UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-07899 and 811-07885
Name of Fund: BlackRock Index Funds, Inc.
iShares MSCI EAFE International Index Fund
iShares Russell 2000 Small-Cap Index Fund
Quantitative Master Series LLC
Master Small Cap Index Series
Fund Address: 100 Bellevue Parkway, Wilmington, DE 19809
Name and address of agent for service: John M. Perlowski, Chief Executive Officer, BlackRock Index Funds, Inc. and Quantitative Master Series LLC, 55 East 52nd Street, New York, NY 10055
Registrants’ telephone number, including area code: (800) 441-7762
Date of fiscal year end: 12/31/2017
Date of reporting period: 12/31/2017
| Item 1 – | Report to Stockholders |
DECEMBER 31, 2017
| ANNUAL REPORT |
|
BlackRock Index Funds, Inc.
| Ø | iShares MSCI EAFE International Index Fund |
| Ø | iShares Russell 2000 Small-Cap Index Fund |
| Not FDIC Insured • May Lose Value • No Bank Guarantee |
| 2 | THIS PAGE IS NOT PART OF YOUR FUND REPORT |
Table of Contents
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| Fund Financial Statements: |
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| 30 | ||||
| Fund Report of Independent Registered Public Accounting Firm |
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| Series Financial Statements: |
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| 64 | ||||
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| Series Report of Independent Registered Public Accounting Firm |
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| 3 |
| Fund Summary as of December 31, 2017 | iShares MSCI EAFE International Index Fund |
Investment Objective
iShares MSCI EAFE International Index Fund’s (the “Fund”) investment objective is to match the performance of the MSCI EAFE Index (Europe, Australasia, Far East) (the “MSCI EAFE Index”) in U.S. dollars with net dividends as closely as possible before the deduction of Fund expenses.
On February 24, 2017, the Board approved a proposal to change the name of BlackRock International Index Fund to iShares MSCI EAFE International Index Fund, which was effective on June 19, 2017.
Portfolio Management Commentary
How did the Fund perform?
For the 12-month period ended December 31, 2017, the Fund’s Institutional Shares returned 25.24%, Investor A Shares returned 24.84% and Class K Shares returned 25.17%. The benchmark MSCI EAFE Index returned 25.03% for the same period. The MSCI EAFE Index is a free-float adjusted, market-capitalization weighted index designed to measure equity performance of developed markets, excluding the United States and Canada.
Describe the market environment.
Japanese equities posted solid gains in the first quarter. Some success can be attributed to Japanese companies having a higher exposure to global growth, which has been trending upward over the past few quarters. 2016 fourth-quarter earnings reports were among the strongest in Japan in nearly a decade. Continued yield curve management from the central bank, better corporate governance and domestic investor buying have also been supportive of Japanese stocks.
In the case of Europe, economic data improved in the first quarter of 2017, particularly in large export-driven economies like Germany. Additionally, inflation in the region has started to stabilize, although not a major reversal, with headline CPI hitting 1.8% year-over-year and core inflation firming to 0.9% year-over-year in January. Political anxiety over elections in the Netherlands and France in the first half of the year, as well as fears over the European Central Bank (“ECB”) tapering its asset purchase program too soon, weighed on investor sentiment to some extent.
In the United Kingdom, Prime Minster Theresa May triggered Article 50 at the end of March, marking the start of the two-year period in which the United Kingdom must leave the European Union. While the initial impact of Brexit appeared to be inconsequential, recent economic data has shown the first signs of stress. January retail sales and average earnings missed expectations. Furthermore, a continued weakening of the pound sterling could continue to squeeze consumers further through increasing costs of imports. In such an environment, large-cap multinationals listed on the London Stock Exchange would likely remain better positioned than domestically focused small caps. The FTSE 100 Index hit a new record high against currency weakness.
Australia also experienced a positive first quarter, as the country benefited from global reflation, rising metal prices, and strong domestic and Chinese economic indicators.
In the second quarter, the Japanese yen was relatively volatile throughout the period, as the Bank of Japan made no changes to their policy, but revised upward their assessment of economic prospects. Japan’s strengthening economy translated into strong corporate earnings growth and positive earnings revisions.
