not borrow under the Credit Agreement for leverage. The Funds may borrow up to the maximum amount allowable under each Funds current Prospectus and Statement of Additional
Information, subject to various other legal, regulatory or contractual limits. Borrowing results in interest expense and other fees and expenses for the Funds which may impact net Fund expenses borne by remaining shareholders of the Funds. The
costs of borrowing may reduce each Funds return. Each Fund is charged its pro rata share of upfront fees and commitment fees on the aggregate commitment amount based on its net assets. If a Fund borrows pursuant to the Credit
Agreement, the Fund is charged interest at a variable rate.
I-25
V.
|
|
Information on Sales Charges and Distribution Related Expenses
|
Distribution Agreement and Distribution and Service Plan.
The
Trust has entered into a distribution agreement with BlackRock Investments, LLC (BRIL, or the Distributor) under which BRIL, as agent, offers shares of the Funds on a continuous basis. BRIL has agreed to use appropriate
efforts to effect sales of the shares, but it is not obligated to sell any particular amount of shares. BRILs principal business address is 40 East 52nd Street, New York, New York 10022. BRIL is an affiliate of BlackRock.
The Trust may pay to brokers, dealers, financial institutions and industry
professionals (including BlackRock, BRIL, BAC, Merrill Lynch, PNC, Barclays PLC and their affiliates) (collectively, Service Organizations) fees for the provision of personal services to shareholders. In the past, BlackRock or BRIL has
retained a portion of the shareholder servicing fees paid by the Trust. To the extent a shareholder is not associated with a Service Organization, the shareholder servicing fees will be paid to BlackRock, and BlackRock will provide services.
Set forth below is information on sales charges (including any
contingent deferred sales charges (CDSCs)) received by the Funds, including the amounts paid to affiliates of BlackRock, for the period indicated. BRIL, an affiliate of the Manager, acts as the Funds sole Distributor.
GNMA Portfolio
Investor A Sales Charges Information
|
|
|
|
|
|
|
|
|
|
|
Investor A Shares
|
For the Fiscal Year Ended September 30,
|
|
Gross Sales
Charges
Collected
|
|
Sales Charges
Retained by
BRIL
|
|
Sales Charges
Paid to
Affiliates
|
|
CDSCs Received on
Redemption of
Load-Waived Shares
|
|
|
|
|
|
2012
|
|
$1,352,982
|
|
$103,705
|
|
$107,748
|
|
$28,573
|
|
|
|
|
|
2011
|
|
$618,227
|
|
$48,044
|
|
$73,356
|
|
$31,833
|
|
|
|
|
|
2010
|
|
$1,260,741
|
|
$94,532
|
|
$171,918
|
|
$38,704
|
Investor B Sales Charges Information
|
|
|
|
|
|
|
Investor B Shares
|
For the Fiscal Year Ended September 30,
|
|
CDSCs Received
by BRIL
|
|
CDSCs Paid to
Affiliates
|
|
|
|
2012
|
|
$7,074
|
|
$7,074
|
|
|
|
2011
|
|
$20,685
|
|
$20,685
|
|
|
|
2010
|
|
$29,254
|
|
$29,254
|
Investor C Sales Charges Information
|
|
|
|
|
|
|
Investor C Shares
|
For the Fiscal Year Ended September 30,
|
|
CDSCs Received
by BRIL
|
|
CDSCs Paid to
Affiliates
|
|
|
|
2012
|
|
$40,436
|
|
$40,436
|
|
|
|
2011
|
|
$79,689
|
|
$79,689
|
|
|
|
2010
|
|
$170,900
|
|
$170,900
|
I-26
Inflation Protected Bond Portfolio
Investor A Sales Charges Information
|
|
|
|
|
|
|
|
|
|
|
Investor A Shares
|
For the Fiscal Year Ended September 30,
|
|
Gross Sales
Charges
Collected
|
|
Sales Charges
Retained by
BRIL
|
|
Sales Charges
Paid to
Affiliates
|
|
CDSCs Received on
Redemption of
Load-Waived Shares
|
|
|
|
|
|
2012
|
|
$2,190,471
|
|
$158,368
|
|
$162,685
|
|
$5,724
|
|
|
|
|
|
2011
|
|
$2,099,756
|
|
$158,369
|
|
$180,653
|
|
$22,422
|
|
|
|
|
|
2010
|
|
$3,297,956
|
|
$245,425
|
|
$322,462
|
|
$11,387
|
Investor B Sales Charges Information
|
|
|
|
|
|
|
Investor B Shares
|
For the Fiscal Year Ended September 30,
|
|
CDSCs Received
by BRIL
|
|
CDSCs Paid to
Affiliates
|
|
|
|
2012
|
|
$4,604
|
|
$4,604
|
|
|
|
2011
|
|
$9,809
|
|
$9,809
|
|
|
|
2010
|
|
$12,883
|
|
$12,883
|
Investor C Sales Charges Information
|
|
|
|
|
|
|
Investor C Shares
|
For the Fiscal Year Ended September 30,
|
|
CDSCs Received
by BRIL
|
|
CDSCs Paid to
Affiliates
|
|
|
|
2012
|
|
$113,644
|
|
$113,644
|
|
|
|
2011
|
|
$163,223
|
|
$163,223
|
|
|
|
2010
|
|
$160,086
|
|
$160,086
|
Investment Grade Bond
Investor A Sales Charges Information
|
|
|
|
|
|
|
|
|
|
|
Investor A Shares
|
For the Fiscal Year Ended September 30,
|
|
Gross Sales
Charges
Collected
|
|
Sales Charges
Retained by
BRIL
|
|
Sales Charges
Paid to
Affiliates
|
|
CDSCs Received on
Redemption of
Load-Waived Shares
|
|
|
|
|
|
2012
|
|
$116,347
|
|
$8,323
|
|
$8,323
|
|
$0
|
|
|
|
|
|
2011
|
|
$19,609
|
|
$1,506
|
|
$1,506
|
|
$2,525
|
|
|
|
|
|
2010
|
|
$33,431
|
|
$2,440
|
|
$2,440
|
|
$0
|
U.S. Government Bond Portfolio
Investor A Sales Charges Information
|
|
|
|
|
|
|
|
|
|
|
Investor A Shares
|
For the Fiscal Year Ended September 30,
|
|
Gross Sales
Charges
Collected
|
|
Sales Charges
Retained by
BRIL
|
|
Sales Charges
Paid to
Affiliates
|
|
CDSCs Received on
Redemption of
Load-Waived Shares
|
|
|
|
|
|
2012
|
|
$237,461
|
|
$18,012
|
|
$18,012
|
|
$7,477
|
|
|
|
|
|
2011
|
|
$101,722
|
|
$9,370
|
|
$9,893
|
|
$5,221
|
|
|
|
|
|
2010
|
|
$143,023
|
|
$10,885
|
|
$14,283
|
|
$12,479
|
I-27
Investor B Sales Charges Information
|
|
|
|
|
|
|
Investor B Shares
|
For the Fiscal Year Ended September 30,
|
|
CDSCs Received
by BRIL
|
|
CDSCs Paid to
Affiliates
|
|
|
|
2012
|
|
$6,451
|
|
$6,451
|
|
|
|
2011
|
|
$14,415
|
|
$14,415
|
|
|
|
2010
|
|
$16,140
|
|
$16,140
|
Investor B1 Sales Charges Information
|
|
|
|
|
|
|
Investor B1 Shares
|
For the Fiscal Year Ended September 30,
|
|
CDSCs Received
by BRIL
|
|
CDSCs Paid to
Affiliates
|
|
|
|
2012
|
|
$908
|
|
$908
|
|
|
|
2011
|
|
$473
|
|
$473
|
Investor C Sales Charges Information
|
|
|
|
|
|
|
Investor C Shares
|
For the Fiscal Year Ended September 30,
|
|
CDSCs Received
by BRIL
|
|
CDSCs Paid to
Affiliates
|
|
|
|
2012
|
|
$17,093
|
|
$17,093
|
|
|
|
2011
|
|
$11,369
|
|
$11,369
|
|
|
|
2010
|
|
$13,407
|
|
$13,407
|
Investor C1 Sales Charges Information
|
|
|
|
|
|
|
Investor C1 Shares
|
For the Fiscal Year Ended September 30,
|
|
CDSCs Received
by BRIL
|
|
CDSCs Paid to
Affiliates
|
|
|
|
2012
|
|
$297
|
|
$297
|
|
|
|
2011
|
|
$142
|
|
$142
|
The tables below provide information for the
fiscal year ended September 30, 2012 about the 12b-1 fees each Fund paid to BRIL under the Trusts 12b-1 plans. A significant amount of the fees collected by BRIL were paid to affiliates, for providing shareholder servicing activities for
Investor A and Service Shares and for providing shareholder servicing and distribution-related activities and services for Investor B and Investor C Shares.
GNMA Portfolio
|
|
|
Class Name
|
|
Paid to BRIL
|
|
|
Investor A Shares
|
|
$942,517
|
|
|
Investor B Shares
|
|
$65,561
|
|
|
Investor C Shares
|
|
$2,901,368
|
|
|
Service Shares
|
|
$144,411
|
Inflation Protected Bond
Portfolio
|
|
|
Class Name
|
|
Paid to BRIL
|
|
|
Investor A Shares
|
|
$4,499,979
|
|
|
Investor B Shares
|
|
$79,804
|
|
|
Investor C Shares
|
|
$7,666,349
|
|
|
Service Shares
|
|
$224,912
|
I-28
Investment Grade Bond Portfolio
|
|
|
Class Name
|
|
Paid to BRIL
|
|
|
Investor A Shares
|
|
$54,640
|
U.S. Government Bond
Portfolio
|
|
|
Class Name
|
|
Paid to BRIL
|
|
|
Investor A Shares
|
|
$1,893,170
|
|
|
Investor B Shares
|
|
$79,274
|
|
|
Investor B1 Shares
|
|
$244,030
|
|
|
Investor C Shares
|
|
$1,089,022
|
|
|
Investor C1 Shares
|
|
$997,998
|
|
|
Class R Shares
|
|
$189,425
|
|
|
Service Shares
|
|
$13,743
|
VI.
|
|
Computation of Offering Price Per Share
|
An illustration of the computation of the public offering price of the Investor A Shares of each Fund, based on the value of the Funds Investor A
Shares net assets and number of Investor A Shares outstanding as of September 30, 2012 follows:
|
|
|
|
|
|
|
|
|
|
|
GNMA
Portfolio
Investor A
Shares
|
|
Inflation
Protected
Bond
Portfolio
Investor
A
Shares
|
|
Investment
Grade
Bond
Portfolio
Investor
A
Shares
|
|
U.S.
Government
Bond
Portfolio
Investor
A
Shares
|
|
|
|
|
|
Net Assets
|
|
$457,536,729
|
|
$2,089,998,500
|
|
$25,194,943
|
|
$742,412,594
|
|
|
|
|
|
Number of Shares Outstanding
|
|
43,421,562
|
|
172,906,353
|
|
2,065,312
|
|
67,706,940
|
|
|
|
|
|
Net Asset Value Per Share (net assets divided by number of shares outstanding)
|
|
$10.54
|
|
$12.09
|
|
$12.20
|
|
$10.97
|
|
|
|
|
|
Sales Charge (for Investor A Shares: 4:00% of offering price for GNMA Portfolio; Inflation Protected Bond Portfolio; Investment Grade Bond Portfolio and U.S. Government Bond
Portfolio)
1
|
|
$0.44
|
|
$0.50
|
|
$0.51
|
|
$0.46
|
|
|
|
|
|
Offering Price
|
|
$10.98
|
|
$12.59
|
|
$12.71
|
|
$11.43
|
1
|
|
Assumes maximum sales charge applicable. The maximum sales charge as a percentage of net asset value per share was 4.19% for GNMA Portfolio; 4.13% for
Inflation Protected Bond Portfolio; and 4.20% for Investment Grade Bond Portfolio and U.S. Government Bond Portfolio.
|
The offering price for the Funds other share classes is equal to the share class net asset value computed as set forth above for Investor A
Shares. Though not subject to a sales charge, certain share classes may be subject to a CDSC on redemption. For more information on the purchasing and valuation of shares, please see Purchase of Shares and Pricing of Shares
in Part II of this Statement of Additional Information.
VII.
|
|
Portfolio Transactions and Brokerage
|
See Portfolio Transactions and Brokerage in Part II of this Statement of Additional Information for more information.
I-29
Information about the brokerage commissions paid by the Funds, including commissions paid to Affiliates, for
the last three fiscal years is set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
GNMA Portfolio
|
|
Inflation Protected Bond Portfolio
|
Fiscal Year Ended September 30,
|
|
Aggregate
Brokerage
Commissions
Paid
|
|
Commissions
Paid to
Affiliates
|
|
Aggregate
Brokerage
Commissions
Paid
|
|
Commissions
Paid to
Affiliates
|
|
|
|
|
|
2012
|
|
$233,713
|
|
$0
|
|
$501,917
|
|
$0
|
|
|
|
|
|
2011
|
|
$503,770
|
|
$0
|
|
$390,623
|
|
$0
|
|
|
|
|
|
2010
|
|
$410,922
|
|
$0
|
|
$435,386
|
|
$0
|
|
|
|
|
|
Investment Grade Bond
Portfolio
|
|
U.S. Government Bond
Portfolio
|
Fiscal Year Ended September 30,
|
|
Aggregate
Brokerage
Commissions
Paid
|
|
Commissions
Paid to
Affiliates
|
|
Aggregate
Brokerage
Commissions
Paid
|
|
Commissions
Paid to
Affiliates
|
|
|
|
|
|
2012
|
|
$25,711
|
|
$0
|
|
$854,031
|
|
$0
|
|
|
|
|
|
2011
|
|
$28,014
|
|
$0
|
|
$680,186
|
|
$0
|
|
|
|
|
|
2010
|
|
$35,360
|
|
$0
|
|
$559,573
|
|
$0
|
For the fiscal year ended
September 30, 2012, the brokerage commissions paid to affiliates by the GNMA Portfolio, Inflation Protected Bond Portfolio, Investment Grade Bond Portfolio and U.S. Government Bond Portfolio represented 0%, 0%, 0% and 0%, respectively, of the
aggregate brokerage commissions paid and involved 0%, 0%, 0% and 0%, respectively, of the dollar amount of transactions involving payment of commissions during the year.
The following table shows the dollar amount of brokerage commissions paid to
brokers for providing third party research services and the approximate dollar amount of the transactions involved for the fiscal year ended September 30, 2012. The provision of third party research services was not necessarily a factor in the
placement of all brokerage business with such brokers.
|
|
|
|
|
Funds
|
|
Brokerage Commissions
|
|
Amount of the Transactions Involved
|
|
|
|
GNMA Portfolio
|
|
$0
|
|
$0
|
|
|
|
Inflation Protected Bond Portfolio
|
|
$0
|
|
$0
|
|
|
|
Investment Grade Bond Portfolio
|
|
$0
|
|
$0
|
|
|
|
U.S. Government Bond Portfolio
|
|
$0
|
|
$0
|
The value of the GNMA Portfolios
aggregate holdings of the securities of its regular brokers or dealers (as defined in Rule 10b-1 under the Investment Company Act) if any portion of such holdings were purchased during the fiscal year ended September 30, 2012 are as follows:
Held No Such Securities
The value of the Inflation Protected Bond Portfolios aggregate holdings
of the securities of its regular brokers or dealers (as defined in Rule 10b-1 under the Investment Company Act) if any portion of such holdings were purchased during the fiscal year ended September 30, 2012 are as follows:
|
|
|
|
|
Regular Broker/Dealer
|
|
Debt (D)/Equity (E)
|
|
Aggregate Holdings (000s)
|
|
|
|
Citigroup Global Markets, Inc.
|
|
D
|
|
$5,481
|
|
|
|
JPMorgan Securities, Inc
|
|
D
|
|
$351
|
I-30
The value of the Investment Grade Bond Portfolios aggregate holdings of the securities of its
regular brokers or dealers (as defined in Rule 10b-1 under the Investment Company Act) if any portion of such holdings were purchased during the fiscal year ended September 30, 2012 are as follows:
|
|
|
|
|
Regular Broker/Dealer
|
|
Debt (D)/Equity (E)
|
|
Aggregate Holdings (000s)
|
|
|
|
Goldman Sachs & Co.
|
|
D
|
|
$2,007
|
|
|
|
JPMorgan Securities, Inc
|
|
D
|
|
$3,862
|
|
|
|
Barclays Bank PLC
|
|
D
|
|
$281
|
|
|
|
Morgan Stanley & Co., Inc
|
|
D
|
|
$716
|
|
|
|
UBS Securities LLC
|
|
D
|
|
$1,150
|
|
|
|
Citigroup Global Markets, Inc.
|
|
D
|
|
$1,038
|
|
|
|
Banc Of America Securities LLC
|
|
D
|
|
$3,615
|
The value of the U.S. Government Bond
Portfolios aggregate holdings of the securities of its regular brokers or dealers (as defined in Rule 10b-1 under the Investment Company Act) if any portion of such holdings were purchased during the fiscal year ended September 30, 2012
are as follows:
|
|
|
|
|
Regular Broker/Dealer
|
|
Debt (D)/Equity (E)
|
|
Aggregate Holdings (000s)
|
|
|
|
Held No Such Securities
|
|
|
|
|
The Funds have received an exemptive order
from the commission permitting them to lend portfolio securities to their affiliates. See Part II Investment Risks and Considerations Securities lending in this Statement of Additional Information.
The following table shows the securities lending agent fees that were paid
by the Funds to the lending agent for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended September 30,
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
GNMA Portfolio
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Inflation Protected Bond Portfolio
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Investment Grade Bond Portfolio
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
U.S. Government Bond Portfolio
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
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VIII.
|
|
Additional Information
|
The Trust was organized as a Massachusetts business trust on April 26, 2007 and is registered under the Investment Company Act as an open-end,
management investment company. Each of the Funds except the Inflation Protected Bond Portfolio is diversified. Shares of each class of each Fund of the Trust bear their pro rata portion of all operating expenses paid by a Fund, except transfer
agency fees, certain administrative/servicing fees and amounts payable under the Trusts Amended and Restated Distribution and Service Plan. Each share of a Fund of the Trust has a par value of $.001, represents an interest in that Fund and is
entitled to the dividends and distributions earned on that Funds assets that are declared in the discretion of the Board of Trustees. The Trusts shareholders are entitled to one vote for each full share held and proportionate fractional
votes for fractional shares held, and will vote in the aggregate and not by class, except where otherwise required by law or as determined by the Board of Trustees.
Shares of the Trust have non-cumulative voting rights and, accordingly, the
holders of more than 50% of the Trusts outstanding shares (irrespective of class) may elect all of the Trustees. Shares have no preemptive rights and only such conversion and exchange rights as the Board may grant in its discretion. When
issued for payment, shares will be fully paid and non-assessable by the Trust.
There will normally be no meetings of shareholders for the purpose of electing Trustees unless and until such time as required by law. At that time, the Trustees then in office will call a shareholders
meeting to elect Trustees. Except as set forth above, the Trustees shall continue to hold office and may appoint successor Trustees. The Trusts Declaration of Trust provides that meetings of the shareholders of the Trust shall be
I-31
called by the Trustees upon the written request of shareholders owning at least 10% of the outstanding shares entitled to vote.
Rule 18f-2 under the Investment Company Act provides that any matter required by the provisions of the Investment Company Act
or applicable state law, or otherwise, to be submitted to the holders of the outstanding voting securities of an investment company such as the Trust shall not be deemed to have been effectively acted upon unless approved by the holders of a
majority of the outstanding shares of each investment portfolio affected by such matter. Rule 18f-2 further provides that an investment portfolio shall be deemed to be affected by a matter unless the interests of each investment portfolio in the
matter are substantially identical or the matter does not affect any interest of the investment portfolio. Under the Rule, the approval of an investment advisory agreement, a distribution plan subject to Rule 12b-1 under the Investment Company Act
or any change in a fundamental investment policy would be effectively acted upon with respect to an investment portfolio only if approved by a majority of the outstanding shares of such investment portfolio. However, the Rule also provides that the
ratification of the appointment of independent accountants, the approval of principal underwriting contracts and the election of Trustees may be effectively acted upon by shareholders of the Trust voting together in the aggregate without regard to a
particular investment portfolio.
The proceeds received by each
Fund for each issue or sale of its shares, and all net investment income, realized and unrealized gain and proceeds thereof, subject only to the rights of creditors, will be specifically allocated to and constitute the underlying assets of that
Fund. The underlying assets of each Fund will be segregated on the books of account, and will be charged with the liabilities in respect to that Fund and with a share of the general liabilities of the Trust. As stated herein, certain expenses of a
Fund may be charged to a specific class of shares representing interests in that Fund.
The Trusts Declaration of Trust authorizes the Board of Trustees, without shareholder approval (unless otherwise required by applicable law), to: (i) sell and convey the assets belonging to a
class of shares to another management investment company for consideration which may include securities issued by the purchaser and, in connection therewith, to cause all outstanding shares of such class to be redeemed at a price which is equal to
their net asset value and which may be paid in cash or by distribution of the securities or other consideration received from the sale and conveyance; (ii) sell and convert the assets belonging to one or more classes of shares into money and,
in connection therewith, to cause all outstanding shares of such class to be redeemed at their net asset value; or (iii) combine the assets belonging to a class of shares with the assets belonging to one or more other classes of shares if the
Board of Trustees reasonably determines that such combination will not have a material adverse effect on the shareholders of any class participating in such combination and, in connection therewith, to cause all outstanding shares of any such class
to be redeemed or converted into shares of another class of shares at their net asset value. The Board of Trustees may authorize the liquidation and termination of any Fund or class of shares. Upon any liquidation of a Fund, shareholders of each
class of the Fund are entitled to share pro rata in the net assets belonging to that class available for distribution.
Shareholder and Trustee Liability of the Trust.
Under Massachusetts law, shareholders of a business trust may, under certain circumstances, be held
personally liable as partners for the obligations of the trust. However, the Trusts Declaration of Trust provides that shareholders shall not be subject to any personal liability in connection with the assets of the Trust for the acts or
obligations of the Trust, and that every note, bond, contract, order or other undertaking made by the Trust shall contain a provision to the effect that the shareholders are not personally liable thereunder. The Declaration of Trust provides for
indemnification out of the trust property of any shareholder held personally liable solely by reason of his being or having been a shareholder and not because of his acts or omissions or some other reason. The Declaration of Trust also provides that
the Trust shall, upon request, assume the defense of any claim made against any shareholder for any act or obligation of the Trust, and shall satisfy any judgment thereon.
The Declaration of Trust further provides that all persons having any claim
against the trustees or Trust shall look solely to the trust property for payment; that no trustee of the Trust shall be personally liable for or on
I-32
account of any contract, debt, tort, claim, damage, judgment or decree arising out of or connected with the administration or preservation of the trust property or the conduct of any business of
the Trust; and that no trustee shall be personally liable to any person for any action or failure to act except by reason of his own bad faith, willful misfeasance, gross negligence or reckless disregard of his duties as a trustee. With the
exception stated, the Declaration of Trust provides that a trustee is entitled to be indemnified against all liabilities and expenses reasonably incurred by him in connection with the defense or disposition of any proceeding in which he may be
involved or with which he may be threatened by reason of his being or having been a trustee, and that the Trust will indemnify officers, representatives and employees of the Trust to the same extent that trustees are entitled to indemnification.
Counsel.
Willkie Farr & Gallagher LLP, 787
Seventh Avenue, New York, New York 10019 serves as the Trusts counsel.
Independent Registered Public Accounting Firm.
[ ], with offices at [ ], serves as the Funds independent registered public accounting firm.
Principal Shareholders.
To the knowledge of the Trust,
the following entities owned beneficially or of record 5% or more of each Funds shares as of [ ], 2013:
GNMA Portfolio
|
|
|
|
|
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Name
|
|
Address
|
|
%
|
|
Class
|
|
|
|
|
*MERRILL LYNCH PIERCE FENNER & SMITH INCORPORATED
|
|
4800 DEER LAKE DRIVE EAST
JACKSONVILLE,
FL 32246-6484
|
|
34.19
|
|
Investor A Shares
|
|
|
|
|
*NFS LLC FEBO
|
|
499 WASHINGTON BLVD
JERSEY
CITY, NJ 07310
|
|
13.34
|
|
Investor A Shares
|
|
|
|
|
*PERSHING LLC
|
|
1 PERSHING PLAZA
JERSEY
CITY,
NJ 07399-0001
|
|
12.07
|
|
Investor A Shares
|
|
|
|
|
*UBS WM USA
|
|
499 WASHINGTON BLVD
9TH
FLOOR
JERSEY CITY,
NJ
07310-2055
|
|
6.40
|
|
Investor A Shares
|
|
|
|
|
*AMERICAN ENTERPRISE INVESTMENT SVC
|
|
707 2ND AVE S MINNEAPOLIS, MN 55402
|
|
5.14
|
|
Investor A Shares
|
|
|
|
|
*MERRILL LYNCH PIERCE FENNER & SMITH INCORPORATED
|
|
4800 DEER LAKE DRIVE EAST
JACKSONVILLE,
FL 32246-6484
|
|
67.77
|
|
Investor B Shares
|
|
|
|
|
*PERSHING LLC
|
|
1 PERSHING PLAZA
JERSEY
CITY,
NJ 07399-0001
|
|
7.32
|
|
Investor B Shares
|
|
|
|
|
*MORGAN STANLEY & CO.
|
|
HARBORSIDE FINANCIAL CENTER PLAZA II
3RD FLOOR
JERSEY CITY, NJ 07311
|
|
5.19
|
|
Investor B Shares
|
|
|
|
|
*MERRILL LYNCH PIERCE FENNER & SMITH INCORPORATED
|
|
4800 DEER LAKE DRIVE EAST
JACKSONVILLE,
FL 32246-6484
|
|
49.62
|
|
Investor C Shares
|
|
|
|
|
*FIRST CLEARING, LLC
|
|
2801 MARKET STREET
ST. LOUIS,
MO 63103
|
|
8.18
|
|
Investor C Shares
|
|
|
|
|
*RAYMOND JAMES OMNIBUS FOR MUTUAL FUNDS
|
|
880 CARILLON PARKWAY ST. PETERSBURG, FL 33716
|
|
6.89
|
|
Investor C Shares
|
|
|
|
|
*MORGAN STANLEY & CO.
|
|
HARBORSIDE FINANCIAL CENTER PLAZA II
3RD FLOOR
JERSEY CITY, NJ 07311
|
|
6.49
|
|
Investor C Shares
|
|
|
|
|
*PERSHING LLC
|
|
1 PERSHING PLAZA
JERSEY
CITY,
NJ 07399-0001
|
|
5.62
|
|
Investor C Shares
|
I-33
|
|
|
|
|
|
|
Name
|
|
Address
|
|
%
|
|
Class
|
|
|
|
|
*MERRILL LYNCH PIERCE FENNER & SMITH INCORPORATED
|
|
4800 DEER LAKE DRIVE EAST JACKSONVILLE,
FL 32246-6484
|
|
35.15
|
|
Institutional Class
|
|
|
|
|
*FIRST CLEARING, LLC
|
|
2801 MARKET STREET
ST. LOUIS,
MO 63103
|
|
7.01
|
|
Institutional Class
|
|
|
|
|
*SAXON AND CO
|
|
PO BOX 7780-1888 PHILADELPHIA, PA 19182
|
|
5.88
|
|
Institutional Class
|
|
|
|
|
*TD AMERITRADE INC
|
|
PO BOX 2226
OMAHA, NE
68103-2226
|
|
5.57
|
|
Institutional Class
|
|
|
|
|
*MORGAN STANLEY & CO.
|
|
HARBORSIDE FINANCIAL CENTER PLAZA II
3RD FLOOR
JERSEY CITY, NJ 07311
|
|
5.48
|
|
Institutional Class
|
|
|
|
|
*CHARLES SCHWAB & CO INC
|
|
101 MONTGOMERY ST. SAN FRANCISCO,
CA 94104-4122
|
|
82.53
|
|
Service Shares
|
|
|
|
|
*PERSHING LLC
|
|
1 PERSHING PLAZA
JERSEY
CITY,
NJ 07399-0001
|
|
40.99
|
|
BlackRock Class
|
|
|
|
|
*NFS LLC FEBO
|
|
499 WASHINGTON BLVD JERSEY CITY, NJ 07310
|
|
40.30
|
|
BlackRock Class
|
|
|
|
|
*WILMINGTON TRUST RISC AS TTEE FBO
NOBEL BIOCARE USA 401K PLAN
|
|
P.O. BOX 52129
PHOENIX, AZ
85072
|
|
12.52
|
|
BlackRock Class
|
*
|
|
Record holder that does not beneficially hold the shares.
|
Inflation Protected Bond Portfolio
|
|
|
|
|
|
|
Name
|
|
Address
|
|
%
|
|
Class
|
|
|
|
|
*AMERICAN ENTERPRISE INVESTMENT SVC
|
|
707 2ND AVE S MINNEAPOLIS, MN 55402
|
|
30.63
|
|
Investor A Shares
|
|
|
|
|
*MORGAN STANLEY & CO.
|
|
HARBORSIDE FINANCIAL CENTER PLAZA II
3RD FLOOR JERSEY CITY, NJ 07311
|
|
12.71
|
|
Investor A Shares
|
|
|
|
|
*MERRILL LYNCH PIERCE FENNER & SMITH INCORPORATED
|
|
4800 DEER LAKE DRIVE EAST JACKSONVILLE,
FL 32246-6484
|
|
9.88
|
|
Investor A Shares
|
|
|
|
|
*NFS LLC FEBO
|
|
499 WASHINGTON BLVD
JERSEY
CITY, NJ 07310
|
|
9.77
|
|
Investor A Shares
|
|
|
|
|
*UBS WM USA
|
|
499 WASHINGTON BLVD
9TH FLOOR
JERSEY CITY,
NJ 07310-2055
|
|
6.12
|
|
Investor A Shares
|
|
|
|
|
*MERRILL LYNCH PIERCE FENNER & SMITH INCORPORATED
|
|
4800 DEER LAKE DRIVE EAST JACKSONVILLE,
FL 32246-6484
|
|
62.25
|
|
Investor B Shares
|
|
|
|
|
*FIRST CLEARING, LLC
|
|
2801 MARKET STREET
ST. LOUIS,
MO 63103
|
|
5.74
|
|
Investor B Shares
|
|
|
|
|
*MERRILL LYNCH PIERCE FENNER & SMITH INCORPORATED
|
|
4800 DEER LAKE DRIVE EAST JACKSONVILLE,
FL 32246-6484
|
|
41.30
|
|
Investor C Shares
|
|
|
|
|
*MORGAN STANLEY & CO.
|
|
HARBORSIDE FINANCIAL CENTER PLAZA II 3RD FLOOR
JERSEY CITY, NJ 07311
|
|
15.63
|
|
Investor C Shares
|
|
|
|
|
*FIRST CLEARING, LLC
|
|
2801 MARKET STREET
ST. LOUIS,
MO 63103
|
|
10.26
|
|
Investor C Shares
|
|
|
|
|
*UBS WM USA
|
|
499 WASHINGTON BLVD
9TH FLOOR
JERSEY CITY,
NJ 07310-2055
|
|
5.94
|
|
Investor C Shares
|
|
|
|
|
*PERSHING LLC
|
|
1 PERSHING PLAZA
JERSEY
CITY,
NJ 07399-0001
|
|
5.68
|
|
Investor C Shares
|
I-34
|
|
|
|
|
|
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Name
|
|
Address
|
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%
|
|
Class
|
|
|
|
|
*MORGAN STANLEY & CO.
|
|
HARBORSIDE FINANCIAL CENTER PLAZA II 3RD FLOOR JERSEY CITY,
NJ 07311
|
|
17.27
|
|
Institutional Class
|
|
|
|
|
*MERRILL LYNCH PIERCE FENNER & SMITH INCORPORATED
|
|
4800 DEER LAKE DRIVE EAST JACKSONVILLE,
FL 32246-6484
|
|
14.36
|
|
Institutional Class
|
|
|
|
|
*CHARLES SCHWAB & CO INC
|
|
101 MONTGOMERY ST. SAN FRANCISCO,
CA 94104-4122
|
|
13.35
|
|
Institutional Class
|
|
|
|
|
*NFS LLC FEBO
|
|
499 WASHINGTON BLVD JERSEY CITY, NJ 07310
|
|
10.46
|
|
Institutional Class
|
|
|
|
|
*CHARLES SCHWAB & CO INC
|
|
101 MONTGOMERY ST. SAN FRANCISCO,
CA 94104-4122
|
|
51.67
|
|
Service Shares
|
|
|
|
|
*PERSHING LLC
|
|
1 PERSHING PLAZA
JERSEY
CITY,
NJ 07399-0001
|
|
8.63
|
|
Service Shares
|
|
|
|
|
*NFS LLC FEBO
|
|
499 WASHINGTON BLVD
JERSEY
CITY, NJ 07310
|
|
6.90
|
|
Service Shares
|
|
|
|
|
*FIDELITY INVESTMENTS INSTITUTIONAL OP CO INC
FIIOC AS AGENT FOR CERTAIN EMPLOYEE BEN PLAN
|
|
100 MAGELLAN WAY (KW1C) COVINGTON,
KY 41015-0000
|
|
18.04
|
|
BlackRock Class
|
|
|
|
|
*MAC & CO
|
|
525 WILLIAM PENN PLACE
PO BOX
3198
PITTSBURGH,
PA
15230-3198
|
|
9.78
|
|
BlackRock Class
|
|
|
|
|
*NFS LLC FEBO
|
|
499 WASHINGTON BLVD
JERSEY
CITY, NJ 07310
|
|
7.62
|
|
BlackRock Class
|
*
|
|
Record holder that does not beneficially hold the shares.
|
Investment Grade Bond Portfolio
|
|
|
|
|
|
|
Name
|
|
Address
|
|
%
|
|
Class
|
|
|
|
|
[ ]
|
|
[ ]
|
|
[ ]
|
|
[ ]
|
[*
|
|
Record holder that does not beneficially hold the shares.]
|
U.S. Government Bond Portfolio
|
|
|
|
|
|
|
Name
|
|
Address
|
|
%
|
|
Class
|
|
|
|
|
*MERRILL LYNCH PIERCE FENNER & SMITH INCORPORATED
|
|
4800 DEER LAKE DRIVE EAST JACKSONVILLE,
FL 32246-6484
|
|
59.11
|
|
Investor A Shares
|
|
|
|
|
*MERRILL LYNCH PIERCE FENNER & SMITH INCORPORATED
|
|
4800 DEER LAKE DRIVE EAST JACKSONVILLE,
FL 32246-6484
|
|
65.33
|
|
Investor B Shares
|
|
|
|
|
*FIRST CLEARING, LLC
|
|
2801 MARKET STREET
ST. LOUIS,
MO 63103
|
|
7.16
|
|
Investor B Shares
|
|
|
|
|
*NFS LLC FEBO
|
|
499 WASHINGTON BLVD
JERSEY
CITY, NJ 07310
|
|
7.06
|
|
Investor B Shares
|
|
|
|
|
*MERRILL LYNCH PIERCE FENNER & SMITH INCORPORATED
|
|
4800 DEER LAKE DRIVE EAST JACKSONVILLE,
FL 32246-6484
|
|
96.06
|
|
Investor B1 Shares
|
|
|
|
|
*MERRILL LYNCH PIERCE FENNER & SMITH INCORPORATED
|
|
4800 DEER LAKE DRIVE EAST JACKSONVILLE,
FL 32246-6484
|
|
71.72
|
|
Investor C Shares
|
|
|
|
|
*PERSHING LLC
|
|
1 PERSHING PLAZA
JERSEY
CITY,
NJ 07399-0001
|
|
5.50
|
|
Investor C Shares
|
I-35
|
|
|
|
|
|
|
Name
|
|
Address
|
|
%
|
|
Class
|
|
|
|
|
*MERRILL LYNCH PIERCE FENNER & SMITH INCORPORATED
|
|
4800 DEER LAKE DRIVE EAST JACKSONVILLE,
FL 32246-6484
|
|
95.63
|
|
Investor C1 Shares
|
|
|
|
|
*MERRILL LYNCH PIERCE FENNER & SMITH INCORPORATED
|
|
4800 DEER LAKE DRIVE EAST JACKSONVILLE,
FL 32246-6484
|
|
26.96
|
|
Institutional Class
|
|
|
|
|
*SAXON AND CO
|
|
PO BOX 7780-1888 PHILADELPHIA, PA 19182
|
|
21.78
|
|
Institutional Class
|
|
|
|
|
*SAXON AND CO
|
|
PO BOX 7780-1888 PHILADELPHIA, PA 19182
|
|
20.63
|
|
Institutional Class
|
|
|
|
|
*SAXON AND CO
|
|
PO BOX 7780-1888 PHILADELPHIA, PA 19182
|
|
16.85
|
|
Institutional Class
|
|
|
|
|
*SAXON AND CO
|
|
PO BOX 7780-1888 PHILADELPHIA, PA 19182
|
|
72.68
|
|
Service Shares
|
|
|
|
|
*MORGAN STANLEY & CO.
|
|
HARBORSIDE FINANCIAL CENTER PLAZA II 3RD FLOOR JERSEY CITY,
NJ 07311
|
|
9.30
|
|
Service Shares
|
|
|
|
|
*PERSHING LLC
|
|
1 PERSHING PLAZA JERSEY CITY, NJ 07399-0001
|
|
5.63
|
|
Service Shares
|
|
|
|
|
*SAXON AND CO
|
|
PO BOX 7780-1888 PHILADELPHIA, PA 19182
|
|
5.03
|
|
Service Shares
|
|
|
|
|
*MERRILL LYNCH PIERCE FENNER & SMITH INCORPORATED
|
|
4800 DEER LAKE DRIVE EAST JACKSONVILLE,
FL 32246-6484
|
|
92.42
|
|
Class R Shares
|
*
|
|
Record holder that does not beneficially hold the shares.
|
Shareholder Approvals.
As used in this Statement of Additional Information and in the Prospectuses, a majority of the outstanding
shares of a class, series or Fund means, with respect to the approval of an investment advisory agreement, a distribution plan or a change in a fundamental investment policy, the lesser of (1) 67% of the shares of the particular
class, series or Fund represented at a meeting at which the holders of more than 50% of the outstanding shares of such class, series or Fund are present in person or by proxy, or (2) more than 50% of the outstanding shares of such
class, series or Fund.
Each Funds audited financial statements, including the report of the independent registered public accounting firm, are incorporated into this
Statement of Additional Information by reference to its 2012 Annual Report. You may request a copy of the Annual Report at no charge by calling 1-800-441-7762 between 8:00 a.m. and 6:00 p.m. Eastern time on any business day.
I-36
P
ART
II
Throughout this Statement of Additional Information (SAI), each
BlackRock-advised fund may be referred to as a Fund or collectively with others as the Funds. Certain Funds may also be referred to as Municipal Funds if they invest certain of their assets in municipal
investments described below.
Each Fund is organized either as a
Maryland corporation, a Massachusetts business trust or a Delaware statutory trust. In each jurisdiction, nomenclature varies. For ease and clarity of presentation, shares of common stock and shares of beneficial interest are referred to herein as
shares or Common Stock, holders of shares of Common Stock are referred to as shareholders, the trustees or directors of each Fund are referred to as Directors, BlackRock Advisors, LLC or its affiliates
is the investment adviser or manager of each Fund and is referred to herein as the Manager or BlackRock and the investment advisory agreement or management agreement applicable to each Fund is referred to as the
Management Agreement. Each Funds Articles of Incorporation or Declaration of Trust, together with all amendments thereto, is referred to as its charter. The Investment Company Act of 1940, as amended, is referred to
herein as the Investment Company Act. The Securities Act of 1933, as amended, is referred to herein as the Securities Act. The Securities and Exchange Commission is referred to herein as the Commission or the
SEC.
Certain Funds are feeder funds
(each, a Feeder Fund) that invest all or a portion of their assets in a corresponding master portfolio (each, a Master Portfolio) of a master limited liability company (each, a Master LLC), a mutual
fund that has the same objective and strategies as the Feeder Fund. All investments are generally made at the level of the Master Portfolio. This structure is sometimes called a master/feeder structure. A Feeder Funds investment
results will correspond directly to the investment results of the underlying Master Portfolio in which it invests. For simplicity, this SAI uses the term Fund to include both a Feeder Fund and its Master Portfolio.
In addition to containing information about the Funds, Part II of this SAI
contains general information about all funds in the BlackRock-advised fund complex. Certain information contained herein may not be relevant to a particular Fund.
I
NVESTMENT
R
ISKS
AND
C
ONSIDERATIONS
Set forth below are descriptions of some of the types of investments and investment strategies that one or more of the Funds may use, and the risks and considerations associated with those investments and
investment strategies. Please see each Funds Prospectus and the Investment Objectives and Policies section of Part I of this SAI for further information on each Funds investment policies and risks. Information contained in
this section about the risks and considerations associated with a Funds investments and/or investment strategies applies only to those Funds specifically identified in Part I of this Statement of Additional Information as making each type of
investment or using each investment strategy (each, a Covered Fund). Information that does not apply to a Covered Fund does not form a part of that Covered Funds Statement of Additional Information and should not be relied on by
investors in that Covered Fund. Only information that is clearly identified as applicable to a Covered Fund is considered to form a part of that Covered Funds Statement of Additional Information.
144A Securities.
A Fund may purchase securities that can be
offered and sold only to qualified institutional buyers under Rule 144A under the Securities Act. The Directors have determined to treat as liquid Rule 144A securities that are either freely tradable in their primary markets offshore or
have been determined to be liquid in accordance with the policies and procedures adopted by the Funds Directors. The Directors have adopted guidelines and delegated to the Manager the daily function of determining and monitoring liquidity of
144A securities. The Directors, however, will retain sufficient oversight and will ultimately be responsible for the determinations. Since it is not possible to predict with assurance exactly how the market for securities sold and offered under Rule
144A will continue to develop, the Directors will carefully monitor a Funds investments in these securities. This investment practice could have the effect of increasing the level of illiquidity in a Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these securities.
Asset-Backed Securities.
Asset-backed securities are securities backed by home equity loans, installment sale contracts, credit card receivables or other assets. Asset-backed securities are
pass-through securities, meaning that principal and interest payments net of expenses made by the borrower on the underlying assets (such as credit
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card receivables) are passed through to a Fund. The value of asset-backed securities, like that of traditional fixed income securities, typically increases when interest rates fall and decreases
when interest rates rise. However, asset-backed securities differ from traditional fixed income securities because of their potential for prepayment. The price paid by a Fund for its asset-backed securities, the yield the Fund expects to receive
from such securities and the average life of the securities are based on a number of factors, including the anticipated rate of prepayment of the underlying assets. In a period of declining interest rates, borrowers may prepay the underlying assets
more quickly than anticipated, thereby reducing the yield to maturity and the average life of the asset-backed securities. Moreover, when a Fund reinvests the proceeds of a prepayment in these circumstances, it will likely receive a rate of interest
that is lower than the rate on the security that was prepaid. To the extent that a Fund purchases asset-backed securities at a premium, prepayments may result in a loss to the extent of the premium paid. If a Fund buys such securities at a discount,
both scheduled payments and unscheduled prepayments will increase current and total returns and unscheduled prepayments will also accelerate the recognition of income which, when distributed to shareholders, will be taxable as ordinary income. In a
period of rising interest rates, prepayments of the underlying assets may occur at a slower than expected rate, creating maturity extension risk. This particular risk may effectively change a security that was considered short- or intermediate-term
at the time of purchase into a longer term security. Since the value of longer-term securities generally fluctuates more widely in response to changes in interest rates than does the value of shorter-term securities, maturity extension risk could
increase the volatility of the Fund. When interest rates decline, the value of an asset-backed security with prepayment features may not increase as much as that of other fixed-income securities, and, as noted above, changes in market rates of
interest may accelerate or retard prepayments and thus affect maturities.
Asset-Based Securities.
Certain Funds may invest in debt, preferred or convertible securities, the principal amount, redemption terms or conversion terms of which are related to the market
price of some natural resource asset such as gold bullion. These securities are referred to as asset-based securities. A Fund will purchase only asset-based securities that are rated, or are issued by issuers that have outstanding debt
obligations rated, investment grade (for example, AAA, AA, A or BBB by Standard & Poors (S&P) or Fitch Ratings (Fitch), or Baa by Moodys Investors Service, Inc. (Moodys) or
commercial paper rated A-1 by S&P or Prime-1 by Moodys) or by issuers that the Manager has determined to be of similar creditworthiness. Obligations ranked in the fourth highest rating category, while considered investment
grade, may have certain speculative characteristics and may be more likely to be downgraded than securities rated in the three highest rating categories. If an asset-based security is backed by a bank letter of credit or other similar
facility, the Manager may take such backing into account in determining the creditworthiness of the issuer. While the market prices for an asset-based security and the related natural resource asset generally are expected to move in the same
direction, there may not be perfect correlation in the two price movements. Asset-based securities may not be secured by a security interest in or claim on the underlying natural resource asset. The asset-based securities in which a Fund may invest
may bear interest or pay preferred dividends at below market (or even relatively nominal) rates. Certain asset-based securities may be payable at maturity in cash at the stated principal amount or, at the option of the holder, directly in a stated
amount of the asset to which it is related. In such instance, because no Fund presently intends to invest directly in natural resource assets, a Fund would sell the asset-based security in the secondary market, to the extent one exists, prior to
maturity if the value of the stated amount of the asset exceeds the stated principal amount and thereby realize the appreciation in the underlying asset.
Precious Metal-Related Securities.
A Fund may invest in the securities of companies that explore for, extract, process or deal in precious metals
(e.g., gold, silver and platinum), and in asset-based securities indexed to the value of such metals. Such securities may be purchased when they are believed to be attractively priced in relation to the value of a companys precious
metal-related assets or when the values of precious metals are expected to benefit from inflationary pressure or other economic, political or financial uncertainty or instability. Based on historical experience, during periods of economic or
financial instability the securities of companies involved in precious metals may be subject to extreme price fluctuations, reflecting the high volatility of precious metal prices during such periods. In addition, the instability of precious metal
prices may result in volatile earnings of precious metal-related companies, which may, in turn, adversely affect the financial condition of such companies. The major producers of gold include the Republic of South Africa, Russia, Canada, the United
States, Brazil and Australia. Sales of gold by Russia are largely unpredictable and often relate to political and economic considerations rather than to market forces. Economic, financial, social and political factors within South Africa may
significantly affect South African gold production.
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Bank Loans.
Certain Funds may invest in bank loans. Bank loans are generally
non-investment grade floating rate instruments. Usually, they are freely callable at the issuers option. Certain Funds may invest in fixed and floating rate loans (Loans) arranged through private negotiations between a corporate
borrower or a foreign sovereign entity and one or more financial institutions (Lenders). A Fund may invest in such Loans in the form of participations in Loans (Participations) and assignments of all or a portion of Loans
from third parties (Assignments). A Fund considers these investments to be investments in debt securities for purposes of its investment policies. Participations typically will result in the Fund having a contractual relationship only
with the Lender, not with the borrower. The Fund will have the right to receive payments of principal, interest and any fees to which it is entitled only from the Lender selling the Participation and only upon receipt by the Lender of the payments
from the borrower. In connection with purchasing Participations, the Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the Loans, nor any rights of set-off against the borrower,
and the Fund may not benefit directly from any collateral supporting the Loan in which it has purchased the Participation. As a result, the Fund will assume the credit risk of both the borrower and the Lender that is selling the Participation. In
the event of the insolvency of the Lender selling the Participation, the Fund may be treated as a general creditor of the Lender and may not benefit from any set-off between the Lender and the borrower. The Fund will acquire Participations only if
the Lender interpositioned between the Fund and the borrower is determined by the Funds manager to be creditworthy. When the Fund purchases Assignments from Lenders, the Fund will acquire direct rights against the borrower on the Loan, and
will not have exposure to a counterpartys credit risk. The Funds may enter into Participations and Assignments on a forward commitment or when-issued basis, whereby a Fund would agree to purchase a Participation or Assignment at
set terms in the future. For more information on forward commitments and when-issued securities, see When-Issued Securities, Delayed Delivery Securities and Forward Commitments below.
A Fund may have difficulty disposing of Assignments and Participations. In
certain cases, the market for such instruments is not highly liquid, and therefore the Fund anticipates that in such cases such instruments could be sold only to a limited number of institutional investors. The lack of a highly liquid secondary
market may have an adverse impact on the value of such instruments and on the Funds ability to dispose of particular Assignments or Participations in response to a specific economic event, such as deterioration in the creditworthiness of the
borrower. Assignments and Participations will not be considered illiquid so long as it is determined by the Funds manager that an adequate trading market exists for these securities. To the extent that liquid Assignments and Participations
that a Fund holds become illiquid, due to the lack of sufficient buyers or market or other conditions, the percentage of the Funds assets invested in illiquid assets would increase.
Leading financial institutions often act as agent for a broader group of lenders, generally referred to as a syndicate. The
syndicates agent arranges the loans, holds collateral and accepts payments of principal and interest. If the agent develops financial problems, a Fund may not recover its investment or recovery may be delayed.
The Loans in which the Fund may invest are subject to the risk of loss of
principal and income. Although borrowers frequently provide collateral to secure repayment of these obligations they do not always do so. If they do provide collateral, the value of the collateral may not completely cover the borrowers
obligations at the time of a default. If a borrower files for protection from its creditors under the U.S. bankruptcy laws, these laws may limit a Funds rights to its collateral. In addition, the value of collateral may erode during a
bankruptcy case. In the event of a bankruptcy, the holder of a Loan may not recover its principal, may experience a long delay in recovering its investment and may not receive interest during the delay.
Borrowing and Leverage.
Each Fund may borrow as a temporary
measure for extraordinary or emergency purposes, including to meet redemptions or to settle securities transactions. Certain Funds will not purchase securities at any time when borrowings exceed 5% of their total assets, except (a) to honor
prior commitments or (b) to exercise subscription rights when outstanding borrowings have been obtained exclusively for settlements of other securities transactions. Certain Funds may also borrow in order to make investments. The purchase of
securities while borrowings are outstanding will have the effect of leveraging the Fund. Such leveraging increases the Funds exposure to capital risk, and borrowed funds are subject to interest costs that will reduce net income. The use of
leverage by a Fund creates an opportunity for greater total return, but, at the same time, creates special risks. For example, leveraging may exaggerate changes in the net asset value of Fund shares and in the yield on the Funds portfolio.
Although the principal of such borrowings will be fixed, the Funds assets may change in value during the time the borrowings are outstanding. Borrowings will create interest expenses for the Fund that can exceed the income from the assets
purchased with the borrowings. To the extent the income or capital appreciation derived
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from securities purchased with borrowed funds exceeds the interest the Fund will have to pay on the borrowings, the Funds return will be greater than if leverage had not been used.
Conversely, if the income or capital appreciation from the securities purchased with such borrowed funds is not sufficient to cover the cost of borrowing, the return to the Fund will be less than if leverage had not been used and, therefore, the
amount available for distribution to shareholders as dividends will be reduced. In the latter case, the Manager in its best judgment nevertheless may determine to maintain the Funds leveraged position if it expects that the benefits to the
Funds shareholders of maintaining the leveraged position will outweigh the current reduced return.
Certain types of borrowings by a Fund may result in the Fund being subject to covenants in credit agreements relating to asset coverage, portfolio composition requirements and other matters. It is not
anticipated that observance of such covenants would impede the Manager from managing a Funds portfolio in accordance with the Funds investment objectives and policies. However, a breach of any such covenants not cured within the
specified cure period may result in acceleration of outstanding indebtedness and require the Fund to dispose of portfolio investments at a time when it may be disadvantageous to do so.
Each Fund may at times borrow from affiliates of the Manager, provided that the terms of such borrowings are no less favorable
than those available from comparable sources of funds in the marketplace.
Cash Flows; Expenses.
The ability of each Fund to satisfy its investment objective depends to some extent on the Managers ability to manage cash flow (primarily from purchases and
redemptions and distributions from the Funds investments). The Manager will make investment changes to a Funds portfolio to accommodate cash flow while continuing to seek to replicate the total return of the Funds target index.
Investors should also be aware that the investment performance of each index is a hypothetical number which does not take into account brokerage commissions and other transaction costs, custody and other costs of investing, and any incremental
operating costs (e.g., transfer agency and accounting costs) that will be borne by the Funds. Finally, since each Fund seeks to replicate the total return of its target index, the Manager generally will not attempt to judge the merits of any
particular security as an investment.
Cash
Management.
Generally, the Manager will employ futures and options on futures to provide liquidity necessary to meet anticipated redemptions or for day-to-day operating purposes. However, if considered appropriate in the opinion of the
Manager, a portion of a Funds assets may be invested in certain types of instruments with remaining maturities of 397 days or less for liquidity purposes. Such instruments would consist of: (i) obligations of the U.S. Government, its
agencies, instrumentalities, authorities or political subdivisions (U.S. Government Securities); (ii) other fixed-income securities rated Aa or higher by Moodys or AA or higher by S&P or, if unrated, of comparable quality
in the opinion of the Manager; (iii) commercial paper; (iv) bank obligations, including negotiable certificates of deposit, time deposits and bankers acceptances; and (v) repurchase agreements. At the time the Fund invests in
commercial paper, bank obligations or repurchase agreements, the issuer or the issuers parent must have outstanding debt rated Aa or higher by Moodys or AA or higher by S&P or outstanding commercial paper, bank obligations or other
short-term obligations rated Prime-1 by Moodys or A-1 by S&P; or, if no such ratings are available, the instrument must be of comparable quality in the opinion of the Manager.
Collateralized Debt Obligations.
Certain Funds may invest in collateralized debt obligations (CDOs),
which include collateralized bond obligations (CBOs), collateralized loan obligations (CLOs) and other similarly structured securities. CDOs are types of asset-backed securities. A CBO is ordinarily issued by a trust or other
special purpose entity (SPE) and is typically backed by a diversified pool of fixed income securities (which may include high risk, below investment grade securities) held by such issuer. A CLO is ordinarily issued by a trust or other
SPE and is typically collateralized by a pool of loans, which may include, among others, domestic and non-U.S. senior secured loans, senior unsecured loans, and subordinate corporate loans, including loans that may be rated below investment grade or
equivalent unrated loans, held by such issuer. Although certain CDOs may benefit from credit enhancement in the form of a senior-subordinate structure, over-collateralization or bond insurance, such enhancement may not always be present, and may
fail to protect a Fund against the risk of loss on default of the collateral. Certain CDO issuers may use derivatives contracts to create synthetic exposure to assets rather than holding such assets directly, which entails the risks of
derivative instruments described elsewhere in this SAI. CDOs may charge management fees and administrative expenses, which are in addition to those of a Fund.
For both CBOs and CLOs, the cash flows from the SPE are split into two or more portions, called tranches, varying in risk and yield. The riskiest portion
is the equity tranche, which bears the first loss from defaults from the bonds
II-4
or loans in the SPE and serves to protect the other, more senior tranches from default (though such protection is not complete). Since it is partially protected from defaults, a senior tranche
from a CBO or CLO typically has higher ratings and lower yields than its underlying securities, and may be rated investment grade. Despite the protection from the equity tranche, CBO or CLO tranches can experience substantial losses due to actual
defaults, downgrades of the underlying collateral by rating agencies, forced liquidation of the collateral pool due to a failure of coverage tests, increased sensitivity to defaults due to collateral default and disappearance of protecting tranches,
market anticipation of defaults as well as investor aversion to CBO or CLO securities as a class. Interest on certain tranches of a CDO may be paid in kind or deferred and capitalized (paid in the form of obligations of the same type rather than
cash), which involves continued exposure to default risk with respect to such payments.
The risks of an investment in a CDO depend largely on the type of the collateral securities and the class of the CDO in which a Fund invests. Normally, CBOs, CLOs and other CDOs are privately offered and
sold, and thus are not registered under the securities laws. As a result, investments in CDOs may be characterized by a Fund as illiquid securities. However, an active dealer market may exist for CDOs, allowing a CDO to qualify for Rule 144A
transactions. In addition to the normal risks associated with fixed income securities and asset-backed securities generally discussed elsewhere in this SAI, CDOs carry additional risks including, but not limited to: (i) the possibility that
distributions from collateral securities will not be adequate to make interest or other payments; (ii) the risk that the collateral may default or decline in value or be downgraded, if rated by a nationally recognized statistical rating
organization (NRSRO); (iii) a Fund may invest in tranches of CDOs that are subordinate to other tranches; (iv) the structure and complexity of the transaction and the legal documents could lead to disputes among investors
regarding the characterization of proceeds; (v) the investment return achieved by the Fund could be significantly different than those predicted by financial models; (vi) the lack of a readily available secondary market for CDOs;
(vii) risk of forced fire sale liquidation due to technical defaults such as coverage test failures; and (viii) the CDOs manager may perform poorly.