Investor interest accelerated in European equities in the second quarter, leading to solid, broad-based returns across the region. The defeat of anti-European Union populists in France and the Netherlands diminished political risk for the region overall. This allowed investors to focus on the strongest European earnings season in seven years amid both a strengthening regional economy and global economy. French President Emmanuel Macron’s victory was positively felt across the continent and unsurprisingly had the largest impact within France. Gains in Eurozone equities were capped, as some investors looked cautiously at ECB developments for signs of monetary tightening. The United Kingdom did experience some volatility ahead and in the immediate wake of the snap election in June.
In Europe, the positive tailwinds of strong corporate profit and economic growth sustained the equity market rally. The euro area real effective exchange rate increased roughly 2% in the third quarter, as the improved growth picture in the region led markets to expect ECB President Mario Draghi to announce a further reduction in the pace of quantitative easing purchases, which could provide upward pressure on anemically low eurozone bond yields. However, the momentum behind the Franco-German drive to promote a deeper eurozone was slightly challenged in the German elections. While Chancellor Angela Merkel won a fourth term, the euro-skeptic right-wing Alternative for Germany party won a larger-than-expected share of the parliament. In response to growing ambitions of a Catalonian separatist movement, Spanish authorities arrested Catalan officials and raided several ministries ahead of an independence vote on October 1.
In the fourth quarter, Prime Minister Shinzo Abe’s victory at the October 22 “snap” election diminished uncertainty in the market, which helped investors focus on an improved earnings outlook, the benefits of increased global trade, and a strengthening domestic economy. In Europe, robust economic and corporate earnings growth helped the region post respectable gains despite recent headline noise around Spain and stubbornly low inflation.
Describe recent portfolio activity.
During the six-month period, as changes were made to the composition of the MSCI EAFE Index, the Fund purchased and sold securities to maintain its objective of replicating the risks and return of the benchmark index.
Describe portfolio positioning at period end.
The Fund remains positioned to match the risk characteristics of its benchmark index, irrespective of the market’s future direction.
The views expressed reflect the opinions of BlackRock as of the date of this report and are subject to change based on changes in market, economic or other conditions. These views are not intended to be a forecast of future events and are no guarantee of future results.
| 4 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
| Fund Summary as of December 31, 2017 (continued) | iShares MSCI EAFE International Index Fund |
TOTAL RETURN BASED ON A $10,000 INVESTMENT
| (a) | Assuming transaction costs and other operating expenses, including administration fees, if any. |
| (b) | Prior to August 1, 2016, the Fund invested all of its assets in Master International Index Series, a series of Quantative Master Series LLC. Master International Index Series invested in a statistically selected sample of equity securities included in the MSCI EAFE Index and in derivative instruments linked to the MSCI EAFE Index. On August 1, 2016, the Fund ceased to invest in the Master International Index Series as part of a “master/feeder” structure and instead began to operate as a stand-alone fund. |
| (c) | A free-float adjusted, market-capitalization weighted index designed to measure equity performance of developed markets, excluding the United States and Canada. |
Performance Summary for the Period Ended December 31, 2017
| Average Annual Total Returns (d) | ||||||||||||||||||||||||||||
| 6-Month Total Returns |
1 Year | 5 Years | 10 Years | |||||||||||||||||||||||||
| Institutional |
9.23 | % | 25.24 | % | 7.41 | % | 1.66 | % | ||||||||||||||||||||
| Investor A |
9.06 | 24.84 | 7.12 | 1.39 | ||||||||||||||||||||||||
| Class K |
9.18 | 25.17 | 7.44 | 1.70 | ||||||||||||||||||||||||
| MSCI EAFE Index |
9.86 | 25.03 | 7.90 | 1.94 | ||||||||||||||||||||||||
| (d) | See “About Fund Performance” on page 9 for a detailed description of share classes, including any related fees. |
Past performance is not indicative of future results.
Performance results may include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles.
Expense Example
| Actual | Hypothetical (b) | |||||||||||||||||||||||||||||||
| Beginning Account Value (07/01/17) |
Ending Account Value (12/31/17) |
Expenses Paid During the Period (a) |
Beginning Account Value (07/01/17) |
Ending Account Value (12/31/17) |
Expenses Paid During the Period (a) |
Annualized Expense Ratio |
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| Institutional |
$ | 1,000.00 | $ | 1,092.30 | $ | 0.53 | $ | 1,000.00 | $ | 1,024.70 | $ | 0.51 | 0.10 | % | ||||||||||||||||||
| Investor A |
1,000.00 | 1,090.60 | 1.90 | 1,000.00 | 1,023.39 | 1.84 | 0.36 | |||||||||||||||||||||||||
| Class K |
1,000.00 | 1,091.80 | 0.32 | 1,000.00 | 1,024.90 | 0.31 | 0.06 | |||||||||||||||||||||||||
| (a) | For each class of the Fund, expenses are equal to the annualized net expense ratio for the class, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period shown). |
| (b) | Hypothetical 5% annual return before expenses is calculated by prorating the number of days in the most recent fiscal half year divided by 365. |
See “Disclosure of Expenses” on page 9 for further information on how expenses were calculated.
| FUND SUMMARY | 5 |
| Fund Summary as of December 31, 2017 (continued) | iShares MSCI EAFE International Index Fund |
Portfolio Information
| 6 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
| Fund Summary as of December 31, 2017 (continued) | iShares Russell 2000 Small-Cap Index Fund |
Investment Objective
iShares Russell 2000 Small-Cap Index Fund’s (the “Fund”) investment objective is to match the performance of the Russell 2000® Index as closely as possible before the deduction of Fund expenses.
On February 24, 2017, the Board approved a proposal to change the name of BlackRock Small Cap Index Fund to iShares Russell 2000 Small-Cap Index Fund, which was effective on June 19, 2017.
Portfolio Management Commentary
How did the Fund perform?
For the 12-month period ended December 31, 2017, the Fund’s Institutional Shares returned 14.55%, Investor A Shares returned 14.35% and Class K Shares returned 14.69%. The benchmark Russell 2000® Index returned 14.65% for the same period.
The Fund invests all of its assets in Master Small Cap Index Series (the “Series”), a series of Quantitative Master Series LLC.
Describe the market environment.
The reflation trade in the United States continued to gain steam in the first quarter of the year. Macro data highlighted continued economic growth and a strengthening labor market, which supported the U.S. Federal Reserve’s (the “Fed”) decision to increase the federal funds rate by 25 basis points (0.25%) in March, marking the second rate hike in the past six months. The Fed’s summary of economic projections indicated that they will maintain a gradual pace of tightening should current economic trends continue.
Expectations of the new administration’s policies also boosted market sentiment, sending several U.S. equity indices to record highs. The inauguration of President Trump in late January stoked risk-on appetite, as pledges of tax relief and increased fiscal spending were supportive of cyclical stocks. However, the final weeks of the first quarter saw some profit taking as investor optimism waned after the failed attempt to repeal the Affordable Care Act called into question whether the new administration will be able to push through further reforms in 2017. Despite these setbacks, U.S. equities in the first quarter finished strong and the 10-year Treasury yield added 31 basis points in the quarter.
In the second quarter of 2017, political risk was a headwind to U.S. equities. President Trump’s firing of FBI Director James Comey on May 9 and the subsequent developments regarding the investigation of pre-election correspondence between Trump administration members and Russian officials was an enduring source of negative market sentiment. The largest single day fall of the S&P 500® in the quarter came in the wake of the House Oversight Committee’s request for all documents from the meetings between President Trump and Comey on May 17.
Although the Fed continued their monetary policy normalization, the yield on the 10-year U.S. Treasury compressed by nine basis points to 2.31% in the second quarter. The Fed increased the federal funds rate by 25 basis points at the June meeting, to between 1% and 1.25%, citing strength in the labor market and business spending, despite relatively weak inflation trends throughout the quarter.
Investors focused on sustained corporate earnings expansion, a subdued interest rate environment, and a healthy economic backdrop over threats from an increasingly hostile North Korea and a damaging hurricane season in the third quarter. This backdrop pushed volatility to the lowest levels in recorded history, with the Chicago Board Options Exchange Volatility Index averaging a record low of 10.94 in the quarter.