Commercial Paper
.
Certain Funds may
purchase commercial paper. Commercial paper purchasable by each Fund includes Section 4(2) paper, a term that includes debt obligations issued in reliance on the private placement exemption from registration afforded by
Section 4(2) of the Securities Act. Section 4(2) paper is restricted as to disposition under the Federal securities laws, and is frequently sold (and resold) to institutional investors such as the Fund through or with the assistance of
investment dealers who make a market in the Section 4(2) paper, thereby providing liquidity. Certain transactions in Section 4(2) paper may qualify for the registration exemption provided in Rule 144A under the Securities Act.
Commodity-Linked Derivative Instruments and Hybrid Instruments.
Certain Funds seek to gain exposure to the commodities markets primarily through investments in hybrid instruments. Hybrid instruments are either equity or debt derivative securities with one or more commodity-dependent components that have
payment features similar to a commodity futures contract, a commodity option contract, or a combination of both. Therefore, these instruments are commodity-linked. They are considered hybrid instruments because they have both
commodity-like and security-like characteristics. Hybrid instruments are derivative instruments because at least part of their value is derived from the value of an underlying commodity, futures contract, index or other readily measurable economic
variable.
The prices of commodity-linked derivative instruments
may move in different directions than investments in traditional equity and debt securities when the value of those traditional securities is declining due to adverse economic conditions. As an example, during periods of rising inflation, debt
securities have historically tended to decline in value due to the general increase in prevailing interest rates. Conversely, during those same periods of rising inflation, the prices of certain commodities, such as oil and metals, have historically
tended to increase. Of course, there cannot be any guarantee that these investments will perform in that manner in the future, and at certain times the price movements of commodity-linked instruments have been parallel to those of debt and equity
securities. Commodities have historically tended to increase and decrease in value during different parts of the business cycle than financial assets. Nevertheless, at various times, commodities prices may move in tandem with the prices of financial
assets and thus may not provide overall portfolio diversification benefits. Under favorable economic conditions, the Funds investments may be expected to under-perform an investment in traditional securities. Over the long term, the returns on
the Funds investments are expected to exhibit low or negative correlation with stocks and bonds.
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Qualifying Hybrid Instruments.
Certain Funds may invest in hybrid instruments that qualify for
exclusion from regulation under the Commodity Exchange Act and the regulations adopted thereunder. A hybrid instrument that qualifies for this exclusion from regulation must be predominantly a security. A hybrid instrument is considered
to be predominantly a security if (a) the issuer of the hybrid instrument receives payment in full of the purchase price of the hybrid instrument, substantially contemporaneously with delivery of the hybrid instrument; (b) the purchaser or
holder of the hybrid instrument is not required to make any payment to the issuer in addition to the purchase price paid under subparagraph (a), whether as margin, settlement payment, or otherwise, during the life of the hybrid instrument or at
maturity; (c) the issuer of the hybrid instrument is not subject by the terms of the instrument to mark-to-market margining requirements; and (d) the hybrid instrument is not marketed as a contract of sale of a commodity for future
delivery (or option on such a contract) subject to applicable provisions of the Commodity Exchange Act. Hybrid instruments may be principal protected, partially protected, or offer no principal protection. A principal protected hybrid instrument
means that the issuer will pay, at a minimum, the par value of the note at maturity. Therefore, if the commodity value to which the hybrid instrument is linked declines over the life of the note, the Fund will receive at maturity the face or stated
value of the note. With a principal protected hybrid instrument, the Fund will receive at maturity the greater of the par value of the note or the increase in its value based on the underlying commodity or index. This protection is, in effect, an
option whose value is subject to the volatility and price level of the underlying commodity. The Managers decision whether to use principal protection depends in part on the cost of the protection. In addition, the protection feature depends
upon the ability of the issuer to meet its obligation to buy back the security, and, therefore, depends on the creditworthiness of the issuer. With full principal protection, the Fund will receive at maturity of the hybrid instrument either the
stated par value of the hybrid instrument, or potentially, an amount greater than the stated par value if the underlying commodity, index, futures contract or economic variable to which the hybrid instrument is linked has increased in value.
Partially protected hybrid instruments may suffer some loss of principal if the underlying commodity, index, futures contract or economic variable to which the hybrid instrument is linked declines in value during the term of the hybrid instrument.
However, partially protected hybrid instruments have a specified limit as to the amount of principal that they may lose.
Hybrid Instruments Without Principal Protection.
Certain Funds may invest in hybrid instruments that offer no principal protection. At maturity,
there is a risk that the underlying commodity price, futures contract, index or other economic variable may have declined sufficiently in value such that some or all of the face value of the hybrid instrument might not be returned. The Manager, at
its discretion, may invest in a partially protected principal structured note or a note without principal protection. In deciding to purchase a note without principal protection, the Manager may consider, among other things, the expected performance
of the underlying commodity futures contract, index or other economic variable over the term of the note, the cost of the note, and any other economic factors that the Manager believes are relevant.
Limitations on Leverage.
Some of the hybrid instruments in which a
Fund may invest may involve leverage. To avoid being subject to undue leverage risk, a Fund will seek to limit the amount of economic leverage it has under any one hybrid instrument that it buys and the leverage of the Funds overall portfolio.
A Fund will not invest in a hybrid instrument if, at the time of purchase: (i) that instruments leverage ratio exceeds 300% of the price increase in the underlying commodity, futures contract, index or other economic variable
or (ii) the Funds portfolio leverage ratio exceeds 150%, measured at the time of purchase. Leverage ratio is the expected increase in the value of a hybrid instrument, assuming a one percent price increase in the
underlying commodity, futures contract, index or other economic factor. In other words, for a hybrid instrument with a leverage factor of 150%, a 1% gain in the underlying economic variable would be expected to result in a 1.5% gain in value for the
hybrid instrument. Conversely, a hybrid instrument with a leverage factor of 150% would suffer a 1.5% loss if the underlying economic variable lost 1% of its value. Portfolio leverage ratio is defined as the average (mean) leverage ratio
of all instruments in a Funds portfolio, weighted by the market values of such instruments or, in the case of futures contracts, their notional values. To the extent that the policy on a Funds use of leverage stated above conflicts with
the Investment Company Act or the rules and regulations thereunder, the Fund will comply with the applicable provisions of the Investment Company Act. A Fund may at times or from time to time decide not to use leverage in its investments or use less
leverage than may otherwise be allowable.
Counterparty
Risk.
A significant risk of hybrid instruments is counterparty risk. Unlike exchange-traded futures and options, which are standard contracts, hybrid instruments are customized securities, tailor-made by a specific issuer. With a listed futures
or options contract, an investors counterparty is the exchange clearinghouse. Exchange
II-6
clearinghouses are capitalized by the exchange members and typically have high investment grade ratings (e.g., ratings of AAA or AA by S&P). Therefore, the risk is small that an exchange
clearinghouse might be unable to meet its obligations at maturity. However, with a hybrid instrument, a Fund will take on the counterparty credit risk of the issuer. That is, at maturity of the hybrid instrument, there is a risk that the issuer may
be unable to perform its obligations under the structured note.
Convertible Securities.
A convertible security is a bond, debenture, note, preferred stock or other security that may be converted into or
exchanged for a prescribed amount of common stock or other equity security of the same or a different issuer within a particular period of time at a specified price or formula. A convertible security entitles the holder to receive interest paid or
accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged. Before conversion, convertible securities have characteristics similar to nonconvertible income securities in that
they ordinarily provide a stable stream of income with generally higher yields than those of common stocks of the same or similar issuers, but lower yields than comparable nonconvertible securities. The value of a convertible security is influenced
by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also may have an effect on the convertible securitys
investment value. Convertible securities rank senior to common stock in a corporations capital structure but are usually subordinated to comparable nonconvertible securities. Convertible securities may be subject to redemption at the option of
the issuer at a price established in the convertible securitys governing instrument.
The characteristics of convertible securities make them potentially attractive investments for an investment company seeking a high total return from capital appreciation and investment income. These
characteristics include the potential for capital appreciation as the value of the underlying common stock increases, the relatively high yield received from dividend or interest payments as compared to common stock dividends and decreased risks of
decline in value relative to the underlying common stock due to their fixed income nature. As a result of the conversion feature, however, the interest rate or dividend preference on a convertible security is generally less than would be the case if
the securities were issued in nonconvertible form.
In analyzing
convertible securities, the Manager will consider both the yield on the convertible security relative to its credit quality and the potential capital appreciation that is offered by the underlying common stock, among other things.
Convertible securities are issued and traded in a number of securities
markets. Even in cases where a substantial portion of the convertible securities held by a Fund are denominated in U.S. dollars, the underlying equity securities may be quoted in the currency of the country where the issuer is domiciled. As a
result, fluctuations in the exchange rate between the currency in which the debt security is denominated and the currency in which the share price is quoted will affect the value of the convertible security. With respect to convertible securities
denominated in a currency different from that of the underlying equity securities, the conversion price may be based on a fixed exchange rate established at the time the security is issued, which may increase the effects of currency risk. As
described below, a Fund is authorized to enter into foreign currency hedging transactions in which it may seek to reduce the effect of exchange rate fluctuations.
Apart from currency considerations, the value of convertible securities is
influenced by both the yield on nonconvertible securities of comparable issuers and by the value of the underlying common stock. The value of a convertible security viewed without regard to its conversion feature (
i.e.
, strictly on the basis
of its yield) is sometimes referred to as its investment value. To the extent interest rates change, the investment value of the convertible security typically will fluctuate. At the same time, however, the value of the convertible
security will be influenced by its conversion value, which is the market value of the underlying common stock that would be obtained if the convertible security were converted. Conversion value fluctuates directly with the price of the
underlying common stock. If the conversion value of a convertible security is substantially below its investment value, the price of the convertible security is governed principally by its investment value. To the extent the conversion value of a
convertible security increases to a point that approximates or exceeds its investment value, the price of the convertible security will be influenced principally by its conversion value. A convertible security will sell at a premium over the
conversion value to the extent investors place value on the right to acquire the underlying common stock while holding a fixed income security. The yield and conversion premium of convertible securities issued in Japan and the Euromarket are
frequently determined at levels that cause the conversion value to affect their market value more than the securities investment value.
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Holders of convertible securities generally have a claim on the assets of the issuer prior to the common
stockholders but may be subordinated to other debt securities of the same issuer. A convertible security may be subject to redemption at the option of the issuer at a price established in a charter provision, indenture or other governing instrument
pursuant to which the convertible security was issued. If a convertible security held by a Fund is called for redemption, the Fund will be required to redeem the security, convert it into the underlying common stock or sell it to a third party.
Certain convertible debt securities may provide a put option to the holder, which entitles the holder to cause the security to be redeemed by the issuer at a premium over the stated principal amount of the debt security under certain circumstances.
A Fund may also invest in synthetic convertible securities.
Synthetic convertible securities may include either Cash-Settled Convertibles or Manufactured Convertibles. Cash-Settled Convertibles are instruments that are created by the issuer and have the economic characteristics of traditional convertible
securities but may not actually permit conversion into the underlying equity securities in all circumstances. As an example, a private company may issue a Cash-Settled Convertible that is convertible into common stock only if the company
successfully completes a public offering of its common stock prior to maturity and otherwise pays a cash amount to reflect any equity appreciation. Manufactured Convertibles are created by the Manager or another party by combining separate
securities that possess one of the two principal characteristics of a convertible security,
i.e.
, fixed income (fixed income component) or a right to acquire equity securities (convertibility component). The fixed
income component is achieved by investing in nonconvertible fixed income securities, such as nonconvertible bonds, preferred stocks and money market instruments. The convertibility component is achieved by investing in call options, warrants, or
other securities with equity conversion features (equity features) granting the holder the right to purchase a specified quantity of the underlying stocks within a specified period of time at a specified price or, in the case of a stock
index option, the right to receive a cash payment based on the value of the underlying stock index.
A Manufactured Convertible differs from traditional convertible securities in several respects. Unlike a traditional convertible security, which is a single security that has a unitary market value, a
Manufactured Convertible is comprised of two or more separate securities, each with its own market value. Therefore, the total market value of such a Manufactured Convertible is the sum of the values of its fixed income component and its
convertibility component.
More flexibility is possible in the
creation of a Manufactured Convertible than in the purchase of a traditional convertible security. Because many corporations have not issued convertible securities, the Manager may combine a fixed income instrument and an equity feature with respect
to the stock of the issuer of the fixed income instrument to create a synthetic convertible security otherwise unavailable in the market. The Manager may also combine a fixed income instrument of an issuer with an equity feature with respect to the
stock of a different issuer when the Manager believes such a Manufactured Convertible would better promote a Funds objective than alternative investments. For example, the Manager may combine an equity feature with respect to an issuers
stock with a fixed income security of a different issuer in the same industry to diversify the Funds credit exposure, or with a U.S. Treasury instrument to create a Manufactured Convertible with a higher credit profile than a traditional
convertible security issued by that issuer. A Manufactured Convertible also is a more flexible investment in that its two components may be purchased separately and, upon purchasing the separate securities, combined to create a
Manufactured Convertible. For example, the Fund may purchase a warrant for eventual inclusion in a Manufactured Convertible while postponing the purchase of a suitable bond to pair with the warrant pending development of more favorable market
conditions.
The value of a Manufactured Convertible may respond
to certain market fluctuations differently from a traditional convertible security with similar characteristics. For example, in the event a Fund created a Manufactured Convertible by combining a short-term U.S. Treasury instrument and a call option
on a stock, the Manufactured Convertible would be expected to outperform a traditional convertible of similar maturity that is convertible into that stock during periods when Treasury instruments outperform corporate fixed income securities and
underperform during periods when corporate fixed income securities outperform Treasury instruments.
Debt Securities.
Debt securities, such as bonds, involve credit risk. This is the risk that the issuer will not make timely payments of principal and interest. The degree of credit risk
depends on the issuers financial condition and on the terms of the debt securities. Changes in an issuers credit rating or the markets perception of an issuers creditworthiness may also affect the value of a Funds
investment in that issuer. Credit risk is reduced to the extent a Fund limits its debt investments to U.S. Government securities.
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All debt securities, however, are subject to interest rate risk. This is the risk that the value of the
security may fall when interest rates rise. If interest rates move sharply in a manner not anticipated by Fund management, a Funds investments in debt securities could be adversely affected and the Fund could lose money. In general, the market
price of debt securities with longer maturities will go up or down more in response to changes in interest rates than will the market price of shorter-term debt securities.
During periods of rising interest rates, the average life of certain fixed
income securities is extended because of slower than expected principal payments. This may lock in a below-market interest rate and extend the duration of these fixed-income securities, especially mortgage-related securities, making them more
sensitive to changes in interest rates. As a result, in a period of rising interest rates, these securities may exhibit additional volatility and lose value. This is known as extension risk.
The value of fixed income securities in the Funds can be expected to vary inversely with changes in prevailing interest rates.
Fixed income securities with longer maturities, which tend to produce higher yields, are subject to potentially greater capital appreciation and depreciation than securities with shorter maturities. The Funds are not restricted to any maximum or
minimum time to maturity in purchasing individual portfolio securities, and the average maturity of a Funds assets will vary.
Depositary Receipts (ADRs, EDRs and GDRs).
Certain Funds may invest in the securities of foreign issuers in the form of Depositary Receipts
or other securities convertible into securities of foreign issuers. Depositary Receipts may not necessarily be denominated in the same currency as the underlying securities into which they may be converted. The Fund may invest in both sponsored and
unsponsored American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), Global Depositary Receipts (GDRs) and other similar global instruments. ADRs typically are issued by an American bank or trust
company and evidence ownership of underlying securities issued by a foreign corporation. EDRs, which are sometimes referred to as Continental Depositary Receipts, are receipts issued in Europe, typically by foreign banks and trust companies, that
evidence ownership of either foreign or domestic underlying securities. GDRs are depositary receipts structured like global debt issues to facilitate trading on an international basis. Unsponsored ADR, EDR and GDR programs are organized
independently and without the cooperation of the issuer of the underlying securities. As a result, available information concerning the issuer may not be as current as for sponsored ADRs, EDRs and GDRs, and the prices of unsponsored ADRs, EDRs and
GDRs may be more volatile than if such instruments were sponsored by the issuer. Depositary Receipts are generally subject to the same risks as the foreign securities that they evidence or into which they may be converted. Investments in ADRs, EDRs
and GDRs present additional investment considerations as described under Foreign Investment Risks.
Derivatives
Each Fund may use instruments referred to as derivative securities. Derivatives are financial instruments the value of which is derived from another security, a commodity (such as gold or oil), a currency
or an index (a measure of value or rates, such as the S&P 500 Index or the prime lending rate). Derivatives allow a Fund to increase or decrease the level of risk to which the Fund is exposed more quickly and efficiently than transactions in
other types of instruments. Each Fund may use derivatives for hedging purposes. Certain Funds may also use derivatives for speculative purposes to seek to enhance returns. The use of a derivative is speculative if the Fund is primarily seeking to
achieve gains, rather than offset the risk of other positions. When a Fund invests in a derivative for speculative purposes, the Fund will be fully exposed to the risks of loss of that derivative, which may sometimes be greater than the
derivatives cost. Unless otherwise permitted, no Fund may use any derivative to gain exposure to an asset or class of assets that it would be prohibited by its investment restrictions from purchasing directly.
Hedging.
Hedging is a strategy in which a derivative is used to
offset the risks associated with other Fund holdings. Losses on the other investment may be substantially reduced by gains on a derivative that reacts in an opposite manner to market movements. While hedging can reduce losses, it can also reduce or
eliminate gains or cause losses if the market moves in a manner different from that anticipated by the Fund or if the cost of the derivative outweighs the benefit of the hedge. Hedging also involves correlation risk,
i.e.
the risk that
changes in the value of the derivative will not match those of the holdings being hedged as expected by a Fund, in which case any losses on the holdings being hedged may not be reduced or may be increased. The inability to close options and futures
positions also could have an adverse impact on a Funds ability to hedge effectively its portfolio. There is also a risk of loss by the Fund of margin deposits or collateral in the event of bankruptcy of a broker with whom the Fund has an open
position in an option, a futures contract or a related option. There can be no assurance that a Funds hedging
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strategies will be effective. No Fund is required to engage in hedging transactions and each Fund may choose not to do so.
A Fund may use derivative instruments and trading strategies, including the
following:
Indexed and Inverse Securities.
A Fund may
invest in securities that provide a potential return based on a particular index of value or interest rates. For example, a Fund may invest in securities that pay interest based on an index of interest rates. The principal amount payable upon
maturity of certain securities also may be based on the value of the index. To the extent a Fund invests in these types of securities, the Funds return on such securities will be subject to risk with respect to the value of the particular
index: that is, if the value of the index falls, the value of the indexed securities owned by the Fund will fall. Interest and principal payable on certain securities may also be based on relative changes among particular indices. A Fund may also
invest in so-called inverse floating obligations or residual interest bonds on which the interest rates vary inversely with a floating rate (which may be reset periodically by a dutch auction, a remarketing agent, or by
reference to a short-term tax-exempt interest rate index). A Fund may purchase synthetically-created inverse floating rate bonds evidenced by custodial or trust receipts. Generally, income on inverse floating rate bonds will decrease when interest
rates increase, and will increase when interest rates decrease. Such securities have the effect of providing a degree of investment leverage, since they may increase or decrease in value in response to changes, as an illustration, in market interest
rates at a rate that is a multiple of the rate at which fixed-rate securities increase or decrease in response to such changes. As a result, the market values of such securities will generally be more volatile than the market values of fixed-rate
securities. To seek to limit the volatility of these securities, a Fund may purchase inverse floating obligations that have shorter-term maturities or that contain limitations on the extent to which the interest rate may vary. Certain investments in
such obligations may be illiquid. The Manager believes that indexed and inverse floating obligations represent flexible portfolio management instruments for a Fund that allow the Fund to seek potential investment rewards, hedge other portfolio
positions or vary the degree of investment leverage relatively efficiently under different market conditions. A Fund may invest in indexed and inverse securities for hedging purposes or to seek to increase returns. When used for hedging purposes,
indexed and inverse securities involve correlation risk. Furthermore, where such a security includes a contingent liability, in the event of an adverse movement in the underlying index or interest rate, a Fund may be required to pay substantial
additional margin to maintain the position.
The Funds may
invest up to 10% of their total assets in leveraged inverse floating rate debt instruments (inverse floaters). Municipal tender option bonds, both taxable and tax-exempt, which may include inverse floating rate debt instruments,
(including residual interests thereon) are excluded from this 10% limitation.
Swap Agreements.
A Fund may enter into swap agreements, including interest rate and index swap agreements, for hedging purposes or to seek to obtain a particular desired return at a lower cost to
the Fund than if the Fund had invested directly in an instrument that yielded the desired return. Swap agreements are two party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than one year.
In a standard swap transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or
swapped between the parties are calculated with respect to a notional amount,
i.e.
, the dollar amount invested at a particular interest rate, in a particular foreign currency, or in a basket of securities
representing a particular index. The notional amount of the swap agreement is only a fictive basis on which to calculate the obligations that the parties to a swap agreement have agreed to exchange. A Funds obligations (or rights)
under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the net amount). A Funds
obligations under a swap agreement will be accrued daily (offset against any amounts owing to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by marking as segregated liquid, unencumbered assets, marked
to market daily, to avoid any potential leveraging of the Funds portfolio.
Whether a Funds use of swap agreements will be successful in furthering its investment objective will depend on the Managers ability to correctly predict whether certain types of investments
are likely to produce greater returns than other investments. Because they are two party contracts and because they may have terms of greater than seven days, some swap agreements may be considered to be illiquid. Moreover, a Fund bears the risk of
loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. A Fund will seek to lessen this risk to some extent by entering into a transaction only if the counterparty
meets the current credit requirement for OTC option counterparties. Swap agreements also bear the risk
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that a Fund will not be able to meet its payment obligations to the counterparty. As noted, however, a Fund will segregate liquid assets permitted to be so segregated by the Commission in an
amount equal to or greater than the market value of the Funds liabilities under the swap agreement or the amount it would cost the Fund initially to make an equivalent direct investment plus or minus any amount the Fund is obligated to pay or
is to receive under the swap agreement. Restrictions imposed by the tax rules applicable to regulated investment companies, may limit the Funds ability to use swap agreements. The swap market is largely unregulated. It is possible that
developments in the swap market, including potential government regulation, could adversely affect each Funds ability to terminate existing swap agreements or to realize amounts to be received under such agreements.
See Credit Default Swap Agreements, Interest Rate Swaps,
Caps and Floors and Municipal Interest Rate Swap Agreements below for further information on particular types of swap agreements that may be used by certain Funds.
Interest Rate Swaps, Caps and Floors.
In order to hedge the value of a Funds portfolio against interest rate
fluctuations or to enhance a Funds income, a Fund may enter into various transactions, such as interest rate swaps and the purchase or sale of interest rate caps and floors. Interest rate swaps are OTC contracts in which each party agrees to
make a periodic interest payment based on an index or the value of an asset in return for a periodic payment from the other party based on a different index or asset. The purchase of an interest rate floor entitles the purchaser, to the extent that
a specified index falls below a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate floor. The purchase of an interest rate cap entitles the purchaser, to the extent
that a specified index rises above a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate cap.
A Fund expects to enter into these transactions primarily to preserve a
return or spread on a particular investment or portion of its portfolio or to protect against any increase in the price of securities the Fund anticipates purchasing at a later date. A Fund generally will use these transactions primarily as a hedge
and not as a speculative investment. However, a Fund may also invest in interest rate swaps to enhance income or to increase the Funds yield during periods of steep interest rate yield curves (
i.e.
, wide differences between short term
and long term interest rates). In an interest rate swap, a Fund may exchange with another party their respective commitments to pay or receive interest,
e.g.
, an exchange of fixed rate payments for floating rate payments. For example, if a
Fund holds a mortgage- backed security with an interest rate that is reset only once each year, it may swap the right to receive interest at this fixed rate for the right to receive interest at a rate that is reset every week. This would enable a
Fund to offset a decline in the value of the mortgage backed security due to rising interest rates but would also limit its ability to benefit from falling interest rates. Conversely, if a Fund holds a mortgage-backed security with an interest rate
that is reset every week and it would like to lock in what it believes to be a high interest rate for one year, it may swap the right to receive interest at this variable weekly rate for the right to receive interest at a rate that is fixed for one
year. Such a swap would protect the Fund from a reduction in yield due to falling interest rates and may permit the Fund to enhance its income through the positive differential between one week and one year interest rates, but would preclude it from
taking full advantage of rising interest rates.
A Fund usually
will enter into interest rate swap transactions on a net basis (
i.e.
, the two payment streams are netted against one another with the Fund receiving or paying, as the case may be, only the net amount of the two payment streams). Inasmuch as
these transactions are entered into for good faith hedging purposes, the Manager believes that such obligations do not constitute senior securities and, accordingly, will not treat them as being subject to its borrowing restrictions. The net amount
of the excess, if any, of a Funds obligations over its entitlements with respect to each interest rate swap will be accrued on a daily basis, and an amount of liquid assets that have an aggregate net asset value at least equal to the accrued
excess will be maintained in a segregated account by the Fund.
If the interest rate swap transaction is entered into on other than a net basis, the full amount of a Funds obligations will be accrued on a daily
basis, and the full amount of the Funds obligations will be maintained in a segregated account.
Typically the parties with which a Fund will enter into interest rate transactions will be broker-dealers and other financial institutions. A Fund will enter into interest rate swap, cap or floor
transactions only with counterparties that are rated investment grade quality by at least one nationally recognized statistical rating organization at the time of entering into such transaction or whose creditworthiness is believed by the Manager to
be equivalent to such rating. If there is a default by the counterparty to such a transaction, a Fund will have contractual remedies pursuant to the
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agreements related to the transaction. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents
using standardized swap documentation. As a result, the swap market has become relatively liquid in comparison with other similar instruments traded in the interbank market. Caps and floors, however, are less liquid than swaps. Certain Federal
income tax requirements may limit a Funds ability to engage in certain interest rate transactions. Gains from transactions in interest rate swaps distributed to shareholders will be taxable as ordinary income or, in certain circumstances, as
long term capital gains to shareholders.
Credit Default Swap
Agreements and Similar Instruments.
Certain Funds may enter into credit default swap agreements and similar agreements, and may also buy credit-linked securities. The credit default swap agreement or similar instrument may have as reference
obligations one or more securities that are not currently held by a Fund. The protection buyer in a credit default contract may be obligated to pay the protection seller an up-front payment or a periodic stream of payments
over the term of the contract, provided generally that no credit event on a reference obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the par value (full notional value) of the swap in exchange
for an equal face amount of deliverable obligations of the reference entity described in the swap, or the seller may be required to deliver the related net cash amount, if the swap is cash settled. A Fund may be either the buyer or seller in the
transaction. If a Fund is a buyer and no credit event occurs, the Fund recovers nothing if the swap is held through its termination date. However, if a credit event occurs, the Fund may elect to receive the full notional value of the swap in
exchange for an equal face amount of deliverable obligations of the reference entity that may have little or no value. As a seller, a Fund generally receives an up-front payment or a fixed rate of income throughout the term of the swap, which
typically is between six months and three years, provided that there is no credit event. If a credit event occurs, generally the seller must pay the buyer the full notional value of the swap in exchange for an equal face amount of deliverable
obligations of the reference entity that may have little or no value.
Credit default swaps and similar instruments involve greater risks than if a Fund had invested in the reference obligation directly, since, in addition to general market risks, they are subject to
illiquidity risk, counterparty risk and credit risk. A Fund will enter into credit default swap agreements and similar instruments only with counterparties who are rated investment grade quality by at least one nationally recognized statistical
rating organization at the time of entering into such transaction or whose creditworthiness is believed by the Manager to be equivalent to such rating. A buyer also will lose its investment and recover nothing should no credit event occur and the
swap is held to its termination date. If a credit event were to occur, the value of any deliverable obligation received by the seller, coupled with the up-front or periodic payments previously received, may be less than the full notional value it
pays to the buyer, resulting in a loss of value to the Fund. When a Fund acts as a seller of a credit default swap or a similar instrument, it is exposed to many of the same risks of leverage since, if a credit event occurs, the seller may be
required to pay the buyer the full notional value of the contract net of any amounts owed by the buyer related to its delivery of deliverable obligations.
Credit Linked Securities.
Among the income producing securities in which a Fund may invest are credit linked securities, which are issued by a
limited purpose trust or other vehicle that, in turn, invests in a derivative instrument or basket of derivative instruments, such as credit default swaps, interest rate swaps and other securities, in order to provide exposure to certain fixed
income markets. For instance, a Fund may invest in credit linked securities as a cash management tool in order to gain exposure to a certain market and/or to remain fully invested when more traditional income producing securities are not available.
Like an investment in a bond, investments in these credit linked
securities represent the right to receive periodic income payments (in the form of distributions) and payment of principal at the end of the term of the security. However, these payments are conditioned on the issuers receipt of payments from,
and the issuers potential obligations to, the counterparties to the derivative instruments and other securities in which the issuer invests. For instance, the issuer may sell one or more credit default swaps, under which the issuer would
receive a stream of payments over the term of the swap agreements provided that no event of default has occurred with respect to the referenced debt obligation upon which the swap is based. If a default occurs, the stream of payments may stop and
the issuer would be obligated to pay the counterparty the par (or other agreed upon value) of the referenced debt obligation. This, in turn, would reduce the amount of income and principal that a Fund would receive. A Funds investments in
these instruments are indirectly subject to the risks associated with derivative instruments, including, among others, credit risk, default or similar event risk, counterparty risk, interest rate risk, leverage risk and
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management risk. It is also expected that the securities will be exempt from registration under the Securities Act. Accordingly, there may be no established trading market for the securities and
they may constitute illiquid investments.
Interest Rate
Transactions and Swaptions.
A Fund, to the extent permitted under applicable law, may enter into interest rate swaps, may purchase or sell interest rate caps and floors and may enter into options on swap agreements (swaptions) on
either an asset-based or liability-based basis, depending on whether a Fund is hedging its assets or its liabilities. A Fund may enter into these transactions primarily to preserve a return or spread on a particular investment or portion of their
holdings, as a duration management technique or to protect against an increase in the price of securities a Fund anticipates purchasing at a later date. They may also be used for speculation to increase returns.
Swap agreements are two-party contracts entered into primarily by
institutional investors for periods ranging from a few weeks to more than one year. In a standard swap transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular
predetermined investments or instruments, which may be adjusted for an interest factor. The gross returns to be exchanged or swapped between the parties are generally calculated with respect to a notional amount, i.e., the
return on or increase in value of a particular dollar amount invested at a particular interest rate or in a basket of securities representing a particular index. Forms of swap agreements include interest rate caps, under which, in return
for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or cap; and interest rate floors, under which, in return for a premium, one party agrees to make payments to the
other to the extent that interest rates fall below a specified rate, or floor. Caps and floors are less liquid than swaps.
A Fund will usually enter into interest rate swaps on a net basis, i.e., the two payment streams are netted out, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments.
A swaption
is a contract that gives a counterparty the right (but not the obligation) to enter into a new swap agreement or to shorten, extend, cancel or otherwise modify an existing swap agreement, at some designated future time on specified terms. A Fund may
write (sell) and purchase put and call swaptions.
Depending on
the terms of the particular option agreement, a Fund will generally incur a greater degree of risk when it writes a swaption than it will incur when it purchases a swaption. When a Fund purchases a swaption, it risks losing only the amount of the
premium it has paid should it decide to let the option expire unexercised. However, when a Fund writes a swaption, upon exercise of the option the Fund will become obligated according to the terms of the underlying agreement.
A Fund will accrue the net amount of the excess, if any, of its obligations
over its entitlements with respect to each interest rate or currency swap or swaption on a daily basis and its Manager or sub-adviser will designate liquid assets on its books and records in an amount having an aggregate net asset value at least
equal to the accrued excess to the extent required by Commission guidelines. If the other party to an interest rate swap defaults, a Funds risk of loss consists of the net amount of interest payments that the Fund is contractually entitled to
receive.
Total Return Swap Agreements.
Total return swap
agreements are contracts in which one party agrees to make periodic payments to another party based on the change in market value of the assets underlying the contract, which may include a specified security, basket of securities or securities
indices during the specified period, in return for periodic payments based on a fixed or variable interest rate or the total return from other underlying assets. Total return swap agreements may be used to obtain exposure to a security or market
without owning or taking physical custody of such security or investing directly in such market. Total return swap agreements may effectively add leverage to the Funds portfolio because, in addition to its total net assets, the Fund would be
subject to investment exposure on the notional amount of the swap.
Total return swap agreements are subject to the risk that a counterparty will default on its payment obligations to the Fund thereunder. Swap agreements
also bear the risk that the Fund will not be able to meet its obligation to the counterparty. Generally, the Fund will enter into total return swaps on a net basis (
i.e.
, the two payment streams are netted against one another with the Fund
receiving or paying, as the case may be, only the net amount of the two payments). The net amount of the excess, if any, of the Funds obligations over its entitlements with respect to each total return swap will be accrued on a daily basis,
and an amount of liquid assets having an aggregate net asset value
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at least equal to the accrued excess will be segregated by the Fund. If the total return swap transaction is entered into on other than a net basis, the full amount of the Funds obligations
will be accrued on a daily basis, and the full amount of the Funds obligations will be segregated by the Fund in an amount equal to or greater than the market value of the liabilities under the total return swap agreement or the amount it
would have cost the Fund initially to make an equivalent direct investment, plus or minus any amount the Fund is obligated to pay or is to receive under the total return swap agreement.
Types of Options
Options on Securities and Securities Indices.
A Fund may engage in transactions in options on individual securities, baskets of securities or
securities indices, or particular measurements of value or rates (an index), such as an index of the price of treasury securities or an index representative of short-term interest rates. Such investments may be made on exchanges and in
the over-the-counter (OTC) markets. In general, exchange-traded options have standardized exercise prices and expiration dates and require the parties to post margin against their obligations, and the performance of the parties
obligations in connection with such options is guaranteed by the exchange or a related clearing corporation. OTC options have more flexible terms negotiated between the buyer and the seller, but generally do not require the parties to post margin
and are subject to greater credit risk. OTC options also involve greater liquidity risk. See Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives below.
Call Options.
A Fund may purchase call options on any of the types of
securities or instruments in which it may invest. A purchased call option gives a Fund the right to buy, and obligates the seller to sell, the underlying security at the exercise price at any time during the option period. A Fund also may purchase
and sell call options on indices. Index options are similar to options on securities except that, rather than taking or making delivery of securities underlying the option at a specified price upon exercise, an index option gives the holder the
right to receive cash upon exercise of the option if the level of the index upon which the option is based is greater than the exercise price of the option.
A call option is also covered if a Fund holds a call on the same security or index as the call written where the exercise price of the call held is
(i) equal to or less than the exercise price of the call written, or (ii) greater than the exercise price of the call written provided the difference is maintained by the Fund in liquid assets designated on the advisers or
sub-advisers books and records to the extent required by Commission guidelines.
A Fund also is authorized to write (
i.e.
, sell) covered call options on the securities or instruments in which it may invest and to enter into closing purchase transactions with respect to certain
of such options. A covered call option is an option in which a Fund, in return for a premium, gives another party a right to buy specified securities owned by the Fund at a specified future date and price set at the time of the contract. The
principal reason for writing call options is the attempt to realize, through the receipt of premiums, a greater return than would be realized on the securities alone. By writing covered call options, a Fund gives up the opportunity, while the option
is in effect, to profit from any price increase in the underlying security above the option exercise price. In addition, a Funds ability to sell the underlying security will be limited while the option is in effect unless the Fund enters into
a closing purchase transaction. A closing purchase transaction cancels out a Funds position as the writer of an option by means of an offsetting purchase of an identical option prior to the expiration of the option it has written. Covered call
options also serve as a partial hedge to the extent of the premium received against the price of the underlying security declining.
A Fund also is authorized to write (
i.e.
, sell) uncovered call options on securities or instruments in which it may invest but that are not
currently held by the Fund. The principal reason for writing uncovered call options is to realize income without committing capital to the ownership of the underlying securities or instruments. When writing uncovered call options, a Fund must
deposit and maintain sufficient margin with the broker-dealer through which it made the uncovered call option as collateral to ensure that the securities can be purchased for delivery if and when the option is exercised. In addition, in connection
with each such transaction a Fund will segregate unencumbered liquid securities or cash with a value at least equal to the Funds exposure (the difference between the unpaid amounts owed by the Fund on such transaction minus any collateral
deposited with the broker-dealer), on a marked-to-market basis (as calculated pursuant to requirements of the Commission). Such segregation will ensure that the Fund has assets available to satisfy its obligations with respect to the transaction and
will avoid any potential leveraging of the Funds portfolio. Such segregation will not limit the Funds exposure to loss. During periods of
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declining securities prices or when prices are stable, writing uncovered calls can be a profitable strategy to increase a Funds income with minimal capital risk. Uncovered calls are riskier
than covered calls because there is no underlying security held by a Fund that can act as a partial hedge. Uncovered calls have speculative characteristics and the potential for loss is unlimited. When an uncovered call is exercised, a Fund must
purchase the underlying security to meet its call obligation. There is also a risk, especially with less liquid preferred and debt securities, that the securities may not be available for purchase. If the purchase price exceeds the exercise price, a
Fund will lose the difference.
Put Options.
A Fund is
authorized to purchase put options to seek to hedge against a decline in the value of its securities or to enhance its return. By buying a put option, a Fund acquires a right to sell the underlying securities or instruments at the exercise price,
thus limiting the Funds risk of loss through a decline in the market value of the securities or instruments until the put option expires. The amount of any appreciation in the value of the underlying securities or instruments will be partially
offset by the amount of the premium paid for the put option and any related transaction costs. Prior to its expiration, a put option may be sold in a closing sale transaction and profit or loss from the sale will depend on whether the amount
received is more or less than the premium paid for the put option plus the related transaction costs. A closing sale transaction cancels out a Funds position as the purchaser of an option by means of an offsetting sale of an identical option
prior to the expiration of the option it has purchased. A Fund also may purchase uncovered put options.
Each Fund also has authority to write (
i.e.
, sell) put options on the types of securities or instruments that may be held by the Fund, provided that such put options are covered, meaning that such
options are secured by segregated, liquid assets. A Fund will receive a premium for writing a put option, which increases the Funds return.
Each Fund is also authorized to write (
i.e.
, sell) uncovered put options on securities or instruments in which it may invest but with respect to
which the Fund does not currently have a corresponding short position or has not deposited as collateral cash equal to the exercise value of the put option with the broker dealer through which it made the uncovered put option. The principal reason
for writing uncovered put options is to receive premium income and to acquire such securities or instruments at a net cost below the current market value. A Fund has the obligation to buy the securities or instruments at an agreed upon price if the
price of the securities or instruments decreases below the exercise price. If the price of the securities or instruments increases during the option period, the option will expire worthless and a Fund will retain the premium and will not have to
purchase the securities or instruments at the exercise price. In connection with such a transaction, a Fund will segregate unencumbered liquid assets with a value at least equal to the Funds exposure, on a marked-to-market basis (as calculated
pursuant to requirements of the Commission). Such segregation will ensure that a Fund has assets available to satisfy its obligations with respect to the transaction and will avoid any potential leveraging of the Funds portfolio. Such
segregation will not limit the Funds exposure to loss.
Options on Government National Mortgage Association (GNMA) Certificates.
The following information relates to the unique
characteristics of options on GNMA Certificates. Since the remaining principal balance of GNMA Certificates declines each month as a result of mortgage payments, a Fund, as a writer of a GNMA call holding GNMA Certificates as cover to
satisfy its delivery obligation in the event of exercise, may find that the GNMA Certificates it holds no longer have a sufficient remaining principal balance for this purpose. Should this occur, a Fund will purchase additional GNMA Certificates
from the same pool (if obtainable) or other GNMA Certificates in the cash market in order to maintain its cover.
A GNMA Certificate held by a Fund to cover an option position in any but the nearest expiration month may cease to represent cover for the option in the
event of a decline in the GNMA coupon rate at which new pools are originated under the FHA/VA loan ceiling in effect at any given time. If this should occur, a Fund will no longer be covered, and the Fund will either enter into a closing purchase
transaction or replace such Certificate with a certificate that represents cover. When a Fund closes its position or replaces such Certificate, it may realize an unanticipated loss and incur transaction costs.
Risks Associated with Options.
There are several risks associated
with transactions in options on securities and indexes. For example, there are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to
achieve its objectives. In addition, a liquid secondary market for particular options, whether traded over-the-counter or on a national securities exchange (Exchange) may be absent for reasons which include the following: there may be
insufficient trading
II-15
interest in certain options; restrictions may be imposed by an Exchange on opening transactions or closing transactions or both; trading halts, suspensions or other restrictions may be imposed
with respect to particular classes or series of options or underlying securities; unusual or unforeseen circumstances may interrupt normal operations on an Exchange; the facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or one or more Exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in
which event the secondary market on that Exchange (or in that class or series of options) would cease to exist, although outstanding options that had been issued by the Options Clearing Corporation as a result of trades on that Exchange would
continue to be exercisable in accordance with their terms.
Futures
A Fund may engage in transactions in futures and options on futures. Futures are standardized, exchange-traded contracts that obligate a purchaser to take delivery, and a seller to make delivery, of a
specific amount of an asset at a specified future date at a specified price. No price is paid upon entering into a futures contract. Rather, upon purchasing or selling a futures contract a Fund is required to deposit collateral (margin)
equal to a percentage (generally less than 10%) of the contract value. Each day thereafter until the futures position is closed, the Fund will pay additional margin representing any loss experienced as a result of the futures position the prior day
or be entitled to a payment representing any profit experienced as a result of the futures position the prior day. Futures involve substantial leverage risk.
The sale of a futures contract limits a Funds risk of loss from a decline in the market value of portfolio holdings correlated with the futures
contract prior to the futures contracts expiration date. In the event the market value of the portfolio holdings correlated with the futures contract increases rather than decreases, however, a Fund will realize a loss on the futures position
and a lower return on the portfolio holdings than would have been realized without the purchase of the futures contract.
The purchase of a futures contract may protect a Fund from having to pay more for securities as a consequence of increases in the market value for such
securities during a period when the Fund was attempting to identify specific securities in which to invest in a market the Fund believes to be attractive. In the event that such securities decline in value or a Fund determines not to complete an
anticipatory hedge transaction relating to a futures contract, however, the Fund may realize a loss relating to the futures position.
A Fund is also authorized to purchase or sell call and put options on futures contracts including financial futures and stock indices. Generally, these
strategies would be used under the same market and market sector conditions (
i.e.
, conditions relating to specific types of investments) in which the Fund entered into futures transactions. A Fund may purchase put options or write call
options on futures contracts and stock indices in lieu of selling the underlying futures contract in anticipation of a decrease in the market value of its securities. Similarly, a Fund can purchase call options, or write put options on futures
contracts and stock indices, as a substitute for the purchase of such futures to hedge against the increased cost resulting from an increase in the market value of securities which the Fund intends to purchase.
To maintain greater flexibility, a Fund may invest in instruments which have
characteristics similar to futures contracts. These instruments may take a variety of forms, such as debt securities with interest or principal payments determined by reference to the value of a security, an index of securities or a commodity at a
future point in time. The risks of such investments could reflect the risks of investing in futures and securities, including volatility and illiquidity.
Risks Associated with Futures.
The primary risks associated with the use of futures contracts and options are (a) the imperfect correlation
between the change in market value of the instruments held by a Fund and the price of the futures contract or option; (b) possible lack of a liquid secondary market for a futures contract and the resulting inability to close a futures contract
when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; (d) the Managers or sub-advisers inability to predict correctly the direction of securities prices, interest rates, currency
exchange rates and other economic factors; and (e) the possibility that the counterparty will default in the performance of its obligations.
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Foreign Exchange Transactions.
A Fund may engage in spot and forward foreign exchange transactions
and currency swaps, purchase and sell options on currencies and purchase and sell currency futures and related options thereon (collectively, Currency Instruments) for purposes of hedging against the decline in the value of currencies in
which its portfolio holdings are denominated against the U.S. dollar or, with respect to certain Funds, to seek to enhance returns. Such transactions could be effected with respect to hedges on foreign dollar denominated securities owned by a Fund,
sold by a Fund but not yet delivered, or committed or anticipated to be purchased by a Fund. As an illustration, a Fund may use such techniques to hedge the stated value in U.S. dollars of an investment in a yen-denominated security. In such
circumstances, for example, the Fund may purchase a foreign currency put option enabling it to sell a specified amount of yen for dollars at a specified price by a future date. To the extent the hedge is successful, a loss in the value of the yen
relative to the dollar will tend to be offset by an increase in the value of the put option. To offset, in whole or in part, the cost of acquiring such a put option, the Fund may also sell a call option which, if exercised, requires it to sell a
specified amount of yen for dollars at a specified price by a future date (a technique called a straddle). By selling such a call option in this illustration, the Fund gives up the opportunity to profit without limit from increases in
the relative value of the yen to the dollar. Straddles of the type that may be used by a Fund are considered to constitute hedging transactions. Certain Funds have a fundamental investment restriction that restricts currency option
straddles. No Fund will attempt to hedge all of its foreign portfolio positions.
Forward Foreign Exchange Transactions.
Forward foreign exchange transactions are OTC contracts to purchase or sell a specified amount of a specified currency or multinational currency unit at a
price and future date set at the time of the contract. Spot foreign exchange transactions are similar but require current, rather than future, settlement. A Fund will enter into foreign exchange transactions for purposes of hedging either a specific
transaction or a portfolio position, or, with respect to certain Funds, to seek to enhance returns. A Fund may enter into a foreign exchange transaction for purposes of hedging a specific transaction by, for example, purchasing a currency needed to
settle a security transaction or selling a currency in which the Fund has received or anticipates receiving a dividend or distribution. A Fund may enter into a foreign exchange transaction for purposes of hedging a portfolio position by selling
forward a currency in which a portfolio position of the Fund is denominated or by purchasing a currency in which the Fund anticipates acquiring a portfolio position in the near future. Forward foreign exchange transactions involve substantial
currency risk, and also involve credit and liquidity risk. A Fund may also hedge a currency by entering into a transaction in a Currency Instrument denominated in a currency other than the currency being hedged (a cross-hedge). A Fund
will only enter into a cross-hedge if the Manager believes that (i) there is a demonstrably high correlation between the currency in which the cross-hedge is denominated and the currency being hedged, and (ii) executing a cross-hedge
through the currency in which the cross-hedge is denominated will be significantly more cost-effective or provide substantially greater liquidity than executing a similar hedging transaction by means of the currency being hedged.
A Fund may also engage in proxy hedging transactions to reduce the effect of
currency fluctuations on the value of existing or anticipated holdings of portfolio securities. Proxy hedging is often used when the currency to which the Fund is exposed is difficult to hedge or to hedge against the dollar. Proxy hedging entails
entering into a forward contract to sell a currency whose changes in value are generally considered to be linked to a currency or currencies in which some or all of the Funds securities are, or are expected to be, denominated, and to buy U.S.
dollars. Proxy hedging involves some of the same risks and considerations as other transactions with similar instruments. Currency transactions can result in losses to the Fund if the currency being hedged fluctuates in value to a degree or in a
direction that is not anticipated. In addition, there is the risk that the perceived linkage between various currencies may not be present or may not be present during the particular time that a Fund is engaging in proxy hedging. A Fund may also
cross-hedge currencies by entering into forward contracts to sell one or more currencies that are expected to decline in value relative to other currencies to which the Fund has or in which the Fund expects to have portfolio exposure. For example, a
Fund may hold both Canadian government bonds and Japanese government bonds, and the adviser or sub-adviser may believe that Canadian dollars will deteriorate against Japanese yen. The Fund would sell Canadian dollars to reduce its exposure to that
currency and buy Japanese yen. This strategy would be a hedge against a decline in the value of Canadian dollars, although it would expose the Fund to declines in the value of the Japanese yen relative to the U.S. dollar.
Some of the forward non-U.S. currency contracts entered into by the Funds
are classified as non-deliverable forwards (NDF). NDFs are cash-settled, short-term forward contracts that may be thinly traded or are denominated in non-convertible foreign currency, where the profit or loss at the time at the settlement date is
calculated by taking
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the difference between the agreed upon exchange rate and the spot rate at the time of settlement, for an agreed upon notional amount of funds. All NDFs have a fixing date and a settlement date.
The fixing date is the date at which the difference between the prevailing market exchange rate and the agreed upon exchange rate is calculated. The settlement date is the date by which the payment of the difference is due to the party receiving
payment. NDFs are commonly quoted for time periods of one month up to two years, and are normally quoted and settled in U.S. dollars. They are often used to gain exposure to and/or hedge exposure to foreign currencies that are not internationally
traded.
Currency Futures.
A Fund may also seek to enhance
returns or hedge against the decline in the value of a currency through use of currency futures or options thereon. Currency futures are similar to forward foreign exchange transactions except that futures are standardized, exchange-traded contracts
while forward foreign exchange transactions are traded in the OTC market. Currency futures involve substantial currency risk, and also involve leverage risk.
Currency Options.
A Fund may also seek to enhance returns or hedge against the decline in the value of a currency through the use of currency
options. Certain Funds have fundamental restrictions that permit the purchase of currency options, but prohibit the writing of currency options. Currency options are similar to options on securities. For example, in consideration for an option
premium the writer of a currency option is obligated to sell (in the case of a call option) or purchase (in the case of a put option) a specified amount of a specified currency on or before the expiration date for a specified amount of another
currency. A Fund may engage in transactions in options on currencies either on exchanges or OTC markets. See Types of Options above and Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives
below. Currency options involve substantial currency risk, and may also involve credit, leverage or liquidity risk.
Currency Swaps.
In order to protect against currency fluctuations, a Fund may enter into currency swaps. A Fund may also hedge portfolio positions
through currency swaps, which are transactions in which one currency is simultaneously bought for a second currency on a spot basis and sold for the second currency on a forward basis. Currency swaps involve the exchange of the rights of a Fund and
another party to make or receive payments in specified currencies. Currency swaps usually involve the delivery of the entire principal value of one designated currency in exchange for the other designated currency. Because currency swaps usually
involve the delivery of the entire principal value of one designated currency in exchange for the other designated currency, the entire principal value of a currency swap is subject to the risk that the other party to the swap will default on its
contractual delivery obligations.
Limitations on Currency
Transactions.
A Fund will not hedge a currency in excess of the aggregate market value of the securities that it owns (including receivables for unsettled securities sales), or has committed to purchase or anticipates purchasing, which are
denominated in such currency. Open positions in forward foreign exchange transactions used for non-hedging purposes will be covered by the segregation of liquid assets and are marked to market daily. A Funds exposure to futures or options on
currencies will be covered as described below under Risk Factors in Derivatives.
Risk Factors in Hedging Foreign Currency.
Hedging transactions involving Currency Instruments involve substantial risks, including correlation risk. While a Funds use of Currency Instruments
to effect hedging strategies is intended to reduce the volatility of the net asset value of the Funds shares, the net asset value of the Funds shares will fluctuate. Moreover, although Currency Instruments will be used with the intention
of hedging against adverse currency movements, transactions in Currency Instruments involve the risk that anticipated currency movements will not be accurately predicted and that the Funds hedging strategies will be ineffective. To the extent
that a Fund hedges against anticipated currency movements that do not occur, the Fund may realize losses and decrease its total return as the result of its hedging transactions. Furthermore, a Fund will only engage in hedging activities from time to
time and may not be engaging in hedging activities when movements in currency exchange rates occur.
In connection with its trading in forward foreign currency contracts, a Fund will contract with a foreign or domestic bank, or foreign or domestic securities dealer, to make or take future delivery of a
specified amount of a particular currency. There are no limitations on daily price moves in such forward contracts, and banks and dealers are not required to continue to make markets in such contracts. There have been periods during which certain
banks or dealers have refused to quote prices for such forward contracts or have quoted prices with an unusually wide spread between the price at which the bank or dealer is prepared to buy and that at which it is prepared to sell.
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Governmental imposition of credit controls might limit any such forward contract trading. With respect to its trading of forward contracts, if any, a Fund will be subject to the risk of bank or
dealer failure and the inability of, or refusal by, a bank or dealer to perform with respect to such contracts. Any such default would deprive the Fund of any profit potential or force the Fund to cover its commitments for resale, if any, at the
then market price and could result in a loss to the Fund.
It may
not be possible for a Fund to hedge against currency exchange rate movements, even if correctly anticipated, in the event that (i) the currency exchange rate movement is so generally anticipated that the Fund is not able to enter into a hedging
transaction at an effective price, or (ii) the currency exchange rate movement relates to a market with respect to which Currency Instruments are not available and it is not possible to engage in effective foreign currency hedging. The cost to
a Fund of engaging in foreign currency transactions varies with such factors as the currencies involved, the length of the contract period and the market conditions then prevailing. Since transactions in foreign currency exchange usually are
conducted on a principal basis, no fees or commissions are involved.
Risk Factors in Derivatives
Derivatives are volatile and involve significant risks, including:
Credit Risk
the risk that the counterparty in a derivative transaction will be unable to honor its financial obligation to a Fund, or the risk that the reference entity in a credit default
swap or similar derivative will not be able to honor its financial obligations.
Currency Risk
the risk that changes in the exchange rate between two currencies will adversely affect the value (in U.S. dollar terms) of an investment.
Leverage Risk
the risk associated with certain types of
investments or trading strategies (such as, for example, borrowing money to increase the amount of investments) that relatively small market movements may result in large changes in the value of an investment. Certain investments or trading
strategies that involve leverage can result in losses that greatly exceed the amount originally invested.
Liquidity Risk
the risk that certain securities may be difficult or impossible to sell at the time that the seller would like or at the price that the seller believes the security is
currently worth.
Correlation Risk
the risk that
changes in the value of a derivative will not match the changes in the value of the portfolio holdings that are being hedged or of the particular market or security to which the Fund seeks exposure.
Index Risk
If the derivative is linked to the performance of
an index, it will be subject to the risks associated with changes in that index. If the index changes, a Fund could receive lower interest payments or experience a reduction in the value of the derivative to below what that Fund paid. Certain
indexed securities, including inverse securities (which move in an opposite direction to the index), may create leverage, to the extent that they increase or decrease in value at a rate that is a multiple of the changes in the applicable index.
A Fund intends to enter into transactions involving derivatives
only if there appears to be a liquid secondary market for such instruments or, in the case of illiquid instruments traded in OTC transactions, such instruments satisfy the criteria set forth below under Additional Risk Factors of OTC
Transactions; Limitations on the Use of OTC Derivatives. However, there can be no assurance that, at any specific time, either a liquid secondary market will exist for a derivative or the Fund will otherwise be able to sell such instrument at
an acceptable price. It may, therefore, not be possible to close a position in a derivative without incurring substantial losses, if at all.
Certain transactions in derivatives (such as futures transactions or sales of put options) involve substantial leverage risk and may expose a Fund to
potential losses that exceed the amount originally invested by the Fund. When a Fund engages in such a transaction, the Fund will segregate liquid assets with a value at least equal to the Funds exposure, on a mark-to-market basis, to the
transaction (as calculated pursuant to requirements of the Commission). Such segregation will ensure that a Fund has assets available to satisfy its obligations with respect to the transaction, but will not limit the Funds exposure to loss.
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Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives
Certain derivatives traded in OTC markets, including indexed securities,
swaps and OTC options, involve substantial liquidity risk. The absence of liquidity may make it difficult or impossible for a Fund to sell such instruments promptly at an acceptable price. The absence of liquidity may also make it more difficult for
a Fund to ascertain a market value for such instruments. A Fund will, therefore, acquire illiquid OTC instruments (i) if the agreement pursuant to which the instrument is purchased contains a formula price at which the instrument may be
terminated or sold, or (ii) for which the Manager anticipates the Fund can receive on each business day at least two independent bids or offers, unless a quotation from only one dealer is available, in which case that dealers quotation
may be used.
Because derivatives traded in OTC markets are not
guaranteed by an exchange or clearing corporation and generally do not require payment of margin, to the extent that a Fund has unrealized gains in such instruments or has deposited collateral with its counterparty the Fund is at risk that its
counterparty will become bankrupt or otherwise fail to honor its obligations. A Fund will attempt to minimize these risks by engaging in transactions in derivatives traded in OTC markets only with financial institutions that have substantial capital
or that have provided the Fund with a third-party guaranty or other credit enhancement.
Distressed Securities.
A Fund may invest in securities, including loans purchased in the secondary market, that are the subject of bankruptcy proceedings or otherwise in default or in risk
of being in default as to the repayment of principal and/or interest at the time of acquisition by the Fund or that are rated in the lower rating categories by one or more nationally recognized statistical rating organizations (for example, Ca or
lower by Moodys and CC or lower by S&P or Fitch) or, if unrated, are in the judgment of the Manager of equivalent quality (Distressed Securities). Investment in Distressed Securities is speculative and involves significant
risks.
A Fund will generally make such investments only when the
Manager believes it is reasonably likely that the issuer of the Distressed Securities will make an exchange offer or will be the subject of a plan of reorganization pursuant to which the Fund will receive new securities in return for the Distressed
Securities. However, there can be no assurance that such an exchange offer will be made or that such a plan of reorganization will be adopted. In addition, a significant period of time may pass between the time at which a Fund makes its investment
in Distressed Securities and the time that any such exchange offer or plan of reorganization is completed. During this period, it is unlikely that a Fund will receive any interest payments on the Distressed Securities, the Fund will be subject to
significant uncertainty as to whether or not the exchange offer or plan of reorganization will be completed and the Fund may be required to bear certain extraordinary expenses to protect and recover its investment. Therefore, to the extent the Fund
seeks capital appreciation through investment in distressed securities, the Funds ability to achieve current income for its shareholders may be diminished. The Fund also will be subject to significant uncertainty as to when and in what manner
and for what value the obligations evidenced by the distressed securities will eventually be satisfied (e.g., through a liquidation of the obligors assets, an exchange offer or plan of reorganization involving the distressed securities or a
payment of some amount in satisfaction of the obligation). Even if an exchange offer is made or plan of reorganization is adopted with respect to Distressed Securities held by a Fund, there can be no assurance that the securities or other assets
received by a Fund in connection with such exchange offer or plan of reorganization will not have a lower value or income potential than may have been anticipated when the investment was made or no value. Moreover, any securities received by a Fund
upon completion of an exchange offer or plan of reorganization may be restricted as to resale. Similarly, if a Fund participates in negotiations with respect to any exchange offer or plan of reorganization with respect to an issuer of Distressed
Securities, the Fund may be restricted from disposing of such securities. To the extent that a Fund becomes involved in such proceedings, the Fund may have a more active participation in the affairs of the issuer than that assumed generally by an
investor. The Fund, however, will not make investments for the purpose of exercising day-to-day management of any issuers affairs.
Dollar Rolls.
A dollar roll transaction involves a sale by the Fund of a mortgage-backed or other security concurrently with an agreement by
the Fund to repurchase a similar security at a later date at an agreed-upon price. The securities that are repurchased will bear the same interest rate and a similar maturity as those sold, but pools of mortgages collateralizing those securities may
have different prepayment histories than those sold. During the period between the sale and repurchase, a Fund will not be entitled to receive interest and principal payments on the securities sold. Proceeds of the sale will be invested in
additional instruments for the Fund, and the income from these investments will generate income for the Fund. If such income does not exceed the income, capital appreciation and gain or loss that would have been realized on the securities sold as
part of the dollar roll, the use of
II-20
this technique will diminish the investment performance of a Fund compared with what the performance would have been without the use of dollar rolls. At the time a Fund enters into a dollar roll
transaction, the Manager or sub-adviser will designate assets on its books and records in an amount equal to the amount of the Funds commitments and will subsequently monitor the account to ensure that its value is maintained.
Dollar rolls involve the risk that the market value of the securities
subject to a Funds forward purchase commitment may decline below, or the market value of the securities subject to a Funds forward sale commitment may increase above, the exercise price of the forward commitment. In the event the buyer
of the securities files for bankruptcy or becomes insolvent, a Funds use of the proceeds of the current sale portion of the transaction may be restricted pending a determination by the other party, or its trustee or receiver, whether to
enforce the Funds obligation to purchase the similar securities in the forward transaction. Dollar rolls are speculative techniques that can be deemed to involve leverage. At the time a Fund sells securities and agrees to repurchase securities
at a future date, the Fund will segregate liquid assets with a value equal to the repurchase price. A Fund may engage in dollar roll transactions to enhance return. Each dollar roll transaction is accounted for as a sale or purchase of a portfolio
security and a subsequent purchase or sale of a substantially similar security in the forward market. Successful use of mortgage dollar rolls may depend upon the Managers ability to correctly predict interest rates and prepayments. There is no
assurance that dollar rolls can be successfully employed.
Equity Securities.
Equity securities include common stock and, for certain Funds, preferred stock (including convertible preferred stock);
bonds, notes and debentures convertible into common or preferred stock; stock purchase warrants and rights; equity interests in trusts; general and limited partnerships and limited liability companies; and depositary receipts. Stock markets are
volatile. The price of equity securities will fluctuate and can decline and reduce the value of a portfolio investing in equities. The price of equity securities fluctuates based on changes in a companys financial condition and overall market
and economic conditions. The value of equity securities purchased by the Fund could decline if the financial condition of the companies the Fund invests in decline or if overall market and economic conditions deteriorate. They may also decline due
to factors that affect a particular industry or industries, such as labor shortages or increase in production costs and competitive conditions within an industry. In addition, they may decline due to general market conditions that are not
specifically related to a company or industry, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates or generally adverse investor sentiment.
From time to time certain of the Funds may invest in shares of companies
through initial public offerings (IPOs). IPOs have the potential to produce, and have in fact produced, substantial gains for certain Funds. There is no assurance that any Fund will have continued access to profitable IPOs and therefore
investors should not rely on these past gains as an indication of future performance. The investment performance of a Fund during periods when it is unable to invest significantly or at all in IPOs may be lower than during periods when it is able to
do so. In addition, as a Fund increases in size, the impact of IPOs on its performance will generally decrease. Securities issued in IPOs are subject to many of the same risks as investing in companies with smaller market capitalizations. Securities
issued in IPOs have no trading history, and information about the companies may be available for very limited periods. In addition, the prices of securities sold in IPOs may be highly volatile or may decline shortly after the initial public
offering.
The Funds may invest in companies that have relatively
small market capitalizations. These organizations will normally have more limited product lines, markets and financial resources and will be dependent upon a more limited management group than larger capitalized companies. In addition, it is more
difficult to get information on smaller companies, which tend to be less well known, have shorter operating histories, do not have significant ownership by large investors and are followed by relatively few securities analysts. The securities of
smaller capitalized companies are often traded in the over-the-counter markets and may have fewer market makers and wider price spreads. This may result in greater price movements and less ability to sell a Funds investment than if the Fund
held the securities of larger, more established companies.
Exchange Traded Notes (ETNs).
Certain Funds may invest in ETNs. ETNs are generally notes representing debt of the issuer,
usually a financial institution. ETNs combine both aspects of bonds and ETFs. An ETNs returns are based on the performance of one or more underlying assets, reference rates or indexes, minus fees and expenses. Similar to ETFs, ETNs are listed
on an exchange and traded in the secondary market. However, unlike an ETF, an ETN can be held until the ETNs maturity, at which time the issuer will pay a return linked to the performance of the specific asset, index or rate (reference
instrument) to which the ETN is linked minus certain fees. Unlike regular bonds, ETNs do not make periodic interest payments, and principal is not protected.
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The value of an ETN may be influenced by, among other things, time to maturity, level of supply and demand
for the ETN, volatility and lack of liquidity in underlying markets, changes in the applicable interest rates, the performance of the reference instrument, changes in the issuers credit rating and economic, legal, political or geographic
events that affect the reference instrument. An ETN that is tied to a reference instrument may not replicate the performance of the reference instrument. ETNs also incur certain expenses not incurred by their applicable reference instrument. Some
ETNs that use leverage can, at times, be relatively illiquid and, thus, they may be difficult to purchase or sell at a fair price. Levered ETNs are subject to the same risk as other instruments that use leverage in any form. While leverage allows
for greater potential return, the potential for loss is also greater. Finally, additional losses may be incurred if the investment loses value because, in addition to the money lost on the investment, the loan still needs to be repaid.
Because the return on the ETN is dependent on the issuers ability or
willingness to meet its obligations, the value of the ETN may change due to a change in the issuers credit rating, despite no change in the underlying reference instrument. The market value of ETN shares may differ from the value of the
reference instrument. This difference in price may be due to the fact that the supply and demand in the market for ETN shares at any point in time is not always identical to the supply and demand in the market for the assets underlying the reference
instrument that the ETN seeks to track.
There may be
restrictions on the Funds right to redeem its investment in an ETN, which are generally meant to be held until maturity. The Funds decision to sell its ETN holdings may be limited by the availability of a secondary market. An investor in
an ETN could lose some or all of the amount invested.
Foreign Investment Risks.
Certain Funds may invest in foreign securities, including securities from issuers located in emerging market
countries. These securities may be denominated in U.S. dollars or in a foreign currency. Investing in foreign securities involves risks not typically associated with investing in securities of companies organized and operated in the United States
that can increase the chances that a Fund will lose money.
Securities issued by certain companies organized outside the United States may not be deemed to be foreign securities (but rather deemed to be U.S.
securities) if (i) the companys principal operations are conducted from the U.S., (ii) the companys equity securities trade principally on a U.S. stock exchange, (iii) the company does a substantial amount of business in
the U.S. or (iv) the issuer of securities is included in the Funds primary U.S. benchmark index.
In addition to equity securities, foreign investments of the Funds may include: (a) debt obligations issued or guaranteed by foreign sovereign governments or their agencies, authorities,
instrumentalities or political subdivisions, including a foreign state, province or municipality; (b) debt obligations of supranational organizations; (c) debt obligations of foreign banks and bank holding companies; (d) debt
obligations of domestic banks and corporations issued in foreign currencies; (e) debt obligations denominated in the Euro; and (f) foreign corporate debt securities and commercial paper. Such securities may include loan participations and
assignments, convertible securities and zero-coupon securities.
Dividends or interest on, or proceeds from the sale of, foreign securities may be subject to foreign withholding taxes.
Foreign Market Risk.
Funds that may invest in foreign securities
offer the potential for more diversification than a Fund that invests only in the United States because securities traded on foreign markets have often (though not always) performed differently from securities traded in the United States. However,
such investments often involve risks not present in U.S. investments that can increase the chances that a Fund will lose money. In particular, a Fund is subject to the risk that, because there are generally fewer investors on foreign exchanges and a
smaller number of shares traded each day, it may be difficult for the Fund to buy and sell securities on those exchanges. In addition, prices of foreign securities may fluctuate more than prices of securities traded in the United States. Investments
in foreign markets may also be adversely affected by governmental actions such as the imposition of punitive taxes. In addition, the governments of certain countries may prohibit or impose substantial restrictions on foreign investing in their
capital markets or in certain industries. Any of these actions could severely affect security prices, impair a Funds ability to purchase or sell foreign securities or transfer the Funds assets or income back into the United States, or
otherwise adversely affect a Funds operations. Other potential foreign market risks include exchange controls, difficulties in pricing securities, defaults on foreign government securities, difficulties in enforcing favorable legal judgments
in foreign courts, and political and social conditions, such as diplomatic relations,
II-22
confiscatory taxation, expropriation, limitation on the removal of funds or assets, or imposition of (or change in) exchange control regulations. Legal remedies available to investors in certain
foreign countries may be less extensive than those available to investors in the United States or other foreign countries. In addition, changes in government administrations or economic or monetary policies in the U.S. or abroad could result in
appreciation or depreciation of portfolio securities and could favorably or adversely affect a Funds operations.
Foreign Economy Risk.
The economies of certain foreign markets often do not compare favorably with that of the United States with respect to such
issues as growth of gross national product, reinvestment of capital, resources, and balance of payments position. Certain such economies may rely heavily on particular industries or foreign capital and are more vulnerable to diplomatic developments,
the imposition of economic sanctions against a particular country or countries, changes in international trading patterns, trade barriers, and other protectionist or retaliatory measures.
Currency Risk and Exchange Risk.
Because foreign securities generally are denominated and pay dividends or interest in
foreign currencies, the value of a Fund that invests in foreign securities as measured in U.S. dollars will be affected favorably or unfavorably by changes in exchange rates. Generally, when the U.S. dollar rises in value against a foreign currency,
a security denominated in that currency loses value because the currency is worth fewer U.S. dollars. Conversely, when the U.S. dollar decreases in value against a foreign currency, a security denominated in that currency gains value because the
currency is worth more U.S. dollars. This risk, generally known as currency risk, means that a stronger U.S. dollar will reduce returns for U.S. investors while a weak U.S. dollar will increase those returns.
Governmental Supervision and Regulation/Accounting Standards.
Many
foreign governments supervise and regulate stock exchanges, brokers and the sale of securities less than does the United States. Some countries may not have laws to protect investors comparable to the U.S. securities laws. For example, some foreign
countries may have no laws or rules against insider trading. Insider trading occurs when a person buys or sells a companys securities based on nonpublic information about that company. Accounting standards in other countries are not
necessarily the same as in the United States. If the accounting standards in another country do not require as much detail as U.S. accounting standards, it may be harder for Fund management to completely and accurately determine a companys
financial condition. In addition, the U.S. Government has from time to time in the past imposed restrictions, through penalties and otherwise, on foreign investments by U.S. investors such as the Fund. If such restrictions should be reinstituted, it
might become necessary for the Fund to invest all or substantially all of its assets in U.S. securities. Also, brokerage commissions and other costs of buying or selling securities often are higher in foreign countries than they are in the United
States. This reduces the amount the Fund can earn on its investments.
Certain Risks of Holding Fund Assets Outside the United States.
A Fund generally holds its foreign securities and cash in foreign banks and securities depositories. Some foreign banks and
securities depositories may be recently organized or new to the foreign custody business. In addition, there may be limited or no regulatory oversight over their operations. Also, the laws of certain countries may put limits on a Funds ability
to recover its assets if a foreign bank or depository or issuer of a security or any of their agents goes bankrupt. In addition, it is often more expensive for a Fund to buy, sell and hold securities in certain foreign markets than in the United
States. The increased expense of investing in foreign markets reduces the amount a Fund can earn on its investments and typically results in a higher operating expense ratio for the Fund as compared to investment companies that invest only in the
United States.
Publicly Available Information.
In
general, less information is publicly available with respect to foreign issuers than is available with respect to U.S. companies. Most foreign companies are also not subject to the uniform accounting and financial reporting requirements applicable
to issuers in the United States. While the volume of transactions effected on foreign stock exchanges has increased in recent years, it remains appreciably below that of the New York Stock Exchange. Accordingly, a Funds foreign investments may
be less liquid and their prices may be more volatile than comparable investments in securities in U.S. companies. In addition, there is generally less government supervision and regulation of securities exchanges, brokers and issuers in foreign
countries than in the United States.
Settlement Risk.
Settlement and clearance procedures in certain foreign markets differ significantly from those in the United States. Foreign settlement procedures and trade regulations also may involve certain risks (such as delays in payment for or delivery of
securities) not typically generated by the settlement of U.S. investments.
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Communications between the United States and emerging market countries may be unreliable, increasing the risk of delayed settlements or losses of security certificates in markets that still rely
on physical settlement. Settlements in certain foreign countries at times have not kept pace with the number of securities transactions; these problems may make it difficult for a Fund to carry out transactions. If a Fund cannot settle or is delayed
in settling a purchase of securities, it may miss attractive investment opportunities and certain of its assets may be uninvested with no return earned thereon for some period. If a Fund cannot settle or is delayed in settling a sale of securities,
it may lose money if the value of the security then declines or, if it has contracted to sell the security to another party, the Fund could be liable to that party for any losses incurred.
Funding Agreements.
Certain Funds may invest in Guaranteed Investment Contracts (GICs) and similar
funding agreements. In connection with these investments, a Fund makes cash contributions to a deposit fund of an insurance companys general account. The insurance company then credits to the Fund on a monthly basis guaranteed interest, which
is based on an index (such as LIBOR). The funding agreements provide that this guaranteed interest will not be less than a certain minimum rate. The purchase price paid for a funding agreement becomes part of the general assets of the insurance
company, and the contract is paid from the general assets of the insurance company. Generally, funding agreements are not assignable or transferable without the permission of the issuing insurance companies, and an active secondary market in some
funding agreements does not currently exist.
Guarantees.
A Fund may purchase securities which contain guarantees issued by an entity separate from the issuer of the security. Generally, the guarantor of a security (often an affiliate of the issuer) will fulfill an issuers payment obligations
under a security if the issuer is unable to do so.
Illiquid or Restricted Securities.
Each Fund may invest up to 15% of its net assets in securities that lack an established secondary trading
market or otherwise are considered illiquid. Liquidity of a security relates to the ability to dispose easily of the security and the price to be obtained upon disposition of the security, which may be less than would be obtained for a comparable
more liquid security. Illiquid securities may trade at a discount from comparable, more liquid investments. Investment of a Funds assets in illiquid securities may restrict the ability of the Fund to dispose of its investments in a timely
fashion and for a fair price as well as its ability to take advantage of market opportunities. The risks associated with illiquidity will be particularly acute where a Funds operations require cash, such as when the Fund redeems shares or pays
dividends, and could result in the Fund borrowing to meet short term cash requirements or incurring capital losses on the sale of illiquid investments.
A Fund may invest in securities that are not registered under the Securities Act (restricted securities). Restricted securities may be sold in
private placement transactions between issuers and their purchasers and may be neither listed on an exchange nor traded in other established markets. In many cases, privately placed securities may not be freely transferable under the laws of the
applicable jurisdiction or due to contractual restrictions on resale. As a result of the absence of a public trading market, privately placed securities may be less liquid and more difficult to value than publicly traded securities. To the extent
that privately placed securities may be resold in privately negotiated transactions, the prices realized from the sales, due to illiquidity, could be less than those originally paid by the Fund or less than their fair market value. In addition,
issuers whose securities are not publicly traded may not be subject to the disclosure and other investor protection requirements that may be applicable if their securities were publicly traded. If any privately placed securities held by a Fund are
required to be registered under the securities laws of one or more jurisdictions before being resold, the Fund may be required to bear the expenses of registration. Certain of the Funds investments in private placements may consist of direct
investments and may include investments in smaller, less seasoned issuers, which may involve greater risks. These issuers may have limited product lines, markets or financial resources, or they may be dependent on a limited management group. In
making investments in such securities, a Fund may obtain access to material nonpublic information, which may restrict the Funds ability to conduct portfolio transactions in such securities.
Some of these securities are new and complex, and trade only among
institutions; the markets for these securities are still developing, and may not function as efficiently as established markets. Owning a large percentage of restricted or illiquid securities could hamper the Funds ability to raise cash to
meet redemptions. Also, because there may not be an established market price for these securities, the Fund may have to estimate their value, which means that their valuation (and, to a much smaller extent, the valuation of the Fund) may have a
subjective element. Transactions in restricted or illiquid securities may entail registration expense and other transaction costs that are higher than those for transactions in unrestricted or liquid securities. Where registration is required for
restricted or illiquid securities a considerable time period may elapse between the time the Fund decides to sell the security and the time it is
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actually permitted to sell the security under an effective registration statement. If during such period, adverse market conditions were to develop, the Fund might obtain less favorable pricing
terms that when it decided to sell the security.
Inflation-Indexed Bonds.
Certain Funds may invest in inflation-indexed bonds, which are fixed income securities or other instruments whose
principal value is periodically adjusted according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that accrues inflation into the principal value of the bond. Most other issuers pay out
the Consumer Price Index (CPI) accruals as part of a semi-annual coupon.
Inflation-indexed securities issued by the U.S. Treasury have maturities of five, ten or thirty years, although it is possible that securities with other maturities will be issued in the future. The U.S.
Treasury securities pay interest on a semi-annual basis, equal to a fixed percentage of the inflation-adjusted principal amount. For example, if a Fund purchased an inflation-indexed bond with a par value of $1,000 and a 3% real rate of return
coupon (payable 1.5% semi-annually), and inflation over the first six months was 1%, the mid-year par value of the bond would be $1,010 and the first semi-annual interest payment would be $15.15 ($1,010 times 1.5%). If inflation during the second
half of the year resulted in the whole years inflation equaling 3%, the end-of-year par value of the bond would be $1,030 and the second semi-annual interest payment would be $15.45 ($1,030 times 1.5%).
If the periodic adjustment rate measuring inflation falls, the principal
value of inflation-indexed bonds will be adjusted downward, and, consequently, the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of the original bond principal upon maturity
(as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds, even during a period of deflation. However, the current market value of the bonds is not guaranteed, and will fluctuate. Certain Funds may also invest in
other inflation related bonds which may or may not provide a similar guarantee. If a guarantee of principal is not provided, the adjusted principal value of the bond repaid at maturity may be less than the original principal. In addition, if the
Fund purchases inflation-indexed bonds offered by foreign issuers, the rate of inflation measured by the foreign inflation index may not be correlated to the rate of inflation in the United States.
The value of inflation-indexed bonds is expected to change in response to
changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates and the rate of inflation. Therefore, if inflation were to rise at a faster rate than nominal interest rates, real interest
rates might decline, leading to an increase in value of inflation-indexed bonds. In contrast, if nominal interest rates increased at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation-indexed
bonds. There can be no assurance, however, that the value of inflation-indexed bonds will be directly correlated to changes in interest rates.
While these securities are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value.
If interest rates rise due to reasons other than inflation (for example, due to changes in currency exchange rates), investors in these securities may not be protected to the extent that the increase is not reflected in the bonds inflation
measure.
In general, the measure used to determine the periodic
adjustment of U.S. inflation-indexed bonds is the Consumer Price Index for Urban Consumers (CPI-U), which is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in the cost of living, made up
of components such as housing, food, transportation and energy. Inflation-indexed bonds issued by a foreign government are generally adjusted to reflect a comparable inflation index, calculated by that government. There can be no assurance that the
CPI-U or any foreign inflation index will accurately measure the real rate of inflation in the prices of goods and services. Moreover, there can be no assurance that the rate of inflation in a foreign country will be correlated to the rate of
inflation in the United States.
Any increase in the principal
amount of an inflation-indexed bond will be considered taxable ordinary income, even though investors do not receive their principal until maturity.
Inflation Risk
.
Like all mutual funds, the Funds are subject to inflation risk. Inflation risk is the risk that the
present value of assets or income from investments will be less in the future as inflation decreases the value of money. As inflation increases, the present value of a Funds assets can decline as can the value of a Funds distributions.
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Investment Grade Debt Obligations.
Certain Funds may invest in investment grade
securities, which are securities rated in the four highest rating categories of an NRSRO or deemed to be of equivalent quality by a Funds Manager. Certain Funds may invest in debt securities rated Aaa by Moodys or AAA by S&P.
It should be noted that debt obligations rated in the lowest of the top four ratings (i.e., Baa by Moodys or BBB by S&P) are considered to have some speculative characteristics and are more sensitive to economic
change than higher rated securities. If an investment grade security of a Fund is subsequently downgraded below investment grade, the Funds Manager will consider such an event in determining whether the Fund should continue to hold the
security. Subject to its investment strategies, there is no limit on the amount of such downgraded securities a Fund may hold, although under normal market conditions the manager do not expect to hold these securities to a material extent.
See Appendix A to this Statement of Additional Information for a
description of applicable securities ratings.
Investment
in Emerging Markets.
Certain Funds may invest in the securities of issuers domiciled in various countries with emerging capital markets. Specifically, a country with an emerging capital market is any country that the World Bank, the
International Finance Corporation, the United Nations or its authorities has determined to have a low or middle income economy. Countries with emerging markets can be found in regions such as Asia, Latin America, Eastern Europe and Africa.
Investments in the securities of issuers domiciled in countries
with emerging capital markets involve certain additional risks that do not generally apply to investments in securities of issuers in more developed capital markets, such as (i) low or non-existent trading volume, resulting in a lack of
liquidity and increased volatility in prices for such securities, as compared to securities of comparable issuers in more developed capital markets; (ii) uncertain national policies and social, political and economic instability, increasing the
potential for expropriation of assets, confiscatory taxation, high rates of inflation or unfavorable diplomatic developments; (iii) possible fluctuations in exchange rates, differing legal systems and the existence or possible imposition of
exchange controls, custodial restrictions or other foreign or U.S. governmental laws or restrictions applicable to such investments; (iv) national policies that may limit a Funds investment opportunities such as restrictions on investment
in issuers or industries deemed sensitive to national interests; and (v) the lack or relatively early development of legal structures governing private and foreign investments and private property. In addition to withholding taxes on investment
income, some countries with emerging markets may impose differential capital gains taxes on foreign investors.
Political and economic structures in emerging market countries may be undergoing significant evolution and rapid development, and these countries may lack the social, political and economic stability
characteristic of more developed countries. In such a dynamic environment, there can be no assurance that any or all of these capital markets will continue to present viable investment opportunities for a Fund. In the past, governments of such
nations have expropriated substantial amounts of private property, and most claims of the property owners have never been fully settled. There is no assurance that such expropriations will not reoccur. In such an event, it is possible that a Fund
could lose the entire value of its investments in the affected market. As a result the risks described above, including the risks of nationalization or expropriation of assets, may be heightened. In addition, unanticipated political or social
developments may affect the value of investments in these countries and the availability to a Fund of additional investments. The small size and inexperience of the securities markets in certain of these countries and the limited volume of trading
in securities in these countries may make investments in the countries illiquid and more volatile than investments in Japan or most Western European countries.
Also, there may be less publicly available information about issuers in emerging markets than would be available about issuers in more developed capital
markets, and such issuers may not be subject to accounting, auditing and financial reporting standards and requirements comparable to those to which U.S. companies are subject. In certain countries with emerging capital markets, reporting standards
vary widely. As a result, traditional investment measurements used in the United States, such as price/earnings ratios, may not be applicable. Emerging market securities may be substantially less liquid and more volatile than those of mature
markets, and company shares may be held by a limited number of persons. This may adversely affect the timing and pricing of the Funds acquisition or disposal of securities.
Practices in relation to settlement of securities transactions in emerging
markets involve higher risks than those in developed markets, in part because a Fund will need to use brokers and counterparties that are less well capitalized, and custody and registration of assets in some countries may be unreliable. The
possibility of fraud, negligence, undue influence being exerted by the issuer or refusal to recognize ownership exists in some emerging markets, and,
II-26
along with other factors, could result in ownership registration being completely lost. A Fund would absorb any loss resulting from such registration problems and may have no successful claim for
compensation.
Investment in non-dollar denominated securities
including securities from issuers located in emerging market countries may be on either a currency hedged or unhedged basis, and the Funds may hold from time to time various foreign currencies pending investment or conversion into U.S. dollars. Some
of these instruments may have the characteristics of futures contracts. In addition, certain Funds may engage in foreign currency exchange transactions to seek to protect against changes in the level of future exchange rates which would adversely
affect the Funds performance. These investments and transactions involving foreign securities, currencies, options (including options that relate to foreign currencies), futures, hedging and cross-hedging are described below and under
Interest Rate Transactions and Currency Swaps, Foreign Currency Transactions and Options and Futures Contracts.
Risks of Investing in Asia-Pacific Countries.
In addition to the risks of foreign investing and the risks of investing in developing markets, the
developing market Asia-Pacific countries in which a Fund may invest are subject to certain additional or specific risks. Certain Funds may make substantial investments in Asia-Pacific countries. In many of these markets, there is a high
concentration of market capitalization and trading volume in a small number of issuers representing a limited number of industries, as well as a high concentration of investors and financial intermediaries. Many of these markets also may be affected
by developments with respect to more established markets in the region such as in Japan and Hong Kong. Brokers in developing market Asia-Pacific countries typically are fewer in number and less well capitalized than brokers in the United States.
These factors, combined with the U.S. regulatory requirements for open-end investment companies and the restrictions on foreign investment discussed below, result in potentially fewer investment opportunities for a Fund and may have an adverse
impact on the investment performance of the Fund.
Many of the
developing market Asia-Pacific countries may be subject to a greater degree of economic, political and social instability than is the case in the United States and Western European countries. Such instability may result from, among other things:
(i) authoritarian governments or military involvement in political and economic decision-making, including changes in government through extra-constitutional means; (ii) popular unrest associated with demands for improved political,
economic and social conditions; (iii) internal insurgencies; (iv) hostile relations with neighbouring countries; and (v) ethnic, religious and racial disaffection. In addition, the governments of many of such countries, such as
Indonesia, have a substantial role in regulating and supervising the economy. Another risk common to most such countries is that the economy is heavily export oriented and, accordingly, is dependent upon international trade. The existence of
overburdened infrastructure and obsolete financial systems also presents risks in certain countries, as do environmental problems. Certain economies also depend to a significant degree upon exports of primary commodities and, therefore, are
vulnerable to changes in commodity prices that, in turn, may be affected by a variety of factors.
The legal systems in certain developing market Asia-Pacific countries also may have an adverse impact on the Fund. For example, while the potential liability of a shareholder in a U.S. corporation with
respect to acts of the corporation is generally limited to the amount of the shareholders investment, the notion of limited liability is less clear in certain emerging market Asia-Pacific countries. Similarly, the rights of investors in
developing market Asia-Pacific companies may be more limited than those of shareholders of U.S. corporations. It may be difficult or impossible to obtain and/or enforce a judgment in a developing market Asia-Pacific country.
Governments of many developing market Asia-Pacific countries have exercised
and continue to exercise substantial influence over many aspects of the private sector. In certain cases, the government owns or controls many companies, including the largest in the country. Accordingly, government actions in the future could have
a significant effect on economic conditions in developing market Asia-Pacific countries, which could affect private sector companies and a Fund itself, as well as the value of securities in the Funds portfolio. In addition, economic statistics
of developing market Asia-Pacific countries may be less reliable than economic statistics of more developed nations.
In addition to the relative lack of publicly available information about developing market Asia-Pacific issuers and the possibility that such issuers may
not be subject to the same accounting, auditing and financial reporting standards as U.S. companies, inflation accounting rules in some developing market Asia-Pacific countries require companies that keep accounting records in the local currency,
for both tax and accounting purposes, to restate certain assets and liabilities on the companys balance sheet in order to express items in terms of currency of
II-27
constant purchasing power. Inflation accounting may indirectly generate losses or profits for certain developing market Asia-Pacific companies.
Satisfactory custodial services for investment securities may not be
available in some developing Asia-Pacific countries, which may result in the Fund incurring additional costs and delays in providing transportation and custody services for such securities outside such countries.
Certain developing Asia-Pacific countries, such as the Philippines, India
and Turkey, are especially large debtors to commercial banks and foreign governments.
On March 11, 2011, a powerful earthquake and resulting tsunami struck northeastern Japan causing major damage along the coast, including damage to nuclear power plants in the region. This disaster,
and the resulting damage, could have a severe and negative impact on a Funds investment portfolio and, in the longer term, could impair the ability of issuers in which the Fund invests to conduct their businesses in the manner normally
conducted.
Fund management may determine that, notwithstanding
otherwise favorable investment criteria, it may not be practicable or appropriate to invest in a particular developing Asia-Pacific country. A Fund may invest in countries in which foreign investors, including management of the Fund, have had no or
limited prior experience.
Restrictions on Foreign Investments
in Asia-Pacific Countries.
Some developing Asia-Pacific countries prohibit or impose substantial restrictions on investments in their capital markets, particularly their equity markets, by foreign entities such as a Fund. As illustrations,
certain countries may require governmental approval prior to investments by foreign persons or limit the amount of investment by foreign persons in a particular company or limit the investment by foreign persons to only a specific class of
securities of a company which may have less advantageous terms (including price and shareholder rights) than securities of the company available for purchase by nationals. There can be no assurance that a Fund will be able to obtain required
governmental approvals in a timely manner. In addition, changes to restrictions on foreign ownership of securities subsequent to a Funds purchase of such securities may have an adverse effect on the value of such shares. Certain countries may
restrict investment opportunities in issuers or industries deemed important to national interests.
The manner in which foreign investors may invest in companies in certain developing Asia-Pacific countries, as well as limitations on such investments, also may have an adverse impact on the operations of
a Fund. For example, a Fund may be required in certain of such countries to invest initially through a local broker or other entity and then have the shares purchased re-registered in the name of the Fund. Re-registration may in some instances not
be able to occur on a timely basis, resulting in a delay during which a Fund may be denied certain of its rights as an investor, including rights as to dividends or to be made aware of certain corporate actions. There also may be instances where a
Fund places a purchase order but is subsequently informed, at the time of re-registration, that the permissible allocation of the investment to foreign investors has been filled, depriving the Fund of the ability to make its desired investment at
that time.
Substantial limitations may exist in certain
countries with respect to a Funds ability to repatriate investment income, capital or the proceeds of sales of securities by foreign investors. A Fund could be adversely affected by delays in, or a refusal to grant, any required governmental
approval for repatriation of capital, as well as by the application to the Fund of any restrictions on investments. It is possible that certain countries may impose currency controls or other restrictions relating to their currencies or to
securities of issuers in those countries. To the extent that such restrictions have the effect of making certain investments illiquid, securities may not be available for sale to meet redemptions. Depending on a variety of financial factors, the
percentage of a Funds portfolio subject to currency controls may increase. In the event other countries impose similar controls, the portion of the Funds assets that may be used to meet redemptions may be further decreased. Even where
there is no outright restriction on repatriation of capital, the mechanics of repatriation may affect certain aspects of the operations of a Fund (for example, if funds may be withdrawn only in certain currencies and/or only at an exchange rate
established by the government).
In certain countries, banks or
other financial institutions may be among the leading companies or have actively traded securities available for investment. The Investment Company Act restricts a Funds investments in any equity securities of an issuer that, in its most
recent fiscal year, derived more than 15% of its revenues from securities related activities, as defined by the rules thereunder. These provisions may restrict a Funds investments in certain foreign banks and other financial
institutions.
II-28
Political and economic structures in emerging market countries may be undergoing significant evolution and
rapid development, and these countries may lack the social, political and economic stability characteristic of more developed countries. Some of these countries may have in the past failed to recognize private property rights and have at times
nationalized or expropriated the assets of private companies. As a result the risks described above, including the risks of nationalization or expropriation of assets, may be heightened. In addition, unanticipated political or social developments
may affect the value of investments in these countries and the availability to a Fund of additional investments in emerging market countries. The small size and inexperience of the securities markets in certain of these countries and the limited
volume of trading in securities in these countries may make investments in the countries illiquid and more volatile than investments in Japan or most Western European countries. There may be little financial or accounting information available with
respect to issuers located in certain emerging market countries, and it may be difficult to assess the value or prospects of an investment in such issuers.
The expense ratios of the Funds investing significantly in foreign securities can be expected to be higher than those of Funds investing primarily in
domestic securities. The costs attributable to investing abroad are usually higher for several reasons, such as the higher cost of custody of foreign securities, higher commissions paid on comparable transactions on foreign markets and additional
costs arising from delays in settlements of transactions involving foreign securities.
Risks of Investments in Russia.
A Fund may invest a portion of its assets in securities issued by companies located in Russia. Because of the recent formation of the Russian securities markets as
well as the underdeveloped state of Russias banking system, settlement, clearing and registration of securities transactions are subject to significant risks. Ownership of shares is defined according to entries in the companys share
register and normally evidenced by extracts from the register. These extracts are not negotiable instruments and are not effective evidence of securities ownership. The registrars are not necessarily subject to effective state supervision nor are
they licensed with any governmental entity. Also, there is no central registration system for shareholders and it is possible for a Fund to lose its registration through fraud, negligence or mere oversight. While a Fund will endeavor to ensure that
its interest continues to be appropriately recorded either itself or through a custodian or other agent inspecting the share register and by obtaining extracts of share registers through regular confirmations, these extracts have no legal
enforceability and it is possible that subsequent illegal amendment or other fraudulent act may deprive the Fund of its ownership rights or improperly dilute its interest. In addition, while applicable Russian regulations impose liability on
registrars for losses resulting from their errors, it may be difficult for a Fund to enforce any rights it may have against the registrar or issuer of the securities in the event of loss of share registration. While a Fund intends to invest directly
in Russian companies that use an independent registrar, there can be no assurance that such investments will not result in a loss to the Fund.
Brady Bonds.
A Funds emerging market debt securities may include emerging market governmental debt obligations commonly referred to as Brady
Bonds. Brady Bonds are securities created through the exchange of existing commercial bank loans to sovereign entities for new obligations in connection with debt restructurings under a debt restructuring plan introduced by former U.S. Secretary of
the Treasury, Nicholas F. Brady (the Brady Plan). Brady Plan debt restructurings have been implemented in a number of countries, including: Argentina, Bolivia, Brazil, Bulgaria, Costa Rica, the Dominican Republic, Ecuador, Jordan,
Mexico, Niger, Nigeria, Panama, Peru, the Philippines, Poland, Uruguay and Venezuela.
Brady Bonds may be collateralized or uncollateralized, are issued in various currencies (primarily the U.S. dollar) and are actively traded in the over-the-counter secondary market. Brady Bonds are not
considered to be U.S. Government securities. U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed rate par bonds or floating rate discount bonds, are generally collateralized in full as to principal by U.S. Treasury zero-coupon
bonds having the same maturity as the Brady Bonds. Interest payments on these Brady Bonds generally are collateralized on a one-year or longer rolling-forward basis by cash or securities in an amount that, in the case of fixed rate bonds, is equal
to at least one year of interest payments or, in the case of floating rate bonds, initially is equal to at least one years interest payments based on the applicable interest rate at that time and is adjusted at regular intervals thereafter.
Certain Brady Bonds are entitled to value recovery payments in certain circumstances, which in effect constitute supplemental interest payments but generally are not collateralized. For example, some Mexican and Venezuelan Brady Bonds
include attached value recovery options, which increase interest payments if oil revenues rise. Brady Bonds are often viewed as having three or four valuation components: (i) the collateralized repayment of
II-29
principal at final maturity; (ii) the collateralized interest payments; (iii) the uncollateralized interest payments; and (iv) any uncollateralized repayment of principal at
maturity (the uncollateralized amounts constitute the residual risk).
Brady Bonds involve various risk factors described above associated with investing in foreign securities, including the history of defaults with respect to commercial bank loans by public and private
entities of countries issuing Brady Bonds. In light of the residual risk of Brady Bonds and, among other factors, the history of defaults, investments in Brady Bonds are considered speculative. There can be no assurance that Brady Bonds in which the
Funds may invest will not be subject to restructuring arrangements or to requests for new credit, which may cause the Funds to suffer a loss of interest or principal on any of its holdings.
Investment in Other Investment Companies.
Each Fund may, subject to applicable law, invest in other investment
companies (including investment companies managed by BlackRock and its affiliates), including money market funds and exchange traded funds (ETFs), which are typically open-end funds or unit investment trusts listed on a stock exchange.
In accordance with the Investment Company Act, a Fund may invest up to 10% of its total assets in securities of other investment companies (measured at the time of such investment). In addition, under the Investment Company Act a Fund may not
acquire securities of an investment company if such acquisition would cause the Fund to own more than 3% of the total outstanding voting stock of such investment company and a Fund may not invest in another investment company if such investment
would cause more than 5% of the value of the Funds total assets to be invested in securities of such investment company. (These limits do not restrict a Feeder Fund from investing all of its assets in shares of its Master Portfolio.) In
addition to the restrictions on investing in other investment companies discussed above, a Fund may not invest in a registered closed-end investment company if such investment would cause the Fund and other BlackRock-advised investment companies to
own more than 10% of the total outstanding voting stock of such closed-end investment company. Pursuant to the Investment Company Act (or alternatively, pursuant to exemptive orders received from the Commission) these percentage limitations do not
apply to investments in affiliated money market funds, and under certain circumstances, do not apply to investments in affiliated investment companies, including ETFs. In addition, many third-party ETFs have obtained exemptive relief from the
Commission to permit unaffiliated funds (such as the Funds) to invest in their shares beyond the statutory limits, subject to certain conditions and pursuant to contractual arrangements between the ETFs and the investing funds. A Fund may rely on
these exemptive orders in investing in ETFs. Further, under certain circumstances a Fund may be able to rely on certain provisions of the Investment Company Act to invest in shares of unaffiliated investment companies beyond the statutory limits
noted above, but subject to certain other statutory restrictions.
As with other investments, investments in other investment companies are subject to market and selection risk.
Shares of investment companies, such as closed-end fund investment
companies, that trade on an exchange may at times be acquired at market prices representing premiums to their net asset values. In addition, investment companies held by a Fund that trade on an exchange could trade at a discount from net asset
value, and such discount could increase while the Fund holds the shares. If the market price of shares of an exchange-traded investment company decreases below the price that the Fund paid for the shares and the Fund were to sell its shares of such
investment company at a time when the market price is lower than the price at which it purchased the shares, the Fund would experience a loss.
In addition, if a Fund acquires shares in investment companies, including affiliated investment companies, shareholders would bear both their
proportionate share of expenses in the Fund and, indirectly, the expenses of such investment companies. Such expenses, both at the Fund level and acquired investment company level, would include management and advisory fees, unless such fees have
been waived by BlackRock. Please see the relevant Funds prospectus to determine whether any such management and advisory fees have been waived by BlackRock. Investments by a Fund in wholly owned investment entities created under the laws of
certain countries will not be deemed an investment in other investment companies.
To the extent shares of a Fund are held by an affiliated fund, the ability of the Fund itself to purchase other affiliated investment companies may be limited. In addition, a fund-of-funds (
e.g.
,
an investment company that seeks to meet its investment objective by investing significantly in other investment companies) may be limited in its ability to purchase affiliated underlying funds if such affiliated underlying funds themselves own
shares of affiliated funds.
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A number of publicly traded closed-end investment companies have been organized to facilitate indirect
foreign investment in developing countries, and certain of such countries, such as Thailand, South Korea, Chile and Brazil, have specifically authorized such funds. There also are investment opportunities in certain of such countries in pooled
vehicles that resemble open-end investment companies. The restrictions on investments in securities of investment companies set forth above may limit opportunities for a Fund to invest indirectly in certain developing countries.
Junk Bonds.
Non-investment grade or high yield
fixed income or convertible securities commonly known to investors as junk bonds are debt securities that are rated below investment grade by the major rating agencies or are unrated securities that Fund management believes are of
comparable quality. While generally providing greater income and opportunity for gain, non-investment grade debt securities may be subject to greater risks than securities which have higher credit ratings, including a high risk of default, and their
yields will fluctuate over time. High yield securities will generally be in the lower rating categories of recognized rating agencies (rated Ba or lower by Moodys or BB or lower by S&P) or will be non-rated. The
credit rating of a high yield security does not necessarily address its market value risk, and ratings may from time to time change, positively or negatively, to reflect developments regarding the issuers financial condition. High yield
securities are considered to be speculative with respect to the capacity of the issuer to timely repay principal and pay interest or dividends in accordance with the terms of the obligation and may have more credit risk than higher rated securities.
The major risks in junk bond investments include the following:
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Junk bonds may be issued by less creditworthy companies. These securities are vulnerable to adverse changes in the issuers industry and to
general economic conditions. Issuers of junk bonds may be unable to meet their interest or principal payment obligations because of an economic downturn, specific issuer developments or the unavailability of additional financing.
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The issuers of junk bonds may have a larger amount of outstanding debt relative to their assets than issuers of investment grade bonds. If the issuer
experiences financial stress, it may be unable to meet its debt obligations. The issuers ability to pay its debt obligations also may be lessened by specific issuer developments, or the unavailability of additional financing. Issuers of high
yield securities are often in the growth stage of their development and/or involved in a reorganization or takeover.
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Junk bonds are frequently ranked junior to claims by other creditors. If the issuer cannot meet its obligations, the senior obligations are generally
paid off before the junior obligations, which will potentially limit a Funds ability to fully recover principal or to receive interest payments when senior securities are in default. Thus, investors in high yield securities have a lower degree
of protection with respect to principal and interest payments then do investors in higher rated securities.
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Junk bonds frequently have redemption features that permit an issuer to repurchase the security from a Fund before it matures. If an issuer redeems the
junk bonds, a Fund may have to invest the proceeds in bonds with lower yields and may lose income.
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Prices of junk bonds are subject to extreme price fluctuations. Negative economic developments may have a greater impact on the prices of junk bonds
than on those of other higher rated fixed income securities.
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The secondary markets for high yield securities are not as liquid as the secondary markets for higher rated securities. The secondary markets for high
yield securities are concentrated in relatively few market makers and participants in the markets are mostly institutional investors, including insurance companies, banks, other financial institutions and mutual funds. In addition, the trading
volume for high yield securities is generally lower than that for higher rated securities and the secondary markets could contract under adverse market or economic conditions independent of any specific adverse changes in the condition of a
particular issuer. Under certain economic and/or market conditions, a Fund may have difficulty disposing of certain high yield securities due to the limited number of investors in that sector of the market. An illiquid secondary market may adversely
affect the market price of the high yield security, which may result in increased difficulty selling the particular issue and obtaining accurate market quotations on the issue when valuing a Funds assets. Market quotations on high yield
securities are available only from a limited number of dealers, and such quotations may not be the actual prices available for a purchase or sale. When the secondary market for high yield securities becomes more illiquid, or in the absence of
readily available market quotations for such securities, the relative lack of reliable objective data makes it more difficult to value a Funds securities, and judgment plays a more important role in determining such valuations.
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II-31
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A Fund may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting issuer.
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The junk bond markets may react strongly to adverse news about an issuer or the economy, or to the perception or expectation of adverse news, whether
or not it is based on fundamental analysis. Additionally, prices for high yield securities may be affected by legislative and regulatory developments. These developments could adversely affect a Funds net asset value and investment practices,
the secondary market for high yield securities, the financial condition of issuers of these securities and the value and liquidity of outstanding high yield securities, especially in a thinly traded market. For example, federal legislation requiring
the divestiture by federally insured savings and loan associations of their investments in high yield bonds and limiting the deductibility of interest by certain corporate issuers of high yield bonds adversely affected the market in the past.
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The rating assigned by a rating agency evaluates the issuing agencys assessment of the safety of a non-investment grade securitys principal
and interest payments, but does not address market value risk. Because such ratings of the ratings agencies may not always reflect current conditions and events, in addition to using recognized rating agencies and other sources, the sub-adviser
performs its own analysis of the issuers whose non-investment grade securities a Fund holds. Because of this, the Funds performance may depend more on the sub-advisers own credit analysis than in the case of mutual funds investing in
higher-rated securities.
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In selecting
non-investment grade securities, the adviser or sub-adviser considers factors such as those relating to the creditworthiness of issuers, the ratings and performance of the securities, the protections afforded the securities and the diversity of the
Fund. The sub-adviser continuously monitors the issuers of non-investment grade securities held by the Fund for their ability to make required principal and interest payments, as well as in an effort to control the liquidity of the Fund so that it
can meet redemption requests. If a securitys rating is reduced below the minimum credit rating that is permitted for a Fund, the Funds sub-adviser will consider whether the Fund should continue to hold the security.
In the event that a Fund investing in high yield securities experiences an
unexpected level of net redemptions, the Fund could be forced to sell its holdings without regard to the investment merits, thereby decreasing the assets upon which the Funds rate of return is based.
The costs attributable to investing in the junk bond markets are usually
higher for several reasons, such as higher investment research costs and higher commission costs.
Lease Obligations.
A Fund may hold participation certificates in a lease, an installment purchase contract, or a conditional sales contract (lease obligations).
The Manager will monitor the credit standing of each borrower and each
entity providing credit support and/or a put option relating to lease obligations. In determining whether a lease obligation is liquid, the Manager will consider, among other factors, the following: (i) whether the lease can be cancelled;
(ii) the degree of assurance that assets represented by the lease could be sold; (iii) the strength of the lessees general credit (
e.g.
, its debt, administrative, economic and financial characteristics); (iv) in the case
of a municipal lease, the likelihood that the municipality would discontinue appropriating funding for the leased property because the property is no longer deemed essential to the operations of the municipality (
e.g.
, the potential for an
event of nonappropriation); (v) legal recourse in the event of failure to appropriate; (vi) whether the security is backed by a credit enhancement such as insurance; and (vii) any limitations which are imposed on the lease
obligors ability to utilize substitute property or services other than those covered by the lease obligation.
Liquidity Management
.
As a temporary defensive measure, if its Manager determines that market conditions warrant,
certain Funds may invest without limitation in high quality money market instruments. Certain Funds may also invest in high quality money market instruments pending investment or to meet anticipated redemption requests. High quality money market
instruments include U.S. government obligations, U.S. government agency obligations, dollar denominated obligations of foreign issuers, bank obligations, including U.S. subsidiaries and branches of foreign banks, corporate obligations, commercial
paper, repurchase agreements and obligations of
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supranational organizations. Generally, such obligations will mature within one year from the date of settlement, but may mature within two years from the date of settlement.
Master Limited Partnerships.
Certain Funds may invest in
publicly traded master limited partnerships (MLPs) which are limited partnerships or limited liability companies taxable as partnerships. MLPs may derive income and gains from the exploration, development, mining or production,
processing, refining, transportation (including pipelines transporting gas, oil, or products thereof), or the marketing of any mineral or natural resources. MLPs generally have two classes of owners, the general partner and limited partners. When
investing in an MLP, a Fund intends to purchase publicly traded common units issued to limited partners of the MLP. The general partner is typically owned by a major energy company, an investment fund, the direct management of the MLP or is an
entity owned by one or more of such parties. The general partner may be structured as a private or publicly traded corporation or other entity. The general partner typically controls the operations and management of the MLP through an up to 2%
equity interest in the MLP plus, in many cases, ownership of common units and subordinated units. Limited partners own the remainder of the partnership, through ownership of common units, and have a limited role in the partnerships operations
and management.
MLPs are typically structured such that common
units and general partner interests have first priority to receive quarterly cash distributions up to an established minimum amount (minimum quarterly distributions or MQD). Common and general partner interests also accrue
arrearages in distributions to the extent the MQD is not paid. Once common and general partner interests have been paid, subordinated units receive distributions of up to the MQD; however, subordinated units do not accrue arrearages. Distributable
cash in excess of the MQD paid to both common and subordinated units is distributed to both common and subordinated units generally on a pro rata basis. The general partner is also eligible to receive incentive distributions if the general partner
operates the business in a manner which results in distributions paid per common unit surpassing specified target levels. As the general partner increases cash distributions to the limited partners, the general partner receives an increasingly
higher percentage of the incremental cash distributions. A common arrangement provides that the general partner can reach a tier where it receives 50% of every incremental dollar paid to common and subordinated unit holders. These incentive
distributions encourage the general partner to streamline costs, increase capital expenditures and acquire assets in order to increase the partnerships cash flow and raise the quarterly cash distribution in order to reach higher tiers. Such
results benefit all security holders of the MLP.
MLP common
units represent a limited partnership interest in the MLP. Common units are listed and traded on U.S. securities exchanges, with their value fluctuating predominantly based on prevailing market conditions and the success of the MLP. Certain Funds
intend to purchase common units in market transactions. Unlike owners of common stock of a corporation, owners of common units have limited voting rights and have no ability annually to elect directors. In the event of liquidation, common units have
preference over subordinated units, but not over debt or preferred units, to the remaining assets of the MLP.
Mezzanine Investments.
Certain Funds, consistent with their restrictions on investing in securities of a specific credit quality, may invest in certain high yield securities known as
mezzanine investments, which are subordinated debt securities which are generally issued in private placements in connection with an equity security (e.g., with attached warrants). Such mezzanine investments may be issued with or without
registration rights. Similar to other high yield securities, maturities of mezzanine investments are typically seven to ten years, but the expected average life is significantly shorter at three to five years. Mezzanine investments are usually
unsecured and subordinate to other obligations of the issuer.
Money Market Obligations of Domestic Banks, Foreign Banks and Foreign Branches of U.S. Banks
.
Certain Funds may
purchase bank obligations, such as certificates of deposit, notes, bankers acceptances and time deposits, including instruments issued or supported by the credit of U.S. or foreign banks or savings institutions having total assets at the time
of purchase in excess of $1 billion. These obligations may be general obligations of the parent bank or may be limited to the issuing branch or subsidiary by the terms of a specific obligation or by government regulation. The assets of a bank or
savings institution will be deemed to include the assets of its domestic and foreign branches for purposes of a Funds investment policies. Investments in short-term bank obligations may include obligations of foreign banks and domestic
branches of foreign banks, and also foreign branches of domestic banks.
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To the extent consistent with their investment objectives, a Fund may invest in debt obligations of domestic
or foreign corporations and banks, and may acquire commercial obligations issued by Canadian corporations and Canadian counterparts of U.S. corporations, as well as Europaper, which is U.S. dollar-denominated commercial paper of a foreign issuer.
Money Market Securities.
Certain Funds may invest
in a broad range of short-term, high quality, U.S. dollar-denominated instruments, such as government, bank, commercial and other obligations that are available in the money markets. In particular, the Funds may invest in:
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U.S. dollar-denominated obligations issued or supported by the credit of U.S. or foreign banks or savings institutions with total assets in excess of $1 billion
(including obligations of foreign branches of such banks);
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(b)
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high quality commercial paper and other obligations issued or guaranteed by U.S. and foreign corporations and other issuers rated (at the time of purchase) A-2 or
higher by S&P, Prime-2 or higher by Moodys or F-2 or higher by Fitch, as well as high quality corporate bonds rated (at the time of purchase) A or higher by those rating agencies;
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(c)
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unrated notes, paper and other instruments that are of comparable quality to the instruments described in (b) above as determined by the Funds Manager;
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(d)
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asset-backed securities (including interests in pools of assets such as mortgages, installment purchase obligations and credit card receivables);
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(e)
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securities issued or guaranteed as to principal and interest by the U.S. Government or by its agencies or authorities and related custodial receipts;
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(f)
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dollar-denominated securities issued or guaranteed by foreign governments or their political subdivisions, agencies or authorities;
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(g)
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funding agreements issued by highly-rated U.S. insurance companies;
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(h)
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securities issued or guaranteed by state or local governmental bodies;
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(i)
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repurchase agreements relating to the above instruments;
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(j)
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municipal bonds and notes whose principal and interest payments are guaranteed by the U.S. Government or one of its agencies or authorities or which otherwise depend on
the credit of the United States;
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(k)
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fixed and variable rate notes and similar debt instruments rated MIG-2, VMIG-2 or Prime-2 or higher by Moodys, SP-2 or A-2 or higher by S&P, or F-2 or higher
by Fitch;
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(l)
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tax-exempt commercial paper and similar debt instruments rated Prime-2 or higher by Moodys, A-2 or higher by S&P, or F-2 or higher by Fitch;
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(m)
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municipal bonds rated A or higher by Moodys, S&P or Fitch;
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(n)
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unrated notes, paper or other instruments that are of comparable quality to the instruments described above, as determined by the Funds Manager under guidelines
established by the Board; and
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(o)
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municipal bonds and notes which are guaranteed as to principal and interest by the U.S. Government or an agency or instrumentality thereof or which otherwise depend
directly or indirectly on the credit of the United States.
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Mortgage-Related Securities
Mortgage-Backed Securities.
Mortgage-backed securities represent interests in pools of mortgages in which payments of both principal and interest on the securities are generally made monthly, in
effect passing through monthly payments made by borrowers on the residential or commercial mortgage loans that underlie the securities (net of any fees paid to the issuer or guarantor of the securities). Mortgage-backed securities differ
from other forms
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of debt securities, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates.
Mortgage-backed securities are subject to the general risks associated with
investing in real estate securities; that is, they may lose value if the value of the underlying real estate to which a pool of mortgages relates declines. In addition, investments in mortgage-backed securities involve certain specific risks. These
risks include the failure of a party to meet its commitments under the related operative documents, adverse interest rate changes and the effects of prepayments on mortgage cash flows. Mortgage-backed securities are pass-through
securities, meaning that principal and interest payments made by the borrower on the underlying mortgages are passed through to a Fund. The value of mortgage-backed securities, like that of traditional fixed income securities, typically increases
when interest rates fall and decreases when interest rates rise. However, mortgage-backed securities differ from traditional fixed income securities because of their potential for prepayment without penalty. The price paid by a Fund for its
mortgage-backed securities, the yield the Fund expects to receive from such securities and the weighted average life of the securities are based on a number of factors, including the anticipated rate of prepayment of the underlying mortgages. In a
period of declining interest rates, borrowers may prepay the underlying mortgages more quickly than anticipated, thereby reducing the yield to maturity and the average life of the mortgage-backed securities. Moreover, when a Fund reinvests the
proceeds of a prepayment in these circumstances, it will likely receive a rate of interest that is lower than the rate on the security that was prepaid.