Domestic rates moved modestly higher as investors’ balanced news on the monetary, fiscal, and geopolitical fronts. In the September Federal Open Market Committee (“FOMC”) announcement, the committee revealed they would keep interest rates unchanged and initiate their balance sheet normalization in October. Additionally, amid short term hurricane related inflationary and economic growth pressures, the FOMC found inflation to remain somewhat below 2% in the near term, but expects it to stabilize around 2% by 2019. Real gross domestic product (“GDP”) growth was revised higher for 2017, from 2.2% to 2.4%. The 10-year U.S. Treasury yield ended the third quarter 2 basis points higher, to 2.33%.
The U.S. economy continued to demonstrate strength throughout the fourth quarter. Unemployment fell to 4.1%, the lowest level since 2000. Additional highlights that helped strengthen investor confidence in the macro picture included that nominal third quarter GDP surged 4.1% year-over-year and real GDP increased 2.3% year-over-year. This optimism was expressed throughout many soft indicators. For example, both the University of Michigan Consumer Sentiment Survey and the National Federation of Independent Business Small Business Optimism Index reached 13-year highs in the quarter.
Describe recent portfolio activity.
During the period, as changes were made to the composition of the Russell 2000® Index, the Series purchased and sold securities to maintain its objective of replicating the risks and return of the benchmark index.
The Series held cash committed for pending transactions. The cash balance did not have any material impact on performance.
Describe portfolio positioning at period end.
The Series remains positioned to match the risk characteristics of its benchmark index, irrespective of the market’s future direction.
The views expressed reflect the opinions of BlackRock as of the date of this report and are subject to change based on changes in market, economic or other conditions. These views are not intended to be a forecast of future events and are no guarantee of future results.
| FUND SUMMARY | 7 |
| Fund Summary as of December 31, 2017 (continued) | iShares Russell 2000 Small-Cap Index Fund |
TOTAL RETURN BASED ON A $10,000 INVESTMENT
| (a) | Assuming transaction costs and other operating expenses, including administration fees, if any. |
| (b) | The Fund invests all of its assets in the Series. The Series may invest in a statistically selected sample of the stocks included in the Russell 2000® Index and in derivative instruments linked to the Russell 2000® Index. |
| (c) | An unmanaged index that is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. |
Performance Summary for the Period Ended December 31, 2017
| Average Annual Total Returns (d) | ||||||||||||||||||||||||||||
| 6-Month Total Returns |
1 Year | 5 Years | 10 Years | |||||||||||||||||||||||||
| Institutional |
9.14 | % | 14.55 | % | 14.14 | % | 8.57 | % | ||||||||||||||||||||
| Investor A |
9.07 | 14.35 | 13.86 | 8.31 | ||||||||||||||||||||||||
| Class K |
9.22 | 14.69 | 14.19 | 8.64 | ||||||||||||||||||||||||
| Russell 2000® Index |
9.20 | 14.65 | 14.12 | 8.71 | ||||||||||||||||||||||||
| (d) | See “About Fund Performance” on page 9 for a detailed description of share classes, including related fees, if any. |
Past performance is not indicative of future results.
Performance results may include adjustments made for financial reporting purposes in accordance with U.S. generally accepted accounting principles.
Expense Example
| Actual | Hypothetical (b) | |||||||||||||||||||||||||||||||
| Beginning Account Value (07/01/17) |
Ending (12/31/17) |
Expenses Paid During the Period (a) |
Beginning Account Value (07/01/17) |
Ending Account Value (12/31/17) |
Expenses Paid During the Period (a) |
Annualized Expense Ratio |
||||||||||||||||||||||||||
| Institutional |
$ | 1,000.00 | $ | 1,091.40 | $ | 0.63 | $ | 1,000.00 | $ | 1,024.60 | $ | 0.61 | 0.12 | % | ||||||||||||||||||
| Investor A |
1,000.00 | 1,090.70 | 1.95 | 1,000.00 | 1,023.34 | 1.89 | 0.37 | |||||||||||||||||||||||||
| Class K |
1,000.00 | 1,092.20 | 0.37 | 1,000.00 | 1,024.85 | 0.36 | 0.07 | |||||||||||||||||||||||||
| (a) | For each class of the Fund, expenses are equal to the annualized net expense ratio for the class, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period shown). Because the Fund invests all of its assets in the Series, the expense example reflects the net expenses of both the Fund and the Series. |
| (b) | Hypothetical 5% annual return before expenses is calculated by prorating the number of days in the most recent fiscal half year divided by 365. |
See “Disclosure of Expenses” on page 9 for further information on how expenses were calculated.