To the extent that a Fund purchases mortgage-backed securities at a premium, mortgage foreclosures and principal prepayments may result in a loss to the
extent of the premium paid. If a Fund buys such securities at a discount, both scheduled payments of principal and unscheduled prepayments will increase current and total returns and will accelerate the recognition of income, which, when distributed
to shareholders, will be taxable as ordinary income. In a period of rising interest rates, prepayments of the underlying mortgages may occur at a slower than expected rate, creating maturity extension risk. This particular risk may effectively
change a security that was considered short or intermediate-term at the time of purchase into a long-term security. Since the value of long-term securities generally fluctuates more widely in response to changes in interest rates than that of
shorter-term securities, maturity extension risk could increase the inherent volatility of the Fund. Under certain interest rate and prepayment scenarios, a Fund may fail to recoup fully its investment in mortgage-backed securities notwithstanding
any direct or indirect governmental or agency guarantee.
There
are currently three types of mortgage pass-through securities: (1) those issued by the U.S. government or one of its agencies or instrumentalities, such as the Government National Mortgage Association (Ginnie Mae), the Federal
National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac); (2) those issued by private issuers that represent an interest in or are collateralized by pass-through securities
issued or guaranteed by the U.S. government or one of its agencies or instrumentalities; and (3) those issued by private issuers that represent an interest in or are collateralized by whole mortgage loans or pass-through securities without a
government guarantee but that usually have some form of private credit enhancement.
Ginnie Mae is a wholly owned U.S. government corporation within the Department of Housing and Urban Development. Ginnie Mae is authorized to guarantee, with the full faith and credit of the U.S.
government, the timely payment of principal and interest on securities issued by the institutions approved by Ginnie Mae (such as savings and loan institutions, commercial banks and mortgage banks), and backed by pools of Federal Housing
Administration (FHA)-insured or Veterans Administration (VA)-guaranteed mortgages. Pass-through certificates guaranteed by Ginnie Mae (such certificates are also known as Ginnie Maes) are guaranteed as to
the timely payment of principal and interest by Ginnie Mae, whose guarantee is backed by the full faith and credit of the United States. Ginnie Mae certificates also are supported by the authority of Ginnie Mae to borrow funds from the U.S. Treasury
Department to make payments under its guarantee. Mortgage-related securities issued by Fannie Mae include Fannie Mae guaranteed Mortgage Pass-Through Certificates (also known as Fannie Maes), which are guaranteed as to timely payment of
principal and interest by Fannie Mae. They are not backed by or entitled to the full faith and credit of the United States, but are supported by the right of Fannie Mae to borrow from the U.S. Treasury Department. Fannie Mae was established as a
federal agency in 1938 and in 1968 was chartered by Congress as a private shareholder-owned company. Mortgage-related securities issued by the Freddie Mac include Freddie Mac Mortgage Participation Certificates (also known as Freddie
Macs or PCs). Freddie Mac is a stockholder-owned corporation chartered by Congress in 1970. Freddie Macs are not guaranteed by the United States or by any Federal Home Loan Banks and do not constitute a debt or obligation of the
United States or of any Federal Home Loan Bank. Freddie Macs entitle the holder to timely payment of interest, which is guaranteed by Freddie Mac. Freddie Mac guarantees either ultimate collection or timely payment of all principal payments on the
underlying mortgage loans. While Freddie Mac generally does not guarantee timely payment of principal, Freddie
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Mac may remit the amount due on account of its guarantee of ultimate payment of principal at any time after default on an underlying mortgage, but in no event later than one year after it becomes
payable. On September 6, 2008, Director James Lockhart of the Federal Housing Finance Agency (FHFA) appointed FHFA as conservator of both Fannie Mae and Freddie Mac. In addition the U.S. Treasury Department agreed to provide Fannie
Mae and Freddie Mac up to $100 billion of capital each on an as needed basis to insure that they continue to provide liquidity to the housing and mortgage markets.
Private mortgage pass-through securities are structured similarly to Ginnie
Mae, Fannie Mae, and Freddie Mac mortgage pass-through securities and are issued by originators of and investors in mortgage loans, including depository institutions, mortgage banks, investment banks and special purpose subsidiaries of the
foregoing.
Pools created by private mortgage pass-through
issuers generally offer a higher rate of interest than government and government-related pools because there are no direct or indirect government or agency guarantees of payments in the private pools. However, timely payment of interest and
principal of these pools may be supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit. The insurance and guarantees are issued by governmental entities, private
insurers and the mortgage poolers. The insurance and guarantees and the creditworthiness of the issuers thereof will be considered in determining whether a mortgage-related security meets a Funds investment quality standards. There can be no
assurance that the private insurers or guarantors can meet their obligations under the insurance policies or guarantee arrangements. Private mortgage pass-through securities may be bought without insurance or guarantees if, through an examination of
the loan experience and practices of the originator/servicers and poolers, the Manager determines that the securities meet a Funds quality standards. Any mortgage-related securities that are issued by private issuers have some exposure to
subprime loans as well as to the mortgage and credit markets generally.
In addition, mortgage-related securities that are issued by private issuers are not subject to the underwriting requirements for the underlying mortgages that are applicable to those mortgage-related
securities that have a government or government-sponsored entity guarantee. As a result, the mortgage loans underlying private mortgage-related securities may, and frequently do, have less favorable collateral, credit risk or other underwriting
characteristics than government or government-sponsored mortgage-related securities and have wider variances in a number of terms including interest rate, term, size, purpose and borrower characteristics. Privately issued pools more frequently
include second mortgages, high loan-to-value mortgages and manufactured housing loans. The coupon rates and maturities of the underlying mortgage loans in a private-label mortgage-related securities pool may vary to a greater extent than those
included in a government guaranteed pool, and the pool may include subprime mortgage loans. Subprime loans refer to loans made to borrowers with weakened credit histories or with a lower capacity to make timely payments on their loans. For these
reasons, the loans underlying these securities have had in many cases higher default rates than those loans that meet government underwriting requirements.
The risk of non-payment is greater for mortgage-related securities that are backed by mortgage pools that contain subprime loans, but a level of risk
exists for all loans. Market factors adversely affecting mortgage loan repayments may include a general economic turndown, high unemployment, a general slowdown in the real estate market, a drop in the market prices of real estate, or an increase in
interest rates resulting in higher mortgage payments by holders of adjustable rate mortgages.
Privately issued mortgage-related securities are not traded on an exchange and there may be a limited market for the securities, especially when there is a perceived weakness in the mortgage and real
estate market sectors. Without an active trading market, mortgage-related securities held in a funds portfolio may be particularly difficult to value because of the complexities involved in assessing the value of the underlying mortgage loans.
A Fund from time to time may purchase in the secondary market
(i) certain mortgage pass-through securities packaged and master serviced by PNC Mortgage Securities Corp. (PNC Mortgage) or Midland Loan Services, Inc. (Midland), or (ii) mortgage-related securities containing
loans or mortgages originated by PNC Bank, National Association (PNC Bank) or its affiliates. It is possible that under some circumstances, PNC Mortgage, Midland or other affiliates could have interests that are in conflict with the
holders of these mortgage-backed securities, and such holders could have rights against PNC Mortgage, Midland or their affiliates. For example, if PNC Mortgage, Midland or their affiliates engaged in negligence or willful misconduct in carrying out
its duties as a master servicer, then any holder of the mortgage-backed security could seek recourse against PNC Mortgage, Midland or their affiliates, as applicable. Also, as a master servicer, PNC Mortgage, Midland or their affiliates may
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make certain representations and warranties regarding the quality of the mortgages and properties underlying a mortgage-backed security. If one or more of those representations or warranties is
false, then the holders of the mortgage-backed securities could trigger an obligation of PNC Mortgage, Midland or their affiliates, as applicable, to repurchase the mortgages from the issuing trust. Finally, PNC Mortgage, Midland or their affiliates
may own securities that are subordinate to the senior mortgage-backed securities owned by a Fund.
Collateralized Mortgage Obligations
(CMOs). CMOs are debt obligations collateralized by residential or commercial mortgage loans or residential or commercial mortgage pass-through
securities. Interest and prepaid principal are generally paid monthly. CMOs may be collateralized by whole mortgage loans or private mortgage pass-through securities but are more typically collateralized by portfolios of mortgage pass-through
securities guaranteed by Ginnie Mae, Freddie Mac, or Fannie Mae. The issuer of a series of CMOs may elect to be treated as a Real Estate Mortgage Investment Conduit (REMIC). All future references to CMOs also include REMICs.
CMOs are structured into multiple classes, often referred to as a
tranche, each issued at a specific adjustable or fixed interest rate, and bearing a different stated maturity date and each must be fully retired no later than its final distribution date. Actual maturity and average life will depend
upon the prepayment experience of the collateral, which is ordinarily unrelated to the stated maturity date. CMOs often provide for a modified form of call protection through a de facto breakdown of the underlying pool of mortgages according to how
quickly the loans are repaid. Monthly payment of principal received from the pool of underlying mortgages, including prepayments, is first returned to investors holding the shortest maturity class. Investors holding the longer maturity classes
usually receive principal only after the first class has been retired. An investor may be partially protected against a sooner than desired return of principal because of the sequential payments.
Certain issuers of CMOs are not considered investment companies pursuant to
a rule adopted by the Commission, and a Fund may invest in the securities of such issuers without the limitations imposed by the Investment Company Act on investments by a Fund in other investment companies. In addition, in reliance on an earlier
Commission interpretation, a Funds investments in certain other qualifying CMOs, which cannot or do not rely on the rule, are also not subject to the limitation of the Investment Company Act on acquiring interests in other investment
companies. In order to be able to rely on the Commissions interpretation, these CMOs must be unmanaged, fixed asset issuers, that: (1) invest primarily in mortgage-backed securities; (2) do not issue redeemable securities;
(3) operate under general exemptive orders exempting them from all provisions of the Investment Company Act; and (4) are not registered or regulated under the Investment Company Act as investment companies. To the extent that a Fund
selects CMOs that cannot rely on the rule or do not meet the above requirements, the Fund may not invest more than 10% of its assets in all such entities and may not acquire more than 3% of the voting securities of any single such entity.
A Fund may also invest in, among other things, parallel pay
CMOs, sequential pay CMOs, and floating rate CMOs. Parallel pay CMOs are structured to provide payments of principal on each payment date to more than one class, concurrently on a proportionate or disproportionate basis. These simultaneous payments
are taken into account in calculating the final distribution date of each class. Sequential pay CMOs generally pay principal to only one class at a time while paying interest to several classes. A wide variety of REMIC Certificates may be issued in
the parallel pay or sequential pay structures. These securities include accrual certificates (also known as Z-Bonds), which only accrue interest at a specified rate until all other certificates having an earlier final distribution date
have been retired and are converted thereafter to an interest-paying security. Floating rate CMOs are securities whose coupon rate fluctuates according to some formula related to an existing market index or rate. Typical indices would include the
eleventh district cost-of-funds index (COFI), LIBOR, one-year Treasury yields, and ten-year Treasury yields.
Classes of CMOs also include planned amortization classes (PACs) and targeted amortization classes (TACs). PAC bonds generally
require payments of a specified amount of principal on each payment date. The scheduled principal payments for PAC Certificates generally have the highest priority on each payment date after interest due has been paid to all classes entitled to
receive interest currently. Shortfalls, if any, are added to the amount payable on the next payment date. The PAC Certificate payment schedule is taken into account in calculating the final distribution date of each class of PAC. In order to create
PAC tranches, one or more tranches generally must be created that absorb most of the volatility in the underlying mortgage assets. These tranches (often called supports or companion tranches) tend to have market prices and
yields that are more volatile than the PAC classes.
II-37
TACs are similar to PACs in that they require that specified amounts of principal be applied on each payment
date to one or more classes of REMIC Certificates. A PACs payment schedule, however, remains in effect as long as prepayment rates on the underlying mortgages do not exceed certain ranges. In contrast, a TAC provides investors with protection,
to a certain level, against either faster than expected or slower than expected prepayment rates, but not both. TACs thus provide more cash flow stability than a regular sequential paying class, but less than a PAC. TACs also tend to have market
prices and yields that are more volatile than PACs.
Adjustable Rate Mortgage Securities.
Adjustable rate mortgage securities (ARMs) are pass-through securities collateralized by mortgages
with adjustable rather than fixed rates. ARMs eligible for inclusion in a mortgage pool generally provide for a fixed initial mortgage interest rate for a set number of scheduled monthly payments. After that schedule of payments has been completed,
the interest rates are subject to periodic adjustment based on changes to a designated benchmark index.
ARMs contain maximum and minimum rates beyond which the mortgage interest rate may not vary over the lifetime of the security. In addition, certain ARMs provide for additional limitations on the maximum
amount by which the mortgage interest rate may adjust for any single adjustment period. In the event that market rates of interest rise more rapidly to levels above that of the ARMs maximum rate, the ARMs coupon may represent a below
market rate of interest. In these circumstances, the market value of the ARM security will likely have fallen.
Certain ARMs contain limitations on changes in the required monthly payment. In the event that a monthly payment is not sufficient to pay the interest accruing on an ARM, any such excess interest is added
to the principal balance of the mortgage loan, which is repaid through future monthly payments. If the monthly payment for such an instrument exceeds the sum of the interest accrued at the applicable mortgage interest rate and the principal payment
required at such point to amortize the outstanding principal balance over the remaining term of the loan, the excess is then used to reduce the outstanding principal balance of the ARM.
CMO Residuals.
CMO residuals are derivative mortgage securities issued by agencies or instrumentalities of the U.S.
government or by private originators of, or investors in, mortgage loans, including savings and loan associations, homebuilders, mortgage banks, commercial banks, investment banks, and special purpose entities of the foregoing. The cash flow
generated by the mortgage assets underlying a series of CMOs is applied first to make required payments of principal and interest on the CMOs and second to pay the related administrative expenses of the issuer. The residual in a CMO structure
generally represents the interest in any excess cash flow remaining after making the foregoing payments. Each payment of such excess cash flow to a holder of the related CMO residual represents income and/or a return of capital. The amount of
residual cash flow resulting from a CMO will depend on, among other things, the characteristics of the mortgage assets, the coupon rate of each class of CMO, prevailing interest rates, the amount of administrative expenses and the prepayment
experience on the mortgage assets. In part, the yield to maturity on the CMO residuals is extremely sensitive to prepayments on the related underlying mortgage assets, in the same manner as an interest-only (IO) class of stripped
mortgage-related securities. In addition, if a series of a CMO includes a class that bears interest at an adjustable rate, the yield to maturity on the related CMO residual will also be extremely sensitive to changes in the level of the index upon
which interest rate adjustments are based. In certain circumstances, a Fund may fail to recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors through one or more investment banking firms acting as brokers or dealers. CMO
residuals may not have the liquidity of other more established securities trading in other markets. Transactions in CMO residuals are generally completed only after careful review of the characteristics of the securities in question. In addition,
CMO residuals may or, pursuant to an exemption therefrom, may not have been registered under the Securities Act. Residual interests generally are junior to, and may be significantly more volatile than, regular CMO and REMIC interests.
Stripped Mortgage-Backed Securities.
A Fund may invest in
stripped mortgage-backed securities (SMBSs) issued by agencies or instrumentalities of the United States. SMBSs are derivative multi-class mortgage-backed securities. SMBS arrangements commonly involve two classes of securities that
receive different proportions of the interest and principal distributions on a pool of mortgage assets. A common variety of SMBS is where one class (the principal only or PO class) receives some of the interest and most of the principal from the
underlying assets, while the other class (the interest only or IO class) receives most of the interest and the remainder of the principal. In the most extreme case, the IO class receives all of the interest, while the PO class receives all of the
principal. While a Fund may purchase securities of a PO class, a Fund is more likely to purchase the securities of an IO class. The yield to maturity of an IO class is extremely sensitive to the rate of principal payments (including prepayments) on
the related underlying assets, and a rapid rate of principal payments in excess of that considered in pricing the securities
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will have a material adverse effect on an IO securitys yield to maturity. If the underlying mortgage assets experience greater than anticipated payments of principal, a Fund may fail to
recoup fully its initial investment in IOs. In addition, there are certain types of IOs that represent the interest portion of a particular class as opposed to the interest portion of the entire pool. The sensitivity of this type of IO to interest
rate fluctuations may be increased because of the characteristics of the principal portion to which they relate. As a result of the above factors, a Fund generally will purchase IOs only as a component of so called synthetic securities.
This means that purchases of IOs will be matched with certain purchases of other securities, such as POs, inverse floating rate CMOs or fixed rate securities; as interest rates fall, presenting a greater risk of unanticipated prepayments of
principal, the negative effect on a Fund because of its holdings of IOs should be diminished somewhat because of the increased yield on the inverse floating rate CMOs or the increased appreciation on the POs or fixed rate securities.
Tiered Index Bonds.
Tiered index bonds are relatively new forms of
mortgage-related securities. The interest rate on a tiered index bond is tied to a specified index or market rate. So long as this index or market rate is below a predetermined strike rate, the interest rate on the tiered index bond
remains fixed. If, however, the specified index or market rate rises above the strike rate, the interest rate of the tiered index bond will decrease. Thus, under these circumstances, the interest rate on a tiered index bond, like an
inverse floater, will move in the opposite direction of prevailing interest rates, with the result that the price of the tiered index bond may be considerably more volatile than that of a fixed-rate bond.
Municipal Investments
The Municipal Funds may invest in obligations issued by or on behalf of
states, territories and possessions of the United States and the District of Columbia and their political subdivisions, agencies and instrumentalities, the payments from which, in the opinion of bond counsel to the issuer, are excludable from gross
income for Federal income tax purposes (Municipal Bonds). Certain of the Municipal Funds may also invest in Municipal Bonds that pay interest excludable from gross income for purposes of state and local income taxes of the designated
state and/or allow the value of a Funds shares to be exempt from state and local taxes of the designated state (State Municipal Bonds). The Municipal Funds may also invest in securities not issued by or on behalf of a state or
territory or by an agency or instrumentality thereof, if the Manager believes such securities to pay interest excludable from gross income for purposes of Federal income tax and state and local income taxes of the designated state and/or state and
local personal property taxes of the designated state (Non-Municipal Tax-Exempt Securities). Non-Municipal Tax-Exempt Securities could include trust certificates or other instruments evidencing interest in one or more long term municipal
securities. Non-Municipal Tax-Exempt Securities also may include securities issued by other investment companies that invest in municipal bonds, to the extent such investments are permitted by applicable law. Non-Municipal Tax-Exempt Securities that
pay interest excludable from gross income for Federal income tax purposes will be considered Municipal Bonds for purposes of a Municipal Funds investment objective and policies. Non-Municipal Tax-Exempt Securities that pay interest
excludable from gross income for purposes of Federal income tax and state and local income taxes of a designated state and/or allow the value of a Funds shares to be exempt from state and local personal property taxes of that state will be
considered State Municipal Bonds for purposes of the investment objective and policies of each of California Municipal Bond Fund, New Jersey Municipal Bond Fund, New York Municipal Bond Fund and Pennsylvania Municipal Bond Fund.
Risk Factors and Special Considerations Relating to Municipal
Bonds.
The risks and special considerations involved in investment in Municipal Bonds vary with the types of instruments being acquired. Investments in Non-Municipal Tax-Exempt Securities may present similar risks, depending on the particular
product. Certain instruments in which a Fund may invest may be characterized as derivatives.
The value of Municipal Bonds generally may be affected by uncertainties in the municipal markets as a result of legislation or litigation, including legislation or litigation that changes the taxation of
Municipal Bonds or the rights of Municipal Bond holders in the event of a bankruptcy. Municipal bankruptcies are rare and certain provisions of the U.S. Bankruptcy Code governing such bankruptcies are unclear. Further, the application of state law
to Municipal Bond issuers could produce varying results among the states or among Municipal Bond issuers within a state. These uncertainties could have a significant impact on the prices of the Municipal Bonds in which a Fund invests.
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Description of Municipal Bonds
Municipal Bonds include debt obligations issued to obtain funds for various public purposes, including the construction of a
wide range of public facilities, refunding of outstanding obligations and obtaining funds for general operating expenses and loans to other public institutions and facilities. In addition, certain types of bonds are issued by or on behalf of public
authorities to finance various privately owned or operated facilities, including certain facilities for the local furnishing of electric energy or gas, sewage facilities, solid waste disposal facilities and other specialized facilities. Such
obligations are included within the term Municipal Bonds if the interest paid thereon is excluded from gross income for Federal income tax purposes and any applicable state and local taxes. Other types of private activity bonds, the proceeds of
which are used for the construction, equipment or improvement of privately operated industrial or commercial facilities, may constitute Municipal Bonds, although the current Federal tax laws place substantial limitations on the size of such issues.
The interest on Municipal Bonds may bear a fixed rate or be payable at a variable or floating rate. The two principal classifications of Municipal Bonds are general obligation and revenue or special obligation
bonds, which latter category includes private activity bonds (PABs) (or industrial development bonds under pre-1986 law).
General Obligation Bonds.
General obligation bonds are secured by the issuers pledge of its full faith, credit and taxing power for the
payment of principal and interest. The taxing power of any governmental entity may be limited, however, by provisions of its state constitution or laws, and an entitys creditworthiness will depend on many factors, including potential erosion
of its tax base due to population declines, natural disasters, declines in the states industrial base or inability to attract new industries, economic limits on the ability to tax without eroding the tax base, state legislative proposals or
voter initiatives to limit ad valorem real property taxes and the extent to which the entity relies on Federal or state aid, access to capital markets or other factors beyond the states or entitys control. Accordingly, the capacity of
the issuer of a general obligation bond as to the timely payment of interest and the repayment of principal when due is affected by the issuers maintenance of its tax base.
Revenue Bonds.
Revenue bonds are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise tax or other specific revenue source such as payments from the user of the facility being financed; accordingly, the timely payment of
interest and the repayment of principal in accordance with the terms of the revenue or special obligation bond is a function of the economic viability of such facility or such revenue source.
Revenue bonds issued by state or local agencies to finance the development of low-income, multi-family housing involve special
risks in addition to those associated with municipal bonds generally, including that the underlying properties may not generate sufficient income to pay expenses and interest costs. Such bonds are generally non-recourse against the property owner,
may be junior to the rights of others with an interest in the properties, may pay interest that changes based in part on the financial performance of the property, may be prepayable without penalty and may be used to finance the construction of
housing developments which, until completed and rented, do not generate income to pay interest. Increases in interest rates payable on senior obligations may make it more difficult for issuers to meet payment obligations on subordinated bonds.
PABs.
PABs are, in most cases, tax-exempt securities
issued by states, municipalities or public authorities to provide funds, usually through a loan or lease arrangement, to a private entity for the purpose of financing construction or improvement of a facility to be used by the entity. Such bonds are
secured primarily by revenues derived from loan repayments or lease payments due from the entity, which may or may not be guaranteed by a parent company or otherwise secured. PABs generally are not secured by a pledge of the taxing power of the
issuer of such bonds. Therefore, an investor should understand that repayment of such bonds generally depends on the revenues of a private entity and be aware of the risks that such an investment may entail. The continued ability of an entity to
generate sufficient revenues for the payment of principal and interest on such bonds will be affected by many factors including the size of the entity, its capital structure, demand for its products or services, competition, general economic
conditions, government regulation and the entitys dependence on revenues for the operation of the particular facility being financed.
Moral Obligation Bonds.
Moral obligation bonds are normally issued by special purpose public authorities. If an issuer of moral
obligation bonds is unable to meet its obligations, the repayment of such bonds becomes a moral commitment but not a legal obligation of the state or municipality that created the special purpose public authority that issued the bonds.
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Municipal Notes.
Municipal notes are shorter term municipal debt obligations. They may provide
interim financing in anticipation of tax collection, bond sales or revenue receipts. If there is a shortfall in the anticipated proceeds, repayment on the note may be delayed or the note may not be fully repaid, and a Fund may lose money.
Municipal Commercial Paper.
Municipal commercial paper is
generally unsecured and issued to meet short-term financing needs. The lack of security presents some risk of loss to a Fund since, in the event of an issuers bankruptcy, unsecured creditors are repaid only after the secured creditors out of
the assets, if any, that remain.
Municipal Lease Obligations.
Also included within the general category of Municipal Bonds are certificates of participation (COPs) issued by government authorities or entities to finance the acquisition or construction of equipment, land and/or facilities. The
COPs represent participations in a lease, an installment purchase contract or a conditional sales contract (hereinafter collectively called lease obligations) relating to such equipment, land or facilities. Municipal leases, like other
municipal debt obligations, are subject to the risk of non-payment. Although lease obligations do not constitute general obligations of the issuer for which the issuers unlimited taxing power is pledged, a lease obligation is frequently backed
by the issuers covenant to budget for, appropriate and make the payments due under the lease obligation. However, certain lease obligations contain non-appropriation clauses, which provide that the issuer has no obligation to make
lease or installment purchase payments in future years unless money is appropriated for such purpose on a yearly basis. Although non-appropriation lease obligations are secured by the leased property, disposition of the property in the
event of foreclosure might prove difficult. These securities represent a type of financing that has not yet developed the depth of marketability associated with more conventional securities. Certain investments in lease obligations may be illiquid.
A Fund may not invest in illiquid lease obligations if such investments, together with all other illiquid investments, would exceed 15% of the Funds net assets. A Fund may, however, invest without regard to such limitation in lease obligations
that the Manager, pursuant to guidelines that have been adopted by the Directors and subject to the supervision of the Directors, determines to be liquid. The Manager will deem lease obligations to be liquid if they are publicly offered and have
received an investment grade rating of Baa or better by Moodys, or BBB or better by S&P or Fitch Ratings (Fitch). Unrated lease obligations, or those rated below investment grade, will be considered liquid if the obligations
come to the market through an underwritten public offering and at least two dealers are willing to give competitive bids. In reference to the latter, the Manager must, among other things, also review the creditworthiness of the entity obligated to
make payment under the lease obligation and make certain specified determinations based on such factors as the existence of a rating or credit enhancement such as insurance the frequency of trades or quotes for the obligation and the
willingness of dealers to make a market in the obligation.
The
ability of issuers of municipal leases to make timely lease payments may be adversely impacted in general economic downturns and as relative governmental cost burdens are allocated and reallocated among federal, state and local governmental units.
Such non-payment would result in a reduction of income to a Fund, and could result in a reduction in the value of the municipal lease experiencing non-payment and a potential decrease in the net asset value of a Fund. Issuers of municipal securities
might seek protection under the bankruptcy laws. In the event of bankruptcy of such an issuer, a Fund could experience delays and limitations with respect to the collection of principal and interest on such municipal leases and a Fund may not, in
all circumstances, be able to collect all principal and interest to which it is entitled. To enforce its rights in the event of a default in lease payments, the Fund might take possession of and manage the assets securing the issuers
obligations on such securities, which may increase a Funds operating expenses and adversely affect the net asset value of a Fund. When the lease contains a non-appropriation clause, however, the failure to pay would not be a default and a Fund
would not have the right to take possession of the assets. Any income derived from a Funds ownership or operation of such assets may not be tax-exempt. In addition, a Funds intention to qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the Code), may limit the extent to which a Fund may exercise its rights by taking possession of such assets, because as a regulated investment company a Fund is subject
to certain limitations on its investments and on the nature of its income.
Tender Option Bonds.
Certain Funds may, invest in residual interest municipal tender option bonds, which are derivative interests in Municipal Bonds. The residual interest municipal tender option
bonds in which the Funds will invest pay interest or income that, in the opinion of counsel to the issuer, is exempt from regular Federal income tax. BlackRock will not conduct its own analysis of the tax status of the interest or income paid by
residual interest municipal tender option bonds held by the Funds, but will rely on the opinion of counsel to the issuer. Although volatile, these residual interests typically offer the potential for yields exceeding the yields available on fixed
rate
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Municipal Bonds with comparable credit quality, coupon, call provisions and maturity. The Funds may invest in residual interests for the purpose of using economic leverage.
Residual interest municipal tender option bonds represent beneficial
interests in a special purpose trust formed by a third party sponsor for the purpose of holding Municipal Bonds purchased from a Fund or from another third party. The special purpose trust typically sells two classes of beneficial interests:
short-term floating rate interests (sometimes known as put bonds or puttable securities), which are sold to third party investors, and residual interests, which a Fund would purchase. The short-term floating rate interests
have first priority on the cash flow from the Municipal Bonds. A Fund is paid the residual cash flow from the special purpose trust. If the Fund is the initial seller of the Municipal Bonds to the special purpose trust, it receives the proceeds from
the sale of the floating rate interests in the special purpose trust, less certain transaction costs. These proceeds generally would be used by the Fund to purchase additional Municipal Bonds or other permitted investments. If a Fund ever purchases
all or a portion of the short-term floating rate securities sold by the special purpose trust, it may surrender those short-term floating rate securities together with a proportionate amount of residual interests to the trustee of the special
purpose trust in exchange for a proportionate amount of the Municipal Bonds owned by the special purpose trust. In addition, all voting rights and decisions to be made with respect to any other rights relating to the Municipal Bonds held in the
special purpose trust are passed through to the Fund, as the holder of the residual interests.
A Fund may invest in highly leveraged residual interest municipal tender option bonds. A residual interest municipal tender option bond generally is considered highly leveraged if the principal amount of
the short-term floating rate interests issued by the related tender option bond trust exceeds 50% of the principal amount of the Municipal Bonds owned by the tender option bond trust.
The sponsor of a highly leveraged tender option bond trust generally will retain a liquidity provider that stands ready to
purchase the short-term floating rate interests at their original purchase price upon the occurrence of certain events, such as on a certain date prior to the scheduled expiration date of the transaction, upon a certain percentage of the floating
rate interests failing to be remarketed in a timely fashion, upon the bonds owned by the tender option bond trust being downgraded (but not below investment grade or upon the occurrence of a bankruptcy event with respect to the issuer of the
Municipal Bonds) or upon the occurrence of certain regulatory or tax events. However, the liquidity provider is not required to purchase the floating rate interests upon the occurrence of certain other events, including upon the downgrading of the
Municipal Bonds owned by the tender option bond trust below investment grade or certain events that indicate the issuer of the bonds may be entering bankruptcy. The general effect of these provisions is to pass to the holders of the floating rate
interests the most severe credit risks associated with the Municipal Bonds owned by the tender option bond trust and to leave with the liquidity provider the interest rate risk and certain other risks associated with the Municipal Bonds.
If the liquidity provider acquires the floating rate interests upon the
occurrence of an event described above, the liquidity provider generally will be entitled to an in-kind distribution of the Municipal Bonds owned by the tender option bond trust or to cause the tender option bond trust to sell the bonds and
distribute the proceeds to the liquidity provider. The liquidity provider generally will enter into an agreement with a Fund that will require the Fund to make a payment to the liquidity provider in an amount equal to any loss suffered by the
liquidity provider in connection with the foregoing transactions. The net economic effect of this agreement and these transactions is as if the Fund had entered into a special type of reverse repurchase agreement with the sponsor of the tender
option bond trust, pursuant to which the Fund is required to repurchase the Municipal Bonds it sells to the sponsor only upon the occurrence of certain events (such as a failed remarketing of the floating rate interests most likely due to an
adverse change in interest rates) but not others (such as a default of the Municipal Bonds). In order to cover any potential obligation of the Fund to the liquidity provider pursuant to this agreement, the Fund may designate on its books and records
liquid instruments having a value not less than the amount, if any, by which the original purchase price of the floating rate interests issued by the related tender option bond trust exceeds the market value of the Municipal Bonds owned by the
tender option bond trust.
A Fund may also invest in the
short-term floating rate interest tender option bonds. The remarketing agent for the special purpose trust sets a floating or variable rate on typically a weekly basis. These securities grant the Funds the right to require the issuer or a specified
third party acting as agent for the issuer (e.g., a tender agent) to purchase the bonds, usually at par, at a certain time or times prior to maturity or upon the occurrence of specified events or conditions. The put option or tender option right is
typically available to the investor on a periodic (e.g., daily,
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weekly or monthly) basis. Typically, the put option is exercisable on dates on which the floating or variable rate changes.
Investments in residual interest and floating rate interest tender option
bonds may be considered derivatives and are subject to the risk thereof, including counterparty risk, interest rate risk and volatility.
Yields.
Yields on Municipal Bonds are dependent on a variety of factors, including the general condition of the money market and of the municipal
bond market, the size of a particular offering, the financial condition of the issuer, the maturity of the obligation and the rating of the issue. The ability of a Fund to achieve its investment objective is also dependent on the continuing ability
of the issuers of the securities in which the Fund invests to meet their obligations for the payment of interest and principal when due. There are variations in the risks involved in holding Municipal Bonds, both within a particular classification
and between classifications, depending on numerous factors. Furthermore, the rights of owners of Municipal Bonds and the obligations of the issuer of such Municipal Bonds may be subject to applicable bankruptcy, insolvency and similar laws and court
decisions affecting the rights of creditors generally and to general equitable principles, which may limit the enforcement of certain remedies.
Variable Rate Demand Obligations (VRDOs) and Participating VRDOs.
VRDOs are tax-exempt obligations that contain a floating or variable
interest rate adjustment formula and a right of demand on the part of the holder thereof to receive payment of the unpaid principal balance plus accrued interest upon a short notice period not to exceed seven days. Participating VRDOs provide a Fund
with a specified undivided interest (up to 100%) of the underlying obligation and the right to demand payment of the unpaid principal balance plus accrued interest on the Participating VRDOs from the financial institution that issued the
participation interest upon a specified number of days notice, not to exceed seven days. In addition, the Participating VRDO is backed by an irrevocable letter of credit or guaranty of the financial institution. A Fund would have an undivided
interest in the underlying obligation and thus participate on the same basis as the financial institution in such obligation except that the financial institution typically retains fees out of the interest paid on the obligation for servicing the
obligation, providing the letter of credit and issuing the repurchase commitment.
There is the possibility that because of default or insolvency the demand feature of VRDOs and Participating VRDOs may not be honored. The interest rates are adjustable at intervals (ranging from daily to
up to one year) to some prevailing market rate for similar investments, such adjustment formula being calculated to maintain the market rate of the VRDOs at approximately the par value of the VRDOs on the adjustment date. The adjustments typically
are based upon the Public Securities Association Index or some other appropriate interest rate adjustment index. The Funds have been advised by counsel that they should be entitled to treat the income received on Participating VRDOs as interest from
tax-exempt obligations. It is not contemplated that any Fund will invest more than a limited amount of its total assets in Participating VRDOs.
Because of the interest rate adjustment formula on VRDOs (including Participating VRDOs), VRDOs are not comparable to fixed rate securities. During
periods of declining interest rates, a Funds yield on a VRDO will decrease and its shareholders will forego the opportunity for capital appreciation. During periods of rising interest rates, however, a Funds yield on a VRDO will increase
and the Funds shareholders will have a reduced risk of capital depreciation.
VRDOs that contain a right of demand to receive payment of the unpaid principal balance plus accrued interest on a notice period exceeding seven days may be deemed to be illiquid securities. A VRDO with a
demand notice period exceeding seven days will therefore be subject to a Funds restriction on illiquid investments unless, in the judgment of the Directors such VRDO is liquid. The Directors may adopt guidelines and delegate to the Manager the
daily function of determining and monitoring liquidity of such VRDOs. The Directors, however, will retain sufficient oversight and will be ultimately responsible for such determinations.
The VRDOs and Participating VRDOs in which a Fund may invest will be in the following rating categories at the time of
purchase: MIG-1/ VMIG-1 through MIG-3/VMIG-3 for notes and VRDOs and Prime-1 through Prime-3 for commercial paper (as determined by Moodys), SP-1 through SP-2 for notes and A-1 through A-3 for VRDOs and commercial paper (as determined by
S&P), or F-1 through F-3 for notes, VRDOs and commercial paper (as determined by Fitch).
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Transactions in Financial Futures Contracts.
The Municipal Funds and certain other funds deal in
financial futures contracts based on a long-term municipal bond index developed by the Chicago Board of Trade (CBT) and The Bond Buyer (the Municipal Bond Index). The Municipal Bond Index is comprised of 40 tax-exempt
municipal revenue and general obligation bonds. Each bond included in the Municipal Bond Index must be rated A or higher by Moodys or S&P and must have a remaining maturity of 19 years or more. Twice a month new issues satisfying the
eligibility requirements are added to, and an equal number of old issues are deleted from, the Municipal Bond Index. The value of the Municipal Bond Index is computed daily according to a formula based on the price of each bond in the Municipal Bond
Index, as evaluated by six dealer-to-dealer brokers.
The
Municipal Bond Index futures contract is traded only on the CBT. Like other contract markets, the CBT assures performance under futures contracts through a clearing corporation, a nonprofit organization managed by the exchange membership that is
also responsible for handling daily accounting of deposits or withdrawals of margin.
The particular municipal bonds comprising the index underlying the Municipal Bond Index financial futures contract may vary from the bonds held by a Municipal Fund. As a result, a Municipal Funds
ability to hedge effectively all or a portion of the value of its Municipal Bonds through the use of such financial futures contracts will depend in part on the degree to which price movements in the index underlying the financial futures contract
correlate with the price movements of the Municipal Bonds held by the Fund. The correlation may be affected by disparities in the average maturity, ratings, geographical mix or structure of a Municipal Funds investments as compared to those
comprising the Municipal Bond Index and general economic or political factors. In addition, the correlation between movements in the value of the Municipal Bond Index may be subject to change over time as additions to and deletions from the
Municipal Bond Index alter its structure. The correlation between futures contracts on U.S. Government securities and the Municipal Bonds held by a Municipal Fund may be adversely affected by similar factors and the risk of imperfect correlation
between movements in the prices of such futures contracts and the prices of Municipal Bonds held by a Municipal Fund may be greater. Municipal Bond Index futures contracts were approved for trading in 1986. Trading in such futures contracts may tend
to be less liquid than trading in other futures contracts. The trading of futures contracts also is subject to certain market risks, such as inadequate trading activity, which could at times make it difficult or impossible to liquidate existing
positions.
Call Rights.
A Fund may purchase a Municipal
Bond issuers right to call all or a portion of such Municipal Bond for mandatory tender for purchase (a Call Right). A holder of a Call Right may exercise such right to require a mandatory tender for the purchase of related
Municipal Bonds, subject to certain conditions. A Call Right that is not exercised prior to maturity of the related Municipal Bond will expire without value. The economic effect of holding both the Call Right and the related Municipal Bond is
identical to holding a Municipal Bond as a non-callable security. Certain investments in such obligations may be illiquid. A Fund may not invest in such illiquid obligations if such investments, together with other illiquid investments, would exceed
15% of a Funds net assets.
Municipal Interest Rate Swap
Transactions.
In order to hedge the value of a Fund against interest rate fluctuations or to enhance a Funds income, a Fund may enter into interest rate swap transactions such as Municipal Market Data AAA Cash Curve swaps (MMD
Swaps) or Bond Market Association Municipal Swap Index swaps (BMA Swaps). To the extent that a Fund enters into these transactions, the Fund expects to do so primarily to preserve a return or spread on a particular investment or
portion of its portfolio or to protect against any increase in the price of securities the Fund anticipates purchasing at a later date. A Fund intends to use these transactions primarily as a hedge rather than as a speculative investment. However, a
Fund also may invest in MMD Swaps and BMA Swaps to enhance income or gain or to increase the Funds yield, for example, during periods of steep interest rate yield curves (
i.e.
, wide differences between short term and long term interest
rates).
A Fund may purchase and sell BMA Swaps in the BMA swap
market. In a BMA Swap, a Fund exchanges with another party their respective commitments to pay or receive interest (
e.g.
, an exchange of fixed rate payments for floating rate payments linked to the Bond Market Association Municipal Swap
Index). Because the underlying index is a tax-exempt index, BMA Swaps may reduce cross-market risks incurred by a Fund and increase a Funds ability to hedge effectively. BMA Swaps are typically quoted for the entire yield curve, beginning with
a seven day floating rate index out to 30 years. The duration of a BMA Swap is approximately equal to the duration of a fixed-rate Municipal Bond with the same attributes as the swap (
e.g.
, coupon, maturity, call feature).
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A Fund may also purchase and sell MMD Swaps, also known as MMD rate locks. An MMD Swap permits a Fund to
lock in a specified municipal interest rate for a portion of its portfolio to preserve a return on a particular investment or a portion of its portfolio as a duration management technique or to protect against any increase in the price of securities
to be purchased at a later date. By using an MMD Swap, a Fund can create a synthetic long or short position, allowing the Fund to select the most attractive part of the yield curve. An MMD Swap is a contract between a Fund and an MMD Swap provider
pursuant to which the parties agree to make payments to each other on a notional amount, contingent upon whether the Municipal Market Data AAA General Obligation Scale is above or below a specified level on the expiration date of the contract. For
example, if a Fund buys an MMD Swap and the Municipal Market Data AAA General Obligation Scale is below the specified level on the expiration date, the counterparty to the contract will make a payment to the Fund equal to the specified level minus
the actual level, multiplied by the notional amount of the contract. If the Municipal Market Data AAA General Obligation Scale is above the specified level on the expiration date, a Fund will make a payment to the counterparty equal to the actual
level minus the specified level, multiplied by the notional amount of the contract.
In connection with investments in BMA and MMD Swaps, there is a risk that municipal yields will move in the opposite direction than anticipated by a Fund, which would cause the Fund to make payments to
its counterparty in the transaction that could adversely affect the Funds performance. A Fund has no obligation to enter into BMA or MMD Swaps and may not do so. The net amount of the excess, if any, of a Funds obligations over its
entitlements with respect to each interest rate swap will be accrued on a daily basis and an amount of liquid assets that have an aggregate net asset value at least equal to the accrued excess will be maintained in a segregated account by the Fund.
Insured Municipal Bonds.
Bonds purchased by a Fund may be
covered by insurance that guarantees that interest payments on the bond will be made on time and the principal will be repaid when the bond matures. Either the issuer of the bond or the Fund purchases the insurance. Insurance is expected to protect
the Fund against losses caused by a bond issuers failure to make interest or principal payments. However, insurance does not protect the Fund or its shareholders against losses caused by declines in a bonds market value. Also, the Fund
cannot be certain that any insurance company does not make these payments. In addition, if the Fund purchases the insurance, it may pay the premiums, which will reduce the Funds yield. The Fund seeks to use only insurance companies with claims
paying ability, financial strength, or equivalent ratings of at least investment grade. However, if insurance from insurers with these ratings is not available, the Fund may use insurance companies with lower ratings or stop purchasing insurance or
insured bonds. If a bonds insurer fails to fulfill its obligations or loses its credit rating, the value of the bond could drop.
Build America Bonds.
If a Fund holds Build America Bonds, the Fund may be eligible to receive a Federal income tax credit; however, the issuer of a
Build America Bond may instead elect to receive a cash payment directly from the federal government in lieu of holders such as the fund receiving a tax credit. The interest on Build America Bonds is taxable for Federal income tax purposes. If the
Fund does receive tax credits from Build America Bonds or other tax credit bonds on one or more specified dates during the funds taxable year, and the Fund satisfies the minimum distribution requirement, the Fund may elect for U.S. Federal
income tax purposes to pass through to shareholders tax credits otherwise allowable to the Fund for that year with respect to such bonds. A tax credit bond is defined in the Code as a qualified tax credit bond (which includes a qualified
forestry conservation bond, a new clean renewable energy bond, a qualified energy conservation bond, or a qualified zone academy bond, each of which must meet certain requirements specified in the Code), a Build America Bond (which
includes certain qualified bonds issued before January 1, 2011) or certain other specified bonds. If the Fund were to so elect, a shareholder would be required to include in income and would be entitled to claim as a tax credit an amount equal
to a proportionate share of such credits, and such amount would be subject to withholding provisions of the Code. Certain limitations may apply on the extent to which the credit may be claimed.
Participation Notes.
A Fund may buy participation notes from a
bank or broker-dealer (issuer) that entitle the Fund to a return measured by the change in value of an identified underlying security or basket of securities (collectively, the underlying security). Participation notes are
typically used when a direct investment in the underlying security is restricted due to country-specific regulations.
The Fund is subject to counterparty risk associated with each issuer. Investment in a participation note is not the same as investment in the constituent
shares of the company. A participation note represents only an obligation of the issuer to provide the Fund the economic performance equivalent to holding shares of an underlying security. A
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participation note does not provide any beneficial or equitable entitlement or interest in the relevant underlying security. In other words, shares of the underlying security are not in any way
owned by the Fund. However each participation note synthetically replicates the economic benefit of holding shares in the underlying security. Because a participation note is an obligation of the issuer, rather than a direct investment in shares of
the underlying security, the Fund may suffer losses potentially equal to the full value of the participation note if the issuer fails to perform its obligations. A Fund attempts to mitigate that risk by purchasing only from issuers which BlackRock
deems to be creditworthy.
The counterparty may, but is not
required to, purchase the shares of the underlying security to hedge its obligation. The fund may, but is not required to, purchase credit protection against the default of the issuer. When the participation note expires or a Fund exercises the
participation note and closes its position, that Fund receives a payment that is based upon the then-current value of the underlying security converted into U.S. dollars (less transaction costs). The price, performance and liquidity of the
participation note are all linked directly to the underlying security. A Funds ability to redeem or exercise a participation note generally is dependent on the liquidity in the local trading market for the security underlying the participation
note.
Pay-in-kind Bonds.
Certain Funds may invest
in Pay-in-kind, or PIK, bonds. PIK bonds are bonds which pay interest through the issuance of additional debt or equity securities. Similar to zero coupon obligations, pay-in-kind bonds also carry additional risk as holders of these types of
securities realize no cash until the cash payment date unless a portion of such securities is sold and, if the issuer defaults, a Fund may obtain no return at all on its investment. The market price of pay-in-kind bonds is affected by interest rate
changes to a greater extent, and therefore tends to be more volatile, than that of securities which pay interest in cash. Additionally, current federal tax law requires the holder of certain pay-in-kind bonds to accrue income with respect to these
securities prior to the receipt of cash payments. To maintain its qualification as a regulated investment company and avoid liability for federal income and excise taxes, each Fund may be required to distribute income accrued with respect to these
securities and may have to dispose of portfolio securities under disadvantageous circumstances in order to generate cash to satisfy these distribution requirements.
Portfolio Turnover Rates
.
A Funds
annual portfolio turnover rate will not be a factor preventing a sale or purchase when the Manager believes investment considerations warrant such sale or purchase. Portfolio turnover may vary greatly from year to year as well as within a particular
year. High portfolio turnover (
i.e.
, 100% or more) may result in increased transaction costs to a Fund, including brokerage commissions, dealer mark-ups and other transaction costs on the sale of the securities and reinvestment in other
securities. The sale of a Funds securities may result in the recognition of capital gain or loss. Given the frequency of sales, such gain or loss will likely be short-term capital gain or loss. These effects of higher than normal portfolio
turnover may adversely affect a Funds performance.
Preferred Stock.
Certain of the Funds may invest in preferred stocks. Preferred stock has a preference over common stock in liquidation (and
generally dividends as well) but is subordinated to the liabilities of the issuer in all respects. As a general rule, the market value of preferred stock with a fixed dividend rate and no conversion element varies inversely with interest rates and
perceived credit risk, while the market price of convertible preferred stock generally also reflects some element of conversion value. Because preferred stock is junior to debt securities and other obligations of the issuer, deterioration in the
credit quality of the issuer will cause greater changes in the value of a preferred stock than in a more senior debt security with similar stated yield characteristics. Unlike interest payments on debt securities, preferred stock dividends are
payable only if declared by the issuers board of directors. Preferred stock also may be subject to optional or mandatory redemption provisions.
Real Estate Related Securities.
Although no Fund may invest directly in real estate, certain Funds may invest in equity securities of
issuers that are principally engaged in the real estate industry. Such investments are subject to certain risks associated with the ownership of real estate and with the real estate industry in general. These risks include, among others: possible
declines in the value of real estate; risks related to general and local economic conditions; possible lack of availability of mortgage funds or other limitations on access to capital; overbuilding; risks associated with leverage; market
illiquidity; extended vacancies of properties; increase in competition, property taxes, capital expenditures and operating expenses; changes in zoning laws or other governmental regulation; costs resulting from the clean-up of, and liability to
third parties for damages resulting from, environmental problems; tenant bankruptcies or other credit problems; casualty or condemnation losses; uninsured damages from floods,
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earthquakes or other natural disasters; limitations on and variations in rents, including decreases in market rates for rents; investment in developments that are not completed or that are
subject to delays in completion; and changes in interest rates. To the extent that assets underlying a Funds investments are concentrated geographically, by property type or in certain other respects, the Fund may be subject to certain of the
foregoing risks to a greater extent. Investments by a Fund in securities of companies providing mortgage servicing will be subject to the risks associated with refinancings and their impact on servicing rights.
In addition, if a Fund receives rental income or income from the disposition
of real property acquired as a result of a default on securities the Fund owns, the receipt of such income may adversely affect the Funds ability to retain its tax status as a regulated investment company because of certain income source
requirements applicable to regulated investment companies under the Code.
Real Estate Investment Trusts (REITs).
In pursuing its investment strategy, a Fund may invest in shares of REITs. REITs possess certain risks which differ from an investment in
common stocks. REITs are financial vehicles that pool investors capital to purchase or finance real estate. REITs may concentrate their investments in specific geographic areas or in specific property types, i.e., hotels, shopping malls,
residential complexes and office buildings.
REITs are subject to
management fees and other expenses, and so a Fund that invests in REITs will bear its proportionate share of the costs of the REITs operations. There are three general categories of REITs: Equity REITs, Mortgage REITs and Hybrid REITs. Equity
REITs invest primarily in direct fee ownership or leasehold ownership of real property; they derive most of their income from rents. Mortgage REITs invest mostly in mortgages on real estate, which may secure construction, development or long-term
loans; the main source of their income is mortgage interest payments. Hybrid REITs hold both ownership and mortgage interests in real estate.
Investing in REITs involves certain unique risks in addition to those risks associated with investing in the real estate industry in general. The market
value of REIT shares and the ability of the REITs to distribute income may be adversely affected by several factors, including rising interest rates, changes in the national, state and local economic climate and real estate conditions, perceptions
of prospective tenants of the safety, convenience and attractiveness of the properties, the ability of the owners to provide adequate management, maintenance and insurance, the cost of complying with the Americans with Disabilities Act, increased
competition from new properties, the impact of present or future environmental legislation and compliance with environmental laws, failing to maintain their exemptions from registration under the Investment Company Act, changes in real estate taxes
and other operating expenses, adverse changes in governmental rules and fiscal policies, adverse changes in zoning laws and other factors beyond the control of the issuers of the REITs. In addition, distributions received by a Fund from REITs may
consist of dividends, capital gains and/or return of capital. As REITs generally pay a higher rate of dividends (on a pre-tax basis) than operating companies, to the extent application of the Funds investment strategy results in the Fund
investing in REIT shares, the percentage of the Funds dividend income received from REIT shares will likely exceed the percentage of the Funds portfolio which is comprised of REIT shares. Generally, dividends received by a Fund from REIT
shares and distributed to the Funds shareholders will not constitute qualified dividend income eligible for the reduced tax rate applicable to qualified dividend income; therefore, the tax rate applicable to that portion of the
dividend income attributable to REIT shares held by the Fund that shareholders of the Fund receive will be taxed at a higher rate than dividends eligible for the reduced tax rate applicable to qualified dividend income.
REITs (especially mortgage REITs) are also subject to interest rate risk.
Rising interest rates may cause REIT investors to demand a higher annual yield, which may, in turn, cause a decline in the market price of the equity securities issued by a REIT. Rising interest rates also generally increase the costs of obtaining
financing, which could cause the value of a Funds REIT investments to decline. During periods when interest rates are declining, mortgages are often refinanced. Refinancing may reduce the yield on investments in mortgage REITs. In addition,
since REITs depend on payment under their mortgage loans and leases to generate cash to make distributions to their shareholders, investments in REITs may be adversely affected by defaults on such mortgage loans or leases.
Investing in certain REITs, which often have small market capitalizations,
may also involve the same risks as investing in other small capitalization companies. REITs may have limited financial resources and their securities may trade less frequently and in limited volume and may be subject to more abrupt or erratic price
movements than
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larger company securities. Historically, small capitalization stocks, such as REITs, have been more volatile in price than the larger capitalization stocks such as those included in the S&P
500 Index. The management of a REIT may be subject to conflicts of interest with respect to the operation of the business of the REIT and may be involved in real estate activities competitive with the REIT. REITs may own properties through joint
ventures or in other circumstances in which the REIT may not have control over its investments. REITs may incur significant amounts of leverage.
Repurchase Agreements and Purchase and Sale Contracts.
Under repurchase agreements and purchase and sale contracts, the other party agrees,
upon entering into the contract with a Fund, to repurchase a security sold to the Fund at a mutually agreed-upon time and price in a specified currency, thereby determining the yield during the term of the agreement.
A purchase and sale contract differs from a repurchase agreement in that the
contract arrangements stipulate that securities are owned by the Fund and the purchaser receives any interest on the security paid during the period. In the case of repurchase agreements, the prices at which the trades are conducted do not reflect
accrued interest on the underlying obligation; whereas, in the case of purchase and sale contracts, the prices take into account accrued interest. A Fund may enter into tri-party repurchase agreements. In tri-party repurchase
agreements, an unaffiliated third party custodian maintains accounts to hold collateral for the Fund and its counterparties and, therefore, the Fund may be subject to the credit risk of those custodians.
Repurchase agreements and purchase and sale contracts result in a fixed rate
of return insulated from market fluctuations during the term of the agreement, although such return may be affected by currency fluctuations. However, in the event of a default under a repurchase agreement or under a purchase and sale contract,
instead of the contractual fixed rate, the rate of return to the Fund would be dependent upon intervening fluctuations of the market values of the securities underlying the contract and the accrued interest on those securities. In such event, the
Fund would have rights against the seller for breach of contract with respect to any losses arising from market fluctuations following the default.
Both types of agreement usually cover short periods, such as less than one week, although they may have longer terms, and may be construed to be
collateralized loans by the purchaser to the seller secured by the securities transferred to the purchaser. In the case of a repurchase agreement, as a purchaser, a Funds Manager or sub-adviser will monitor the creditworthiness of the seller,
and a Fund will require the seller to provide additional collateral if the market value of the securities falls below the repurchase price at any time during the term of the repurchase agreement. The Fund does not have this right to seek additional
collateral as a purchaser in the case of purchase and sale contracts. The Funds Manager or sub-adviser will mark-to-market daily the value of the securities. Securities subject to repurchase agreements and purchase and sale contracts will be
held by the Funds custodian (or sub-custodian) in the Federal Reserve/Treasury book-entry system or by another authorized securities depository.
In the event of default by the seller under a repurchase agreement construed to be a collateralized loan, the underlying securities are not owned by the
Fund but only constitute collateral for the sellers obligation to pay the repurchase price. Therefore, the Fund may suffer time delays and incur costs or possible losses in connection with disposition of the collateral. If the seller becomes
insolvent and subject to liquidation or reorganization under applicable bankruptcy or other laws, a Funds ability to dispose of the underlying securities may be restricted. Finally, it is possible that a Fund may not be able to substantiate
its interest in the underlying securities. To minimize this risk, the securities underlying the repurchase agreement will be held by the custodian at all times in an amount at least equal to the repurchase price, including accrued interest. If the
seller fails to repurchase the securities, a Fund may suffer a loss to the extent proceeds from the sale of the underlying securities are less than the repurchase price.
A Fund may not invest in repurchase agreements or purchase and sale
contracts maturing in more than seven days if such investments, together with the Funds other illiquid investments, would exceed 15% of the Funds net assets. Repurchase agreements and purchase and sale contracts may be entered into only
with financial institutions that have capital of at least $50 million or whose obligations are guaranteed by an entity that has capital of at least $50 million.
Reverse Repurchase Agreements.
A Fund may enter into reverse
repurchase agreements with the same parties with whom it may enter into repurchase agreements. Under a reverse repurchase agreement, a Fund sells securities to
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another party and agrees to repurchase them at a particular date and price. A Fund may enter into a reverse repurchase agreement when it is anticipated that the interest income to be earned from
the investment of the proceeds of the transaction is greater than the interest expense of the transaction.
At the time a Fund enters into a reverse repurchase agreement, it will segregate liquid assets with a value not less than the repurchase price (including accrued interest). The use of reverse repurchase
agreements may be regarded as leveraging and, therefore, speculative. Furthermore, reverse repurchase agreements involve the risks that (i) the interest income earned in the investment of the proceeds will be less than the interest expense,
(ii) the market value of the securities retained in lieu of sale by a Fund may decline below the price of the securities the Fund has sold but is obligated to repurchase, (iii) the market value of the securities sold will decline below the
price at which the Fund is required to repurchase them and (iv) the securities will not be returned to the Fund.
In addition, if the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or
receiver may receive an extension of time to determine whether to enforce a Funds obligations to repurchase the securities and the Funds use of the proceeds of the reverse repurchase agreement may effectively be restricted pending such
decision.
Rights Offerings and Warrants to Purchase.
Certain Funds may participate in rights offerings and may purchase warrants, which are privileges issued by corporations enabling the owners to subscribe to and purchase a specified number of shares of the corporation at a specified price
during a specified period of time. Subscription rights normally have a short life span to expiration. The purchase of rights or warrants involves the risk that a Fund could lose the purchase value of a right or warrant if the right to subscribe to
additional shares is not exercised prior to the rights and warrants expiration. Also, the purchase of rights and/or warrants involves the risk that the effective price paid for the right and/or warrant added to the subscription price of
the related security may exceed the value of the subscribed securitys market price such as when there is no movement in the level of the underlying security. Buying a warrant does not make the Fund a shareholder of the underlying stock.
Securities Lending.
Each
Fund may lend portfolio securities with a value not exceeding 33
1
/
3
% of its total assets or the limit prescribed by applicable law to banks, brokers and other financial institutions. In return, the Fund receives collateral in cash or securities issued or guaranteed by
the U.S. Government or irrevocable letters of credit issued by a bank (other than a borrower of the Funds portfolio securities or any affiliate of such borrower), which qualifies as a custodian bank for an investment company under the
Investment Company Act, which collateral will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. The Manager may instruct the lending agent (as defined below) to terminate loans and
recall securities so that the securities may be voted by a Fund if required by Proxy Voting Guidelines adopted by a Fund. Such notice shall be provided in advance such that a period of time equal to no less than the normal settlement period for the
securities in question prior to the record date for the proxy vote or other corporate entitlement is provided.
A Fund receives the equivalent of any income it would have received on the loaned securities. Where a Fund receives securities as collateral, the Fund
receives a fee for its loans from the borrower and does not receive the income on the collateral. Where a Fund receives cash collateral, it may invest such collateral and retain the amount earned, net of any amount rebated to the borrower. As a
result, the Funds yield may increase. Loans of securities are terminable at any time and the borrower, after notice, is required to return borrowed securities within the standard time period for settlement of securities transactions. The Fund
is obligated to return the collateral to the borrower upon the return of the loaned securities. A Fund could suffer a loss in the event the Fund must return the cash collateral and there are losses on investments made with the cash collateral. In
the event the borrower defaults on any of its obligations with respect to a securities loan, a Fund could suffer a loss where the value of the collateral is below the market value of the borrowed securities plus any other receivables from the
Borrower along with any transaction costs to repurchase the securities. A Fund could also experience delays and costs in gaining access to the collateral. Each Fund may pay reasonable finders, lending agent, administrative and custodial fees
in connection with its loans.
Each Fund has received an
exemptive order from the Commission permitting it to lend portfolio securities to affiliates of the Fund and to retain an affiliate of the Fund as lending agent. Pursuant to that order, each Fund has retained an affiliated entity of the Manager as
the securities lending agent (the lending agent) for a fee, including a fee based on a share of the returns on investment of cash collateral. In connection with securities lending activities, the lending agent may, upon the advice of the
Manager and on behalf of a Fund, invest cash collateral received by
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the Fund for such loans, among other things, in a private investment company managed by the lending agent or in registered money market funds advised by the Manager or its affiliates. Pursuant to
the same order, each Fund may invest its uninvested cash in registered money market funds advised by the Manager or its affiliates, or in a private investment company managed by the lending agent. If a Fund acquires shares in either the private
investment company or an affiliated money market fund, shareholders would bear both their proportionate share of the Funds expenses and, indirectly, the expenses of such other entities. However, in accordance with the exemptive order, the
investment adviser to the private investment company will not charge any advisory fees with respect to shares purchased by the Fund. Such shares also will not be subject to a sales load, redemption fee, distribution fee or service fee, or in the
case of the shares of an affiliated money market fund, the payment of any such sales load, redemption fee, distribution fee or service fee will be offset by the Managers waiver of a portion of its advisory fee.
A Fund would continue to accrue the equivalent of the same interest or other
income on loaned securities that it would have received had the securities not been on loan, and would also earn income on investments made with any cash collateral for such loans. Any cash collateral received by a Fund in connection with such loans
may be invested in a broad range of high quality, U.S. dollar-denominated money market instruments that meet Rule 2a-7 restrictions for money market funds.
BlackRock Investment Management, LLC (BIM), an affiliate of BlackRock, acts as securities lending agent for the Funds and will be paid a fee
for the provision of these services, including advisory services with respect to the collateral of the Funds securities lending program.
Short Sales.
Certain Funds may make short sales of securities, either as a hedge against potential declines in value of a portfolio security
or to realize appreciation when a security that the Fund does not own declines in value. Certain Funds have a fundamental investment restriction prohibiting short sales of securities unless they are against-the-box. In a short sale
against-the-box, at the time of the sale, the Fund owns or has the immediate and unconditional right to acquire the identical security at no additional cost. When a Fund makes a short sale, it borrows the security sold short and delivers
it to the broker-dealer through which it made the short sale. A Fund may have to pay a fee to borrow particular securities and is often obligated to turn over any payments received on such borrowed securities to the lender of the securities.
A Fund secures its obligation to replace the borrowed security
by depositing collateral with the broker-dealer, usually in cash, U.S. Government securities or other liquid securities similar to those borrowed. With respect to uncovered short positions, a Fund is required to deposit similar collateral with its
custodian, if necessary, to the extent that the value of both collateral deposits in the aggregate is at all times equal to at least 100% of the current market value of the security sold short. Depending on arrangements made with the broker-dealer
from which the Fund borrowed the security, regarding payment received by the Fund on such security, a Fund may not receive any payments (including interest) on its collateral deposited with such broker-dealer.
Because making short sales in securities that it does not own exposes a Fund
to the risks associated with those securities, such short sales involve speculative exposure risk. A Fund will incur a loss as a result of a short sale if the price of the security increases between the date of the short sale and the date on which
the Fund replaces the borrowed security. As a result, if a Fund makes short sales in securities that increase in value, it will likely underperform similar mutual funds that do not make short sales in securities. A Fund will realize a gain on a
short sale if the security declines in price between those dates. There can be no assurance that a Fund will be able to close out a short sale position at any particular time or at an acceptable price. Although a Funds gain is limited to the
price at which it sold the security short, its potential loss is limited only by the maximum attainable price of the security, less the price at which the security was sold and may, theoretically, be unlimited.
A Fund may also make short sales against the box without being
subject to such limitations.
Sovereign Debt.
Investment in sovereign debt can involve a high degree of risk. The governmental entity that controls the repayment of sovereign debt may not be able or willing to repay the principal and/or interest when due in accordance with the terms of
such debt. A governmental entitys willingness or ability to repay principal and interest due in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign reserves, the availability of
sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the governmental entitys policy towards the International Monetary Fund and the political constraints to which a
governmental entity may be subject. Governmental entities may also be
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dependent on expected disbursements from foreign governments, multilateral agencies and others abroad to reduce principal and interest arrearages on their debt. The commitment on the part of
these governments, agencies and others to make such disbursements may be conditioned on the implementation of economic reforms and/or economic performance and the timely service of such debtors obligations. Failure to implement such reforms,
achieve such levels of economic performance or repay principal or interest when due may result in the cancellation of such third parties commitments to lend funds to the governmental entity, which may further impair such debtors ability
or willingness to timely service its debts. Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt may be requested to participate in the rescheduling of such debt and to extend further loans to governmental entities. In the
event of a default by a governmental entity, there may be few or no effective legal remedies for collecting on such debt.
Standby Commitment Agreements.
Standby commitment agreements commit a Fund, for a stated period of time, to purchase a stated amount of
securities that may be issued and sold to that Fund at the option of the issuer. The price of the security is fixed at the time of the commitment. At the time of entering into the agreement, the Fund is paid a commitment fee, regardless of whether
or not the security is ultimately issued. A Fund will enter into such agreements for the purpose of investing in the security underlying the commitment at a price that is considered advantageous to the Fund. A Fund will limit its investment in such
commitments so that the aggregate purchase price of securities subject to such commitments, together with the value of the Funds other illiquid investments, will not exceed 15% of its net assets taken at the time of the commitment. A Fund
segregates liquid assets in an aggregate amount equal to the purchase price of the securities underlying the commitment.
There can be no assurance that the securities subject to a standby commitment will be issued, and the value of the security, if issued, on the delivery
date may be more or less than its purchase price. Since the issuance of the security underlying the commitment is at the option of the issuer, the Fund may bear the risk of a decline in the value of such security and may not benefit from an
appreciation in the value of the security during the commitment period.
The purchase of a security pursuant to a standby commitment agreement and the related commitment fee will be recorded on the date on which the security can reasonably be expected to be issued, and the
value of the security thereafter will be reflected in the calculation of a Funds net asset value. The cost basis of the security will be adjusted by the amount of the commitment fee. In the event the security is not issued, the commitment fee
will be recorded as income on the expiration date of the standby commitment.
Stand-by commitments will only be entered into with dealers, banks and broker-dealers which, in the Managers or sub-advisers opinion, present minimal credit risks. A Fund will acquire stand-by
commitments solely to facilitate portfolio liquidity and not to exercise its rights thereunder for trading purposes. Stand-by commitments will be valued at zero in determining net asset value. Accordingly, where a Fund pays directly or indirectly
for a stand-by commitment, its cost will be reflected as an unrealized loss for the period during which the commitment is held by such Fund and will be reflected as a realized gain or loss when the commitment is exercised or expires.
Stripped Securities.
Stripped securities are created when the
issuer separates the interest and principal components of an instrument and sells them as separate securities. In general, one security is entitled to receive the interest payments on the underlying assets (the interest only or IO
security) and the other to receive the principal payments (the principal only or PO security). Some stripped securities may receive a combination of interest and principal payments. The yields to maturity on IOs and POs are sensitive to
the expected or anticipated rate of principal payments (including prepayments) on the related underlying assets, and principal payments may have a material effect on yield to maturity. If the underlying assets experience greater than anticipated
prepayments of principal, a Fund may not fully recoup its initial investment in IOs. Conversely, if the underlying assets experience less than anticipated prepayments of principal, the yield on POs could be adversely affected. Stripped securities
may be highly sensitive to changes in interest rates and rates of prepayment.
The International Bond Portfolio also may purchase stripped securities that evidence ownership in the future interest payments or principal payments on obligations of non-U.S. governments.
Structured Notes.
Structured notes and other
related instruments purchased by the Fund are generally privately negotiated debt obligations where the principal and/or interest is determined by reference to the performance of a
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specific asset, benchmark asset, market or interest rate (reference measure). Issuers of structured notes include corporations and banks. The interest rate or the principal amount
payable upon maturity or redemption may increase or decrease, depending upon changes in the value of the reference measure. The terms of a structured note may provide that, in certain circumstances, no principal is due at maturity and, therefore,
may result in a loss of invested capital by a Fund. The interest and/or principal payments that may be made on a structured product may vary widely, depending on a variety of factors, including the volatility of the reference measure.
Structured notes may be positively or negatively indexed, so the
appreciation of the reference measure may produce an increase or a decrease in the interest rate or the value of the principal at maturity. The rate of return on structured notes may be determined by applying a multiplier to the performance or
differential performance of reference measures. Application of a multiplier involves leverage that will serve to magnify the potential for gain and the risk of loss.
The purchase of structured notes exposes a Fund to the credit risk of the
issuer of the structured product. Structured notes may also be more volatile, less liquid, and more difficult to price accurately than less complex securities and instruments or more traditional debt securities. The secondary market for structured
notes could be illiquid making them difficult to sell when the Fund determines to sell them. The possible lack of a liquid secondary market for structured notes and the resulting inability of the Fund to sell a structured note could expose the Fund
to losses and could make structured notes more difficult for the Fund to value accurately.
Supranational Entities.
A Fund may invest in debt securities of supranational entities. Examples of such entities include the International Bank for Reconstruction and Development (the World
Bank), the European Steel and Coal Community, the Asian Development Bank and the Inter-American Development Bank. The government members, or stockholders, usually make initial capital contributions to the supranational entity and in many
cases are committed to make additional capital contributions if the supranational entity is unable to repay its borrowings. There is no guarantee that one or more stockholders of a supranational entity will continue to make any necessary additional
capital contributions. If such contributions are not made, the entity may be unable to pay interest or repay principal on its debt securities, and a Fund may lose money on such investments.
Tax-Exempt Derivatives.
Certain Funds may hold tax-exempt derivatives which may be in the form of tender option
bonds, participations, beneficial interests in a trust, partnership interests or other forms. A number of different structures have been used. For example, interests in long-term fixed-rate municipal debt obligations, held by a bank as trustee or
custodian, are coupled with tender option, demand and other features when the tax-exempt derivatives are created. Together, these features entitle the holder of the interest to tender (or put) the underlying municipal debt obligation to a third
party at periodic intervals and to receive the principal amount thereof. In some cases, municipal debt obligations are represented by custodial receipts evidencing rights to receive specific future interest payments, principal payments, or both, on
the underlying securities held by the custodian. Under such arrangements, the holder of the custodial receipt has the option to tender the underlying securities at their face value to the sponsor (usually a bank or broker dealer or other financial
institution), which is paid periodic fees equal to the difference between the securities fixed coupon rate and the rate that would cause the securities, coupled with the tender option, to trade at par on the date of a rate adjustment. A
participation interest gives the Fund an undivided interest in a Municipal Bond in the proportion the Funds participation bears to the total principal amount of the Municipal Bond, and typically provides for a repurchase feature for all or any
part of the full principal amount of the participation interest, plus accrued interest. Trusts and partnerships are typically used to convert long-term fixed rate high quality bonds of a single state or municipal issuer into variable or floating
rate demand instruments. The Municipal Bond Funds may hold tax-exempt derivatives, such as participation interests and custodial receipts, for municipal debt obligations which give the holder the right to receive payment of principal subject to the
conditions described above. The Internal Revenue Service (the IRS) has not ruled on whether the interest received on tax-exempt derivatives in the form of participation interests or custodial receipts is tax-exempt, and accordingly,
purchases of any such interests or receipts are based on the opinions of counsel to the sponsors of such derivative securities. Neither a Fund nor its investment adviser or sub-advisers will review the proceedings related to the creation of any
tax-exempt derivatives or the basis for such opinions.
Tax-Exempt Preferred Shares.
Certain Funds may invest in preferred interests of other investment funds that pay dividends that are exempt
from regular Federal income tax. Such funds in turn invest in municipal bonds and other assets that pay interest or make distributions that are exempt from regular Federal income tax, such as revenue bonds issued by state or local agencies to fund
the development of low-income, multi-family housing. Investment in such
II-52
tax-exempt preferred shares involves many of the same issues as investing in other investment companies. These investments also have additional risks, including liquidity risk, the absence of
regulation governing investment practices, capital structure and leverage, affiliated transactions and other matters, and concentration of investments in particular issuers or industries. The Municipal Bond Funds will treat investments in tax-exempt
preferred shares as investments in municipal bonds.
Taxability Risk.
Certain of the Funds intends to minimize the payment of taxable income to shareholders by investing in tax-exempt or
municipal securities in reliance at the time of purchase on an opinion of bond counsel to the issuer that the interest paid on those securities will be excludable from gross income for Federal income tax purposes. Such securities, however, may be
determined to pay, or have paid, taxable income subsequent to the Funds acquisition of the securities. In that event, the IRS may demand that the Fund pay Federal income taxes on the affected interest income, and, if the Fund agrees to do so,
the Funds yield could be adversely affected. In addition, the treatment of dividends previously paid or to be paid by the Fund as exempt interest dividends could be adversely affected, subjecting the Funds shareholders to
increased Federal income tax liabilities. If the interest paid on any tax-exempt or municipal security held by the Fund is subsequently determined to be taxable, the Fund will dispose of that security as soon as reasonably practicable. In addition,
the treatment of dividends previously paid or to be paid by the Fund as exempt interest dividends could be adversely affected, subjecting the Funds shareholders to increased Federal income tax liabilities. If the interest paid on
any tax-exempt or municipal security held by the Fund is subsequently determined to be taxable, the Fund will dispose of that security as soon as reasonably practicable. In addition, future laws, regulations, rulings or court decisions may cause
interest on municipal securities to be subject, directly or indirectly, to Federal income taxation or interest on state municipal securities to be subject to state or local income taxation, or the value of state municipal securities to be subject to
state or local intangible personal property tax, or may otherwise prevent the Fund from realizing the full current benefit of the tax-exempt status of such securities. Any such change could also affect the market price of such securities, and thus
the value of an investment in the Fund.
Trust Preferred
Securities.
Certain of the Funds may invest in trust preferred securities. Trust preferred securities are typically issued by corporations, generally in the form of interest bearing notes with preferred securities characteristics, or by an
affiliated business trust of a corporation, generally in the form of beneficial interests in subordinated debentures or similarly structured securities. The trust preferred securities market consists of both fixed and adjustable coupon rate
securities that are either perpetual in nature or have stated maturity dates.
Trust preferred securities are typically junior and fully subordinated liabilities of an issuer and benefit from a guarantee that is junior and fully subordinated to the other liabilities of the
guarantor. In addition, trust preferred securities typically permit an issuer to defer the payment of income for five years or more without triggering an event of default. Because of their subordinated position in the capital structure of an issuer,
the ability to defer payments for extended periods of time without default consequences to the issuer, and certain other features (such as restrictions on common dividend payments by the issuer or ultimate guarantor when full cumulative payments on
the trust preferred securities have not been made), these trust preferred securities are often treated as close substitutes for traditional preferred securities, both by issuers and investors.
Trust preferred securities include but are not limited
to trust originated preferred securities (TOPRS
®
); monthly income preferred securities (MIPS
®
); quarterly income bond securities (QUIBS
®
); quarterly income debt securities (QUIDS
®
); quarterly income preferred securities (QUIPS
SM
); corporate trust securities (CORTS
®
); public income notes
(PINES
®
); and other trust preferred securities.
Trust preferred securities are typically issued with a final maturity date,
although some are perpetual in nature. In certain instances, a final maturity date may be extended and/or the final payment of principal may be deferred at the issuers option for a specified time without default. No redemption can typically
take place unless all cumulative payment obligations have been met, although issuers may be able to engage in open-market repurchases without regard to whether all payments have been paid.
Many trust preferred securities are issued by trusts or other special purpose entities established by operating companies and
are not a direct obligation of an operating company. At the time the trust or special purpose entity sells such preferred securities to investors, it purchases debt of the operating company (with terms comparable to those of the trust or special
purpose entity securities), which enables the operating company to deduct for tax purposes the interest paid on the debt held by the trust or special purpose entity. The trust or special purpose entity is
II-53
generally required to be treated as transparent for Federal income tax purposes such that the holders of the trust preferred securities are treated as owning beneficial interests in the
underlying debt of the operating company. Accordingly, payments on the trust preferred securities are treated as interest rather than dividends for Federal income tax purposes. The trust or special purpose entity in turn would be a holder of the
operating companys debt and would have priority with respect to the operating companys earnings and profits over the operating companys common shareholders, but would typically be subordinated to other classes of the operating
companys debt. Typically a preferred share has a rating that is slightly below that of its corresponding operating companys senior debt securities.
U.S. Government Obligations.
A Fund may purchase obligations issued or guaranteed by the U.S. Government and U.S. Government agencies and
instrumentalities. Obligations of certain agencies and instrumentalities of the U.S. Government are supported by the full faith and credit of the U.S. Treasury. Others are supported by the right of the issuer to borrow from the U.S. Treasury; and
still others are supported only by the credit of the agency or instrumentality issuing the obligation. No assurance can be given that the U.S. Government will provide financial support to U.S. Government-sponsored instrumentalities if it is not
obligated to do so by law. Certain U.S. Treasury and agency securities may be held by trusts that issue participation certificates (such as Treasury income growth receipts (TIGRs) and certificates of accrual on Treasury certificates
(CATs)). These certificates, as well as Treasury receipts and other stripped securities, represent beneficial ownership interests in either future interest payments or the future principal payments on U.S. Government obligations. These
instruments are issued at a discount to their face value and may (particularly in the case of stripped mortgage-backed securities) exhibit greater price volatility than ordinary debt securities because of the manner in which their
principal and interest are returned to investors.
Examples of
the types of U.S. Government obligations that may be held by the Funds include U.S. Treasury Bills, Treasury Notes and Treasury Bonds and the obligations of the Federal Housing Administration, Farmers Home Administration, Export-Import Bank of the
United States, Small Business Administration, Ginnie Mae, Fannie Mae, Federal Financing Bank, General Services Administration, Student Loan Marketing Association, Central Bank for Cooperatives, Federal Home Loan Banks, Freddie Mac, Federal
Intermediate Credit Banks, Federal Land Banks, Farm Credit Banks System, Maritime Administration, Tennessee Valley Authority and Washington D.C. Armory Board. The Funds may also invest in mortgage-related securities issued or guaranteed by U.S.
Government agencies and instrumentalities, including such instruments as obligations of Ginnie Mae, Fannie Mae and Freddie Mac.
U.S. Treasury Obligations.
Treasury obligations may differ in their interest rates, maturities, times of issuance and other characteristics.
Obligations of U.S. Government agencies and authorities are supported by varying degrees of credit but generally are not backed by the full faith and credit of the U.S. Government. No assurance can be given that the U.S. Government will provide
financial support to its agencies and authorities if it is not obligated by law to do so.
Utility Industries
Risks that are intrinsic to the utility industries include difficulty in obtaining an adequate return on invested capital, difficulty in financing large construction programs during an inflationary
period, restrictions on operations and increased cost and delays attributable to environmental considerations and regulation, difficulty in raising capital in adequate amounts on reasonable terms in periods of high inflation and unsettled capital
markets, technological innovations that may render existing plants, equipment or products obsolete, the potential impact of natural or man-made disasters, increased costs and reduced availability of certain types of fuel, occasional reduced
availability and high costs of natural gas for resale, the effects of energy conservation, the effects of a national energy policy and lengthy delays and greatly increased costs and other problems associated with the design, construction, licensing,
regulation and operation of nuclear facilities for electric generation, including, among other considerations, the problems associated with the use of radioactive materials and the disposal of radioactive wastes. There are substantial differences
among the regulatory practices and policies of various jurisdictions, and any given regulatory agency may make major shifts in policy from time to time. There is no assurance that regulatory authorities will, in the future, grant rate increases or
that such increases will be adequate to permit the payment of dividends on common stocks issued by a utility company. Additionally, existing and possible future regulatory legislation may make it even more difficult for utilities to obtain adequate
relief. Certain of the issuers of securities held in the Funds portfolio may own or operate nuclear generating facilities. Governmental authorities may from time to time review existing policies and impose additional requirements governing the
licensing, construction and operation of
II-54
nuclear power plants. Prolonged changes in climatic conditions can also have a significant impact on both the revenues of an electric and gas utility as well as the expenses of a utility,
particularly a hydro-based electric utility.
Utility companies
in the United States and in foreign countries are generally subject to regulation. In the United States, most utility companies are regulated by state and/or federal authorities. Such regulation is intended to ensure appropriate standards of service
and adequate capacity to meet public demand. Generally, prices are also regulated in the United States and in foreign countries with the intention of protecting the public while ensuring that the rate of return earned by utility companies is
sufficient to allow them to attract capital in order to grow and continue to provide appropriate services. There can be no assurance that such pricing policies or rates of return will continue in the future.
The nature of regulation of the utility industries continues to evolve both
in the United States and in foreign countries. In recent years, changes in regulation in the United States increasingly have allowed utility companies to provide services and products outside their traditional geographic areas and lines of business,
creating new areas of competition within the industries. In some instances, utility companies are operating on an unregulated basis. Because of trends toward deregulation and the evolution of independent power producers as well as new entrants to
the field of telecommunications, non-regulated providers of utility services have become a significant part of their respective industries. The Manager believes that the emergence of competition and deregulation will result in certain utility
companies being able to earn more than their traditional regulated rates of return, while others may be forced to defend their core business from increased competition and may be less profitable. Reduced profitability, as well as new uses of funds
(such as for expansion, operations or stock buybacks) could result in cuts in dividend payout rates. The Manager seeks to take advantage of favorable investment opportunities that may arise from these structural changes. Of course, there can be no
assurance that favorable developments will occur in the future.
Foreign utility companies are also subject to regulation, although such regulations may or may not be comparable to those in the United States. Foreign
utility companies may be more heavily regulated by their respective governments than utilities in the United States and, as in the United States, generally are required to seek government approval for rate increases. In addition, many foreign
utilities use fuels that may cause more pollution than those used in the United States, which may require such utilities to invest in pollution control equipment to meet any proposed pollution restrictions. Foreign regulatory systems vary from
country to country and may evolve in ways different from regulation in the United States.
A Funds investment policies are designed to enable it to capitalize on evolving investment opportunities throughout the world. For example, the rapid growth of certain foreign economies will
necessitate expansion of capacity in the utility industries in those countries. Although many foreign utility companies currently are government-owned, thereby limiting current investment opportunities for a Fund, the Manager believes that, in order
to attract significant capital for growth, foreign governments are likely to seek global investors through the privatization of their utility industries. Privatization, which refers to the trend toward investor ownership of assets rather than
government ownership, is expected to occur in newer, faster-growing economies and in mature economies. Of course, there is no assurance that such favorable developments will occur or that investment opportunities in foreign markets will increase.
The revenues of domestic and foreign utility companies generally
reflect the economic growth and development in the geographic areas in which they do business. The Manager will take into account anticipated economic growth rates and other economic developments when selecting securities of utility companies.
Electric.
The electric utility industry consists of
companies that are engaged principally in the generation, transmission and sale of electric energy, although many also provide other energy-related services. In the past, electric utility companies, in general, have been favorably affected by lower
fuel and financing costs and the full or near completion of major construction programs. In addition, many of these companies have generated cash flows in excess of current operating expenses and construction expenditures, permitting some degree of
diversification into unregulated businesses. Some electric utilities have also taken advantage of the right to sell power outside of their traditional geographic areas. Electric utility companies have historically been subject to the risks
associated with increases in fuel and other operating costs, high interest costs on borrowings needed for capital construction programs, costs associated with compliance with environmental and safety regulations and changes in the regulatory
climate. As interest rates declined, many utilities refinanced high cost debt and in doing so improved their fixed
II-55
charges coverage. Regulators, however, lowered allowed rates of return as interest rates declined and thereby caused the benefits of the rate declines to be shared wholly or in part with
customers. In a period of rising interest rates, the allowed rates of return may not keep pace with the utilities increased costs. The construction and operation of nuclear power facilities are subject to strict scrutiny by, and evolving
regulations of, the Nuclear Regulatory Commission and state agencies which have comparable jurisdiction. Strict scrutiny might result in higher operating costs and higher capital expenditures, with the risk that the regulators may disallow inclusion
of these costs in rate authorizations or the risk that a company may not be permitted to operate or complete construction of a facility. In addition, operators of nuclear power plants may be subject to significant costs for disposal of nuclear fuel
and for decommissioning such plants.
The rating agencies look
closely at the business profile of utilities. Ratings for companies are expected to be impacted to a greater extent in the future by the division of their asset base. Electric utility companies that focus more on the generation of electricity may be
assigned less favorable ratings as this business is expected to be competitive and the least regulated. On the other hand, companies that focus on transmission and distribution, which is expected to be the least competitive and the more regulated
part of the business, may see higher ratings given the greater predictability of cash flow.
A number of states are considering or have enacted deregulation proposals. The introduction of competition into the industry as a result of such deregulation has at times resulted in lower revenue, lower
credit ratings, increased default risk, and lower electric utility security prices. Such increased competition may also cause long-term contracts, which electric utilities previously entered into to buy power, to become stranded assets
which have no economic value. Any loss associated with such contracts must be absorbed by ratepayers and investors. In addition, some electric utilities have acquired electric utilities overseas to diversify, enhance earnings and gain experience in
operating in a deregulated environment. In some instances, such acquisitions have involved significant borrowings, which have burdened the acquirers balance sheet. There is no assurance that current deregulation proposals will be adopted.
However, deregulation in any form could significantly impact the electric utilities industry.
Telecommunications.
The telecommunications industry today includes both traditional telephone companies, with a history of broad market coverage and highly regulated businesses, and cable
companies, which began as small, lightly regulated businesses focused on limited markets. Today these two historically different businesses are converging in an industry that is trending toward larger, competitive national and international markets
with an emphasis on deregulation. Companies that distribute telephone services and provide access to the telephone networks still comprise the greatest portion of this segment, but non-regulated activities such as wireless telephone services,
paging, data transmission and processing, equipment retailing, computer software and hardware and internet services are becoming increasingly significant components as well. In particular, wireless and internet telephone services continue to gain
market share at the expense of traditional telephone companies. The presence of unregulated companies in this industry and the entry of traditional telephone companies into unregulated or less regulated businesses provide significant investment
opportunities with companies that may increase their earnings at faster rates than had been allowed in traditional regulated businesses. Still, increasing competition, technological innovations and other structural changes could adversely affect the
profitability of such utilities and the growth rate of their dividends. Given mergers and proposed legislation and enforcement changes, it is likely that both traditional telephone companies and cable companies will continue to provide an expanding
range of utility services to both residential, corporate and governmental customers.
Gas.
Gas transmission companies and gas distribution companies are undergoing significant changes. In the United States, interstate transmission companies are regulated by the Federal Energy
Regulatory Commission, which is reducing its regulation of the industry. Many companies have diversified into oil and gas exploration and development, making returns more sensitive to energy prices. In the recent decade, gas utility companies have
been adversely affected by disruptions in the oil industry and have also been affected by increased concentration and competition. In the opinion of the Manager, however, environmental considerations could improve the gas industry outlook in the
future. For example, natural gas is the cleanest of the hydrocarbon fuels, and this may result in incremental shifts in fuel consumption toward natural gas and away from oil and coal, even for electricity generation. However, technological or
regulatory changes within the industry may delay or prevent this result.
Water.
Water supply utilities are companies that collect, purify, distribute and sell water. In the United States and around the world the industry is highly fragmented because most of the supplies
are owned by local authorities.
II-56
Companies in this industry are generally mature and are experiencing little or no per capita volume growth. In the opinion of the Manager, there may be opportunities for certain companies to
acquire other water utility companies and for foreign acquisition of domestic companies. The Manager believes that favorable investment opportunities may result from consolidation of this segment. As with other utilities, however, increased
regulation, increased costs and potential disruptions in supply may adversely affect investments in water supply utilities.
Utility Industries Generally.
There can be no assurance that the positive developments noted above, including those relating to privatization and
changing regulation, will occur or that risk factors other than those noted above will not develop in the future.
When Issued Securities, Delayed Delivery Securities and Forward Commitments.
A Fund may purchase or sell securities that it is entitled to receive on a when issued basis. A Fund may also
purchase or sell securities on a delayed delivery basis or through a forward commitment (including on a TBA (to be announced) basis). These transactions involve the purchase or sale of securities by a Fund at an established price with
payment and delivery taking place in the future. The Fund enters into these transactions to obtain what is considered an advantageous price to the Fund at the time of entering into the transaction. When a Fund purchases securities in these
transactions, the Fund segregates liquid securities in an amount equal to the amount of its purchase commitments.
There can be no assurance that a security purchased on a when issued basis will be issued or that a security purchased or sold on a delayed delivery basis or through a forward commitment will be
delivered. Also, the value of securities in these transactions on the delivery date may be more or less than the price paid by the Fund to purchase the securities. The Fund will lose money if the value of the security in such a transaction declines
below the purchase price and will not benefit if the value of the security appreciates above the sale price during the commitment period.
If deemed advisable as a matter of investment strategy, a Fund may dispose of or renegotiate a commitment after it has been entered into, and may sell
securities it has committed to purchase before those securities are delivered to the Fund on the settlement date. In these cases the Fund may realize a taxable capital gain or loss.
When a Fund engages in when-issued, TBA or forward commitment transactions, it relies on the other party to consummate the
trade. Failure of such party to do so may result in the Funds incurring a loss or missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a commitment to purchase securities, and any subsequent fluctuations in their market value, is taken into
account when determining the market value of a Fund starting on the day the Fund agrees to purchase the securities. The Fund does not earn interest on the securities it has committed to purchase until they are paid for and delivered on the
settlement date.
Yields and Ratings.
The yields on
certain obligations are dependent on a variety of factors, including general market conditions, conditions in the particular market for the obligation, the financial condition of the issuer, the size of the offering, the maturity of the obligation
and the ratings of the issue. The ratings of Moodys, Fitch and S&P represent their respective opinions as to the quality of the obligations they undertake to rate. Ratings, however, are general and are not absolute standards of quality.
Consequently, obligations with the same rating, maturity and interest rate may have different market prices. Subsequent to its purchase by a Fund, a rated security may cease to be rated. A Funds Manager or sub-adviser will consider such an
event in determining whether the Fund should continue to hold the security.
Zero Coupon Securities.
Zero coupon securities are securities that are sold at a discount to par value and do not pay interest during the life of the security. The discount approximates the
total amount of interest the security will accrue and compound over the period until maturity at a rate of interest reflecting the market rate of the security at the time of issuance. Upon maturity, the holder of a zero coupon security is entitled
to receive the par value of the security.
While interest
payments are not made on such securities, holders of such securities are deemed to have received income (phantom income) annually, notwithstanding that cash may not be received currently. The effect of owning instruments that do not make
current interest payments is that a fixed yield is earned not only on the original investment but also, in effect, on all discount accretion during the life of the obligations. This implicit reinvestment
II-57
of earnings at a fixed rate eliminates the risk of being unable to invest distributions at a rate as high as the implicit yield on the zero coupon bond, but at the same time eliminates the
holders ability to reinvest at higher rates in the future. For this reason, some of these securities may be subject to substantially greater price fluctuations during periods of changing market interest rates than are comparable securities
that pay interest currently. Longer term zero coupon bonds are more exposed to interest rate risk than shorter term zero coupon bonds. These investments benefit the issuer by mitigating its need for cash to meet debt service, but also require a
higher rate of return to attract investors who are willing to defer receipt of cash.
A Fund accrues income with respect to these securities for Federal income tax and accounting purposes prior to the receipt of cash payments. Zero coupon securities may be subject to greater fluctuation in
value and less liquidity in the event of adverse market conditions than comparably rated securities that pay cash interest at regular intervals.
Further, to maintain its qualification for pass-through treatment under the Federal tax laws, a Fund is required to distribute income to its shareholders
and, consequently, may have to dispose of other, more liquid portfolio securities under disadvantageous circumstances or may have to leverage itself by borrowing in order to generate the cash to satisfy these distributions. The required
distributions may result in an increase in a Funds exposure to zero coupon securities.
In addition to the above-described risks, there are certain other risks related to investing in zero coupon securities. During a period of severe market conditions, the market for such securities may
become even less liquid. In addition, as these securities do not pay cash interest, a Funds investment exposure to these securities and their risks, including credit risk, will increase during the time these securities are held in the
Funds portfolio.
Suitability (All Funds)
The economic benefit of an investment in any Fund depends upon many factors
beyond the control of the Fund, the Manager and its affiliates. Each Fund should be considered a vehicle for diversification and not as a balanced investment program. The suitability for any particular investor of a purchase of shares in a Fund will
depend upon, among other things, such investors investment objectives and such investors ability to accept the risks associated with investing in securities, including the risk of loss of principal.
Investment Restrictions (All Funds)
See Investment Restrictions in Part I of each Funds
Statement of Additional Information for the specific fundamental and non-fundamental investment restrictions adopted by each Fund. In addition to those investment restrictions, each Fund is also subject to the restrictions discussed below.
The staff of the Commission has taken the position that
purchased OTC options and the assets used as cover for written OTC options are illiquid securities. Therefore, each Fund has adopted an investment policy pursuant to which it will not purchase or sell OTC options (including OTC options on futures
contracts) if, as a result of any such transaction, the sum of the market value of OTC options currently outstanding that are held by the Fund, the market value of the underlying securities covered by OTC call options currently outstanding that were
sold by the Fund and margin deposits on the Funds existing OTC options on financial futures contracts would exceed 15% of the net assets of the Fund, taken at market value, together with all other assets of the Fund that are determined to be
illiquid. However, if an OTC option is sold by a Fund to a primary U.S. Government securities dealer recognized by the Federal Reserve Bank of New York and if the Fund has the unconditional contractual right to repurchase such OTC option from the
dealer at a predetermined price, then the Fund will treat as illiquid only such amount of the underlying securities as is equal to the repurchase price less the amount by which the option is in-the-money (
i.e.
, current market
value of the underlying securities minus the options strike price). The repurchase price with the primary dealers is typically a formula price that is generally based on a multiple of the premium received for the option, plus the amount by
which the option is in-the-money. This policy as to OTC options is not a fundamental policy of any Fund and may be amended by the Board of Directors of the Fund without the approval of the Funds shareholders.
Each Funds investments will be limited in order to allow the Fund to
qualify as a regulated investment company for purposes of the Code. See Dividends and Taxes Taxes. To qualify, among other requirements, each Fund will limit its investments so that, at the close of each quarter of the
taxable year, (i) at least 50% of the market value
II-58
of each Funds assets is represented by cash, securities of other regulated investment companies, U.S. government securities and other securities, with such other securities limited, in
respect of any one issuer, to an amount not greater than 5% of the Funds assets and not greater than 10% of the outstanding voting securities of such issuer and (ii) not more than 25% of the value of its assets is invested in the
securities (other than U.S. government securities or securities of other regulated investment companies) of any one issuer, any two or more issuers of which 20% or more of the voting stock is held by the Fund and that are determined to be engaged in
the same or similar trades or businesses or related trades or businesses or in the securities of one or more qualified publicly traded partnerships (
i.e.
, partnerships that are traded on an established securities market or tradable on a
secondary market, other than partnerships that derive 90% of their income from interest, dividends, capital gains and other traditionally permitted mutual fund income). For purposes of this restriction, the Municipal Funds generally will regard each
state and each of its political subdivisions, agencies or instrumentalities and each multi-state agency of which the state is a member as a separate issuer. Each public authority that issues securities on behalf of a private entity generally will
also be regarded as a separate issuer, except that if the security is backed only by the assets and revenues of a non-government entity, then the entity with the ultimate responsibility for the payment of interest and principal may be regarded as
the sole issuer. Foreign government securities (unlike U.S. government securities) are not exempt from the diversification requirements of the Code and the securities of each foreign government issuer are considered to be obligations of a single
issuer. These tax-related limitations may be changed by the Directors of a Fund to the extent necessary to comply with changes to the Federal tax requirements. A Fund that is diversified under the Investment Company Act must satisfy the
foregoing 5% and 10% requirements with respect to 75% of its total assets.
Code of Ethics
Each Fund, the Manager, each Sub-Adviser and the Distributor has adopted a Code of Ethics pursuant to Rule 17j-1 under the Investment Company Act. The
Codes of Ethics establish procedures for personal investing and restrict certain transactions. Employees subject to the Code of Ethics may invest in securities for their personal investment accounts, including securities that may be purchased or
held by a Fund.
M
ANAGEMENT
AND
O
THER
S
ERVICE
A
RRANGEMENTS
Directors and Officers
See Information on Directors and Officers,
Biographical Information, Share Ownership and Compensation of Directors in Part I of each Funds Statement of Additional Information for biographical and certain other information
relating to the Directors and officers of your Fund, including Directors compensation.
Management Arrangements
Management Services.
The Manager provides each Fund with investment advisory and management services. Subject to the oversight of the Board of Directors, the Manager is responsible for the actual
management of a Funds portfolio and reviews the Funds holdings in light of its own research analysis and that from other relevant sources. The responsibility for making decisions to buy, sell or hold a particular security rests with the
Manager. The Manager performs certain of the other administrative services and provides all the office space, facilities, equipment and necessary personnel for management of each Fund.
Each Feeder Fund invests all or a portion of its assets in shares of a Master Portfolio. To the extent a Feeder Fund invests
all of its assets in a Master Portfolio, it does not invest directly in portfolio securities and does not require management services. For such Feeder Funds, portfolio management occurs at the Master Portfolio level.
Management Fee.
Each Fund has entered into a Management Agreement
with the Manager pursuant to which the Manager receives for its services to the Fund monthly compensation at an annual rate based on the average daily net assets of the Fund. For information regarding specific fee rates for your Fund and the fees
paid by your Fund to the Manager for the Funds last three fiscal years or other applicable periods, see Management and Advisory Arrangements in Part I of each Funds Statement of Additional Information.
For Funds that do not have an administrator, each Management Agreement
obligates the Manager to provide management services and to pay all compensation of and furnish office space for officers and employees of a Fund in connection with investment and economic research, trading and investment management of the Fund, as
well as
II-59
the fees of all Directors of the Fund who are interested persons of the Fund. Each Fund pays all other expenses incurred in the operation of that Fund, including among other things: taxes;
expenses for legal and auditing services; costs of preparing, printing and mailing proxies, shareholder reports, prospectuses and statements of additional information, except to the extent paid by BlackRock Investments, LLC (BRIL or the
Distributor); charges of the custodian and sub-custodian, and the transfer agent; expenses of redemption of shares; Commission fees; expenses of registering the shares under Federal, state or foreign laws; fees and expenses of Directors
who are not interested persons of a Fund as defined in the Investment Company Act; accounting and pricing costs (including the daily calculations of net asset value); insurance; interest; brokerage costs; litigation and other extraordinary or
non-recurring expenses; and other expenses properly payable by the Fund. Certain accounting services are provided to each Fund by State Street Bank and Trust Company (State Street) or BNY Mellon Investment Servicing (US) Inc. (BNY
Mellon) pursuant to an agreement between State Street or BNY Mellon, as applicable, and each Fund. Each Fund pays a fee for these services. In addition, the Manager provides certain accounting services to each Fund and the Fund pays the
Manager a fee for such services. The Distributor pays certain promotional expenses of the Funds incurred in connection with the offering of shares of the Funds. Certain expenses are financed by each Fund pursuant to distribution plans in compliance
with Rule 12b-1 under the Investment Company Act. See Purchase of Shares Distribution Plans.
Sub-Advisory Fee.
The Manager of certain Funds has entered into one or more sub-advisory agreements (the Sub-Advisory Agreements) with the sub-adviser or sub-advisers identified in each
such Funds prospectus (the Sub-Adviser) pursuant to which the Sub-Adviser provides sub-advisory services to the Manager with respect to the Fund. For information relating to the fees, if any, paid by the Manager to the Sub-Adviser
pursuant to the Sub-Advisory Agreement for the Funds last three fiscal years or other applicable periods, see Management and Advisory Arrangements in Part I of each Funds Statement of Additional Information.
Organization of the Manager.
BlackRock Advisors, LLC is a Delaware
limited liability company and BlackRock Fund Advisors is a California corporation. Each Manager is an indirect, wholly owned subsidiary of BlackRock, Inc. BlackRock, Inc., through its subsidiaries and divisions, provides (i) investment
management services to individuals and institutional investors through separate account management, non-discretionary advisory programs and commingled investment vehicles; (ii) risk management services, investment accounting and trade
processing tools; (iii) transition management services, and (iv) securities lending services.
Duration and Termination.
Unless earlier terminated as described below, each Management Agreement and each Sub-Advisory Agreement will remain in effect for an initial two year period and from year
to year thereafter if approved annually (a) by the Board of Directors or by a vote of a majority of the outstanding voting securities of a Fund and (b) by a majority of the Directors of the Fund who are not parties to such agreement or
interested persons (as defined in the Investment Company Act) of any such party. Each Management Agreement automatically terminates on assignment and may be terminated without penalty on 60 days written notice at the option of either party
thereto or by the vote of the shareholders of the applicable Fund.
Other Service Arrangements
Administrative Services and Administrative Fee.
Certain Funds have entered into an administration agreement (the Administration
Agreement) with an administrator identified in the Funds Prospectus and Part I of the Funds Statement of Additional Information (each an Administrator). For its services to a Fund, the Administrator receives monthly
compensation at the annual rate set forth in each applicable Funds prospectus. For information regarding any administrative fees paid by your Fund to the Administrator for the periods indicated, see Management and Advisory
Arrangements in Part I of that Funds Statement of Additional Information.
For Funds that have an Administrator, the Administration Agreement obligates the Administrator to provide certain administrative services to the Fund and to pay, or cause its affiliates to pay, for
maintaining its staff and personnel and to provide office space, facilities and necessary personnel for the Fund. Each Administrator is also obligated to pay, or cause its affiliates to pay, the fees of those officers and Directors of the Fund who
are affiliated persons of the Administrator or any of its affiliates.
Duration and Termination of Administration Agreement.
Unless earlier terminated as described below, each Administration Agreement will continue for an initial two year period and from year to year
if approved annually (a) by the Board of Directors of each applicable Fund or by a vote of a majority of the outstanding voting securities of
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such Fund and (b) by a majority of the Directors of the Fund who are not parties to such contract or interested persons (as defined in the Investment Company Act) of any such party. Such
contract is not assignable and may be terminated without penalty on 60 days written notice at the option of either party thereto or by the vote of the shareholders of the Fund.
Transfer Agency Services.
BNY Mellon Investment Servicing (US) Inc. (in this capacity, the Transfer Agent),
a subsidiary of The Bank of New York Mellon Corporation, acts as each Funds Transfer Agent pursuant to a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing Agency Agreement (the Transfer Agency Agreement) with
the Funds. Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible for the issuance, transfer and redemption of shares and the opening and maintenance of shareholder accounts. Each Fund pays the Transfer Agent a fee for the
services it receives based on the type of account and the level of services required. Each Fund reimburses the Transfer Agents reasonable out-of-pocket expenses and pays a fee of 0.10% of account assets for certain accounts that participate in
certain fee-based programs sponsored by the Manager or its affiliates. For purposes of each Transfer Agency Agreement, the term account includes a shareholder account maintained directly by the Transfer Agent and any other account
representing the beneficial interest of a person in the relevant share class on a recordkeeping system. Effective July 1, 2010, the Transfer Agent ceased to be an affiliate of the Funds.
Independent Registered Public Accounting Firm.
The Audit Committee of each Fund, which is comprised solely of the
Funds non-interested Directors, has selected an independent registered public accounting firm for that Fund that audits the Funds financial statements. Please see the inside back cover page of your Funds Prospectus for information
on your Funds independent registered public accounting firm.
Custodian Services.
The name and address of the custodian (the Custodian) of each Fund are provided on the inside back cover page of the Funds Prospectus. The Custodian is
responsible for safeguarding and controlling the Funds cash and securities, handling the receipt and delivery of securities and collecting interest and dividends on the Funds investments. The Custodian is authorized to establish separate
accounts in foreign currencies and to cause foreign securities owned by the Fund to be held in its offices outside the United States and with certain foreign banks and securities depositories.
For certain Feeder Funds, the Custodian also acts as the custodian of the
Master Portfolios assets.
With respect to each Fund, under
an arrangement effective January 1, 2010, on a monthly basis, the Custodian nets the Funds daily positive and negative cash balances and calculates a credit (custody credit) or a charge based on that net amount. The custodian
fees, including the amount of any overdraft charges, may be reduced by the amount of such custody credits, and any unused credits at the end of a given month may be carried forward to a subsequent month. Any such credits unused by the end of a
Funds fiscal year will not expire. Net debits at the end of a given month are added to the Funds custody bill and paid by the Fund.
Accounting Services.
Each Fund has entered into an agreement with State Street or BNY Mellon, pursuant to which State Street or BNY Mellon provides
certain accounting services to the Fund. Each Fund pays a fee for these services. State Street or BNY Mellon provides similar accounting services to the Master LLCs. The Manager or the Administrator also provides certain accounting services to each
Fund and each Fund reimburses the Manager or the Administrator for these services.
See Management and Advisory Arrangements Accounting Services in Part I of each Funds Statement of Additional Information for information on the amounts paid by your Fund and, if
applicable, Master LLC to State Street and the Manager or, if applicable, the Administrator for the periods indicated.
Distribution Expenses.
Each Fund has entered into a distribution agreement with the Distributor in connection with the continuous offering of each
class of shares of the Fund (the Distribution Agreements). The Distribution Agreements obligate the Distributor to pay certain expenses in connection with the offering of each class of shares of the Funds. After the prospectuses,
statements of additional information and periodic reports have been prepared, set in type and mailed to shareholders, the Distributor pays for the printing and distribution of these documents used in connection with the offering to dealers and
investors. The Distributor also pays for other supplementary sales literature and advertising costs. Each Distribution Agreement is subject to the same renewal requirements and termination provisions as the Management Agreement described above.
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Code of Ethics
Each Fund, the Manager, each Sub-Adviser and the Distributor has adopted a
Code of Ethics pursuant to Rule 17j-1 under the Investment Company Act. The Codes of Ethics establish procedures for personal investing and restrict certain transactions. Employees subject to the Code of Ethics may invest in securities for their
personal investment accounts, including securities that may be purchased or held by a Fund.
S
ELECTIVE
D
ISCLOSURE
OF
P
ORTFOLIO
H
OLDINGS
The Board of Directors/Trustees each of the Funds and the Board of Directors
of the Manager have each approved Portfolio Information Distribution Guidelines (the Guidelines) regarding the disclosure of the Funds portfolio securities, as applicable, and other portfolio information. The purpose of the
Guidelines is to ensure that (i) shareholders and prospective shareholders of the Fund have equal access to portfolio holdings and characteristics and (ii) third parties (such as consultants, intermediaries and third-party data providers)
have access to such information no more frequently than shareholders and prospective shareholders.
Pursuant to the Guidelines, the Funds and the Manager may, under certain circumstances as set forth below, make selective disclosure with respect to the Funds portfolio holdings. The Funds
Board has approved the adoption by the Funds of the Guidelines, and employees of the Manager are responsible for adherence to the Guidelines. The Funds Board provides ongoing oversight of the Funds and Managers compliance with the
Guidelines. Examples of the types of information that may be disclosed pursuant to the Guidelines are provided below. This information may be both material non-public information (Confidential Information) and proprietary information of
the Manager. Information that is non-material or that may be obtained from public sources (i.e., information that has been publicly disclosed via a filing with the Securities and Exchange Commission (e.g., fund annual report), through a press
release or placement on a publicly-available internet web site) shall not be deemed Confidential Information.
Except as otherwise provided in the Guidelines, Confidential Information relating to the Funds may not be distributed to persons not employed by the Manager unless: the Fund has a legitimate business
purpose for doing so. Confidential Information may be disclosed to the Funds Board members and their counsel, outside counsel for the Funds and the Funds auditors, and may be disclosed to the Funds service providers and other
appropriate parties with the approval of the Funds Chief Compliance Officer, the Managers General Counsel, the Managers Chief Compliance Officer or the designee of such persons, and in addition, in the case of disclosure to third
parties, subject to a confidentiality or non-disclosure agreement, as necessary in accordance with the Guidelines. Information may also be disclosed as required by applicable laws and regulation.
Examples of instances in which selective disclosure of a Funds
portfolio securities or other portfolio information may be appropriate include: (i) disclosure for due diligence purposes to an investment adviser that is in merger or acquisition talks with the Manager; (ii) disclosure to a newly-hired
investment adviser or sub-adviser prior to its commencing its duties; (iii) disclosure to a third-party feeder fund consistent with its agreement with a master portfolio advised by BlackRock; (iv) disclosure to third-party service
providers of legal, auditing, custody, proxy voting, pricing and other services to the Fund; or (v) disclosure to a rating or ranking organization.
Asset and Return Information.
Data on NAVs, asset levels (by total fund and share class), accruals, yields, capital gains, dividends and fund
returns (net of fees by share class) are generally available to shareholders, prospective shareholders, consultants and third-party data providers upon request, as soon as such data is available. Data on number of shareholders (total and by share
class) and benchmark returns (including performance measures such as standard deviation, information ratio, Sharpe ratio, alpha, and beta) are generally available to shareholders, prospective shareholders, consultants and third-party data providers
as soon as such data is released after month-end.
Portfolio
Characteristics.
Examples of portfolio characteristics include sector allocation, credit quality breakdown, maturity distribution, duration and convexity measures, average credit quality, average maturity, average coupon, top 10 holdings with
percent of the fund held, average market capitalization, capitalization range, ROE, P/E, P/B, P/CF, P/S and EPS.
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1.
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Month-end portfolio characteristics are available to shareholders, prospective shareholders, intermediaries and consultants on the fifth calendar day
after month-end.
1
|
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2.
|
Fund Fact Sheets, which contain certain portfolio characteristics, are available, in both hard copy and electronically, to shareholders, prospective shareholders,
intermediaries and consultants on a monthly or quarterly basis no earlier than the fifth calendar day after the end of a month or quarter.
|
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3.
|
Money Market Performance Reports, which contain money market fund performance for the recent month, rolling 12-month average yields and benchmark performance, are
available on a monthly basis to shareholders, prospective shareholders, intermediaries and consultants by the tenth calendar day of the month. This information may also be obtained electronically upon request.
|
Portfolio Holdings.
In addition to position description, portfolio
holdings may also include issuer name, CUSIP, ticker symbol, total shares and market value for equity portfolios and issuer name, CUSIP, ticker symbol, coupon, maturity, current face value and market value for fixed income portfolios. Other
information that may be provided includes quantity, SEDOL, market price, yield, weighted average life, duration and convexity of each security in the Fund as of a specific date.
The following shall not be deemed a disclosure of Confidential Information:
|
|
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Generally, month-end portfolio holdings may be made available to fund shareholders, prospective shareholders, intermediaries, consultants and
third party data providers (e.g., Lipper, Morningstar and Bloomberg) on the 20th calendar day after the end of each month; except for BlackRock Global Allocation Fund, Inc., BlackRock Long-Horizon Equity Fund, BlackRock Global Allocation Portfolio
of BlackRock Series Fund, Inc. and BlackRock Global Allocation V.I. Fund of BlackRock Variable Series Funds, Inc., whose holdings may be made available on the 40
th
calendar day after the end of the quarter (based on each Funds fiscal year end).
2
|
The following information as it
relates to money market funds, unless made available to the public, shall be deemed a disclosure of Confidential Information and, subject to the Guidelines, requires a confidentiality or non-disclosure arrangement:
|
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|
Weekly portfolio holdings made available to fund shareholders, prospective shareholders, intermediaries and consultants on the next business day
after the end of the weekly period.
|
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Weekly portfolio holdings and characteristics made available to third-party data providers (e.g., Lipper, Morningstar, Bloomberg, S&P,
Fitch, Moodys, Crane Data and iMoneyNet, Inc.) on the next business day after the end of the weekly period.
|
Other Information.
The Guidelines shall also apply to other Confidential Information of a Fund such as attribution analyses or security-specific
information (e.g., information about Fund holdings where an issuer has been downgraded, been acquired or declared bankruptcy).
Implementation.
All employees of the Manager must adhere to the Guidelines when responding to inquiries from shareholders, prospective
shareholders, consultants, and third-party databases. The Funds Chief Compliance Officer is responsible for oversight of compliance with the Guidelines and will recommend to the Funds Board any changes to the Guidelines that he or she
deems necessary or appropriate to ensure the Funds and the Managers compliance.
Ongoing Arrangements.
The Manager has entered into ongoing agreements to provide selective disclosure of Fund portfolio holdings to the following persons or entities:
1.
|
Funds Board of Directors and, if necessary independent Directors counsel and Fund counsel
|
1
|
|
The precise number of days specified above may vary slightly from period to period depending on whether the specified calendar day falls on a weekend
or holiday.
|
2
|
|
The precise number of days specified above may vary slightly from period to period depending on whether the specified calendar day falls on a weekend
or holiday.
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4.
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Funds Administrator, if applicable
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5.
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Funds independent registered public accounting firm
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6.
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Funds accounting services provider
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7.
|
Independent rating agencies Morningstar, Inc., Lipper Inc., S&P, Moodys, Fitch
|
8.
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Information aggregators Markit on Demand, Thomson Financial and Bloomberg, eVestments Alliance, Informa /PSN Investment Solutions, Crane Data, and iMoneyNet
|
9.
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Sponsors of 401(k) plans that include BlackRock-advised funds E.I. Dupont de Nemours and Company, Inc.
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10.
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Consultants for pension plans that invest in BlackRock-advised funds Rocaton Investment Advisors, LLC, Mercer Investment Consulting, Callan Associates,
Brockhouse & Cooper, Cambridge Associates, Morningstar/Investorforce, Russell Investments (Mellon Analytical Solutions), and Wilshire Associates
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11.