| 8 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
Institutional and Class K Shares are not subject to any sales charge. These shares bear no ongoing distribution or service fees and are available only to certain eligible investors. Prior to March 31, 2011, Class K Shares’ performance results are those of Institutional Shares restated to reflect Class K Shares’ fees.
Investor A Shares are not subject to any sales charge and bear no ongoing distribution fee. These shares are subject to an ongoing service fee of 0.25% per year. These shares are generally available through financial intermediaries.
Performance information reflects past performance and does not guarantee future results. Current performance may be lower or higher than the performance data quoted. Refer to www.blackrock.com to obtain performance data current to the most recent month end. Performance results do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Figures shown in the performance tables on the previous pages assume reinvestment of all distributions, if any, at net asset value (“NAV”) on the ex-dividend date. Investment return and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Distributions paid to each class of shares will vary because of the different levels of service, distribution and transfer agency fees applicable to each class, which are deducted from the income available to be paid to shareholders.
BlackRock Advisors, LLC (“BAL” or the “Manager and/or Administrator”), each Fund’s investment adviser and/or administrator, has contractually agreed to waive and/or reimburse a portion of each Fund’s expenses. Without such waiver and/or reimbursement, each Fund’s performance would have been lower. The Manager and/or Administrator is under no obligation to continue waiving and/or reimbursing its fees after the applicable termination date of such agreement. See Note 6 of the Notes to Financial Statements for additional information on waivers and/or reimbursements.
Shareholders of these Funds may incur the following charges: (a) transactional expenses, such as sales charges; and (b) operating expenses, including investment advisory fees, administration fees, service fees, including 12b-1 fees, acquired fund fees and expenses and other fund expenses. The expense examples on the previous pages (which are based on a hypothetical investment of $1,000 invested on July 1, 2017 and held through December 31, 2017) are intended to assist shareholders both in calculating expenses based on an investment in each Fund and in comparing these expenses with similar costs of investing in other mutual funds.
The expense examples provide information about actual account values and actual expenses. In order to estimate the expenses a shareholder paid during the period covered by this report, shareholders can divide their account value by $1,000 and then multiply the result by the number corresponding to their Fund and share class under the heading entitled “Expenses Paid During the Period.”
The expense examples also provide information about hypothetical account values and hypothetical expenses based on a Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses. In order to assist shareholders in comparing the ongoing expenses of investing in these Funds and other funds, compare the 5% hypothetical examples with the 5% hypothetical examples that appear in shareholder reports of other funds.
The expenses shown in the expense examples are intended to highlight shareholders’ ongoing costs only and do not reflect transactional expenses, such as sales charges, if any. Therefore, the hypothetical examples are useful in comparing ongoing expenses only, and will not help shareholders determine the relative total expenses of owning different funds. If these transactional expenses were included, shareholder expenses would have been higher.
Derivative Financial Instruments
International Index and the Series may invest in various derivative financial instruments. These instruments are used to obtain exposure to a security, commodity, index, market, and/or other asset without owning or taking physical custody of securities, commodities and/or other referenced assets or to manage market, equity, credit, interest rate, foreign currency exchange rate, commodity and/or other risks. Derivative financial instruments may give rise to a form of economic leverage and involve risks, including the imperfect correlation between the value of a derivative financial instrument and the underlying asset, possible default of the counterparty to the transaction or illiquidity of the instrument. International Index’s and the Series’ successful use of a derivative financial instrument depends on the investment adviser’s ability to predict pertinent market movements accurately, which cannot be assured. The use of these instruments may result in losses greater than if they had not been used, may limit the amount of appreciation International Index or the Series can realize on an investment and/or may result in lower distributions paid to shareholders. International Index’s and the Series’ investments in these instruments, if any, are discussed in detail in the Notes to Financial Statements.