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Pricing Vendors Reuters Pricing Service, Bloomberg, FT Interactive Data (FT IDC), ITG, Telekurs Financial, FactSet Research Systems, Inc., JP Morgan Pricing
Direct (formerly Bear Stearns Pricing Service), Standard and Poors Security Evaluations Service, Lehman Index Pricing, Bank of America High Yield Index, Loan Pricing Corporation (LPC), LoanX, Super Derivatives, IBOXX Index, Barclays Euro
Govt Inflation-Linked Bond Index, JPMorgan Emerging & Developed Market Index, Reuters/WM Company, Nomura BPI Index, Japan Securities Dealers Association, Valuation Research Corporate and Murray, Devine & Co., Inc.
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12.
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Portfolio Compliance Consultants Oracle/i-Flex Solutions, Inc.
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13.
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Third-party feeder funds Hewitt Money Market Fund, Hewitt Series Fund, Hewitt Financial Services LLC, Homestead, Inc., Transamerica, State Farm Mutual Fund,
Sterling Capital Funds and their respective boards, sponsors, administrators and other service providers
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14.
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Affiliated feeder funds BlackRock Cayman Prime Money Market Fund, Ltd. and BlackRock Cayman Treasury Money Market Fund Ltd., and their respective boards,
sponsors, administrators and other service providers
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15.
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Other Investment Company Institute
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With respect to each such arrangement, the Fund has a legitimate business purpose for the release of information. The release of the information is
subject to confidential treatment to prohibit the entity from sharing with an unauthorized source or trading upon the information provided. The Fund, the Manager and their affiliates do not receive any compensation or other consideration in
connection with such arrangements.
The Funds and the Manager
monitor, to the extent possible, the use of Confidential Information by the individuals or firms to which it has been disclosed. To do so, in addition to the requirements of any applicable confidentiality agreement and/or the terms and conditions of
the Funds and Managers Code of Ethics and Code of Business Conduct and Ethics all of which require persons or entities in possession of Confidential Information to keep such information confidential and not to trade on such
information for their own benefit the Managers compliance personnel under the supervision of the Funds Chief Compliance Officer, monitor the Managers securities trading desks to determine whether individuals or firms who
have received Confidential Information have made any trades on the basis of that information. In addition, the Manager maintains an internal restricted list to prevent trading by the personnel of the Manager or its affiliates in securities
including securities held by the Funds about which the Manager has Confidential Information. There can be no assurance, however, that the Funds policies and procedures with respect to the selective disclosure of Fund portfolio holdings
will prevent the misuse of such information by individuals or firms that receive such information.
II-64
Potential Conflicts of Interest
The PNC Financial Services Group, Inc. (PNC) has a significant
economic interest in BlackRock, Inc., the parent of BlackRock Advisors, LLC, the Funds investment adviser. PNC is considered to be an affiliate of BlackRock, Inc., under the Investment Company Act. Certain activities of BlackRock Advisors,
LLC, BlackRock, Inc. and their affiliates (collectively, BlackRock) and PNC and its affiliates (collectively, PNC and together with BlackRock, Affiliates), with respect to the Funds and/or other accounts managed
by BlackRock or PNC may give rise to actual or perceived conflicts of interest such as those described below.
BlackRock is one of the worlds largest asset management firms. PNC is a diversified financial services organization spanning the retail, business and corporate markets. BlackRock, PNC and their
respective affiliates (including, for these purposes, their directors, partners, trustees, managing members, officers and employees), including the entities and personnel who may be involved in the investment activities and business operations of a
Fund, are engaged worldwide in businesses, including equity, fixed income, cash management and alternative investments, and have interests other than that of managing the Funds. These are considerations of which investors in a Fund should be aware,
and which may cause conflicts of interest that could disadvantage the Fund and its shareholders. These activities and interests include potential multiple advisory, transactional, financial and other interests in securities and other instruments,
and companies that may be purchased or sold by a Fund.
BlackRock
and its Affiliates have proprietary interests in, and may manage or advise with respect to, accounts or funds (including separate accounts and other funds and collective investment vehicles) that have investment objectives similar to those of a Fund
and/or that engage in transactions in the same types of securities, currencies and instruments as the Fund. One or more Affiliates are also major participants in the global currency, equities, swap and fixed income markets, in each case both on a
proprietary basis and for the accounts of customers. As such, one or more Affiliates are or may be actively engaged in transactions in the same securities, currencies, and instruments in which a Fund invests. Such activities could affect the prices
and availability of the securities, currencies, and instruments in which a Fund invests, which could have an adverse impact on the Funds performance. Such transactions, particularly in respect of most proprietary accounts or customer accounts,
will be executed independently of a Funds transactions and thus at prices or rates that may be more or less favorable than those obtained by the Fund.
When BlackRock and its Affiliates seek to purchase or sell the same assets for their managed accounts, including a Fund, the assets actually purchased or
sold may be allocated among the accounts on a basis determined in their good faith discretion to be equitable. In some cases, this system may adversely affect the size or price of the assets purchased or sold for a Fund. In addition, transactions in
investments by one or more other accounts managed by BlackRock or its Affiliates may have the effect of diluting or otherwise disadvantaging the values, prices or investment strategies of a Fund, particularly, but not limited to, with respect to
small capitalization, emerging market or less liquid strategies. This may occur when investment decisions regarding a Fund are based on research or other information that is also used to support decisions for other accounts. When BlackRock or its
Affiliates implements a portfolio decision or strategy on behalf of another account ahead of, or contemporaneously with, similar decisions or strategies for a Fund, market impact, liquidity constraints, or other factors could result in the Fund
receiving less favorable trading results and the costs of implementing such decisions or strategies could be increased or the Fund could otherwise be disadvantaged. BlackRock or its Affiliates may, in certain cases, elect to implement internal
policies and procedures designed to limit such consequences, which may cause a Fund to be unable to engage in certain activities, including purchasing or disposing of securities, when it might otherwise be desirable for it to do so.
Conflicts may also arise because portfolio decisions regarding a Fund may
benefit other accounts managed by BlackRock or its Affiliates. For example, the sale of a long position or establishment of a short position by a Fund may impair the price of the same security sold short by (and therefore benefit) one or more
Affiliates or their other accounts, and the purchase of a security or covering of a short position in a security by a Fund may increase the price of the same security held by (and therefore benefit) one or more Affiliates or their other accounts.
BlackRock and its Affiliates and their clients may pursue or
enforce rights with respect to an issuer in which a Fund has invested, and those activities may have an adverse effect on the Fund. As a result, prices, availability, liquidity and terms of the Funds investments may be negatively impacted by
the activities of BlackRock or its Affiliates or
II-65
their clients, and transactions for the Fund may be impaired or effected at prices or terms that may be less favorable than would otherwise have been the case.
The results of a Funds investment activities may differ significantly
from the results achieved by BlackRock and its Affiliates for their proprietary accounts or other accounts (including investment companies or collective investment vehicles) managed or advised by them. It is possible that one or more
Affiliate-managed accounts and such other accounts will achieve investment results that are substantially more or less favorable than the results achieved by a Fund. Moreover, it is possible that a Fund will sustain losses during periods in which
one or more Affiliates or Affiliate-managed accounts achieve significant profits on their trading for proprietary or other accounts. The opposite result is also possible. The investment activities of one or more Affiliates for their proprietary
accounts and accounts under their management may also limit the investment opportunities for a Fund in certain emerging and other markets in which limitations are imposed upon the amount of investment, in the aggregate or in individual issuers, by
affiliated foreign investors.
From time to time, a Funds
activities may also be restricted because of regulatory restrictions applicable to one or more Affiliates, and/or their internal policies designed to comply with such restrictions. As a result, there may be periods, for example, when BlackRock,
and/or one or more Affiliates, will not initiate or recommend certain types of transactions in certain securities or instruments with respect to which BlackRock and/or one or more Affiliates are performing services or when position limits have been
reached.
In connection with its management of a Fund, BlackRock
may have access to certain fundamental analysis and proprietary technical models developed by one or more Affiliates. BlackRock will not be under any obligation, however, to effect transactions on behalf of a Fund in accordance with such analysis
and models. In addition, neither BlackRock nor any of its Affiliates will have any obligation to make available any information regarding their proprietary activities or strategies, or the activities or strategies used for other accounts managed by
them, for the benefit of the management of a Fund and it is not anticipated that BlackRock will have access to such information for the purpose of managing the Fund. The proprietary activities or portfolio strategies of BlackRock and its Affiliates,
or the activities or strategies used for accounts managed by them or other customer accounts could conflict with the transactions and strategies employed by BlackRock in managing a Fund.
In addition, certain principals and certain employees of BlackRock are also principals or employees of BlackRock or another
Affiliate. As a result, the performance by these principals and employees of their obligations to such other entities may be a consideration of which investors in a Fund should be aware.
BlackRock may enter into transactions and invest in securities, instruments and currencies on behalf of a Fund in which
customers of BlackRock or its Affiliates, or, to the extent permitted by the Commission, BlackRock or another Affiliate, serves as the counterparty, principal or issuer. In such cases, such partys interests in the transaction will be adverse
to the interests of the Fund, and such party may have no incentive to assure that the Fund obtains the best possible prices or terms in connection with the transactions. In addition, the purchase, holding and sale of such investments by a Fund may
enhance the profitability of BlackRock or its Affiliates. One or more Affiliates may also create, write or issue derivatives for their customers, the underlying securities, currencies or instruments of which may be those in which a Fund invests or
which may be based on the performance of the Fund. A Fund may, subject to applicable law, purchase investments that are the subject of an underwriting or other distribution by one or more Affiliates and may also enter into transactions with other
clients of an Affiliate where such other clients have interests adverse to those of the Fund.
At times, these activities may cause departments of BlackRock or its Affiliates to give advice to clients that may cause these clients to take actions adverse to the interests of the Fund. To the extent
affiliated transactions are permitted, a Fund will deal with BlackRock and its Affiliates on an arms-length basis. BlackRock or its Affiliates may also have an ownership interest in certain trading or information systems used by a Fund. A
Funds use of such trading or information systems may enhance the profitability of BlackRock and its Affiliates.
One or more Affiliates may act as broker, dealer, agent, lender or adviser or in other commercial capacities for a Fund. It is anticipated that the
commissions, mark-ups, mark-downs, financial advisory fees, underwriting and placement fees, sales fees, financing and commitment fees, brokerage fees, other fees, compensation or profits, rates, terms and conditions charged by an Affiliate will be
in its view commercially reasonable, although each
II-66
Affiliate, including its sales personnel, will have an interest in obtaining fees and other amounts that are favorable to the Affiliate and such sales personnel.
Subject to applicable law, the Affiliates (and their personnel and other
distributors) will be entitled to retain fees and other amounts that they receive in connection with their service to the Funds as broker, dealer, agent, lender, adviser or in other commercial capacities and no accounting to the Funds or their
shareholders will be required, and no fees or other compensation payable by the Funds or their shareholders will be reduced by reason of receipt by an Affiliate of any such fees or other amounts.
When an Affiliate acts as broker, dealer, agent, adviser or in other
commercial capacities in relation to the Funds, the Affiliate may take commercial steps in its own interests, which may have an adverse effect on the Funds. A Fund will be required to establish business relationships with its counterparties based on
the Funds own credit standing. Neither BlackRock nor any of the Affiliates will have any obligation to allow their credit to be used in connection with a Funds establishment of its business relationships, nor is it expected that the
Funds counterparties will rely on the credit of BlackRock or any of the Affiliates in evaluating the Funds creditworthiness.
Purchases and sales of securities for a Fund may be bunched or aggregated with orders for other BlackRock client accounts. BlackRock and its Affiliates,
however, are not required to bunch or aggregate orders if portfolio management decisions for different accounts are made separately, or if they determine that bunching or aggregating is not practicable, required or with cases involving client
direction.
Prevailing trading activity frequently may make
impossible the receipt of the same price or execution on the entire volume of securities purchased or sold. When this occurs, the various prices may be averaged, and the Funds will be charged or credited with the average price. Thus, the effect of
the aggregation may operate on some occasions to the disadvantage of the Funds. In addition, under certain circumstances, the Funds will not be charged the same commission or commission equivalent rates in connection with a bunched or aggregated
order.
BlackRock may select brokers (including, without
limitation, Affiliates) that furnish BlackRock, the Funds, other BlackRock client accounts or other Affiliates or personnel, directly or through correspondent relationships, with research or other appropriate services which provide, in
BlackRocks view, appropriate assistance to BlackRock in the investment decision-making process (including with respect to futures, fixed-price offerings and over-the-counter transactions). Such research or other services may include, to the
extent permitted by law, research reports on companies, industries and securities; economic and financial data; financial publications; proxy analysis; trade industry seminars; computer data bases; research-oriented software and other services and
products.
Research or other services obtained in this manner may
be used in servicing any or all of the Funds and other BlackRock client accounts, including in connection with BlackRock client accounts other than those that pay commissions to the broker relating to the research or other service arrangements. Such
products and services may disproportionately benefit other BlackRock client accounts relative to the Funds based on the amount of brokerage commissions paid by the Funds and such other BlackRock client accounts. For example, research or other
services that are paid for through one clients commissions may not be used in managing that clients account. In addition, other BlackRock client accounts may receive the benefit, including disproportionate benefits, of economies of scale
or price discounts in connection with products and services that may be provided to the Funds and to such other BlackRock client accounts. To the extent that BlackRock uses soft dollars, it will not have to pay for those products and services
itself.
BlackRock may receive research that is bundled with the
trade execution, clearing, and/or settlement services provided by a particular broker-dealer. To the extent that BlackRock receives research on this basis, many of the same conflicts related to traditional soft dollars may exist. For example, the
research effectively will be paid by client commissions that also will be used to pay for the execution, clearing, and settlement services provided by the broker-dealer and will not be paid by BlackRock.
BlackRock may endeavor to execute trades through brokers who, pursuant to
such arrangements, provide research or other services in order to ensure the continued receipt of research or other services BlackRock believes are useful in its investment decision-making process. BlackRock may from time to time choose not to
engage in the above described arrangements to varying degrees. BlackRock may also enter into commission sharing arrangements under which BlackRock may execute transactions through a broker-dealer, including, where permitted, an Affiliate, and
II-67
request that the broker-dealer allocate a portion of the commissions or commission credits to another firm that provides research to BlackRock. To the extent that BlackRock engages in commission
sharing arrangements, many of the same conflicts related to traditional soft dollars may exist.
BlackRock may utilize certain electronic crossing networks (ECNs) in executing client securities transactions for certain types of securities. These ECNs may charge fees for their services,
including access fees and transaction fees. The transaction fees, which are similar to commissions or markups/markdowns, will generally be charged to clients and, like commissions and markups/markdowns, would generally be included in the cost of the
securities purchased. Access fees may be paid by BlackRock even though incurred in connection with executing transactions on behalf of clients, including the Funds. In certain circumstances, ECNs may offer volume discounts that will reduce the
access fees typically paid by BlackRock. This would have the effect of reducing the access fees paid by BlackRock. BlackRock will only utilize ECNs consistent with its obligation to seek to obtain best execution in client transactions.
BlackRock has adopted policies and procedures designed to prevent conflicts
of interest from influencing proxy voting decisions that it makes on behalf of advisory clients, including the Funds, and to help ensure that such decisions are made in accordance with BlackRocks fiduciary obligations to its clients.
Nevertheless, notwithstanding such proxy voting policies and procedures, actual proxy voting decisions of BlackRock may have the effect of favoring the interests of other clients or businesses of other divisions or units of BlackRock and/or its
Affiliates, provided that BlackRock believes such voting decisions to be in accordance with its fiduciary obligations. For a more detailed discussion of these policies and procedures, see Proxy Voting Policies and Procedures.
It is also possible that, from time to time, BlackRock or its Affiliates
may, although they are not required to, purchase and hold shares of a Fund. Increasing a Funds assets may enhance investment flexibility and diversification and may contribute to economies of scale that tend to reduce the Funds expense
ratio. BlackRock and its Affiliates reserve the right to redeem at any time some or all of the shares of a Fund acquired for their own accounts. A large redemption of shares of a Fund by BlackRock or its Affiliates could significantly reduce the
asset size of the Fund, which might have an adverse effect on the Funds investment flexibility, portfolio diversification and expense ratio. BlackRock will consider the effect of redemptions on a Fund and other shareholders in deciding whether
to redeem its shares.
It is possible that a Fund may invest in
securities of companies with which an Affiliate has or is trying to develop investment banking relationships as well as securities of entities in which BlackRock or its Affiliates has significant debt or equity investments or in which an Affiliate
makes a market. A Fund also may invest in securities of companies to which an Affiliate provides or may someday provide research coverage. Such investments could cause conflicts between the interests of a Fund and the interests of other clients of
BlackRock or its Affiliates. In making investment decisions for a Fund, BlackRock is not permitted to obtain or use material non-public information acquired by any division, department or Affiliate of BlackRock in the course of these activities. In
addition, from time to time, the activities of an Affiliate may limit a Funds flexibility in purchases and sales of securities. When an Affiliate is engaged in an underwriting or other distribution of securities of an entity, BlackRock may be
prohibited from purchasing or recommending the purchase of certain securities of that entity for a Fund.
BlackRock and its Affiliates, their personnel and other financial service providers have interests in promoting sales of the Funds. With respect to BlackRock and its Affiliates and their personnel, the
remuneration and profitability relating to services to and sales of the Funds or other products may be greater than remuneration and profitability relating to services to and sales of certain funds or other products that might be provided or
offered. BlackRock and its Affiliates and their sales personnel may directly or indirectly receive a portion of the fees and commissions charged to the Funds or their shareholders. BlackRock and its advisory or other personnel may also benefit from
increased amounts of assets under management. Fees and commissions may also be higher than for other products or services, and the remuneration and profitability to BlackRock or its Affiliates and such personnel resulting from transactions on behalf
of or management of the Funds may be greater than the remuneration and profitability resulting from other funds or products.
BlackRock and its Affiliates and their personnel may receive greater compensation or greater profit in connection with an account for which BlackRock
serves as an adviser than with an account advised by an unaffiliated investment adviser. Differentials in compensation may be related to the fact that BlackRock may pay a portion of its advisory fee to its Affiliate, or relate to compensation
arrangements, including for portfolio management, brokerage transactions or account servicing. Any differential in compensation may create a financial incentive on the part of
II-68
BlackRock or its Affiliates and their personnel to recommend BlackRock over unaffiliated investment advisers or to effect transactions differently in one account over another.
BlackRock and its Affiliates may provide valuation assistance to certain
clients with respect to certain securities or other investments and the valuation recommendations made for their clients accounts may differ from the valuations for the same securities or investments assigned by a Funds pricing vendors,
especially if such valuations are based on broker-dealer quotes or other data sources unavailable to the Funds pricing vendors. While BlackRock will generally communicate its valuation information or determinations to a Funds pricing
vendors and/or fund accountants, there may be instances where the Funds pricing vendors or fund accountants assign a different valuation to a security or other investment than the valuation for such security or investment determined or
recommended by BlackRock.
As disclosed in more detail in
Pricing of Shares Determination of Net Asset Value in this Statement of Additional Information, when market quotations are not readily available or are believed by BlackRock to be unreliable, a Funds investments may be
valued at fair value by BlackRock, pursuant to procedures adopted by the Funds Board of Directors. When determining an assets fair value, BlackRock seeks to determine the price that a Fund might reasonably expect to receive
from the current sale of that asset in an arms-length transaction. The price generally may not be determined based on what a Fund might reasonably expect to receive for selling an asset at a later time or if it holds the asset to maturity.
While fair value determinations will be based upon all available factors that BlackRock deems relevant at the time of the determination, and may be based on analytical values determined by BlackRock using proprietary or third party valuation models,
fair value represents only a good faith approximation of the value of a security. The fair value of one or more securities may not, in retrospect, be the price at which those assets could have been sold during the period in which the particular fair
values were used in determining a Funds net asset value. As a result, a Funds sale or redemption of its shares at net asset value, at a time when a holding or holdings are valued by BlackRock (pursuant to Board-adopted procedures) at
fair value, may have the effect of diluting or increasing the economic interest of existing shareholders.
To the extent permitted by applicable law, a Fund may invest all or some of its short term cash investments in any money market fund or similarly-managed private fund advised or managed by BlackRock. In
connection with any such investments, a Fund, to the extent permitted by the Investment Company Act, may pay its share of expenses of a money market fund in which it invests, which may result in a Fund bearing some additional expenses.
BlackRock and its Affiliates and their directors, officers and employees,
may buy and sell securities or other investments for their own accounts, and may have conflicts of interest with respect to investments made on behalf of a Fund. As a result of differing trading and investment strategies or constraints, positions
may be taken by directors, officers, employees and Affiliates of BlackRock that are the same, different from or made at different times than positions taken for the Fund. To lessen the possibility that a Fund will be adversely affected by this
personal trading, the Fund, BRIL and BlackRock each have adopted a Code of Ethics in compliance with Section 17(j) of the Investment Company Act that restricts securities trading in the personal accounts of investment professionals and others
who normally come into possession of information regarding the Funds portfolio transactions. Each Code of Ethics can be reviewed and copied at the Commissions Public Reference Room in Washington, D.C. Information about obtaining
documents on the Commissions website may be obtained by calling the Commission at (800) SEC-0330. Each Code of Ethics is also available on the EDGAR Database on the Commissions Internet site at http://www.sec.gov, and copies may be
obtained, after paying a duplicating fee, by e-mail at publicinfo@sec.gov or by writing the Commissions Public Reference Section, Washington, DC 20549-0102.
BlackRock and its Affiliates will not purchase securities or other property
from, or sell securities or other property to, a Fund, except that the Fund may in accordance with rules adopted under the Investment Company Act engage in transactions with accounts that are affiliated with the Fund as a result of common officers,
directors, or investment advisers or pursuant to exemptive orders granted to the Funds and/or BlackRock by the Commission. These transactions would be affected in circumstances in which BlackRock determined that it would be appropriate for the Fund
to purchase and another client of BlackRock to sell, or the Fund to sell and another client of BlackRock to purchase, the same security or instrument on the same day. From time to time, the activities of a Fund may be restricted because of
regulatory requirements applicable to BlackRock or its Affiliates and/or BlackRocks internal policies designed to comply with, limit the applicability of, or otherwise relate to such requirements. A client not advised by BlackRock would not be
subject to some of those considerations. There may be periods when BlackRock may not initiate or recommend certain types of transactions, or may otherwise restrict or limit their advice in certain securities or instruments issued by or related to
companies for which an Affiliate is performing investment banking,
II-69
market making, advisory or other services or has proprietary positions. For example, when an Affiliate is engaged in an underwriting or other distribution of securities of, or advisory services
for, a company, the Funds may be prohibited from or limited in purchasing or selling securities of that company. In addition, when BlackRock is engaged to provide advisory or risk management services for a company, BlackRock may be prohibited from
or limited in purchasing or selling securities of that company on behalf of a Fund, particularly where such services result in BlackRock obtaining material non-public information about the company. Similar situations could arise if personnel of
BlackRock or its Affiliates serve as directors of companies the securities of which the Funds wish to purchase or sell. However, if permitted by applicable law, and where consistent with BlackRocks policies and procedures (including the
necessary implementation of appropriate information barriers), the Funds may purchase securities or instruments that are issued by such companies, are the subject of an underwriting, distribution, or advisory assignment by an Affiliate or are the
subject of an advisory or risk management assignment by BlackRock, or where personnel of BlackRock or its Affiliates are directors or officers of the issuer.
In certain circumstances where the Funds invest in securities issued by companies that operate in certain regulated industries, in certain emerging or
international markets, or are subject to corporate or regulatory ownership definitions, there may be limits on the aggregate amount invested by Affiliates (including BlackRock) for their proprietary accounts and for client accounts (including the
Funds) that may not be exceeded without the grant of a license or other regulatory or corporate consent, or, if exceeded, may cause BlackRock, the Funds or other client accounts to suffer disadvantages or business restrictions. As a result,
BlackRock on behalf of its clients (including the Funds) may limit purchases, sell existing investments, or otherwise restrict or limit the exercise of rights (including voting rights) when BlackRock, in its sole discretion, deems it appropriate in
light of potential regulatory or other restrictions on ownership or other consequences resulting from reaching investment thresholds.
In those circumstances where ownership thresholds or limitations must be observed, BlackRock seeks to allocate limited investment opportunities equitably
among clients (including the Funds), taking into consideration benchmark weight and investment strategy. When ownership in certain securities nears an applicable threshold, BlackRock may limit purchases in such securities to the issuers
weighting in the applicable benchmark used by BlackRock to manage the Fund. If client (including Fund) holdings of an issuer exceed an applicable threshold and BlackRock is unable to obtain relief to enable the continued holding of such investments,
it may be necessary to sell down these positions to meet the applicable limitations. In these cases, benchmark overweight positions will be sold prior to benchmark positions being reduced to meet applicable limitations.
In addition to the foregoing, other ownership thresholds may trigger
reporting requirements to governmental and regulatory authorities, and such reports may entail the disclosure of the identity of a client or BlackRocks intended strategy with respect to such security or asset.
BlackRock and its Affiliates may maintain securities indices as part of
their product offerings. Index based funds seek to track the performance of securities indices and may use the name of the index in the fund name. Index providers, including BlackRock and its Affiliates may be paid licensing fees for use of their
index or index name. BlackRock and its Affiliates will not be obligated to license their indices to BlackRock, and BlackRock cannot be assured that the terms of any index licensing agreement with BlackRock and its Affiliates will be as favorable as
those terms offered to other index licensees.
BlackRock and its
Affiliates may serve as Authorized Participants in the creation and redemption of exchange traded funds, including funds advised by affiliates of BlackRock. BlackRock and its Affiliates may therefore be deemed to be participants in a distribution of
such exchange traded funds, which could render them statutory underwriters.
The custody arrangement described in Management and Other Service Arrangements may lead to potential conflicts of interest with BlackRock where BlackRock has agreed to waive fees and/or
reimburse ordinary operating expenses in order to cap expenses of the Funds. This is because the custody arrangements with the Funds custodian may have the effect of reducing custody fees when the Funds leave cash balances uninvested. When a
Funds actual operating expense ratio exceeds a stated cap, a reduction in custody fees reduces the amount of waivers and/or reimbursements BlackRock would be required to make to the Fund. This could be viewed as having the potential to provide
BlackRock an incentive to keep high positive cash balances for Funds with expense caps in order to offset fund custody fees that BlackRock might otherwise reimburse. However, BlackRocks portfolio managers do not
II-70
intentionally keep uninvested balances high, but rather make investment decisions that they anticipate will be beneficial to fund performance.
Present and future activities of BlackRock and its Affiliates, including
BlackRock Advisors, LLC, in addition to those described in this section, may give rise to additional conflicts of interest.
P
URCHASE
OF
S
HARES
Most BlackRock-advised open-end funds offer multiple classes of shares
under a plan adopted under Rule 18f-3 under the Investment Company Act. Investor A Shares are sold to investors choosing the initial sales charge alternative and Investor B and Investor C Shares are sold to investors choosing the deferred sales
charge alternative. Effective July 1, 2009, Investor B Shares of each Fund are no longer available for purchase except through exchanges, dividend reinvestments, and for purchase by certain employer-sponsored retirement plans. Shareholders with
investments in Investor B Shares as of July 1, 2009 may continue to hold such shares until they automatically convert to Investor A Shares under the existing conversion schedule. All other features of Investor B Shares, including the Rule 12b-1
distribution and service fees, contingent deferred sales charge schedules and conversion features, remain unchanged and continue in effect. Institutional Shares and Institutional Daily Shares are sold to certain eligible investors without a sales
charge. Certain Funds offer Class R Shares, which are available only to certain employer-sponsored retirement plans and are sold without a sales charge. In addition, certain Funds offer Service Shares, BlackRock Shares and/or Class K Shares that are
available only to certain eligible investors. Please see the appropriate Prospectus for your Fund to determine which classes are offered by your Fund and under what circumstances. Each class has different exchange privileges. See Shareholder
Services Exchange Privilege.
The applicable
offering price for purchase orders is based on the net asset value of a Fund next determined after receipt of the purchase order by a dealer or other financial intermediary (Selling Dealer) that has been authorized by the Distributor by
contract to accept such orders. As to purchase orders received by Selling Dealers prior to the close of business on the New York Stock Exchange (NYSE) (generally, the NYSE closes at 4:00 p.m. Eastern time), on the day the order is
placed, including orders received after the close of business on the previous day, the applicable offering price is based on the net asset value determined as of the close of business on the NYSE on that day. If the purchase orders are not received
by the Selling Dealer before the close of business on the NYSE, such orders are deemed received on the next business day. It is the responsibility of brokers to transmit purchase orders and payment on a timely basis. Generally, if payment is not
received within the period described in the prospectuses, the order will be canceled, notice thereof will be given, and the broker and its customers will be responsible for any loss to the Fund or its shareholders. Orders of less than $500 may be
mailed by a broker to the Transfer Agent.
The minimum investment
for the initial purchase of shares is set forth in the prospectus for each Fund. The minimum initial investment for employees of a Fund, a Funds Manager, Sub-Advisers or BRIL or employees of their affiliates is $100, unless payment is made
through a payroll deduction program in which case the minimum investment is $25.
Each Fund has lower investment minimums for other categories of shareholders eligible to purchase Institutional and Institutional Daily Shares, including selected fee-based programs. Each Fund may permit
a lower initial investment for certain investors if their purchase, combined with purchases by other investors received together by the Fund, meets the minimum investment requirement. Each Fund may reject any purchase order, modify or waive the
minimum initial or subsequent investment requirements and suspend and resume the sale of any share class of any Fund at any time.
Under certain circumstances, each Fund may permit certain firms to convert shares of a Fund from one class of shares to another class of shares of the
same Fund. Shareholders should consult with their own tax advisors regarding any tax consequences relating to such conversions.
Each Fund or the Distributor may suspend the continuous offering of the Funds shares of any class at any time in response to conditions in the
securities markets or otherwise and may resume offering the shares from time to time. Any order may be rejected by a Fund or the Distributor. Neither the Distributor, the securities dealers nor other financial intermediaries are permitted to
withhold placing orders to benefit themselves by a price change.
II-71
The term purchase, as used in the Prospectus and this Statement of Additional Information,
refers to (i) a single purchase by an individual, (ii) concurrent purchases by an individual, his or her spouse and their children under the age of 21 years purchasing shares for his, her or their own account, and (iii) single
purchases by a trustee or other fiduciary purchasing shares for a single trust estate or single fiduciary account although more than one beneficiary may be involved. The term purchase also includes purchases by any company,
as that term is defined in the Investment Company Act, but does not include purchases by (i) any company that has not been in existence for at least six months, (ii) a company that has no purpose other than the purchase of shares of a Fund
or shares of other registered investment companies at a discount, or (iii) any group of individuals whose sole organizational nexus is that its participants are credit cardholders of a company, policyholders of an insurance company, customers
of either a bank or broker-dealer or clients of an investment adviser.
In-Kind Purchases.
Payment for shares of a Fund may, at the discretion of BlackRock, be made in the form of securities that are permissible investments for the Fund and that meet the investment
objective, policies and limitations of the Fund as described herein. In connection with an in-kind securities payment, the Fund may require, among other things, that the securities: (i) be valued on the day of purchase in accordance with the
pricing methods used by the Fund; (ii) be accompanied by satisfactory assurance that the Fund will have good and marketable title to such securities; (iii) not be subject to any restrictions upon resale by the Fund; (iv) be in proper
form for transfer to the Fund; and (v) be accompanied by adequate information concerning the basis and other tax matters relating to the securities. All dividends, interest, subscription or other rights pertaining to such securities shall
become the property of the Fund engaged in the in-kind purchase transaction and must be delivered to the Fund by the investor upon receipt from the issuer. Shares purchased in exchange for securities generally cannot be redeemed until the transfer
has settled.
Institutional Shares and Institutional Daily
Shares
Institutional and Institutional Daily Shares may be
purchased at net asset value without a sales charge. Only certain investors are eligible to purchase Institutional Shares. Investors who are eligible to purchase Institutional Shares should purchase Institutional Shares because they are not subject
to any sales charge and have lower ongoing expenses than Investor A, Investor A1, Investor B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2, Investor C3, Class R or Service Shares. A Fund may in its discretion waive or
modify any minimum investment amount, may reject any order for any class of shares and may suspend and resume the sale of shares of any Fund at any time.
Eligible Institutional Share Investors.
Institutional Shares of the Funds may be purchased by customers of broker-dealers and agents that have
established a servicing relationship with the Fund on behalf of their customers. These broker-dealers and agents may impose additional or different conditions on the purchase or redemption of Fund shares by their customers and may charge their
customers transaction, account or other fees on the purchase and redemption of Fund shares. Each broker-dealer or agent is responsible for transmitting to its customers a schedule of any such fees and information regarding any additional or
different conditions regarding purchases and redemptions. Shareholders who are customers of such broker-dealers or agents should consult them for information regarding these fees and conditions.
Payment for Institutional Shares must normally be made in Federal funds or
other funds immediately available by 4 p.m. (Eastern time) on the first business day following receipt of the order. Payment may also, in the discretion of the Fund, be made in the form of securities that are permissible investments for the Fund. If
payment for a purchase order is not received by the prescribed time, an investor may be liable for any resulting losses or expenses incurred by the Fund.
Payment for Institutional Daily Shares must normally by made in Federal funds or other funds immediately available by the close of the Federal funds wire
(normally 6:00 p.m. Eastern time) on the same business day as the receipt of the order. Payment may also, in the discretion of the Fund, be made in the form of securities that are permissible investments for the Fund. If payment for a purchase order
is not received by the prescribed time, the order will generally be canceled and the investor may be liable for any resulting losses or expenses incurred by the Fund.
Investors who currently own Institutional Shares or Institutional Daily
Shares in a shareholder account are entitled to purchase additional Institutional Shares or Institutional Daily Shares of a Fund in that account. In addition, the
II-72
following investors may purchase Institutional Shares or Institutional Daily Shares: employees, officers and directors/trustees of BlackRock, Inc., BlackRock Funds, Merrill Lynch & Co,
Inc., The PNC Financial Services Group Inc., Barclays PLC or their respective affiliates and any trust, pension, profit-sharing or other benefit plan for such persons; institutional and individual retail investors with a minimum investment of $2
million who purchase through certain broker-dealers or directly from the Fund; certain employer-sponsored retirement plans; investors in selected fee based programs; clients of registered investment advisers who have $250,000 invested in the Funds;
clients of the trust departments of PNC Bank and Bank of America, N.A. and their affiliates for whom they (i) act in a fiduciary capacity (excluding participant directed employee benefit plans); (ii) otherwise have investment discretion;
or (iii) act as custodian for at least $2 million in assets; unaffiliated banks, thrifts or trust companies that have agreements with the Distributor; certain state sponsored 529 college savings plans; and holders of certain Merrill Lynch
sponsored unit investment trusts (UITs) who reinvest dividends received from such UITs in shares of a Fund.
Shareholders liquidated from BlackRock Investment Quality Municipal Income Trust, BlackRock New York Investment Quality Municipal Trust, Inc. and BlackRock New Jersey Investment Quality Municipal Trust,
Inc. (each, a Liquidated Fund) may, prior to September 28, 2012, buy Institutional Shares of BlackRock National Municipal Fund (a series of BlackRock Municipal Bond Fund, Inc.), BlackRock New York Municipal Bond Fund (a series of
BlackRock Multi-State Municipal Series Trust) and BlackRock New Jersey Municipal Bond Fund (a series of BlackRock Multi-State Municipal Series Trust) (each, an Eligible Fund). Purchases must be made directly through BlackRock by calling
(800) 441-7762. Shareholders who make an initial investment in Institutional Shares of an Eligible Fund prior to September 28, 2012 may make additional purchases of Institutional Shares of that same Eligible Fund following such date.
Purchase Privileges of Certain Persons.
Employees,
officers, directors/trustees of BlackRock, Inc., BlackRock Funds, Merrill Lynch & Co., Inc., The PNC Financial Services Group Inc., or their respective affiliates; and any trust, pension, profit-sharing or other benefit plan for such
persons may purchase Institutional or Institutional Daily Shares at lower investment minimums than stated in each Funds prospectus. In addition, employees, officers, directors/trustees previously associated with BNY Mellon Investment Servicing
(US) Inc. (formerly PNC Global Investment Servicing (U.S.) Inc.) in its capacity as the Funds former Transfer Agent and/or accounting agent, and who, prior to July 1, 2010, acquired Investor A Shares in a Fund without paying a sales
charge based on a waiver for such persons previously in effect, may continue to buy Investor A Shares in such Fund without paying a sales charge. A Fund realizes economies of scale and reduction of sales-related expenses by virtue of the familiarity
of these persons with the Fund. Employees, directors, and board members of other funds wishing to purchase shares of a Fund must satisfy the Funds suitability standards.
Initial Sales Charge Alternative Investor A Shares
Investors who prefer an initial sales charge alternative may elect to
purchase Investor A Shares. Investor A1 Shares generally are not continuously offered but are offered (i) for purchase by certain employer-sponsored retirement plans and (ii) to certain investors who currently hold Investor A1 Shares for
dividend and capital gain reinvestment only. For ease of reference, Investor A and Investor A1 Shares are sometimes referred to herein as front-end load shares.
Investors qualifying for significantly reduced initial sales charges may
find the initial sales charge alternative particularly attractive because similar sales charge reductions are not available with respect to the deferred sales charges imposed in connection with investments in Investor B, Investor B1, Investor B2,
Investor B3, Investor C, Investor C1, Investor C2 and Investor C3 Shares (sometimes referred to herein as CDSC shares). Investors who do not qualify for reduced initial sales charges and who expect to maintain their investment for an
extended period of time also may elect to purchase Investor A Shares, because over time the accumulated ongoing service and distribution fees on CDSC shares may exceed the front-end load shares initial sales charge and service fee. Although
some investors who previously purchased Institutional Shares may no longer be eligible to purchase Institutional Shares of other Funds, those previously purchased Institutional Shares, together with all BlackRock front-end load and CDSC share
holdings, will count toward a right of accumulation that may qualify the investor for a reduced initial sales charge on new initial sales charge purchases. In addition, the ongoing CDSC shares service and distribution fees will cause CDSC shares to
have higher expense ratios, pay lower dividends and have lower total returns than the initial sales charge shares. The ongoing front-end load shares service fees will cause Investor A, Investor A1 and Service Shares to have a higher expense
ratio, pay lower dividends and have a lower total return than Institutional Shares.
II-73
See Information on Sales Charges and Distribution Related Expenses Investor A Sales Charge
Information in Part I of each Funds Statement of Additional Information for information about amounts paid to the Distributor in connection with Investor A and Investor A1 Shares for the periods indicated.
The Distributor may reallow discounts to selected securities dealers and
other financial intermediaries and retain the balance over such discounts. At times a Distributor may reallow the entire sales charge to such dealers. Since securities dealers and other financial intermediaries selling front-end load shares of a
Fund will receive a concession equal to most of the sales charge, they may be deemed to be underwriters under the Securities Act.
Reduced Initial Sales Charges
Certain investors may be eligible for a reduction in or waiver of a sales load due to the nature of the investors and/or the reduced sales efforts
necessary to obtain their investments.
Reinvested Dividends.
No sales charges are imposed upon shares issued as a result of the automatic reinvestment of dividends.
Rights of Accumulation.
Investors have a right of accumulation under which the current value of an investors existing Investor A, Investor A1, Investor B, Investor B1, Investor
B2, Investor B3, Investor C, Investor C1, Investor C2, Investor C3 and Institutional Shares in most BlackRock Funds and the investment in the BlackRock College Advantage 529 Program by the investor or by or on behalf of the investors spouse
and minor children may be combined with the amount of the current purchase in determining whether an investor qualifies for a breakpoint and a reduced front-end sales charge. Financial intermediaries may value current holdings of their customers
differently for purposes of determining whether an investor qualifies for a breakpoint and a reduced front-end sales charge, although customers of the same financial intermediary will be treated similarly. In order to use this right, the investor
must alert BlackRock to the existence of any previously purchased shares.
Letter of Intent.
An investor may qualify for a reduced front-end sales charge immediately by signing a Letter of Intent stating the investors intention to buy a specified amount
of Investor A, Investor B, Investor C or Institutional Shares in one or more BlackRock Funds within the next 13 months that would, if bought all at once, qualify the investor for a reduced sales charge. The initial investment must meet the minimum
initial purchase requirement. The 13-month Letter of Intent period commences on the day that the Letter of Intent is received by the Fund, and the investor must tell the Fund that later purchases are subject to the Letter of Intent. Purchases
submitted prior to the date the Letter of Intent is received by the Fund are not counted toward the sales charge reduction. During the term of the Letter of Intent, the Fund will hold Investor A Shares representing up to 5% of the indicated amount
in an escrow account for payment of a higher sales load if the full amount indicated in the Letter of Intent is not purchased. If the full amount indicated is not purchased within the 13-month period, and the investor does not pay the higher sales
load within 20 days, the Fund will redeem enough of the Investor A Shares held in escrow to pay the difference.
Purchase Privileges of Certain Persons.
BlackRock may pay placement fees to dealers on purchases of Investor A Shares of all Funds, which may depend on the policies, procedures and trading platforms of your financial intermediary.
Except as noted below these placement fees may be up to the following
amounts:
|
|
|
|
|
$1 million but less than $3 million
|
|
|
0.50
|
%
|
$3 million but less than $15 million
|
|
|
0.25
|
%
|
$15 million and above
|
|
|
0.15
|
%
|
With respect to BlackRock Total Return
Fund of BlackRock Bond Fund, Inc., and BlackRock High Yield Bond Portfolio, BlackRock International Bond Portfolio, BlackRock Strategic Income Opportunities Portfolio and BlackRock Core Bond Portfolio of BlackRock Funds II, and BlackRock U.S.
Mortgage Portfolio of Managed Account Series, and BlackRock Global Long/Short Credit Fund of BlackRock Funds, the placement fees may be up to the following amounts:
|
|
|
|
|
$1 million but less than $3 million
|
|
|
0.75
|
%
|
II-74
|
|
|
|
|
$3 million but less than $15 million
|
|
|
0.50
|
%
|
$15 million and above
|
|
|
0.25
|
%
|
With respect to the BlackRock Inflation
Protected Bond Portfolio of BlackRock Funds II, the placement fees may be up to the following amounts:
|
|
|
|
|
$1 million but less than $3 million
|
|
|
0.15
|
%
|
$3 million but less than $15 million
|
|
|
0.10
|
%
|
$15 million and above
|
|
|
0.05
|
%
|
With respect to the Emerging Market Local
Debt Portfolio of BlackRock Funds II, the placement fees may be up to the following amounts:
|
|
|
|
|
$1 million but less than $3 million
|
|
|
1.00
|
%
|
$3 million but less than $15 million
|
|
|
0.50
|
%
|
$15 million and above
|
|
|
0.25
|
%
|
With respect to BlackRock Low Duration Bond
Portfolio, BlackRock Floating Rate Income Portfolio and BlackRock Secured Credit Portfolio of BlackRock Funds II, the placement fees may be up to the following amounts:
|
|
|
|
|
$500,000 but less than $3 million
|
|
|
0.75
|
%
|
$3 million but less than $15 million
|
|
|
0.50
|
%
|
$15 million and above
|
|
|
0.25
|
%
|
With respect to all Tax Exempt
Fixed-Income Funds, the placement fees may be up to the following amounts:
|
|
|
|
|
$1 million but less than $4 million
|
|
|
1.00
|
%
|
$4 million but less than $10 million
|
|
|
0.50
|
%
|
$10 million and above
|
|
|
0.25
|
%
|
With respect to the Short-Term Municipal
Bond Fund of BlackRock Municipal Bond Fund, Inc. the placement fees may be up to the following amounts:
|
|
|
|
|
$250,000 and above
|
|
|
0.50
|
%
|
For the tables above, the placement fees
indicated will apply up to the indicated breakpoint (so that, for example, a sale of $4 million worth of Bond Fund Investor A Shares will result in a placement fee of up to 0.50% on the first $3 million and 0.25% on the final $1 million).
Other.
The following persons may also buy Investor A
Shares without paying a sales charge: (a) certain employer-sponsored retirement plans (for purposes of this waiver, employer-sponsored retirement plans do not include SEP IRAs, SIMPLE IRAs or SARSEPs); (b) rollovers of current investments
through certain employer-sponsored retirement plans provided the shares are transferred to the same BlackRock Fund as either a direct rollover, or subsequent to distribution, the rolled -over proceeds are contributed to a BlackRock IRA through an
account directly with the Fund; or purchases by IRA programs that are sponsored by financial intermediary firms provided the financial intermediary firm has entered into a Class A Net Asset Value agreement with respect to such program with
II-75
the Distributor; (c) insurance company separate accounts; (d) registered investment advisers, trust companies and bank trust departments exercising discretionary investment authority
with respect to amounts to be invested in a Fund; (e) persons participating in a fee-based program (such as a wrap account) under which they pay advisory fees to a broker-dealer or other financial institution; (f) financial intermediaries who have
entered into an agreement with the Distributor and have been approved by the Distributor to offer Fund shares to self-directed investment brokerage accounts that may or may not charge a transaction fee; (g) state sponsored 529 college savings
plans; and (h) persons involuntarily liquidated from a Fund, who within 60 days of liquidation buy new shares of another BlackRock Fund (but only up to the amount that was liquidated). The following persons associated with the Funds, the
Funds Manager, Sub-Advisers, Transfer Agent, Distributor, fund accounting agents, Barclays PLC and their affiliates may buy Investor A Shares of each of the Funds without paying a sales charge to the extent permitted by these firms including:
(a) officers, directors and partners; (b) employees and retirees; (c) employees of firms who have entered into selling agreements to distribute shares of BlackRock-advised funds; (d) immediate family members of such persons
(immediate family members shall be defined as the investor, the investors spouse or domestic partner, children, parents and siblings); and (e) any trust, pension, profit-sharing or other benefit plan for any of the persons set
forth in (a) through (d). Investors who qualify for any of these exemptions from the sales charge should purchase Investor A Shares. The availability of Investor A Shares sales charge waivers may depend upon the policies, procedures and trading
platforms of your financial intermediary; consult your financial adviser.
If you invest $1,000,000 ($250,000 for BlackRock Short-Term Municipal Fund of BlackRock Municipal Bond Fund, Inc., $500,000 for BlackRock Low Duration Bond Portfolio, BlackRock Floating Rate Income
Portfolio and BlackRock Secured Credit Portfolio of BlackRock Funds II) or more in Investor A or Investor A1 Shares, you may not pay an initial sales charge. However, if you redeem your Investor A or Investor A1 Shares within eighteen months after
purchase, you may be charged a deferred sales charge. The deferred sales charge on Investor A Shares is not charged in connection with: (a) redemptions of Investor A Shares purchased through certain employer-sponsored retirement plans and
rollovers of current investments in a Fund through such plans; (b) exchanges described in Exchange Privilege below; (c) redemptions made in connection with minimum required distributions due to the shareholder reaching age
70
1
/
2
from IRA and 403(b)(7) accounts; (d) certain post-retirement withdrawals from an IRA or other retirement plan if you are over
59
1
/
2
years old and you purchased your shares prior to October 2,
2006; (e) redemptions made with respect to certain retirement plans sponsored by a Fund, BlackRock or its affiliates; (f) redemptions (i) within one year of a shareholders death or, if later, the receipt of a certified probate
settlement (including in connection with the distribution of account assets to a beneficiary of the decedent) or (ii) in connection with a shareholders disability (as defined in the Code) subsequent to the purchase of Investor A Shares;
(g) involuntary redemptions of Investor A Shares in accounts with low balances; (h) certain redemptions made pursuant to the Systematic Withdrawal Plan (described below); (i) redemptions related to the payment of BNY Mellon Investment
Servicing Trust Company custodial IRA fees; and (j) redemptions when a shareholder can demonstrate hardship, in the absolute discretion of a Fund.
With respect to certain employer-sponsored retirement plans, if a dealer
waives its right to receive a placement fee, the Fund may, at its own discretion, waive the CDSC (as defined below) related to purchases of $1,000,000 ($250,000 for BlackRock Short-Term Municipal Fund of BlackRock Municipal Bond Fund, Inc., and
$500,000 for BlackRock Low Duration Bond Portfolio, BlackRock Floating Rate Income Portfolio and BlackRock Secured Credit Portfolio of BlackRock Funds II) or more of Investor A Shares. This may depend upon the policies, procedures and trading
platforms of your financial intermediary; consult your financial adviser.
Investor A Shares are also available at net asset value to investors that, for regulatory reasons, are required to transfer investment positions from a foreign registered investment company advised by
BlackRock or its affiliates to a U.S. registered BlackRock-advised fund.
Acquisition of Certain Investment Companies.
Investor A Shares may be offered at net asset value in connection with the acquisition of the assets of or merger or consolidation with a personal
holding company or a public or private investment company.
Purchases Through Certain Financial Intermediaries.
Reduced sales charges may be applicable for purchases of Investor A or Investor A1 Shares of a
Fund through certain financial advisers, selected securities dealers and other financial intermediaries that meet and adhere to standards established by the Manager from time to time.
II-76
Deferred Sales Charge Alternative Investor B and Investor C Shares
Investor B, Investor B1, Investor B2 and Investor B3 Shares generally are
not continuously offered but are offered by exchange (Investor B Shares only) and also to certain investors who currently hold Investor B, Investor B1, Investor B2 or Investor B3 Shares for dividend and capital gain reinvestment. In addition,
certain employer-sponsored retirement plans that currently hold Investor B, Investor B1, Investor B2 or Investor B3 Shares may purchase additional Investor B, Investor B1, Investor B2 or Investor B3 Shares or effect exchanges between Funds in those
classes.
Investors choosing the deferred sales charge
alternative should consider Investor C Shares if they are uncertain as to the length of time they intend to hold their assets in a Fund. If you select Investor C Shares, you do not pay an initial sales charge at the time of purchase. A Fund will not
accept a purchase order of $500,000 or more for Investor C Shares.
If you select Investor C, Investor C1, Investor C2 or Investor C3 Shares, you do not pay an initial sales charge at the time of purchase. Investor C1, Investor C2 and Investor C3 Shares generally are not
continuously offered but are offered (i) for purchase by certain employer-sponsored retirement plans and (ii) to certain investors who currently hold Investor C1, Investor C2 or Investor C3 Shares for dividend and capital gain
reinvestment.
The deferred sales charge alternatives may be
particularly appealing to investors who do not qualify for the reduction in initial sales charges. CDSC shares are subject to ongoing service fees and distribution fees; however, these fees potentially may be offset to the extent any return is
realized on the additional funds initially invested in CDSC shares. In addition, certain Investor B, Investor B1, Investor B2 and Investor B3 Shares will be converted into Investor A or Investor A1 Shares, as set forth in each Funds
prospectus, of a Fund after a conversion period of approximately seven years (ten years for BlackRock California Municipal Bond Fund, BlackRock High Yield Bond Portfolio (Investor B1 Shares), BlackRock Intermediate Municipal Fund, BlackRock Low
Duration Bond Portfolio (Investor B3 Shares), BlackRock National Municipal Fund, BlackRock New Jersey Municipal Bond Fund (Investor B1 Shares), BlackRock New York Municipal Bond Fund, BlackRock Pennsylvania Municipal Bond Fund (Investor B1 Shares),
BlackRock Short-Term Municipal Fund, BlackRock Total Return Fund (Investor B and Investor B1 Shares), BlackRock U.S. Government Bond Portfolio (Investor B1 Shares), BlackRock World Income Fund and Franklin Templeton Total Return FDP Fund), and,
thereafter, investors will be subject to lower ongoing fees.
BlackRock compensates financial advisers and other financial intermediaries for selling CDSC shares at the time of purchase from its own funds. Proceeds
from the CDSC (as defined below) and the distribution fee are paid to the Distributor and are used by the Distributor to defray the expenses of securities dealers or other financial intermediaries related to providing distribution-related services
to each Fund in connection with the sale of the CDSC shares. The combination of the CDSC and the ongoing distribution fee facilitates the ability of each Fund to sell the CDSC shares without a sales charge being deducted at the time of purchase. See
Distribution Plans below. Imposition of the CDSC and the distribution fee on CDSC shares is limited by the NASD asset-based sales charge rule. See Limitations on the Payment of Deferred Sales Charges below.
Dealers will generally receive commissions equal to 4.00% of Investor B
Shares sold by them plus ongoing fees under the Funds Distribution and Service Plan. Dealers may not receive a commission in connection with sales of Investor B, Investor B1, Investor B2 or Investor B3 Shares to certain employer-sponsored
retirement plans sponsored by the Fund, BlackRock or its affiliates, but may receive fees under the Distribution and Service Plan. These commissions and payments may be different than the reallowances, placement fees and commissions paid to dealers
in connection with sales of Investor A, Investor A1, Investor C, Investor C1, Investor C2 and Investor C3 Shares.
Dealers will generally immediately receive commissions equal to 1.00% of the Investor C Shares sold by them plus ongoing fees under the Funds Distribution and Service Plan. Dealers may not receive a
commission in connection with sales of Investor C, Investor C1, Investor C2 or Investor C3 Shares to certain employer-sponsored retirement plans sponsored by the Fund, BlackRock or its affiliates, but may receive fees under the Amended and Restated
Distribution and Service Plan. These commissions and payments may be different than the reallowances, placement fees and commissions paid to dealers in connection with sales of Investor A, Investor A1, Investor B, Investor B1, Investor B2 and
Investor B3 Shares. These may depend upon the policies, procedures and trading platforms of your financial intermediary; consult your financial adviser.
II-77
Contingent Deferred Sales Charges
Investor B, Investor B1, Investor B2 and Investor B3 Shares.
If you redeem Investor B, Investor B1, Investor B2 or Investor B3 Shares within six years of purchase (three years for Investor B1 Shares of BlackRock Total Return Fund of BlackRock Bond Fund, Inc. and Investor B Shares of BlackRock Short Term
Municipal Fund and BlackRock Intermediate Municipal Fund), you may be charged a contingent deferred sales charge (CDSC) at the rates indicated in the Funds Prospectus and below. The CDSC will be calculated in a manner that results
in the lowest applicable rate being charged. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being redeemed. Accordingly, no CDSC will be imposed on increases in net asset value
above the initial purchase price. In addition, no CDSC will be assessed on shares acquired through reinvestment of dividends. The order of redemption will be first of shares held for over six years or three years, as applicable, in the case of
Investor B Shares, next of shares acquired pursuant to reinvestment of dividends, and finally of shares in the order of those held longest. The same order of redemption will apply if you transfer shares from your account to another account. If you
exchange your Investor B or Investor B1 Shares for Investor B Shares of another fund, the CDSC schedule that applies to the shares that you originally purchased will continue to apply to the shares you acquire in the exchange.
The following table sets forth the CDSC schedule that applies to the
Investor B Shares for the following Funds: BlackRock Total Return Fund of BlackRock Bond Fund, Inc., BlackRock World Income Fund, Inc., Franklin Templeton FDP Fund of FDP Series, Inc., BlackRock California Municipal Bond Fund of BlackRock California
Municipal Series Trust, BlackRock Municipal Fund and BlackRock National Municipal Bond Fund of BlackRock Municipal Series Fund, Inc., BlackRock New York Municipal Bond Fund of BlackRock Multi-State Municipal Series Trust, and to the Investor B1
Shares for all Funds, as applicable, except for BlackRock Total Return Fund of BlackRock Bond Fund, Inc. and BlackRock National Municipal Fund, and to the Investor B3 Shares for all Funds, as applicable:
|
|
|
Years Since Purchase
Payment Made
|
|
CDSC as a Percentage
of Dollar Amount
Subject to Charge*
|
|
|
0 1
|
|
4.00%
|
|
|
1 2
|
|
4.00%
|
|
|
2 3
|
|
3.00%
|
|
|
3 4
|
|
3.00%
|
|
|
4 5
|
|
2.00%
|
|
|
5 6
|
|
1.00%
|
|
|
6 and thereafter
|
|
None
|
The following table sets forth the CDSC
schedule that applies to the Investor B Shares of BlackRock GNMA Portfolio, BlackRock High Yield Bond Portfolio, BlackRock Inflation Protected Bond Portfolio, BlackRock U.S. Government Bond Portfolio, BlackRock International Bond Portfolio,
BlackRock Core Bond Portfolio, BlackRock Low Duration Bond Portfolio, each of BlackRock Funds II, and BlackRock New Jersey Municipal Fund and BlackRock Pennsylvania Municipal Fund of BlackRock Multi-State Municipal Series Trust, to the Investor B2
Shares of BlackRock Total Return Fund of BlackRock Bond Fund, Inc., and to Investor B1 Shares of BlackRock National Municipal Fund:
|
|
|
Years Since Purchase
Payment Made
|
|
CDSC as a Percentage
of Dollar Amount
Subject to Charge*
|
|
|
0 1
|
|
4.50%
|
|
|
1 2
|
|
4.00%
|
|
|
2 3
|
|
3.50%
|
|
|
3 4
|
|
3.00%
|
|
|
4 5
|
|
2.00%
|
|
|
5 6
|
|
1.00%
|
|
|
6 and thereafter
|
|
None
|
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To provide an example, assume an investor purchased 100 shares at $10 per share (at a cost of $1,000) and in
the third year after purchase, the net asset value per share is $12 and, during such time, the investor has acquired 10 additional shares upon dividend reinvestment. If at such time the investor makes his or her first redemption of 50 shares
(proceeds of $600), 10 shares will not be subject to a CDSC because they were issued through dividend reinvestment. With respect to the remaining 40 shares, the charge is applied only to the original cost of $10 per share and not to the increase in
net asset value of $2 per share. Therefore, $400 of the $600 redemption proceeds will be charged at a rate of 3.00% (the applicable rate in the third year after purchase).
The following table sets forth the CDSC schedule that applies to the
Investor B Shares for BlackRock Short-Term Municipal Fund of BlackRock Municipal Bond Fund and BlackRock Intermediate Municipal Fund and to the Investor B1 Shares for Total Return Fund of BlackRock Bond Fund, Inc.:
|
|
|
Years Since Purchase
Payment Made
|
|
CDSC as a Percentage
of Dollar Amount
Subject to Charge*
|
|
|
0 1
|
|
1.00%
|
|
|
1 2
|
|
0.50%
|
|
|
2 3
|
|
0.25%
|
|
|
3 and thereafter
|
|
None
|
*
|
|
The percentage charge will apply to the lesser of the original cost of the shares being redeemed or the proceeds of your redemption. Shares acquired through
reinvestment of dividends are not subject to a deferred sales charge. Shares purchased prior to June 1, 2001 were subject to the four-year contingent deferred sales charge schedule then in effect which has now expired. Shares purchased prior to
October 2, 2006 are subject to the 4.00% six-year CDSC schedule in effect at that time. Not all BlackRock funds have identical deferred sales charge schedules. If you exchange your shares for shares of another fund, the original charge will
apply.
|
Conversion of Investor B Shares,
Investor B1, Investor B2 and Investor B3 Shares to Investor A Shares or A1 Shares.
Approximately ten years after purchase (the Conversion Period), Investor B, Investor B1, Investor B2 and Investor B3 Shares of each Fund (except
BlackRock U.S. Government Bond Portfolio, BlackRock GNMA Portfolio, BlackRock High Yield Bond Portfolio, BlackRock Inflation Protected Bond Portfolio, BlackRock International Bond Portfolio, BlackRock Low Duration Bond Portfolio, BlackRock New
Jersey Municipal Bond Fund, BlackRock Pennsylvania Municipal Bond Fund and BlackRock Core Bond Portfolio, and Investor B1 Shares of BlackRock National Municipal Fund) will convert automatically into Investor A or Investor A1 Shares, as set forth in
each Funds prospectus, of that Fund (the Conversion). The Conversion Period for Investor B Shares of BlackRock GNMA Portfolio, BlackRock U.S. Government Bond Portfolio, BlackRock High Yield Bond Portfolio, BlackRock Inflation
Protected Bond Portfolio, BlackRock International Bond Portfolio, BlackRock Low Duration Bond Portfolio, BlackRock New Jersey Municipal Bond Fund, BlackRock Pennsylvania Municipal Bond Fund and BlackRock Core Bond Portfolio, and for Investor B2
Shares of BlackRock Total Return Fund is approximately seven years. The Conversion will occur at least once each month (on the Conversion Date) on the basis of the relative net asset value of the shares of the two classes on the
Conversion Date, without the imposition of any sales load, fee or other charge. The Conversion will not be deemed a purchase or sale of the shares for Federal income tax purposes.
Shares acquired through reinvestment of dividends on Investor B, Investor
B1, Investor B2 or Investor B3 Shares will also convert automatically to Investor A or Investor A1 Shares, as set forth in each Funds prospectus. The Conversion Date for dividend reinvestment shares will be calculated taking into account the
length of time the shares underlying the dividend reinvestment shares were outstanding.
In general, Investor B Shares of equity funds will convert approximately eight years after initial purchase and Investor B, Investor B1, Investor B2 and Investor B3 Shares of taxable and tax-exempt fixed
income Funds will
II-79
convert approximately ten years after initial purchase. A seven year Conversion Period will apply to certain
shares of certain Funds issued in connection with the acquisition of another fund. If you exchange Investor B, Investor B1, Investor B2 or Investor B3 Shares with an eight-year Conversion Period for Investor B Shares with a ten-year Conversion
Period, or vice versa, the Conversion Period that applies to the shares you acquire in the exchange will apply and the holding period for the shares exchanged will be tacked on to the holding period for the shares acquired. The Conversion Period
also may be modified for investors that participate in certain fee-based programs. See Shareholder Services Fee-Based Programs.
If you own shares of a Fund that, in the past, issued stock certificates and you continue to hold such stock certificates, you must deliver any
certificates for Investor B Shares of the Fund to be converted to the Transfer Agent at least one week prior to the Conversion Date applicable to those shares. If the Transfer Agent does not receive the certificates at least one week prior to the
Conversion Date, your Investor B, Investor B1, Investor B2 or Investor B3 Shares will convert to Investor A or Investor A1 Shares, as set forth in each Funds prospectus, on the next scheduled Conversion Date after the certificates are
delivered.
Contingent Deferred Sales Charge Investor C
Shares
Investor C, Investor C1, Investor C2 and Investor C3
Shares that are redeemed within one year of purchase may be subject to a 1.00% CDSC charged as a percentage of the dollar amount subject thereto. In determining whether an Investor C, Investor C1, Investor C2 or Investor C3 Shares CDSC is applicable
to a redemption, the calculation will be determined in the manner that results in the lowest possible rate being charged. The charge will be assessed on an amount equal to the lesser of the proceeds of redemption or the cost of the shares being
redeemed. Accordingly, no CDSC will be imposed on increases in net asset value above the initial purchase price of Investor C, Investor C1, Investor C2 and Investor C3 Shares. In addition, no CDSC will be assessed on Investor C, Investor C1,
Investor C2 and Investor C3 Shares acquired through reinvestment of dividends. It will be assumed that the redemption is first of shares held for over one year or shares acquired pursuant to reinvestment of dividends and then of shares held longest
during the one-year period. A transfer of shares from a shareholders account to another account will be assumed to be made in the same order as a redemption.
See Information on Sales Charges and Distribution Related Expenses
Investor B and Investor C Sales Charge Information in Part I of each Funds Statement of Additional Information for information about amounts paid to the Distributor in connection with CDSC shares for the periods indicated.
Investor B and Investor C Shares Contingent Deferred
Sales Charge Waivers and Reductions
The CDSC on Investor B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2 and Investor C3 Shares is not
charged in connection with: (1) redemptions of Investor B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2 and Investor C3 Shares purchased through certain employer-sponsored retirement plans and rollovers of current
investments in the Fund through such plans; (2) exchanges described in Exchange Privilege below; (3) redemptions made in connection with minimum required distributions due to the shareholder reaching age 70
1
/
2
from IRA and 403(b)(7) accounts; (4) certain post-retirement withdrawals from an IRA or other retirement plan if you are over 59
1
/
2
years old and you purchased your shares prior to October 2, 2006; (5) redemptions made with respect to certain retirement plans sponsored by the Fund, BlackRock or its affiliates;
(6) redemptions in connection with a shareholders death as long as the waiver request is made within one year of death or, if later, reasonably promptly following completion of probate (including in connection with the distribution of
account assets to a beneficiary of the decedent) or disability (as defined in the Code) subsequent to the purchase of Investor B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2 or Investor C3 Shares; (7) withdrawals
resulting from shareholder disability (as defined in the Code) as long as the disability arose subsequent to the purchase of the shares; (8) involuntary redemptions of Investor B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1,
Investor C2 or Investor C3 Shares in accounts with low balances as described in Redemption of Shares below; (9) redemptions made pursuant to a systematic withdrawal plan, subject to the limitations set forth under Systematic
Withdrawal Plan below; (10) redemptions related to the payment of BNY Mellon Investment Servicing Trust Company custodial IRA fees; and (11) redemptions when a shareholder can demonstrate hardship, in the absolute discretion of the
Fund. In addition, no CDSC is charged on Investor B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2 or Investor C3 Shares acquired through the reinvestment of dividends or distributions.
II-80
Class R Shares
Certain of the Funds offer Class R Shares as described in each such
Funds Prospectus. Class R Shares are available only to certain employer-sponsored retirement plans. Class R Shares are not subject to an initial sales charge or a CDSC but are subject to an ongoing distribution fee of 0.25% per year and
an ongoing service fee of 0.25% per year. Distribution fees are used to support the Funds marketing and distribution efforts, such as compensating financial advisers and other financial intermediaries, advertising and promotion. Service
fees are used to compensate securities dealers and other financial intermediaries for service activities.
If Class R Shares are held over time, these fees may exceed the maximum sales charge that an investor would have paid as a shareholder of one of the other share classes.
Class K Shares.
Certain of the Funds offer Class K Shares as
described in each such Funds Prospectus. Class K Shares are available only to (i) qualified recordkeepers with a distribution and/or fund servicing agreement (establishing an omnibus trading relationship) maintained with the Funds
distributor, or (ii) defined benefit plans, defined contribution plans, endowments and foundations with greater than $10 million in a qualified tax-exempt plan, or (iii) employers with greater than $10 million in the aggregate between
qualified and non-qualified plans that they sponsor.
Service Shares.
Certain Funds offer Service Shares, which are available only to certain investors, including: (i) certain financial institutions, such as banks and brokerage firms, acting on
behalf of their customers; (ii) certain persons who were shareholders of the Compass Capital Group of Funds at the time of its combination with The PNC
®
Fund in 1996; and (iii) participants in the Capital DirectionsSM asset allocation program. Service Shares are not subject to an initial sales charge or a CDSC
but are subject to an ongoing service fee of 0.25% per year.
BlackRock Shares.
Certain Funds offer BlackRock Shares, which are available only to certain investors. BlackRock Shares are offered without a sales
charge to institutional investors, registered investment advisers and certain fee-based programs.
Distribution Plans
Each Fund has entered into a distribution agreement with BRIL under which BRIL, as agent, offers shares of each Fund on a continuous basis. BRIL has agreed to use appropriate efforts to effect sales of
the shares, but it is not obligated to sell any particular amount of shares. BRILs principal business address is 40 East 52nd Street, New York, NY 10022. BRIL is an affiliate of BlackRock.
Pursuant to the distribution plans of the Investor A, Investor A1, Investor
B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2, Investor C3 and Class R Shares (each, a Plan), the Fund may pay BRIL and/or BlackRock or any other affiliate or significant shareholder of BlackRock fees for
distribution and sales support services. Currently, as described further below, only Investor B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2, Investor C3 and Class R Shares bear the expense of distribution fees under
a Plan. In addition, the Fund may pay to brokers, dealers, financial institutions and industry professionals (including BlackRock, BRIL, PNC, Barclays and their affiliates) (collectively, Service Organizations) fees for the provision of
personal services to shareholders. In the past, BlackRock or BRIL has retained a portion of the shareholder servicing fees paid by the Fund.
Each Funds Plans are subject to the provisions of Rule 12b-1 under the Investment Company Act. In their consideration of a Plan, the Directors must
consider all factors they deem relevant, including information as to the benefits of the Plan to the Fund and the related class of shareholders. In approving a Plan in accordance with Rule 12b-1, the non-interested Directors concluded that there is
reasonable likelihood that the Plan will benefit the Fund and its related class of shareholders.
The Plan provides, among other things, that: (i) the Board of Directors shall receive quarterly reports regarding the amounts expended under the Plan and the purposes for which such expenditures were
made; (ii) the Plan will continue in effect for so long as its continuance is approved at least annually by the Board of Directors in accordance with Rule 12b-1 under the Investment Company Act; (iii) any material amendment thereto must be
approved by the Board of Directors, including the directors who are not interested persons of the Fund (as defined in the Investment Company Act) and who have no direct or indirect financial interest in the operation of the Plan or
II-81
any agreement entered into in connection with the Plan (the 12b-1 Directors), acting in person
at a meeting called for said purpose; (iv) any amendment to increase materially the costs which any class of shares may bear for distribution services pursuant to the Plan shall be effective only upon approval by a vote of a majority of the
outstanding shares of such class and by a majority of the 12b-1 Directors; and (v) while the Plan remains in effect, the selection and nomination of the Funds Directors who are not interested persons of the Fund shall be
committed to the discretion of the Funds non-interested Directors. Rule 12b-1 further requires that each Fund preserve copies of each Plan and any report made pursuant to such plan for a period of not less than six years from the date of the
Plan or such report, the first two years in an easily accessible place.
Payments under the Plans are based on a percentage of average daily net assets attributable to the shares regardless of the amount of expenses incurred. As a result, distribution-related revenues from the
Plans may be more or less than distribution-related expenses of the related class. Information with respect to the distribution-related revenues and expenses is presented to the Directors for their consideration quarterly. Distribution-related
revenues consist of the service fees, the distribution fees and the CDSCs. Distribution-related expenses consist of financial adviser compensation, branch office and regional operation center selling and transaction processing expenses, advertising,
sales promotion and marketing expenses and interest expense. Distribution-related revenues paid with respect to one class will not be used to finance the distribution expenditures of another class. Sales personnel may receive different compensation
for selling different classes of shares.
The Plan is terminable
as to any class of shares without penalty at any time by a vote of a majority of the 12b-1 Directors, or by vote of the holders of a majority of the shares of such class.
See Distribution Related Expenses in Part I of each Funds
Statement of Additional Information for information relating to the fees paid by your Fund to the Distributor under each Plan during the Funds most recent fiscal year.
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the Conduct Rules of the NASD imposes a
limitation on certain asset-based sales charges such as the distribution fee borne by Class R Shares, and the distribution fee and the CDSC borne by the CDSC shares. This limitation does not apply to the service fee. The maximum sales charge rule is
applied separately to each class and limits the aggregate of distribution fee payments and CDSCs payable by a Fund to (1) 6.25% of eligible gross sales of CDSC shares and Class R Shares, computed separately (excluding shares issued pursuant to
dividend reinvestments and exchanges), plus (2) interest on the unpaid balance for the respective class, computed separately, at the prime rate plus 1% (the unpaid balance being the maximum amount payable minus amounts received from the payment
of the distribution fee and the CDSC).
See Part I, Section V
Information on Sales Charges and Distribution Related Expenses of each Funds Statement of Additional Information for comparative information as of your Funds most recent fiscal year end with respect to the CDSC shares and, if
applicable, Class R Shares of your Fund.
Other Compensation to
Selling Dealers
Pursuant to each Funds Distribution
Agreements and Distribution and Service Plans (the Plans), each Fund may pay BRIL and/or BlackRock or any other affiliate of BlackRock fees for distribution and sales support services. In addition, each Fund may pay to brokers, dealers,
financial institutions and industry professionals (including BlackRock, Merrill Lynch, Hilliard Lyons and their affiliates) (collectively, Service Organizations) fees for the provision of personal services to shareholders. In the past,
BlackRock has retained a portion of the shareholder servicing fees paid by a Fund.
With respect to Class R Shares, the front-end sales charge and the applicable distribution fee payable under the Plan are used to pay commissions and other fees payable to Service Organizations and other
broker/dealers who sell Class R Shares.
With respect to Investor
B, Investor B1, Investor B2 and Investor B3 Shares, Service Organizations and other broker/dealers receive commissions from BRIL for selling Investor B, Investor B1, Investor B2 and Investor B3 Shares, which are paid at the time of the sale. The
applicable distribution fees payable under the Plans are intended to cover the expense to BRIL of paying such up-front commissions, as well as to cover ongoing commission
II-82
payments to broker-dealers or other Service Organizations. The contingent deferred sales charge is
calculated to charge the investor with any shortfall that would occur if Investor B, Investor B1, Investor B2 or Investor B3 Shares are redeemed prior to the expiration of the conversion period, after which Investor B, Investor B1, Investor B2 and
Investor B3 Shares automatically convert to Investor A Shares or Investor A1 Shares, as applicable.
With respect to Investor C, Investor C1, Investor C2 and Investor C3 Shares, Service Organizations and other broker-dealers receive commissions from BRIL for selling Investor C, Investor C1, Investor C2
and Investor C3 Shares, which are paid at the time of the sale. The applicable distribution fees payable under the Plans are intended to cover the expense to BRIL of paying such up-front commissions, as well as to cover ongoing commission payments
to the broker-dealers or other Service Organizations. The contingent deferred sales charge is calculated to charge the investor with any shortfall that would occur if Investor C, Investor C1, Investor C2 or Investor C3 Shares are redeemed within 12
months of purchase.
From time to time BRIL and/or BlackRock and
their affiliates may voluntarily waive receipt of distribution fees under each Plan, which waivers may be terminated at any time. Payments are made by the Fund pursuant to each Plan regardless of expenses incurred by BRIL or BlackRock.
The Funds currently do not make distribution payments with respect to
Investor A, Investor A1, Service, Institutional, Institutional Daily or BlackRock Shares under the Plans. However, the Plans permit BRIL, BlackRock and certain of their affiliates to make payments relating to distribution and sales support
activities out of their past profits or other sources available to them (and not as an additional charge to the Fund). From time to time, BRIL, BlackRock or their affiliates may compensate affiliated and unaffiliated Service Organizations for the
sale and distribution of shares of a Fund or for services to a Fund and its shareholders. These non-Plan payments would be in addition to a Funds payments described in this Statement of Additional Information for distribution and shareholder
servicing. These non-Plan payments may take the form of, among other things, due diligence payments for a dealers examination of the Funds and payments for providing extra employee training and information relating to Funds;
listing fees for the placement of the Funds on a dealers list of mutual funds available for purchase by its customers; finders fees for directing investors to the Fund; distribution and marketing support
fees or revenue sharing for providing assistance in promoting the sale of the Funds shares; payments for the sale of shares and/or the maintenance of share balances; CUSIP fees; maintenance fees; and set-up fees regarding the
establishment of new accounts. The payments made by BRIL, BlackRock and their affiliates may be a fixed dollar amount or may be based on a percentage of the value of shares sold to, or held by, customers of the Service Organization involved, and may
be different for different Service Organizations. The payments described above are made from BRILs, BlackRocks or their affiliates own assets pursuant to agreements with Service Organizations and do not change the price paid by
investors for the purchase of the Funds shares or the amount the Fund will receive as proceeds from such sales.
As of the date of this Statement of Additional Information, as amended or supplemented from time to time, the following Service Organizations are
receiving such payments: Ameriprise Financial Services, AXA Advisors, Cetera Advisor Networks LLC, Cetera Advisors LLC, Cetera Financial Specialists LLC, Cetera Investment Services LLC, Chase Investment Services Corp, CCO Investment Services,
Commonwealth Equity Services (Commonwealth Financial Network), Donegal Securities, FSC Securities Corporation, ING Financial Partners, Investacorp, Inc., LPL Financial Corporation, Merrill Lynch, MetLife Securities, Morgan Stanley Smith Barney, New
England Securities Corporation, Oppenheimer & Co., PFS Investments, Raymond James, RBC Capital Markets, Robert W. Baird & Co., Royal Alliance Associates, SagePoint Financial, Securities America, State Farm VP Management Corp.,
Tower Square Securities, Triad Advisors, Inc., UBS Financial Services, U.S. Bancorp Investments, Walnut Street Securities, Wells Fargo, Woodbury Financial Services, Inc. and/or broker dealers and other financial services firms under common control
with the above organizations (or their successors or assignees). The level of payments made to these Service Organizations in any year will vary, may be limited to specific Funds or share classes, and normally will not exceed the sum of
(a) 0.25% of such years Fund sales by that Service Organization, and (b) 0.21% of the assets attributable to that Service Organization invested in a Fund. In certain cases, the payments described in the preceding sentence are subject
to certain minimum payment levels. In addition, from time to time BRIL, BlackRock or certain of their affiliates may make fixed dollar amount payments to certain Service Organizations listed above that are not based on the value of the shares sold
to, or held by, the Service Organizations customers and may be different for different Service Organizations.
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Other Distribution Arrangements
Certain Funds and BlackRock have entered into a distribution agreement with
UBS AG whereby UBS AG may, in certain circumstances, sell certain shares of the Funds in certain jurisdictions. The level of payments made to UBS AG in any year for the sale and distribution of a Funds shares will vary and normally will not
exceed the sum of the service fee payable on the assets attributable to UBS AG plus an additional fee equal to a percentage of such assets which shall range up to 0.25%.
In lieu of payments pursuant to the foregoing, BRIL, BlackRock, PNC or their
affiliates may make payments to the above named Service Organizations of an agreed-upon amount which, subject to certain agreed-upon minimums, will generally not exceed the amount that would have been payable pursuant to the formula, and may also
make similar payments to other Service Organizations.
If
investment advisers, distributors or affiliates of mutual funds pay bonuses and incentives in differing amounts, financial firms and their financial consultants may have financial incentives for recommending a particular mutual fund over other
mutual funds. In addition, depending on the arrangements in place at any particular time, a financial firm and its financial consultants may also have a financial incentive for recommending a particular share class over other share classes.
You
should consult your financial adviser and review carefully any disclosure by the financial firm as to compensation received by your financial adviser for more information about the payments described above.
Furthermore, BRIL, BlackRock and their affiliates may contribute to various
non-cash and cash incentive arrangements to promote the sale of shares, and may sponsor various contests and promotions subject to applicable FINRA regulations in which participants may receive prizes such as travel awards, merchandise and cash.
Subject to applicable FINRA regulations, BRIL, BlackRock and their affiliates may also: (i) pay for the travel expenses, meals, lodging and entertainment of broker/dealers, financial institutions and their salespersons in connection with
educational and sales promotional programs, (ii) sponsor speakers, educational seminars and charitable events and (iii) provide other sales and marketing conferences and other resources to broker-dealers, financial institutions and their
salespersons.
BlackRock, Inc., the parent company of BlackRock,
has agreed to pay PNC Bank, National Association and certain of its affiliates fees for administration and servicing with respect to assets of the Fund attributable to shares held by customers of such entities. These assets are predominantly in the
Institutional Share class of a Fund, with respect to which the Fund does not pay shareholder servicing fees under a Plan. The fees are paid according to the following schedule: certain money market funds 0.15% of net assets; certain fixed
income funds 0.20% of net assets; and certain equity funds 0.25% of net assets (except that with respect to the Index Equity Fund, the fee is 0.04% of net assets).
Service Organizations may charge their clients additional fees for
account-related services. Service Organizations may charge their customers a service fee in connection with the purchase or redemption of Fund shares. The amount and applicability of such a fee is determined and disclosed to its customers by each
individual Service Organization. Service fees typically are fixed, nominal dollar amounts and are in addition to the sales and other charges described in the Prospectuses and this Statement of Additional Information. Your Service Organization will
provide you with specific information about any service fees you will be charged.
Pursuant to the Plans, each Fund enters into service arrangements with Service Organizations pursuant to which Service Organizations will render certain support services to their customers
(Customers) who are the beneficial owners of Service, Investor A, Investor A1, Investor B, Investor B1, Investor B2, Investor C, Investor C1, Investor C2 and Class R Shares. Such services will be provided to Customers who are the
beneficial owners of shares of such classes and are intended to supplement the services provided by the Funds Administrators and Transfer Agent to the Funds shareholders of record. In consideration for payment of the applicable service
fee Service Organizations may provide general shareholder liaison services, including, but not limited to: (i) answering customer inquiries regarding account status and history, the manner in which purchases, exchanges and redemptions of shares
may be effected and certain other matters pertaining to the Customers investments; and (ii) assisting Customers in designating and changing dividend options, account designations and addresses.
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To the extent a shareholder is not associated with a Service Organization, the shareholder servicing fees
will be paid to BlackRock, and BlackRock will provide services. In addition to, rather than in lieu of, distribution and shareholder servicing fees that a Fund may pay to a Service Organization pursuant to the Plan and fees the Fund pays to its
transfer agent, the Fund may enter into non-Plan agreements with Service Organizations pursuant to which the Fund will pay a Service Organization for administrative, networking, recordkeeping, sub-transfer agency and shareholder services. These
non-Plan payments are generally based on either: (1) a percentage of the average daily net assets of Fund shareholders serviced by a Service Organization or (2) a fixed dollar amount for each account serviced by a Service Organization. The
aggregate amount of these payments may be substantial. From time to time, BlackRock, BRIL or their affiliates also may pay a portion of the fees for administrative, networking, omnibus, operational and recordkeeping, sub-transfer agency and
shareholder services described above at its or their own expense and out of its or their legitimate profits.
For information regarding the purchase of shares of the BlackRock Basic Value V.I. Fund, BlackRock Capital Appreciation V.I. Fund, BlackRock Equity Dividend V.I. Fund, BlackRock Global Allocation V.I.
Fund, BlackRock Global Opportunities V.I. Fund, BlackRock High Yield V.I. Fund, BlackRock International V.I. Fund, BlackRock Large Cap Core V.I. Fund, BlackRock Large Cap Growth V.I. Fund, BlackRock Large Cap Value V.I. Fund, BlackRock Managed
Volatility V.I. Fund, BlackRock Money Market V.I. Fund, BlackRock S&P 500 Index V.I. Fund, BlackRock Total Return V.I. Fund, BlackRock U.S. Government Bond V.I. Fund and BlackRock Value Opportunities V.I. Fund, each a series of BlackRock
Variable Series Funds, Inc., and the BlackRock Balanced Capital Portfolio, BlackRock Capital Appreciation Portfolio, BlackRock Global Allocation Portfolio, BlackRock High Yield Portfolio, BlackRock U.S. Government Bond Portfolio, BlackRock Large Cap
Core Portfolio, BlackRock Money Market Portfolio and BlackRock Total Return Portfolio, each a series of BlackRock Series Fund, Inc., please see the Purchase of Shares section of Part I of this SAI.
R
EDEMPTION
OF
S
HARES
Shares normally will
be redeemed for cash upon receipt of a request in proper form, although each Fund retains the right to redeem some or all of its shares in-kind under unusual circumstances (valued in the same way as they would be valued for purposes of computing a
Funds NAV), in order to protect the interests of remaining shareholders, or to accommodate a request by a particular shareholder that does not adversely affect the interest of the remaining shareholders, by delivery of securities selected from
the Funds assets at its discretion. In-kind payment means payment will be made in portfolio securities rather than cash. If this occurs, the redeeming shareholder might incur brokerage or other transaction costs to convert the securities to
cash. Each Fund has elected, however, to be governed by Rule 18f-1 under the Investment Company Act so that the Fund is obligated to redeem its shares solely in cash up to the lesser of $250,000 or 1% of its net asset value during any 90-day
period for any shareholder of the Fund. The redemption price is the net asset value per share next determined after the initial receipt of proper notice of redemption. The value of shares of each Fund at the time of redemption may be more or less
than your cost at the time of purchase, depending in part on the market value of the securities held by the Fund at such time. Except for any CDSC that may be applicable, there will be no redemption charge if your redemption request is sent directly
to the Transfer Agent. If you are liquidating your holdings you will receive all dividends reinvested through the date of redemption.
The right to redeem shares may be suspended or payment upon redemption may be delayed for more than seven days only (i) for any period during which
trading on the NYSE is restricted as determined by the Commission or during which the NYSE is closed (other than customary weekend and holiday closings), (ii) for any period during which an emergency exists, as defined by the Commission, as a
result of which disposal of portfolio securities or determination of the net asset value of the Fund is not reasonably practicable, or (iii) for such other periods as the Commission may by order permit for the protection of shareholders of the
Fund. (A Fund may also suspend or postpone the recordation of the transfer of its shares upon the occurrence of any of the foregoing conditions.)
Each Fund, with other investment companies advised by the Manager, has entered into a joint committed line of credit with a syndicate of banks that is
intended to provide the Fund with a temporary source of cash to be used to meet redemption requests from shareholders in extraordinary or emergency circumstances.
The Fund may redeem shares involuntarily to reimburse a Fund for any loss
sustained by reason of the failure of a shareholder to make full-payment for shares purchased by the shareholder or to collect any charge relating to a
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transaction effected for the benefit of a shareholder. The Fund reserves the express right to redeem shares
of each Fund involuntarily at any time if the Funds Board determines, in its sole discretion, that failure to do so may have adverse consequences to the holders of shares in the Fund. Upon such redemption the holders of shares so redeemed
shall have no further right with respect thereto other than to receive payment of the redemption price.
Redemption
Investor, Institutional, Institutional Daily and Class R Shares
Redeem by Telephone
: You may sell Investor Shares held at BlackRock
by telephone request if certain conditions are met and if the amount being sold is less than (i) $100,000 for payments by check or (ii) $250,000 for payments through the Automated Clearing House Network (ACH) or wire transfer.
Certain redemption requests, such as those in excess of these amounts, and those where (i) the Fund does not have verified banking information on file; or (ii) the proceeds are not paid to the record owner at the record address, must be in
writing with a medallion signature guarantee provided by any eligible guarantor institution as defined in Rule 17Ad-15 under the Securities Exchange Act of 1934 (the Exchange Act), whose existence and validity may be verified
by the Transfer Agent through the use of industry publications. For Institutional Shares, certain redemption requests may require written instructions with a medallion signature guarantee. Call (800) 441-7762 for details. You can obtain a
medallion signature guarantee stamp from a bank, securities dealer, securities broker, credit union, savings and loan association, national securities exchange or registered securities association. The three recognized medallion programs are
Securities Transfer Agent Medallion Program, Stock Exchanges Medallion Program and New York Stock Exchange, Inc. Medallion Signature Program. Signature guarantees which are not a part of these programs will not be accepted. A notary public seal will
not be acceptable. Generally, a properly signed written request with any required signature guarantee is all that is required for a redemption. In some cases, however, other documents may be necessary. Additional documentary evidence of authority is
required by BNY Mellon in the event redemption is requested by a corporation, partnership, trust, fiduciary, executor or administrator.
If you make a redemption request before a Fund has collected payment for the purchase of shares, the Fund may delay mailing your proceeds. This delay will
usually not exceed ten days. A Fund, its Administrators and the Distributor will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. Telephone redemption requests will not be honored if: (i) the
accountholder is deceased, (ii) the proceeds are to be sent to someone other than the shareholder of record, (iii) a Fund does not have verified information on file, (iv) the request is by an individual other than the accountholder of
record, (v) the account is held by joint tenants who are divorced, (vi) the address on the account has changed within the last 30 days or share certificates have been issued on the account, or (vii) to protect against fraud, if the
caller is unable to provide the account number, the name and address registered on the account and the social security number registered on the account. The Fund and its service providers will not be liable for any loss, liability, cost or expense
for acting upon telephone instructions that are reasonably believed to be genuine in accordance with such procedures. Before telephone requests will be honored, signature approval from all shareholders of record on the account must be obtained. The
Fund may refuse a telephone redemption request if it believes it is advisable to do so. During periods of substantial economic or market change, telephone redemptions may be difficult to complete. Please find below alternative redemption methods.
Redemption orders for Institutional Shares placed prior to 4:00
p.m. (Eastern time) on a business day will be priced at the NAV determined that day. If redemption orders are received by 4:00 p.m. (Eastern time) on a business day, payment for redeemed Institutional Shares will normally be wired in Federal Funds
on the next business day. If the Federal Reserve Bank of Philadelphia is not open on the business day following receipt of the redemption order, the redemption order will be accepted and processed the next succeeding business day when the Federal
Reserve Bank of Philadelphia is open, provided that the Funds custodian is also open for business.
Redemption orders for Institutional Daily Shares placed prior to 12:00 p.m. (Eastern time) on a business day will be priced at the NAV determined that day. If redemption orders are received by 12:00 p.m.
(Eastern time) on a business day, payment for redeemed Institutional Daily Shares will normally be wired in Federal Funds on that same day, provided that the Funds custodian is also open for business. If the Federal Reserve Bank of
Philadelphia is not open on that business day, the redemption order will be accepted and processed the next succeeding business day when the Federal Reserve Bank of Philadelphia is open, provided that the Funds custodian is also open for
business.
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Redeem by VRU
: Investor Shares may also be redeemed by use of a Funds automated voice response
unit service (VRU). Payment for Investor Shares redeemed by VRU may be made for non-retirement accounts in amounts up to $25,000, either through check, ACH or wire.
Redeem by Internet:
You may redeem in your account, by logging onto
the BlackRock website at www.blackrock.com/funds. Proceeds from Internet redemptions may be sent via check, ACH or wire to the bank account of record. Payment for Investor Shares redeemed by Internet may be made for non-retirement accounts in
amounts up to $25,000, either through check, ACH or wire. Different maximums may apply to investors in Institutional Shares.
Redeem in Writing:
If you hold shares with the Transfer Agent you may redeem such shares without charge by writing to BlackRock, P.O. Box 9819,
Providence, Rhode Island 02940-8019. Redemption requests delivered other than by mail should be sent to BlackRock, 4400 Computer Drive, Westborough, Massachusetts 01588. If you hold share certificates issued by your Fund, the letter must be
accompanied by certificates for the shares. All shareholders on the account must sign the letter. A medallion signature guarantee will generally be required but may be waived in certain limited circumstances. You can obtain a medallion signature
guarantee stamp from a bank, securities dealer, securities broker, credit union, savings and loan association, national securities exchange or registered securities association. A notary public seal will not be acceptable. If you hold stock
certificates, return the certificates with the letter. Proceeds from redemptions may be sent via check, ACH or wire to the bank account of record.
The Funds or the Transfer Agent may temporarily suspend telephone transactions at any time.
If you redeem shares directly with the Transfer Agent, payments will generally be mailed within seven days of receipt of the
proper notice of redemption. A Fund may delay the mailing of a redemption check until good payment (that is, cash, Federal funds or certified check drawn on a U.S. bank) has been collected for the purchase of Fund shares, which delay will usually
not exceed 10 days. If your account is held directly with the Transfer Agent and contains a fractional share balance following a redemption, the fractional share balance will be automatically redeemed by the Fund.
Note on Low Balance Accounts.
Because of the high cost of maintaining
smaller shareholder accounts, BlackRock has set a minimum balance of $500 in each Fund position you hold within your account (Fund Minimum), and may take one of two actions if the balance in your Fund falls below the Fund Minimum.
First, the Fund may redeem the shares in your account
(without charging any deferred sales charge) if the net asset value of your account falls below $250 for any reason, including market fluctuation. You will be notified that the value of your account is less than $250 before the Fund makes an
involuntary redemption. The notification will provide you with a 90 calendar day period to make an additional investment in order to bring the value of your account to at least $250 before the Fund makes an involuntary redemption or to the Fund
Minimum in order not to be assessed an annual low balance fee of $20, as set forth below. This involuntary redemption may not apply to accounts of certain employer-sponsored retirement plans, selected fee-based programs, accounts established under
the Uniform Gifts or Transfers to Minors Acts, and certain intermediary accounts.
Second, the Fund charges an annual $20 low balance fee on all Fund accounts that have a balance below the Fund Minimum for any reason, including market fluctuation. The fee will be deducted from the Fund
account only once per calendar year. You will be notified that the value of your account is less than the Fund Minimum before the fee is imposed. You will then have a 90 calendar day period to make an additional investment to bring the value of your
account to the Fund Minimum before the Fund imposes the low balance fee. This low balance fee does not apply to accounts of certain employer-sponsored retirement plans, selected fee-based programs, or accounts established under the Uniform Gifts or
Transfers to Minors Acts.
Repurchase
A Fund normally will accept orders to repurchase shares from Selling Dealers
for their customers. Shares will be priced at the net asset value of the Fund next determined after receipt of the repurchase order by a Selling Dealer that has been authorized by the Distributor by contract to accept such orders. As to repurchase
orders received by Selling Dealers prior to the close of business on the NYSE (generally, the NYSE closes at 4:00 p.m. Eastern time),
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on the day the order is placed, which includes orders received after the close of business on the previous
day, the repurchase price is the net asset value determined as of the close of business on the NYSE on that day. If the orders for repurchase are not received by the Selling Dealer before the close of business on the NYSE, such orders are deemed
received on the next business day.
These repurchase arrangements
are for your convenience and do not involve a charge by the Fund (other than any applicable CDSC). However, Selling Dealers may charge a processing fee in connection with such transactions. In addition, securities firms that do not have selected
dealer agreements with the Distributor may impose a transaction charge for transmitting the notice of repurchase to the Fund. Each Fund reserves the right to reject any order for repurchase. A shareholder whose order for repurchase is rejected by a
Fund, however, may redeem shares as set out above.
Reinstatement Privilege Investor A Shares
Upon redemption of Investor A, Investor A1 or Institutional Shares, as applicable, shareholders may reinvest all or a portion of their redemption proceeds
(after paying any applicable CDSC) in Investor A Shares of the same or another BlackRock fund without paying a front-end sales charge. This right may be exercised once a year and within 60 days of the redemption, provided that the Investor A Shares
of that fund is currently open to new investors or the shareholder has a current account in that closed fund. Shares will be purchased at the NAV calculated at the close of trading on the day the request is received in good order. To exercise this
privilege, the Transfer Agent must receive written notification from the shareholder of record or the registered representative of record, at the time of purchase. Investors should consult a tax adviser concerning the tax consequences of exercising
this reinstatement privilege.
S
HAREHOLDER
S
ERVICES
Each Fund offers one or more of the shareholder services described below
that are designed to facilitate investment in its shares. You can obtain more information about these services from each Fund by calling the telephone number on the cover page, or from the Distributor, your financial adviser, your selected
securities dealer or other financial intermediary. Certain of these services are available only to U.S. investors.
Investment Account
If your account is maintained at the Transfer Agent (an Investment Account) you will receive statements, at least quarterly, from the Transfer Agent. These statements will serve as
confirmations for automatic investment purchases and the reinvestment of dividends. The statements also will show any other activity in your Investment Account since the last statement. You also will receive separate confirmations for each purchase
or sale transaction other than automatic investment purchases and the reinvestment of dividends. If your Investment Account is held at the Transfer Agent you may make additions to it at any time by mailing a check directly to the Transfer Agent. You
may also maintain an account through a selected securities dealer or other financial intermediary. If you transfer shares out of an account maintained with a selected securities dealer or other financial intermediary, an Investment Account in your
name may be opened automatically at the Transfer Agent.
You may
transfer Fund shares from a selected securities dealer or other financial intermediary to another securities dealer or other financial intermediary that has entered into an agreement with the Distributor. Certain shareholder services may not be
available for the transferred shares. All future trading of these assets must be coordinated by the new firm. If you wish to transfer your shares to a securities dealer or other financial intermediary that has not entered into an agreement with the
Distributor, you must either (i) redeem your shares, paying any applicable CDSC or (ii) continue to maintain an Investment Account at the Transfer Agent for those shares. You also may request that the new securities dealer or other
financial intermediary maintain the shares in an account at the Transfer Agent registered in the name of the securities dealer or other financial intermediary for your benefit whether the securities dealer or other financial intermediary has entered
into a selected dealer agreement or not. In the interest of economy and convenience and because of the operating procedures of each Fund, share certificates will not be issued physically. Shares are maintained by each Fund on its register maintained
by the Transfer Agent and the holders thereof will have the same rights and ownership with respect to such shares as if certificates had been issued.
If you are considering transferring a tax-deferred retirement account, such as an individual retirement account, from one selected securities dealer to
another securities dealer or other financial intermediary, you should be aware that if
II-88
the new firm will not take delivery of shares of the Fund, you must either redeem the shares (paying any
applicable CDSC) so that the cash proceeds can be transferred to the account at the new firm, or you must continue to maintain a retirement account at the original selected securities dealer for those shares.
Exchange Privilege
U.S. shareholders of Investor A, Investor A1, Investor B, Investor B1,
Investor B2, Investor B3, Investor C, Investor C1, Investor C2, Investor C3, Institutional and Institutional Daily Shares of each Fund have an exchange privilege with certain other Funds. The minimum amount for exchanges of Investor class shares is
$1,000, although you may exchange less than $1,000 if you already have an account in the Fund into which you are exchanging. You may only exchange into a share class and a Fund that are open to new investors or in which you have a current account if
the class or fund is closed to new investors. If you held the shares used in the exchange for 30 days or less, you may be charged a redemption fee at the time of the exchange. Before effecting an exchange, you should obtain a currently effective
prospectus of the fund into which you wish to make the exchange. Exercise of the exchange privilege is treated as a sale of the exchanged shares and a purchase of the acquired shares for Federal income tax purposes.
Exchanges of Investor A, Investor A1, Institutional and Institutional
Daily Shares.
Institutional and Institutional Daily Shares are exchangeable with Institutional or Institutional Daily Shares of other Funds. Investor A and Investor A1 Shares are exchangeable for Investor A Shares of other Funds.
Exchanges of Institutional or Institutional Daily Shares outstanding for
Institutional or Institutional Daily Shares of a second fund or for shares of a money market fund are effected on the basis of relative net asset value per Institutional or Institutional Daily Share, as applicable. Exchanges of Investor A or
Investor A1 Shares outstanding (outstanding Investor A Shares) for Investor A Shares of a second fund, or for shares of a money market fund (new Investor A Shares) are effected on the basis of relative net asset value per
share.
Exchanges of Investor B, Investor B1, Investor B2,
Investor B3, Investor C, Investor C1, Investor C2 and Investor C3 Shares.
Shareholders of certain Funds with Investor B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2 and Investor C3 Shares outstanding
(outstanding Investor B or Investor C Shares) may exchange their shares for Investor B or Investor C Shares, respectively, of a second fund or for shares of a money market fund (new Investor B or Investor C Shares) on the
basis of relative net asset value per Investor B or Investor C share, without the payment of any CDSC. Certain funds impose different CDSC schedules. If you exchange your Investor B Shares for shares of a fund with a different CDSC schedule, the
CDSC schedule that applies to the shares exchanged will continue to apply. For purposes of computing the CDSC upon redemption of new Investor B or Investor C Shares, the time you held both the exchanged Investor B or Investor C Shares and the new
Investor B Shares or Investor C Shares will count towards the holding period of the new Investor B or Investor C Shares. For example, if you exchange Investor B Shares of a Fund for those of a second Fund after having held the first Funds
Investor B Shares for two-and-a-half years, the 3.00% CDSC that generally would apply to a redemption would not apply to the exchange. Four years later if you decide to redeem the Investor B Shares of the second Fund and receive cash, there will be
no CDSC due on this redemption since by adding the two-and-a-half year holding period of the first Funds Investor B Shares to the four year holding period for the second Funds Investor B Shares, you will be deemed to have held the second
Funds Investor B Shares for more than six years.
Exchanges for Shares of a Money Market Fund.
You may exchange any class of Investor shares for shares of an affiliated money market fund. If you
exchange into BlackRock Summit Cash Reserves Fund (Summit), a series of BlackRock Financial Institutions Series Trust, you will receive one of two classes of shares: exchanges of Investor A, Investor A1 and Institutional Shares of a Fund
will receive Investor A Shares of Summit and exchanges of Investor B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2 and Investor C3 Shares of a Fund will receive Investor B Shares of Summit. You may exchange Investor A
Shares of Summit back into Investor A or Institutional Shares of a Fund. You may exchange Investor B Shares of Summit back into Investor B or Investor C Shares of a Fund and, in the event of such an exchange, the period of time that you held
Investor B Shares of Summit will count toward satisfaction of the holding period requirement for purposes of reducing any CDSC and toward satisfaction of any Conversion Period with respect to Investor B Shares. Investor B Shares of Summit are
subject to a distribution fee at an annual rate of 0.75% of average daily net assets of such Investor B Shares. Exchanges of Investor B or Investor C Shares of a money market fund other than Summit for Investor B or Investor C Shares of a Fund will
be exercised at net asset value. However, a CDSC may be charged in connection with any subsequent redemption of the Investor B or Investor C Shares of the Fund received in the exchange. In
II-89
determining the holding period for calculating the CDSC payable on redemption of Investor B and Investor C
Shares of the Fund received in the exchange, the holding period of the money market fund Investor B or Investor C Shares originally held will be added to the holding period of the Investor B or Investor C Shares acquired through exchange.
Exchanges by Participants in Certain Programs.
The
exchange privilege may be modified with respect to certain participants in mutual fund advisory programs and other fee-based programs sponsored by the Manager, an affiliate of the Manager, or selected securities dealers or other financial
intermediaries that have an agreement with a Distributor. See Fee-Based Programs below.
Exercise of the Exchange Privilege.
To exercise the exchange privilege, you should contact your financial adviser or the Transfer Agent, who will advise each Fund of the exchange. If you do not
hold share certificates, you may exercise the exchange privilege by wire through your securities dealer or other financial intermediary. Each Fund reserves the right to require a properly completed exchange application.
A shareholder who wishes to make an exchange may do so by sending a written
request to the Fund c/o the Transfer Agent at the following address: P.O. Box 9819, Providence, RI 02940-8019. Shareholders are automatically provided with telephone exchange privileges when opening an account, unless they indicate on the
Application that they do not wish to use this privilege. To add this feature to an existing account that previously did not provide this option, a Telephone Exchange Authorization Form must be filed with the Transfer Agent. This form is available
from the Transfer Agent. Once this election has been made, the shareholder may simply contact the Fund by telephone at (800) 441-7762 to request the exchange. During periods of substantial economic or market change, telephone exchanges may be
difficult to complete and shareholders may have to submit exchange requests to the Transfer Agent in writing.
If the exchanging shareholder does not currently own shares of the investment portfolio whose shares are being acquired, a new account will be established with the same registration, dividend and capital
gain options and broker of record as the account from which shares are exchanged, unless otherwise specified in writing by the shareholder with all signatures guaranteed by an eligible guarantor institution as defined below. In order to participate
in the Automatic Investment Program or establish a Systematic Withdrawal Plan for the new account, however, an exchanging shareholder must file a specific written request.
Any share exchange must satisfy the requirements relating to the minimum
initial investment requirement, and must be legally available for sale in the state of the investors residence. For Federal income tax purposes, a share exchange is a taxable event and, accordingly, a capital gain or loss may be realized.
Before making an exchange request, shareholders should consult a tax or other financial adviser and should consider the investment objective, policies and restrictions of the investment portfolio into which the shareholder is making an exchange.
Brokers may charge a fee for handling exchanges.
The Funds
reserve the right to suspend, modify or terminate the exchange privilege at any time. Notice will be given to shareholders of any material modification or termination except where notice is not required. The Funds reserve the right to reject any
telephone exchange request. Telephone exchanges may be subject to limitations as to amount or frequency, and to other restrictions that may be established from time to time to ensure that exchanges do not operate to the disadvantage of any portfolio
or its shareholders.
The Funds, the Administrators and BRIL will
employ reasonable procedures to confirm that instructions communicated by telephone are genuine. The Funds, the Administrators and BRIL will not be liable for any loss, liability, cost or expense for acting upon telephone instructions reasonably
believed to be genuine in accordance with such procedures. By use of the exchange privilege, the investor authorizes the Funds transfer agent to act on telephonic or written exchange instructions from any person representing himself to be the
investor and believed by the Funds transfer agent to be genuine. The records of the Funds transfer agent pertaining to such instructions are binding. The exchange privilege may be modified or terminated at any time upon 60 days
notice to affected shareholders. The exchange privilege is only available in states where the exchange may legally be made.
Each Fund reserves the right to limit the number of times an investor may exercise the exchange privilege. Certain Funds may suspend the continuous
offering of their shares to the general public at any time and may resume such offering from time to time. The exchange privilege is available only to U.S. shareholders in states where the
II-90
exchange legally may be made. The exchange privilege may be applicable to other new mutual funds whose
shares may be distributed by the Distributor.
Fee-Based
Programs
If you participate in certain fee-based programs
offered by BlackRock or an affiliate of BlackRock, or selected securities dealers or other financial intermediaries that have agreements with the Distributor or in certain fee-based programs in which BlackRock participates, you may be able to buy
Institutional or Institutional Daily Shares, including by exchanges from other share classes. Sales charges on the shares being exchanged may be reduced or waived under certain circumstances. You generally cannot transfer shares held through a
fee-based program into another account. Instead, you will have to redeem your shares held through the program and purchase shares of another class, which may be subject to distribution and service fees. This may be a taxable event and you will pay
any applicable sales charges.
Shareholders that participate in a
fee-based program generally have two options at termination. The program can be terminated and the shares liquidated or the program can be terminated and the shares held in an account. In general, when a shareholder chooses to continue to hold the
shares, whatever share class was held in the program can be held after termination. Shares that have been held for less than specified periods within the program may be subject to a fee upon redemption. Shareholders that held Investor A,
Institutional or Institutional Daily Shares in the program are eligible to purchase additional shares of the respective share class of a Fund, but may be subject to upfront sales charges with respect to Investor A Shares. Additional purchases of
Institutional or Institutional Daily Shares are available only if you have an existing position at the time of purchase or are otherwise eligible to purchase Institutional or Institutional Daily Shares.
Details about these features and the relevant charges are included in the
client agreement for each fee-based program and are available from your financial professional, selected securities dealer or other financial intermediary.
Retirement and Education Savings Plans
Individual retirement accounts and other retirement and education savings plans are available from your financial intermediary. Under these plans,
investments may be made in a Fund (other than a Municipal Fund) and certain of the other mutual funds sponsored by the Manager or its affiliates as well as in other securities. There may be fees associated with investing through these plans.
Information with respect to these plans is available on request from your financial intermediary.
Dividends received in each of the plans referred to above are exempt from Federal taxation until distributed from the plans and, in the case of Roth IRAs and education savings plans, may be exempt from
taxation when distributed as well. Investors considering participation in any retirement or education savings plan should review specific tax laws relating to the plan and should consult their attorneys or tax advisers with respect to the
establishment and maintenance of any such plan.
Automatic
Investment Plans
Investor Share
shareholders and certain Service Share shareholders who were shareholders of the Compass Capital Group of Funds at the time of its combination with The PNC
®
Fund in 1996 may arrange for periodic investments in that Fund through automatic deductions from a checking or savings account. The minimum pre-authorized investment
amount is $50. If you buy shares of a Fund through certain accounts, no minimum charge to your bank account is required. Contact your financial adviser or other financial intermediary for more information.
Automatic Dividend Reinvestment Plan
Each Fund will distribute substantially all of its net investment income and
net realized capital gains, if any, to shareholders. All distributions are reinvested at net asset value in the form of additional full and fractional shares of the same class of shares of the relevant Fund unless a shareholder elects otherwise.
Such election, or any revocation thereof, must be made in writing to the Transfer Agent, and will become effective with respect to dividends paid after its receipt by the Transfer Agent. Each Fund declares a dividend each day on settled
shares (
i.e.
, shares for which the particular Fund has received payment in Federal funds) on the first business day after a purchase order is placed with the Fund. Payments by check are normally converted to Federal funds within two business
days of
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receipt. Over the course of a year, substantially all of the Funds net investment income will be
declared as dividends. The amount of the daily dividend for each Fund will be based on periodic projections of its net investment income. All dividends are paid within ten days after the end of each month. Net realized capital gains (including net
short-term capital gains), if any, will be distributed by each Fund at least annually.
Systematic Withdrawal Plans
Shareholders may receive regular distributions from their accounts via a Systematic Withdrawal Plan (SWP). Upon commencement of the SWP, the account must have a current value of $10,000 or
more in a Fund. Shareholders may elect to receive automatic cash payments of $50 or more at any interval. You may choose any day for the withdrawal. If no day is specified, the withdrawals will be processed on the 25th day of the month or, if such
day is not a business day, on the prior business day and are paid promptly thereafter. An investor may utilize the SWP by completing the Systematic Withdrawal Plan Application Form which may be obtained by visiting our website at
www.blackrock.com/funds.
Shareholders should realize that if
withdrawals exceed income dividends their invested principal in the account will be depleted. To participate in the SWP, shareholders must have their dividends automatically reinvested. Shareholders may change or cancel the SWP at any time, upon
written notice to the Fund, or by calling the Fund at (800) 441-7762. Purchases of additional Investor A Shares of the Fund concurrently with withdrawals may be disadvantageous to investors because of the sales charges involved and, therefore,
are discouraged. No CDSC will be assessed on redemptions of Investor B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2 or Investor C3 Shares made through the SWP that do not exceed 12% of the original investment on an
annualized basis. For example, monthly, quarterly and semi-annual SWP redemptions of Investor B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2 or Investor C3 Shares will not be subject to the CDSC if they do not exceed
1% (monthly), 3% (quarterly) and 6% (semi-annually), respectively, of an accounts net asset value on the redemption date. SWP redemptions of Investor B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2 or Investor C3
Shares in excess of this limit are still subject to the applicable CDSC.
For this reason, a shareholder may not participate in the Automatic Investment Plan described above (see How to Buy, Sell, Transfer and Exchange Shares in the Funds Prospectus) and the
SWP at the same time.
Dividend Allocation Plan
The Dividend Allocation Plan allows shareholders to elect to have all their
dividends and any other distributions from any Eligible Fund (which means funds so designated by the Distributor from time to time) automatically invested at net asset value in one other such Eligible Fund designated by the shareholder, provided the
account into which the dividends and distributions are directed is initially funded with the requisite minimum amount.
P
RICING
OF
S
HARES
Determination of Net Asset Value
Valuation of Shares.
The net asset value for each class of shares of
each Fund is generally calculated as of the close of regular trading hours on the NYSE (currently 4:00 p.m. Eastern Time) on each business day the NYSE is open.
Valuation of securities held by each Fund is as follows:
Equity Investments.
Equity securities traded on a recognized
securities exchange (e.g., NYSE), separate trading boards of a securities exchange or through a market system that provides contemporaneous transaction pricing information (an Exchange) are valued via independent pricing services
generally at the Exchange closing price or if an Exchange closing price is not available, the last traded price on that Exchange prior to the time as of which the assets or liabilities are valued, however, under certain circumstances other means of
determining current market value may be used. If an equity security is traded on more than one Exchange, the current market value of the security where it is primarily traded generally will be used. In the event that there are no sales involving an
equity security held by a Fund on a day on which the Fund values such security, the last bid (long positions) or ask (short positions) price, if available, will be used as the value of such security. If a Fund holds both long and short positions in
the same security, the last bid price will be applied to securities held long and the last ask price will be applied to securities sold short. If no bid or ask price is available on a day on which a Fund values such security, the
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prior days price will be used, unless BlackRock determines that such prior days price no longer
reflects the fair value of the security, in which case such asset would be treated as a fair value asset.
Fixed Income Investments.
Fixed income securities for which market quotations are readily available are generally valued using such securities most recent bid prices provided directly from
one or more broker-dealers, market makers, or independent third-party pricing services which may use matrix pricing and valuation models to derive values, each in accordance with valuation procedures approved by the Funds Board. The amortized
cost method of valuation may be used with respect to debt obligations with sixty days or less remaining to maturity unless the Manager and/or Sub-Adviser determine such method does not represent fair value. Loan participation notes are generally
valued at the mean of the last available bid prices from one or more brokers or dealers as obtained from independent third-party pricing services. Certain fixed income investments including asset-backed and mortgage-related securities may be valued
based on valuation models that consider the estimated cash flows of each tranche of the entity, establish a benchmark yield and develop an estimated tranche specific spread to the benchmark yield based on the unique attributes of the tranche. Fixed
income securities for which market quotations are not readily available may be valued by third-party pricing services that make a valuation determination by securing transaction data (e.g., recent representative bids), credit quality information,
perceived market movements, news, and other relevant information and by other methods, which may include consideration of: yields or prices of securities of comparable quality, coupon, maturity and type; indications as to values from dealers; and
general market conditions.
Options, Futures, Swaps and Other
Derivatives.
Exchange-traded equity options for which market quotations are readily available are valued at the mean of the last bid and ask prices as quoted on the Exchange or the board of trade on which such options are traded. In the event
that there is no mean price available for an exchange traded equity option held by a Fund on a day on which the Fund values such option, the last bid (long positions) or ask (short positions) price, if available, will be used as the value of such
option. If no bid or ask price is available on a day on which a Fund values such option, the prior days price will be used, unless BlackRock determines that such prior days price no longer reflects the fair value of the option in which
case such option will be treated as a fair value asset. OTC derivatives may be valued using a mathematical model which may incorporate a number of market data factors. Financial futures contracts and options thereon, which are traded on exchanges,
are valued at their last sale price or settle price as of the close of such exchanges. Swap agreements and other derivatives are generally valued daily based upon quotations from market makers or by a pricing service in accordance with the valuation
procedures approved by the Board.
Underlying Funds.
Shares of underlying open-end funds are valued at net asset value. Shares of underlying exchange-traded closed-end funds or other exchange-traded funds will be valued at their most recent closing price.
General Valuation Information
In determining the market value of portfolio investments, the Fund may employ
independent third party pricing services, which may use, without limitation, a matrix or formula method that takes into consideration market indexes, matrices, yield curves and other specific adjustments. This may result in the securities being
valued at a price different from the price that would have been determined had the matrix or formula method not been used. All cash, receivables and current payables are carried on each Funds books at their face value.
Prices obtained from independent third party pricing services,
broker-dealers or market makers to value each Funds securities and other assets and liabilities are based on information available at the time the Fund values its assets and liabilities. In the event that a pricing service quotation is revised
or updated subsequent to the day on which the Fund valued such security, the revised pricing service quotation generally will be applied prospectively. Such determination shall be made considering pertinent facts and circumstances surrounding such
revision.
In the event that application of the methods of
valuation discussed above result in a price for a security which is deemed not to be representative of the fair market value of such security, the security will be valued by, under the direction of or in accordance with a method specified by the
Funds Board as reflecting fair value. All other assets and liabilities (including securities for which market quotations are not readily available) held by a Fund (including restricted securities) are valued at fair value as determined in good
faith by the Funds Board or by BlackRock (its delegate). Any assets and liabilities which are denominated in a foreign currency are translated into U.S. dollars at the prevailing rates of exchange.
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Certain of the securities acquired by the Funds may be traded on foreign exchanges or over-the-counter
markets on days on which a Funds net asset value is not calculated. In such cases, the net asset value of a Funds shares may be significantly affected on days when investors can neither purchase nor redeem shares of the Fund.
Fair Value.
When market quotations are not readily available or are
believed by BlackRock to be unreliable, a Funds investments are valued at fair value (Fair Value Assets). Fair Value Assets are valued by BlackRock in accordance with procedures approved by the Funds Board. BlackRock may
conclude that a market quotation is not readily available or is unreliable if a security or other asset or liability does not have a price source due to its complete lack of trading, if BlackRock believes a market quotation from a broker-dealer or
other source is unreliable (e.g., where it varies significantly from a recent trade, or no longer reflects the fair value of the security or other asset or liability subsequent to the most recent market quotation), where the security or other asset
or liability is only thinly traded or due to the occurrence of a significant event subsequent to the most recent market quotation. For this purpose, a significant event is deemed to occur if BlackRock determines, in its business judgment
prior to or at the time of pricing a Funds assets or liabilities, that it is likely that the event will cause a material change to the last exchange closing price or closing market price of one or more assets or liabilities held by the Fund.
On any date the NYSE is open and the primary exchange on which a foreign asset or liability is traded is closed, such asset or liability will be valued using the prior days price, provided that BlackRock is not aware of any significant event
or other information that would cause such price to no longer reflect the fair value of the asset or liability, in which case such asset or liability would be treated as a Fair Value Asset. For certain foreign securities, a third-party vendor
supplies evaluated, systematic fair value pricing based upon the movement of a proprietary multi-factor model after the relevant foreign markets have closed. This systematic fair value pricing methodology is designed to correlate the prices of
foreign securities following the close of the local markets to the price that might have prevailed as of a Funds pricing time.
BlackRock, with input from the BlackRock Portfolio Management Group, will submit its recommendations regarding the valuation and/or valuation
methodologies for Fair Value Assets to BlackRocks Valuation Committee. The Valuation Committee may accept, modify or reject any recommendations. In addition, the Funds accounting agent periodically endeavors to confirm the prices it
receives from all third party pricing services, index providers and broker-dealers, and, with the assistance of BlackRock, to regularly evaluate the values assigned to the securities and other assets and liabilities held by the Funds. The pricing of
all Fair Value Assets is subsequently reported to and ratified by the Board or a Committee thereof.
When determining the price for a Fair Value Asset, the BlackRock Valuation Committee (or the Pricing Group) shall seek to determine the price that a Fund might reasonably expect to receive from the
current sale of that asset or liability in an arms-length transaction. The price generally may not be determined based on what a Fund might reasonably expect to receive for selling an asset or liability at a later time or if it holds the asset
or liability to maturity. Fair value determinations shall be based upon all available factors that the Valuation Committee (or Pricing Group) deems relevant at the time of the determination, and may be based on analytical values determined by
BlackRock using proprietary or third party valuation models.
Fair value represents a good faith approximation of the value of an asset or liability. The fair value of one or more assets or liabilities may not, in
retrospect, be the price at which those assets or liabilities could have been sold during the period in which the particular fair values were used in determining a Funds net asset value. As a result, a Funds sale or redemption of its
shares at net asset value, at a time when a holding or holdings are valued at fair value, may have the effect of diluting or increasing the economic interest of existing shareholders.
Each Funds annual audited financial statements, which are prepared in accordance with accounting principles generally
accepted in the United States of America (US GAAP), follow the requirements for valuation set forth in Financial Accounting Standards Board Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures
(ASC 820), which defines and establishes a framework for measuring fair value under US GAAP and expands financial statement disclosure requirements relating to fair value measurements.
Generally, ASC 820 and other accounting rules applicable to mutual funds and
various assets in which they invest are evolving. Such changes may adversely affect a Fund. For example, the evolution of rules governing the determination of the fair market value of assets or liabilities to the extent such rules become more
stringent would tend to increase the cost and/or reduce the availability of third-party determinations of fair market value. This may in turn increase the costs associated with selling assets or affect their liquidity due to the Funds
inability to obtain a third-party determination of fair market value.
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P
ORTFOLIO
T
RANSACTIONS
AND
B
ROKERAGE
Transactions
in Portfolio Securities
Subject to policies established by
the Board of Directors, BlackRock is primarily responsible for the execution of a Funds portfolio transactions and the allocation of brokerage. BlackRock does not execute transactions through any particular broker or dealer, but seeks to
obtain the best net results for the Fund, taking into account such factors as price (including the applicable brokerage commission or dealer spread), size of order, difficulty of execution, operational facilities of the firm and the firms risk
and skill in positioning blocks of securities. While BlackRock generally seeks reasonable trade execution costs, a Fund does not necessarily pay the lowest spread or commission available, and payment of the lowest commission or spread is not
necessarily consistent with obtaining the best price and execution in particular transactions. Subject to applicable legal requirements, BlackRock may select a broker based partly upon brokerage or research services provided to BlackRock and its
clients, including a Fund. In return for such services, BlackRock may cause a Fund to pay a higher commission than other brokers would charge if BlackRock determines in good faith that the commission is reasonable in relation to the services
provided.
In the case of Feeder Funds, because each Feeder Fund
generally invests exclusively in beneficial interests of a Master Portfolio, it is expected that all transactions in portfolio securities will be entered into by the Master Portfolio.
In selecting brokers or dealers to execute portfolio transactions, the Manager and sub-advisers seek to obtain the best price
and most favorable execution for a Fund, taking into account a variety of factors including: (i) the size, nature and character of the security or instrument being traded and the markets in which it is purchased or sold; (ii) the desired
timing of the transaction; (iii) BlackRocks knowledge of the expected commission rates and spreads currently available; (iv) the activity existing and expected in the market for the particular security or instrument, including any
anticipated execution difficulties; (v) the full range of brokerage services provided; (vi) the brokers or dealers capital (vii) the quality of research and research services provided; (viii) the reasonableness of the
commission, dealer spread or its equivalent for the specific transaction; and (ix) BlackRocks knowledge of any actual or apparent operational problems of a broker or dealer.
Section 28(e) of the Exchange Act (Section 28(e)) permits an investment adviser, under certain circumstances,
to cause an account to pay a broker or dealer a commission for effecting a transaction that exceeds the amount another broker or dealer would have charged for effecting the same transaction in recognition of the value of brokerage and research
services provided by that broker or dealer. This includes commissions paid on riskless principal transactions under certain conditions. Brokerage and research services include: (1) furnishing advice as to the value of securities, including
pricing and appraisal advice, credit analysis, risk measurement analysis, performance and other analysis, as well as the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of
securities; (2) furnishing analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; and (3) effecting securities transactions and performing
functions incidental to securities transactions (such as clearance, settlement, and custody). BlackRock believes that access to independent investment research is beneficial to its investment decision-making processes and, therefore, to the Funds.
BlackRock may participate in client commission arrangements
under which BlackRock may execute transactions through a broker-dealer and request that the broker-dealer allocate a portion of the commissions or commission credits to another firm that provides research to BlackRock. BlackRock believes that
research services obtained through soft dollar or commission sharing arrangements enhance its investment decision-making capabilities, thereby increasing the prospects for higher investment returns. BlackRock will engage only in soft dollar or
commission sharing transactions that comply with the requirements of Section 28(e). BlackRock regularly evaluates the soft dollar products and services utilized, as well as the overall soft dollar and commission sharing arrangements to ensure
that trades are executed by firms that are regarded as best able to execute trades for client accounts, while at the same time providing access to the research and other services BlackRock views as impactful to its trading results.
BlackRock may utilize soft dollars and related services, including research
(whether prepared by the broker-dealer or prepared by a third-party and provided to BlackRock by the broker-dealer) and execution or brokerage services within applicable rules and BlackRocks policies to the extent that such permitted services
do not compromise BlackRocks ability to seek to obtain best execution. In this regard, the portfolio management investment and/or
II-95
trading teams may consider a variety of factors, including the degree to which the broker-dealer:
(a) provides access to company management; (b) provides access to their analysts; (c) provides meaningful/insightful research notes on companies or other potential investments; (d) facilitates calls on which meaningful or
insightful ideas about companies or potential investments are discussed; (e) facilitates conferences at which meaningful or insightful ideas about companies or potential investments are discussed; or (f) provides research tools such as
market data, financial analysis, and other third party related research and brokerage tools that aid in the investment process.
Research-oriented services for which BlackRock might pay with Fund commissions may be in written form or through direct contact with individuals and may
include information as to particular companies or industries and securities or groups of securities, as well as market, economic, or institutional advice and statistical information, political developments and technical market information that
assists in the valuation of investments. Except as noted immediately below, research services furnished by brokers may be used in servicing some or all client accounts and not all services may be used in connection with the Fund or account that paid
commissions to the broker providing such services. In some cases, research information received from brokers by mutual fund management personnel, or personnel principally responsible for BlackRocks individually managed portfolios, is not
necessarily shared by and between such personnel. Any investment advisory or other fees paid by a Fund to BlackRock are not reduced as a result of BlackRocks receipt of research services. In some cases, BlackRock may receive a service from a
broker that has both a research and a non-research use. When this occurs BlackRock makes a good faith allocation, under all the circumstances, between the research and non-research uses of the service. The percentage of the
service that is used for research purposes may be paid for with client commissions, while BlackRock will use its own funds to pay for the percentage of the service that is used for non-research purposes. In making this good faith allocation,
BlackRock faces a potential conflict of interest, but BlackRock believes that its allocation procedures are reasonably designed to ensure that it appropriately allocates the anticipated use of such services to their research and non-research uses.
Payments of commissions to brokers who are affiliated persons of
the Fund, or the Master Portfolio with respect to the Feeder Fund (or affiliated persons of such persons), will be made in accordance with Rule 17e-1 under the Investment Company Act. Subject to policies established by the Board of Directors of the
Master Portfolio, BlackRock is primarily responsible for the execution of the Master Portfolios portfolio transactions and the allocation of brokerage.
From time to time, a Fund may purchase new issues of securities in a fixed price offering. In these situations, the broker may be a member of the selling
group that will, in addition to selling securities, provide BlackRock with research services. FINRA has adopted rules expressly permitting these types of arrangements under certain circumstances. Generally, the broker will provide research
credits in these situations at a rate that is higher than that available for typical secondary market transactions. These arrangements may not fall within the safe harbor of Section 28(e).
BlackRock does not consider sales of shares of the mutual funds it advises
as a factor in the selection of brokers or dealers to execute portfolio transactions for a Fund; however, whether or not a particular broker or dealer sells shares of the mutual funds advised by BlackRock neither qualifies nor disqualifies such
broker or dealer to execute transactions for those mutual funds.
Each Fund anticipates that its brokerage transactions involving foreign securities generally will be conducted primarily on the principal stock exchanges
of the applicable country. Foreign equity securities may be held by a Fund in the form of depositary receipts, or other securities convertible into foreign equity securities. Depositary receipts may be listed on stock exchanges, or traded in
over-the-counter markets in the United States or Europe, as the case may be. American Depositary Receipts, like other securities traded in the United States, will be subject to negotiated commission rates. Because the shares of each Fund are
redeemable on a daily basis in U.S. dollars, each Fund intends to manage its portfolio so as to give reasonable assurance that it will be able to obtain U.S. dollars to the extent necessary to meet anticipated redemptions. Under present conditions,
it is not believed that these considerations will have a significant effect on a Funds portfolio strategies.
See Portfolio Transactions and Brokerage in the Statement of Additional Information for information about the brokerage commissions paid by your Fund, including commissions paid to affiliates,
if any, for the periods indicated.
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Each Fund may invest in certain securities traded in the OTC market and intends to deal directly with the
dealers who make a market in the particular securities, except in those circumstances in which better prices and execution are available elsewhere. Under the Investment Company Act, persons affiliated with a Fund and persons who are affiliated with
such affiliated persons are prohibited from dealing with the Fund as principal in the purchase and sale of securities unless a permissive order allowing such transactions is obtained from the Commission. Since transactions in the OTC market usually
involve transactions with the dealers acting as principal for their own accounts, the Funds will not deal with affiliated persons, including PNC and its affiliates, in connection with such transactions. However, an affiliated person of a Fund may
serve as its broker in OTC transactions conducted on an agency basis provided that, among other things, the fee or commission received by such affiliated broker is reasonable and fair compared to the fee or commission received by non-affiliated
brokers in connection with comparable transactions. In addition, a Fund may not purchase securities during the existence of any underwriting syndicate for such securities of which PNC is a member or in a private placement in which PNC serves as
placement agent except pursuant to procedures approved by the Board of Directors that either comply with rules adopted by the Commission or with interpretations of the Commission staff.
Over-the-counter issues, including most fixed income securities such as corporate debt and U.S. Government securities, are
normally traded on a net basis without a stated commission, through dealers acting for their own account and not as brokers. The Funds will primarily engage in transactions with these dealers or deal directly with the issuer unless a
better price or execution could be obtained by using a broker. Prices paid to a dealer with respect to both foreign and domestic securities will generally include a spread, which is the difference between the prices at which the dealer
is willing to purchase and sell the specific security at the time, and includes the dealers normal profit.
Purchases of money market instruments by a Fund are made from dealers, underwriters and issuers. The Funds do not currently expect to incur any brokerage commission expense on such transactions because
money market instruments are generally traded on a net basis with dealers acting as principal for their own accounts without a stated commission. The price of the security, however, usually includes a profit to the dealer. Each Money
Market Fund intends to purchase only securities with remaining maturities of 13 months or less as determined in accordance with the rules of the Commission. As a result, the portfolio turnover rates of a Money Market Fund will be relatively high.
However, because brokerage commissions will not normally be paid with respect to investments made by a Money Market Fund, the turnover rates should not adversely affect the Funds net asset values or net income.
Securities purchased in underwritten offerings include a fixed amount of
compensation to the underwriter, generally referred to as the underwriters concession or discount. When securities are purchased or sold directly from or to an issuer, no commissions or discounts are paid.
The Manager or sub-advisers may seek to obtain an undertaking from issuers
of commercial paper or dealers selling commercial paper to consider the repurchase of such securities from a Fund prior to maturity at their original cost plus interest (sometimes adjusted to reflect the actual maturity of the securities), if it
believes that a Funds anticipated need for liquidity makes such action desirable. Any such repurchase prior to maturity reduces the possibility that a Fund would incur a capital loss in liquidating commercial paper, especially if interest
rates have risen since acquisition of such commercial paper.
Investment decisions for each Fund and for other investment accounts managed by the Manager or sub-advisers are made independently of each other in light
of differing conditions. BlackRock allocates investments among client accounts in a fair and equitable manner. A variety of factors will be considered in making such allocations. These factors include: (i) investment objectives or strategies
for particular accounts, including sector, industry, country or region and capitalization weightings, (ii) tax considerations of an account, (iii) risk or investment concentration parameters for an account, (iv) supply or demand for a
security at a given price level, (v) size of available investment, (vi) cash availability and liquidity requirements for accounts, (vii) regulatory restrictions, (viii) minimum investment size of an account, (ix) relative
size of account, and (x) such other factors as may be approved by BlackRocks general counsel. Moreover, investments may not be allocated to one client account over another based on any of the following considerations: (i) to favor
one client account at the expense of another, (ii) to generate higher fees paid by one client account over another or to produce greater performance compensation to BlackRock, (iii) to develop or enhance a relationship with a client or
prospective client, (iv) to compensate a client for past services or benefits rendered to BlackRock or to induce future services or benefits to be rendered to BlackRock, or (v) to manage or equalize investment performance among different
client accounts.
II-97
Equity securities will generally be allocated among client accounts within the same investment mandate on a
pro rata basis. This pro-rata allocation may result in a Fund receiving less of a particular security than if pro-ration had not occurred. All allocations of equity securities will be subject, where relevant, to share minimums established for
accounts and compliance constraints.
Initial public offerings of
securities may be over-subscribed and subsequently trade at a premium in the secondary market. When BlackRock is given an opportunity to invest in such an initial offering or new or hot issue, the supply of securities
available for client accounts is often less than the amount of securities the accounts would otherwise take. In order to allocate these investments fairly and equitably among client accounts over time, each portfolio manager or a member of his or
her respective investment team will indicate to BlackRocks trading desk their level of interest in a particular offering with respect to eligible clients accounts for which that team is responsible. Initial public offerings of U.S. equity
securities will be identified as eligible for particular client accounts that are managed by portfolio teams who have indicated interest in the offering based on market capitalization of the issuer of the security and the investment mandate of the
client account and in the case of international equity securities, the country where the offering is taking place and the investment mandate of the client account. Generally, shares received during the initial public offering will be allocated among
participating client accounts within each investment mandate on a pro rata basis. In situations where supply is too limited to be allocated among all accounts for which the investment is eligible, portfolio managers may rotate such investment
opportunities among one or more accounts so long as the rotation system provides for fair access for all client accounts over time. Other allocation methodologies that are considered by BlackRock to be fair and equitable to clients may be used as
well.
Because different accounts may have differing investment
objectives and policies, BlackRock may buy and sell the same securities at the same time for different clients based on the particular investment objective, guidelines and strategies of those accounts. For example, BlackRock may decide that it may
be entirely appropriate for a growth fund to sell a security at the same time a value fund is buying that security. To the extent that transactions on behalf of more than one client of BlackRock or its affiliates during the same period may increase
the demand for securities being purchased or the supply of securities being sold, there may be an adverse effect on price. For example, sales of a security by BlackRock on behalf of one or more of its clients may decrease the market price of such
security, adversely impacting other BlackRock clients that still hold the security. If purchases or sales of securities arise for consideration at or about the same time that would involve a Fund or other clients or funds for which BlackRock or an
affiliate act as investment manager, transactions in such securities will be made, insofar as feasible, for the respective funds and clients in a manner deemed equitable to all.
In certain instances, BlackRock may find it efficient for purposes of
seeking to obtain best execution, to aggregate or bunch certain contemporaneous purchases or sale orders of its advisory accounts. In general, all contemporaneous trades for client accounts under management by the same portfolio manager
or investment team will be bunched in a single order if the trader believes the bunched trade would provide each client with an opportunity to achieve a more favorable execution at a potentially lower execution cost. The costs associated with a
bunched order will be shared pro rata among the clients in the bunched order. Generally, if an order for a particular portfolio manager or management team is filled at several different prices through multiple trades, all accounts participating in
the order will receive the average price except in the case of certain international markets where average pricing is not permitted. While in some cases this practice could have a detrimental effect upon the price or value of the security as far as
a Fund is concerned, in other cases it could be beneficial to the Fund. Transactions effected by BlackRock on behalf of more than one of its clients during the same period may increase the demand for securities being purchased or the supply of
securities being sold, causing an adverse effect on price. The trader will give the bunched order to the broker dealer that the trader has identified as being able to provide the best execution of the order. Orders for purchase or sale of securities
will be placed within a reasonable amount of time of the order receipt and bunched orders will be kept bunched only long enough to execute the order.
A Fund will not purchase securities during the existence of any underwriting or selling group relating to such securities of which BlackRock, PNC, BRIL or
any affiliated person (as defined in the Investment Company Act) thereof is a member except pursuant to procedures adopted by the Board of Directors in accordance with Rule 10f-3 under the Investment Company Act. In no instance will portfolio
securities be purchased from or sold to BlackRock, PNC, BRIL or any affiliated person of the foregoing entities except as permitted by Commission exemptive order or by applicable law.
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Portfolio Turnover
While a Fund generally does not expect to engage in trading for short term
gains, it will effect portfolio transactions without regard to any holding period if, in Fund managements judgment, such transactions are advisable in light of a change in circumstances of a particular company or within a particular industry
or in general market, economic or financial conditions. The portfolio turnover rate is calculated by dividing the lesser of a Funds annual sales or purchases of portfolio securities (exclusive of purchases or sales of U.S. government
securities and all other securities whose maturities at the time of acquisition were one year or less) by the monthly average value of the securities in the portfolio during the year. A high rate of portfolio turnover results in certain tax
consequences, such as increased capital gain dividends and/or ordinary income dividends, and in correspondingly greater transaction costs in the form of dealer spreads and brokerage commissions, which are borne directly by a Fund.
D
IVIDENDS
AND
T
AXES
Dividends
Each Fund intends to distribute substantially all of its net
investment income, if any. Dividends from such net investment income are paid as set forth in each Funds prospectus. Each Fund will also distribute all net realized capital gains, if any, as set forth in such Funds prospectus. From time
to time, a Fund may declare a special distribution at or about the end of the calendar year in order to comply with Federal tax requirements that certain percentages of its ordinary income and capital gains be distributed during the year. If in any
fiscal year, a Fund has net income from certain foreign currency transactions, such income will be distributed at least annually.
For information concerning the manner in which dividends may be reinvested automatically in shares of each Fund, see Shareholder Services
Automatic Dividend Reinvestment Plan. Shareholders may also elect in writing to receive any such dividends in cash. Dividends are taxable to shareholders, as discussed below, whether they are reinvested in shares of the Fund or received in
cash. The per share dividends on front-end load shares, CDSC shares and Service Shares will be lower than the per share dividends on Institutional Shares as a result of the service, distribution and higher transfer agency fees applicable to CDSC
shares, the service fees applicable to front-end load shares and Service Shares, and the service and distribution fees applicable to Class R Shares. Similarly, the per share dividends on CDSC shares and Class R Shares will be lower than the per
share dividends on front-end load shares and Service Shares as a result of the distribution fees and higher transfer agency fees applicable to CDSC shares and the distribution fees applicable to Class R Shares, and the per share dividends on CDSC
shares will be lower than the per share dividends on Class R Shares as a result of the higher distribution fees and higher transfer agency fees applicable to CDSC shares.
Taxes
Each Fund intends to continue to qualify for the special tax treatment afforded to regulated investment companies
(RICs) under the Code. As long as a Fund so qualifies, the Fund (but not its shareholders) will not be subject to Federal income tax on the part of its investment company taxable income and net realized capital gains that it distributes
to its shareholders in years in which it distributes at least 90% of its investment company taxable income and 90% of its net tax-exempt interest income, if any, for the year. To qualify as a RIC, a Fund must meet certain requirements regarding the
source of its income and the composition and diversification of its assets. See Part II, Investment Risks and Considerations Investment Restrictions (All Funds) for a discussion of the asset diversification requirements. In the
case of a Feeder Fund, such Fund may look to the underlying assets of the Master Portfolio in which it has invested for purposes of satisfying the asset diversification requirement and various other requirements of the Code applicable to RICs.
Each Fund intends to distribute substantially all of such income
and gains. If, in any taxable year, a Fund fails to qualify as a RIC under the Code, notwithstanding the availability of certain relief provisions, such Fund would be taxed in the same manner as an ordinary corporation and all distributions from
earnings and profits (as determined under Federal income tax principles) to its shareholders would be taxable as ordinary dividend income eligible for taxation at a reduced tax rate for non-corporate shareholders and the dividends-received deduction
for corporate shareholders. However, a Municipal Funds distributions derived from income on tax-exempt obligations, as defined herein, would no longer qualify for treatment as exempt interest. Each Fund that is a series of a RIC that consists
of multiple series is treated as a separate corporation for Federal income tax purposes, and therefore is considered to be
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a separate entity in determining its treatment under the rules for RICs. Losses in one series of a RIC do
not offset gains in another, and the requirements (other than certain organizational requirements) for qualifying for RIC status will be determined at the level of the individual series. In the following discussion, the term Fund means
each individual series, if applicable.
The Code requires a RIC
to pay a nondeductible 4% excise tax to the extent the RIC does not distribute, during each calendar year, 98% of its ordinary income, determined on a calendar year basis, and 98.2% of its capital gain net income, determined, in general, as if the
RICs taxable year ended on October 31, plus certain undistributed amounts from the previous years. While each Fund intends to distribute its income and capital gains in the manner necessary to avoid imposition of the 4% excise tax, there
can be no assurance that a sufficient amount of the Funds taxable income and capital gains will be distributed to avoid entirely the imposition of the tax. In such event, a Fund will be liable for the tax only on the amount by which it does
not meet the foregoing distribution requirements.
Dividends paid
by a Fund from its ordinary income or from an excess of net short-term capital gain over net long-term capital loss (together referred to as ordinary income dividends) are taxable to shareholders as ordinary income. Distributions made
from an excess of net long-term capital gain over net short-term capital loss (including gains or losses from certain transactions in futures and options) (capital gain dividends) are taxable to shareholders as long-term capital gains,
regardless of the length of time the shareholder has owned Fund shares. Distributions paid by a Fund that are reported as exempt-interest dividends will not be subject to regular Federal income tax. Certain dividend income and long-term capital
gains are eligible for taxation at a reduced rate that applies to non-corporate shareholders. Under these rules, the portion of ordinary income dividends constituting qualified dividend income when paid by a RIC to non-corporate
shareholders may be taxable to such shareholders at long-term capital gain rates. However, to the extent a Funds distributions are derived from income on debt securities, certain types of preferred stock treated as debt for Federal income tax
purposes and short-term capital gains, such distributions will not constitute qualified dividend income.
Beginning in 2013, a 3.8% Medicare contribution tax will be imposed on net investment income, including interest, dividends, and net gain, of U.S.
individuals with income exceeding $200,000 (or $250,000 if married filing jointly), and of estates and trusts.
A Funds net capital gain (the excess of net long-term capital gains over net short-term capital losses) is not subject to the 90% distribution requirement for taxation as a RIC, described above. If
a Fund retains net capital gain, it is subject to tax on that gain, and may designate the retained amount as undistributed capital gain in a notice to its shareholders, who will be required to include in income, as long-term capital gain, their
proportionate shares of such undistributed net capital gain, will be deemed to have paid and may claim as a credit against their Federal income tax liability (and as a refund to the extent it exceeds that liability) their proportionate shares of the
tax paid by the Fund on that gain, and may increase the basis of their shares in the Fund by the excess of the amount included in income over the amount allowed as a credit against their taxes.
Distributions in excess of a Funds current and accumulated earnings
and profits will first constitute nontaxable returns of capital and will reduce the adjusted tax basis of a holders shares and after such adjusted tax basis is reduced to zero, will constitute capital gains to such holder (assuming the shares
are held as a capital asset). Distributions in excess of a Funds minimum distribution requirements but not in excess of a Funds earnings and profits will be taxable to shareholders and will not constitute nontaxable returns of capital. A
Funds capital loss carryovers, if any, carried from taxable years beginning before 2011 do not reduce current earnings and profits, even if such carryforwards offset current year realized gains. Any loss upon the sale or exchange of Fund
shares held for six months or less will be treated as long-term capital loss to the extent of any capital gain dividends received by the shareholder.
Ordinary income and capital gain dividends are taxable to shareholders even if they are reinvested in additional shares of a Fund. Distributions by a
Fund, whether from ordinary income or capital gains, generally will not be eligible for the dividends received deduction allowed to corporations under the Code. If a Fund pays a dividend in January that was declared in the previous October, November
or December to shareholders of record on a specified date in one of such months, then such dividend will be treated for tax purposes as being paid by the Fund and received by its shareholders on December 31 of the year in which the dividend was
declared.
No gain or loss will be recognized by Investor B or
Investor B1 shareholders on the conversion of their Investor B Shares into Investor A Shares or Investor B1 Shares into Investor A1 Shares. A shareholders tax basis in the Investor A or Investor A1 Shares acquired upon conversion will be the
same as the shareholders tax basis in the
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converted Investor B or Investor B1 Shares, and the holding period of the acquired Investor A or Investor A1
Shares will include the holding period for the converted Investor B or Investor B1 Shares.
If a shareholder of a Fund exercises an exchange privilege within 90 days of acquiring the shares of a Fund, prior to January 31 of the following year, then the loss that the shareholder recognizes
on the exchange will be reduced (or the gain increased) to the extent any sales charge paid on the exchanged shares reduces any sales charge the shareholder would have owed upon the purchase of the new shares in the absence of the exchange
privilege. Instead, such sales charge will be treated as an amount paid for the new shares.
A loss realized on a sale or exchange of shares of a Fund will be disallowed if other substantially identical shares are acquired (whether through the automatic reinvestment of dividends or otherwise)
within a 61-day period beginning 30 days before and ending 30 days after the date on which the shares are sold or exchanged. In such case, the basis of the shares acquired will be adjusted to reflect the disallowed loss.
Certain Funds may invest in derivative contracts such as options,
futures contracts, forward contracts and swap agreements. The federal income tax treatment of a derivative contract may not be as favorable as a direct investment in the underlying security and may adversely affect the timing, character and amount
of income the Fund realizes from its investments. As a result, a larger portion of the Funds distributions may be treated as ordinary income rather than capital gains. In addition, section 1256 contracts held by a Fund at the end
of each taxable year (and, for purposes of the 4% excise tax, certain other dates as prescribed under the Code) are generally marked-to-market, and unrealized gains or losses are treated as though they were realized, which may increase
the amount that must be distributed to meet distribution requirements and avoid the excise tax. In addition, the tax treatment of derivative contracts, such as swap agreements, is unsettled and may be subject to future legislation, regulation or
administrative pronouncements issued by the IRS. If such future guidance limits the Funds ability to use derivatives, the Fund may have to find other ways of achieving its investment objectives.
A provision added to the Code by the Dodd-Frank Wall Street Reform and
Consumer Protection Act clarifies that certain swap agreements, including exchange-traded swap agreements, are treated as notional principal contracts rather than as section 1256 contracts. This can affect the type of income earned by such swap
agreements. Although all of the income on a notional principal contract is ordinary income, only some of the income on a section 1256 contract is short-term capital gain, which is generally taxable at ordinary income rates. The rest is long-term
capital gain, which may be taxable at more favorable rates than ordinary income. Recently proposed regulations interpret what types of swap agreements are to be treated as notional principal contracts rather than as section 1256 contracts. When
finalized, these regulations could result in the Fund having to treat more of its income on swap agreements and more of the distributions made to shareholders as ordinary income and less as long-term capital gains.
Certain Funds may invest in zero coupon U.S. Treasury bonds and other debt
securities that are issued at a discount or provide for deferred interest. Even though a Fund receives no actual interest payments on these securities, it will be deemed to receive income equal, generally, to a portion of the excess of the face
value of the securities over their issue price (original issue discount) each year that the securities are held. Since the original issue discount income earned by a Fund in a taxable year may not be represented by cash income, the Fund
may have to dispose of securities, which it might otherwise have continued to hold, or borrow to generate cash in order to satisfy its distribution requirements. In addition, a Funds investment in foreign currencies or foreign currency
denominated or referenced debt securities, certain asset-backed securities and contingent payment and inflation-indexed debt instruments also may increase or accelerate the Funds recognition of income, including the recognition of taxable
income in excess of cash generated by such investments.
Ordinary
income dividends paid to shareholders who are nonresident aliens or foreign entities generally will be subject to a 30% U.S. withholding tax under existing provisions of the Code applicable to foreign individuals and entities unless a reduced rate
of withholding or a withholding exemption is provided under applicable treaty law.
A 30% withholding tax will be imposed on dividends paid after December 31, 2013 and redemption proceeds paid after December 31, 2016, to (i) foreign financial institutions including
non-U.S. investment funds unless they agree to collect and disclose to the IRS information regarding their direct and indirect U.S. account holders and (ii) certain other foreign entities unless they certify certain information regarding their
direct and indirect U.S. owners. To avoid withholding, a foreign financial institution will need to enter into agreements with the IRS regarding providing the
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IRS information including the name, address and taxpayer identification number of direct and indirect U.S. account holders, to comply with due diligence procedures with respect to the
identification of U.S. accounts, to report to the IRS certain information with respect to U.S. accounts maintained, to agree to withhold tax on certain payments made to non-compliant foreign financial institutions or to account holders who fail to
provide the required information, and to determine certain other information as to their account holders. Other foreign entities will need to provide the name, address, and TIN of each substantial U.S. owner or certifications of no substantial U.S.
ownership unless certain exceptions apply.
Foreign shareholders
of a Fund must generally treat a distribution attributable to gain from a Funds sale of an interest in a REIT as real property gain if 50% or more of the value of a Funds assets is invested in REITs. The Fund is required to withhold a
35% tax on a distribution to a foreign shareholder attributable to real property gain, and such a distribution may subject a foreign shareholder to a U.S. tax filing obligation and create a branch profits tax liability for foreign corporate
shareholders. Under a de minimis exception to this rule, if the foreign shareholder has not held more than 5% of a class of stock at any time during the one-year period ending on the date of the distribution, the foreign shareholder is not treated
as receiving real property gain. There are also certain additional restrictions regarding the use of wash sales and substitute payments.
Shareholders that are nonresident aliens or foreign entities are urged to consult their own tax advisers concerning the particular tax consequences to
them of an investment in a Fund.
Under certain provisions of the
Code, some shareholders may be subject to a withholding tax on ordinary income dividends, capital gain dividends and redemption payments (backup withholding). Generally, shareholders subject to backup withholding will be non-corporate
shareholders for whom no certified taxpayer identification number is on file with the Fund or who, to the Funds knowledge, have furnished an incorrect number. When establishing an account, an investor must certify under penalty of perjury that
such number is correct and that such investor is not otherwise subject to backup withholding. Backup withholding is not an additional tax. Any amount withheld generally may be allowed as a refund or a credit against a shareholders Federal
income tax liability, provided that the required information is timely forwarded to the IRS.
If a shareholder recognizes a loss with respect to a Funds shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder in any single taxable year
(or a greater amount in any combination of taxable years), the shareholder must file a disclosure statement on Form 8886 with the IRS. Direct shareholders of portfolio securities are in many cases exempted. That a loss is reportable under these
regulations does not affect the legal determination of whether the taxpayers treatment of the loss is proper. Shareholders should consult their tax advisers to determine the applicability of these regulations in light of their individual
circumstances.
Dividends and interest received by a Fund may
give rise to withholding and other taxes imposed by foreign countries. Tax conventions between certain foreign countries and the United States may reduce or eliminate such taxes. Shareholders of a Fund more than 50% by value of the assets of which
at the close of a taxable year are foreign securities may be able to claim U.S. foreign tax credits with respect to such foreign taxes paid by the Fund, subject to certain requirements and limitations contained in the Code. For example, certain
retirement accounts and certain tax-exempt organizations cannot claim foreign tax credits on investments in foreign securities held in a Fund. In addition, a foreign tax credit may be claimed with respect to withholding tax on payments with respect
to a security only if the holder of the security meets certain holding period requirements. Both the shareholder and the Fund must meet these holding period requirements, and if a Fund fails to do so, it will not be able to pass through
to shareholders the ability to claim a credit or a deduction for the related foreign taxes paid by the Fund. Further, to the extent that a Fund engages in securities lending with respect to a security paying income subject to foreign taxes, it may
not be able to pass through to its shareholders the ability to take a foreign tax credit for those taxes. If a Fund satisfies the applicable requirements, such Fund will be eligible to file an election with the IRS pursuant to which shareholders of
the Fund will be required to include their proportionate shares of such foreign taxes in their U.S. income tax returns as gross income, treat such proportionate shares as taxes paid by them, and deduct such proportionate shares in computing their
taxable incomes or, alternatively, use them as foreign tax credits against their U.S. income taxes. No deductions for foreign taxes, however, may be claimed by noncorporate shareholders who do not itemize deductions. A shareholder that is a
nonresident alien individual or a foreign corporation may be subject to U.S. withholding tax on the income resulting from a Funds election described in this paragraph but may
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not be able to claim a credit or deduction against such U.S. tax for the foreign taxes treated as having
been paid by such shareholder. A Fund will report annually to its shareholders the amount per share of such foreign taxes and other information needed to claim the foreign tax credit.
Certain transactions entered into by the Funds are subject to special tax rules of the Code that may, among other things,
(a) affect the character of gains and losses realized, (b) disallow, suspend or otherwise limit the allowance of certain losses or deductions, and (c) accelerate the recognition of income without a corresponding receipt of cash (with
which to make the necessary distributions to satisfy distribution requirements applicable to RICs). Operation of these rules could, therefore, affect the character, amount and timing of distributions to shareholders. Special tax rules also may
require a Fund to mark to market certain types of positions in its portfolio (
i.e.
, treat them as sold on the last day of the taxable year), and may result in the recognition of income without a corresponding receipt of cash. Funds
engaging in transactions affected by these provisions intend to monitor their transactions, make appropriate tax elections and make appropriate entries in their books and records to lessen the effect of these tax rules and avoid any possible
disqualification from the special treatment afforded RICs under the Code.
A Fund that invests in commodities-linked instruments may take certain positions through a wholly-owned (or majority-owned), foreign subsidiary (the Subsidiary). Based on the anticipated
structure and activities of the Subsidiary, it is expected that the Subsidiary will be a controlled foreign corporation and that all of its net income will be subpart F income for U.S. federal income tax purposes. If that is
the case, the Fund will be required to report all of the Subsidiarys net income as ordinary income regardless of whether that income would be treated differently (for example, as capital gain) at the Subsidiary level and regardless of whether
that income is distributed to the Fund. (Previously taxed income will not, however, be taxable again when distributed). If a net loss is realized by the Subsidiary in any taxable year, the loss will generally not be available to offset the
Funds other income for that year. It is not expected that the Subsidiary will be subject to an entity level tax.
If a Fund purchases shares of an investment company (or similar investment entity) organized under foreign law, the Fund will generally be treated as
owning shares in a passive foreign investment company (PFIC) for Federal income tax purposes. A Fund may be subject to Federal income tax, and interest charges (at the rate applicable to tax underpayments) on tax liability treated as
having been deferred with respect to certain distributions from such a company and on gain from the disposition of the shares of such a company (collectively referred to as excess distributions), even if such excess distributions are
paid by the Fund as a dividend to its shareholders. However, a Fund may elect to mark to market at the end of each taxable year shares that it holds in PFICs. The election is made separately for each PFIC held and, once made, would be
effective for all subsequent taxable years, unless revoked with consent from the IRS. Under this election, a Fund would recognize as ordinary income any increase in the value of its shares as of the close of the taxable year over their adjusted tax
basis and as ordinary loss any decrease in such value, but only to the extent of previously recognized mark-to-market gains. By making the mark-to-market election, a Fund could avoid imposition of the interest charge with respect to
excess distributions from PFICs, but in any particular year might be required to recognize income in excess of the distributions it received from PFICs.
If the Fund were to invest in a PFIC and elect to treat the PFIC as a qualified electing fund under the Code, in lieu of the foregoing
requirements, the Fund would be required to include in income each year a portion of the ordinary earnings and net capital gains of the qualified electing fund, even if not distributed to the Fund, and such amounts would be subject to the 90% and
excise tax distribution requirements described above. In order to make this election, the Fund would be required to obtain certain annual information from the PFICs in which it invests, which may be difficult or impossible to obtain.
Municipal Funds
Each Municipal Fund intends to qualify to pay exempt-interest
dividends as defined in Section 852(b)(5) of the Code. Under such section if, at the close of each quarter of a Funds taxable year, at least 50% of the value of the Funds total assets consists of obligations exempt from
Federal income tax (tax-exempt obligations) under Section 103(a) of the Code (relating generally to obligations of a state or local governmental unit), the Fund shall be qualified to pay exempt-interest dividends to holders of all
outstanding classes of its shares (together the shareholders). Exempt-interest dividends are dividends or any part thereof paid by a Fund that are attributable to
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interest on tax-exempt obligations and reported by the Fund as exempt-interest dividends. A Fund will
allocate interest from tax-exempt obligations (as well as ordinary income, capital gains and tax preference items discussed below) among the Funds shareholders according to a method (that it believes is consistent with the Commission rule
permitting the issuance and sale of multiple classes of shares) that is based upon the gross income that is allocable to each class of shareholders during the taxable year, or such other method as the IRS may prescribe.
Exempt-interest dividends will be excludable from a shareholders gross
income for Federal income tax purposes. Exempt-interest dividends are included, however, in determining the portion, if any, of a persons social security and railroad retirement benefits subject to Federal income taxes. Interest on
indebtedness incurred or continued to purchase or carry shares of a RIC paying exempt-interest dividends, such as the Fund, will not be deductible by the investor for Federal income tax purposes to the extent attributable to exempt-interest
dividends. Shareholders are advised to consult their tax advisers with respect to whether exempt-interest dividends retain the exclusion under Code Section 103(a) if a shareholder would be treated as a substantial user or
related person under Code Section 147(a) with respect to property financed with the proceeds of an issue of PABs, if any, held by a Fund.
All or a portion of a Funds gains from the sale or redemption of tax-exempt obligations purchased at a market discount will be treated as ordinary
income rather than capital gain. This rule may increase the amount of ordinary income dividends received by shareholders. Distributions in excess of a Funds earnings and profits will first reduce the adjusted tax basis of a holders
shares and, after such adjusted tax basis is reduced to zero, will constitute capital gains to such holder (assuming the shares are held as a capital asset). Any loss upon the sale or exchange of Fund shares held for six months or less will be
disallowed to the extent of any exempt-interest dividends received by the shareholder. In addition, any such loss that is not disallowed under the rule stated above will be treated as long-term capital loss to the extent of any capital gain
dividends received by the shareholder.
The Code subjects
interest received on certain otherwise tax-exempt securities to a Federal alternative minimum tax. The alternative minimum tax applies to interest received on certain PABs issued after August 7, 1986. PABs are bonds that, although
tax-exempt, are used for purposes other than those generally performed by governmental units and that benefit non-governmental entities (
e.g.
, bonds used for industrial development or housing purposes). Income received on such bonds is
classified as an item of tax preference, which could subject certain investors in such bonds, including shareholders of a Fund, to a Federal alternative minimum tax. A Fund will purchase such PABs and will report to
shareholders after the close of the calendar year-end the portion of the Funds dividends declared during the year that constitute an item of tax preference for alternative minimum tax purposes. The Code further provides that corporations are
subject to a Federal alternative minimum tax based, in part, on certain differences between taxable income as adjusted for other tax preferences and the corporations adjusted current earnings, which more closely reflect a
corporations economic income. Because an exempt-interest dividend paid by a Fund will be included in adjusted current earnings, a corporate shareholder may be required to pay alternative minimum tax on exempt-interest dividends paid by the
Fund.
Each Municipal Fund may engage in interest rate swap
transactions. The Federal income tax rules governing the taxation of interest rate swaps are not entirely clear and may require a Fund to treat payments received under such arrangements as ordinary income and to amortize payments made under certain
circumstances. Because payments received by a Fund in connection with swap transactions will be taxable rather than tax-exempt, they may result in increased taxable distributions to shareholders.
Please see Part I of your Funds Statement of Additional Information
for certain state tax information relevant to an investment in BlackRock California Municipal Bond Fund, BlackRock New Jersey Municipal Bond Fund, BlackRock New York Municipal Bond Fund and BlackRock Pennsylvania Municipal Bond Fund, as well as
information on economic conditions within each applicable state.
The foregoing is a general and abbreviated summary of the applicable provisions of the Code and Treasury regulations presently in effect. For the complete
provisions, reference should be made to the pertinent Code sections and the Treasury regulations promulgated thereunder. The Code and the Treasury regulations are subject to change by legislative, judicial or administrative action either
prospectively or retroactively.
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Ordinary income and capital gain dividends may also be subject to state and local taxes. Certain states
exempt from state income taxation dividends paid by RICs that are derived from interest on U.S. government obligations. State law varies as to whether dividend income attributable to U.S. government obligations is exempt from state income tax.
Shareholders of each Fund are urged to consult their tax
advisers regarding specific questions as to Federal, foreign, state or local taxes with respect to their Fund. Foreign investors should consider applicable foreign taxes in their evaluation of an investment in a Fund.
In the case of a Feeder Fund, such Fund is entitled to look to the
underlying assets of the Master Portfolio in which it has invested for purposes of satisfying various qualification requirements of the Code applicable to RICs. Each Master Portfolio is classified either as a partnership or a separate disregarded
entity (depending on the particular Master Portfolio) for U.S. Federal income tax purposes. If applicable tax provisions were to change, then the Board of Directors of a Feeder Fund will determine, in its discretion, the appropriate course of action
for the Feeder Fund. One possible course of action would be to withdraw the Feeder Funds investments from the Master Portfolio and to retain an investment manager to manage the Feeder Funds assets in accordance with the investment
policies applicable to the Feeder Fund.
The foregoing general
discussion of Federal income tax consequences is based on the Code and the regulations issued thereunder as in effect on the date of this Statement of Additional Information. Future legislative or administrative changes or court decisions may
significantly change the conclusions expressed in this discussion, and any such changes or decisions may have a retroactive effect.
An investment in a Fund may have consequences under state, local or foreign tax law, about which investors should consult their tax advisors.
P
ERFORMANCE
D
ATA
From time to time a Fund may include its
average annual total return and other total return data, and, if applicable, yield and tax-equivalent yield in advertisements or information furnished to present or prospective shareholders. Total return, yield and tax-equivalent yield each is based
on a Funds historical performance and is not intended to indicate future performance. Average annual total return is determined separately for each class of shares in accordance with a formula specified by the Commission.
Quotations of average annual total return, before tax, for the specified
periods are computed by finding the average annual compounded rates of return (based on net investment income and any realized and unrealized capital gains or losses on portfolio investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of each period. Average annual total return before taxes is computed assuming all dividends are reinvested and taking into account all applicable recurring and nonrecurring expenses,
including the maximum sales charge, in the case of front-end load shares, and the CDSC that would be applicable to a complete redemption of the investment at the end of the specified period in the case of CDSC shares, but does not take into account
taxes payable on dividends or on redemption.
Quotations of
average annual total return, after taxes, on dividends for the specified periods are computed by finding the average annual compounded rates of return that would equate the initial amount invested to the ending value of such investment at the end of
each period assuming payment of taxes on dividends received during such period. Average annual total return after taxes on dividends is computed assuming all dividends, less the taxes due on such dividends, are reinvested and taking into account all
applicable recurring and nonrecurring expenses, including the maximum sales charge, in the case of front-end load shares and the CDSC that would be applicable to a complete redemption of the investment at the end of the specified period in the case
of CDSC shares. The taxes due on dividends are calculated by applying to each dividend the highest applicable marginal Federal individual income tax rates in effect on the reinvestment date for that dividend. The rates used correspond to the tax
character (including eligibility for the maximum 20% tax rate applicable to qualified dividend income) of each dividend. The taxable amount and tax character of each dividend are specified by each Fund on the dividend declaration date, but may be
adjusted to reflect subsequent recharacterizations of distributions. The applicable tax rates may vary over the measurement period. The effects of state and local taxes are not reflected. Applicable tax credits, such as foreign
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credits, are taken into account according to Federal law. The ending value is determined assuming complete
redemption at the end of the applicable periods with no tax consequences associated with such redemption.
Quotations of average annual total return, after taxes, on both dividends and redemption for the specified periods are computed by finding the average annual compounded rates of return that would equate
the initial amount invested to the ending value of such investment at the end of each period assuming payment of taxes on dividends received during such period as well as on complete redemption. Average annual total return after taxes on
distributions and redemption is computed assuming all dividends, less the taxes due on such dividends, are reinvested and taking into account all applicable recurring and nonrecurring expenses, including the maximum sales charge in the case of
front-end load shares and the CDSC that would be applicable to a complete redemption of the investment at the end of the specified period in the case of CDSC shares and assuming, for all classes of shares, complete redemption and payment of taxes
due on such redemption. The ending value is determined assuming complete redemption at the end of the applicable periods, subtracting capital gains taxes resulting from the redemption and adding the presumed tax benefit from capital losses resulting
from redemption. The taxes due on dividends and on the deemed redemption are calculated by applying the highest applicable marginal Federal individual income tax rates in effect on the reinvestment and/or the redemption date. The rates used
correspond to the tax character (including eligibility for the maximum 20% tax rate applicable to qualified dividend income) of each component of each dividend and/or the redemption payment. The applicable tax rates may vary over the measurement
period. The effects of state and local taxes are not reflected.
A Fund also may quote annual, average annual and annualized total return and aggregate total return performance data, both as a percentage and as a dollar amount based on a hypothetical investment of
$1,000 or some other amount, for various periods other than those noted in Part I of each Funds Statement of Additional Information. Such data will be computed as described above, except that (1) as required by the periods of the
quotations, actual annual, annualized or aggregate data, rather than average annual data, may be quoted and (2) the maximum applicable sales charges will not be included with respect to annual or annualized rates of return calculations. Aside
from the impact on the performance data calculations of including or excluding the maximum applicable sales charges, actual annual or annualized total return data generally will be lower than average annual total return data since the average rates
of return reflect compounding of return; aggregate total return data generally will be higher than average annual total return data since the aggregate rates of return reflect compounding over a longer period of time.
Yield quotations will be computed based on a 30-day period by dividing
(a) the net income based on the yield of each security earned during the period by (b) the average daily number of shares outstanding during the period that were entitled to receive dividends multiplied by the maximum offering price per
share on the last day of the period. Tax equivalent yield quotations will be computed by dividing (a) the part of a Funds yield that is tax-exempt by (b) one minus a stated tax rate and adding the result to that part, if any, of the
Funds yield that is not tax-exempt.
A Funds total
return will vary depending on market conditions, the securities comprising a Funds portfolio, a Funds operating expenses and the amount of realized and unrealized net capital gains or losses during the period. The value of an investment
in a Fund will fluctuate and an investors shares, when redeemed, may be worth more or less than their original cost.
In order to reflect the reduced sales charges in the case of front-end load shares or the waiver of the CDSC in the case of CDSC shares applicable to
certain investors, as described under Purchase of Shares and Redemption of Shares, respectively, the total return data quoted by a Fund in advertisements directed to such investors may take into account the reduced, and not
the maximum, sales charge or may take into account the CDSC waiver and, therefore, may reflect greater total return since, due to the reduced sales charges or the waiver of sales charges, a lower amount of expenses is deducted.
On occasion, a Fund may compare its performance to, among other things, the
Funds benchmark index indicated in the Prospectus, the Value Line Composite Index, the Dow Jones Industrial Average, or to other published indices, or to performance data published by Lipper Inc., Morningstar, Inc. (Morningstar),
Money Magazine, U.S. News & World Report, BusinessWeek, Forbes Magazine, Fortune Magazine
or other industry publications. When comparing its performance to a market index, a Fund may refer to various statistical measures derived from
the historical performance of a Fund and the index, such as standard deviation and beta. As with other performance data, performance comparisons should not be considered indicative of a Funds relative performance for any future
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period. In addition, from time to time a Fund may include the Funds Morningstar risk-adjusted
performance ratings assigned by Morningstar in advertising or supplemental sales literature. From time to time a Fund may quote in advertisements or other materials other applicable measures of Fund performance and may also make reference to awards
that may be given to the Manager. Certain Funds may also compare their performance to composite indices developed by Fund management.
A Fund may provide information designed to help investors understand how the Fund is seeking to achieve its investment objectives. This may include
information about past, current or possible economic, market, political or other conditions, descriptive information or general principles of investing such as asset allocation, diversification and risk tolerance, discussion of a Funds
portfolio composition, investment philosophy, strategy or investment techniques, comparisons of the Funds performance or portfolio composition to that of other funds or types of investments, indices relevant to the comparison being made, or to
a hypothetical or model portfolio. A Fund may also quote various measures of volatility and benchmark correlation in advertising and other materials, and may compare these measures to those of other funds or types of investments.
P
ROXY
V
OTING
P
OLICIES
AND
P
ROCEDURES
The Board of Directors of the Funds has delegated the voting of proxies for the Funds securities to the Manager pursuant to the Managers proxy voting guidelines. Under these guidelines, the
Manager will vote proxies related to Fund securities in the best interests of the Fund and its stockholders. From time to time, a vote may present a conflict between the interests of the Funds stockholders, on the one hand, and those of the
Manager, or any affiliated person of the Fund or the Manager, on the other. The Manager maintains policies and procedures that are designed to prevent undue influence on the Managers proxy voting activity that might stem from any relationship
between the issuer of a proxy (or any dissident shareholder) and the Manager, the Managers affiliates, a Fund or a Funds affiliates. Most conflicts are managed through a structural separation of the Managers Corporate Governance
Group from the Managers employees with sales and client responsibilities. In addition, the Manager maintains procedures to ensure that all engagements with corporate issuers or dissident shareholders are managed consistently and without regard
to the Managers relationship with the issuer of the proxy or dissident shareholder. In certain instances, BlackRock may determine to engage an independent fiduciary to vote proxies as a further safeguard to avoid potential conflicts of
interest or as otherwise required by applicable law. A copy of the Funds Proxy Voting Policies is attached as Appendix B.
Information on how each Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available without
charge, (i) at www.blackrock.com and (ii) on the Commissions website at http://www.sec.gov.
G
ENERAL
I
NFORMATION
Description of Shares
Shareholders of a Fund are entitled to one vote for each full share held and
fractional votes for fractional shares held in the election of Directors and generally on other matters submitted to the vote of shareholders of the Fund. Shareholders of a class that bears distribution and/or service expenses have exclusive voting
rights with respect to matters relating to such distribution and service expenditures (except that Investor B and Investor B1 shareholders may vote upon any material changes to such expenses charged under the Investor A Distribution Plan). Voting
rights are not cumulative, so that the holders of more than 50% of the shares voting in the election of Directors can, if they choose to do so, elect all the Directors of a Fund, in which event the holders of the remaining shares would be unable to
elect any person as a Director.
No Fund intends to hold annual
meetings of shareholders in any year in which the Investment Company Act does not require shareholders to act upon any of the following matters: (i) election of Directors; (ii) approval of a management agreement; (iii) approval of a
distribution agreement; and (iv) ratification of selection of independent accountants. Shares issued are fully paid and non-assessable and have no preemptive rights. Redemption and conversion rights are discussed elsewhere herein and in each
Funds Prospectus. Each share of each class of Common Stock is entitled to participate equally in dividends and distributions declared by a Fund and in the net assets of the Fund upon liquidation or dissolution after satisfaction of outstanding
liabilities.
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For Funds organized as Maryland corporations, the by-laws of the Fund require that a special meeting of
shareholders be held upon the written request of a minimum percentage of the outstanding shares of the Fund entitled to vote at such meeting, if they comply with applicable Maryland law.
Certain of the Funds are organized as Massachusetts business trusts. Under Massachusetts law, shareholders of such
a trust may, under certain circumstances, be held personally liable as partners for its obligations. However, the Declaration of Trust establishing a trust, a copy of which for each applicable Fund, together with all amendments thereto (the
Declaration of Trust), is on file in the office of the Secretary of the Commonwealth of Massachusetts, contains an express disclaimer of shareholder liability for acts or obligations of the trust and provides for indemnification and
reimbursement of expenses out of the trust property for any shareholder held personally liable for the obligations of the trust. The Declaration of Trust also provides that a trust may maintain appropriate insurance (for example, fidelity bond and
errors and omissions insurance) for the protection of the trust, its shareholders, Trustees, officers, employees and agents covering possible tort and other liabilities. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate insurance existed and the trust itself was unable to meet its obligations.
Certain Funds are organized as Delaware statutory trusts.
See Additional Information Description of Shares in Part I of each Funds Statement of Additional Information for additional
capital stock information for your Fund.
Additional
Information
Under a separate agreement, BlackRock has granted
certain Funds the right to use the BlackRock name and has reserved the right to (i) withdraw its consent to the use of such name by a Fund if the Fund ceases to retain BlackRock Advisors, LLC as investment adviser and (ii) to
grant the use of such name to any other company.
See
Additional Information Principal Shareholders in Part I of each Funds Statement of Additional Information for information on the holders of 5% or more of any class of shares of your Fund.
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