| ABOUT FUND PERFORMANCE / DISCLOSURE OF EXPENSES / DERIVATIVE FINANCIAL INSTRUMENTS | 9 |
|
December 31, 2017 |
iShares MSCI EAFE International Index Fund (Percentages shown are based on Net Assets) |
| 10 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
| Schedule of Investments (continued) December 31, 2017 |
iShares MSCI EAFE International Index Fund (Percentages shown are based on Net Assets) |
| SCHEDULES OF INVESTMENTS | 11 |
| Schedule of Investments (continued) December 31, 2017 |
iShares MSCI EAFE International Index Fund (Percentages shown are based on Net Assets) |
| 12 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
| Schedule of Investments (continued) December 31, 2017 |
iShares MSCI EAFE International Index Fund (Percentages shown are based on Net Assets) |
| SCHEDULES OF INVESTMENTS | 13 |
| Schedule of Investments (continued) December 31, 2017 |
iShares MSCI EAFE International Index Fund (Percentages shown are based on Net Assets) |
| 14 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
| Schedule of Investments (continued) December 31, 2017 |
iShares MSCI EAFE International Index Fund (Percentages shown are based on Net Assets) |
| SCHEDULES OF INVESTMENTS | 15 |
| Schedule of Investments (continued) December 31, 2017 |
iShares MSCI EAFE International Index Fund (Percentages shown are based on Net Assets) |
| 16 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
| Schedule of Investments (continued) December 31, 2017 |
iShares MSCI EAFE International Index Fund (Percentages shown are based on Net Assets) |
| SCHEDULES OF INVESTMENTS | 17 |
| Schedule of Investments (continued) December 31, 2017 |
iShares MSCI EAFE International Index Fund |
| (h) | During the year ended December 31, 2017, investments in issuers considered to be affiliates of the Fund for purposes of Section 2(a)(3) of the Investment Company Act of 1940, as amended, were as follows: |
| Affiliate | Shares Held at 12/31/16 |
Shares Purchased |
Shares Sold |
Shares/ Investment Value Held at 12/31/17 |
Value at 12/31/17 |
Income | Net Realized Gain (Loss) (a) |
Change in Unrealized Appreciation (Depreciation) |
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| BlackRock Cash Funds: Institutional, SL Agency Shares |
— | 49,359,160 | (b) | — | 49,359,160 | $ | 49,364,096 | $ | 626,882 | (c) | $ | (3,397 | ) | $ | (1,627 | ) | ||||||||||||||||
| BlackRock Cash Funds: Treasury, SL Agency Shares |
— | 31,372,620 | (b) | — | 31,372,620 | 31,372,620 | 127,323 | — | — | |||||||||||||||||||||||
| BlackRock Liquidity Funds, T-Fund, Institutional Class |
25,377,782 | — | (25,377,782 | )(d) | — | — | 190,841 | — | — | |||||||||||||||||||||||
| SL Liquidity Series, LLC, Money Market Series |
1,766,646 | (1,766,646 | )(d) | — | — | — | 99 | (12 | ) | |||||||||||||||||||||||
| iShares MSCI EAFE ETF |
— | 25,122,141 | (25,122,141 | ) | — | — | — | (2,223,857 | ) | — | ||||||||||||||||||||||
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| $ | 80,736,716 | $ | 945,046 | $ | (2,227,155 | ) | $ | (1,639 | ) | |||||||||||||||||||||||
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| (a) | Includes net capital gain distributions, if applicable. |
| (b) | Represents net shares/investment value purchased |
| (c) | Represents securities lending income earned from the reinvestment of cash collateral from loaned securities, net of fees and collateral investment expenses, and other payments to and from borrowers of securities. |
| (d) | Represents net shares/investment value sold. |
Derivative Financial Instruments Outstanding as of Period End
Futures Contracts
| Description | Number of Contracts |
Expiration Date |
Notional Amount (000) |
Unrealized Appreciation (Depreciation) |
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| Long Contracts |
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| Nikkei 225 Index |
207 | 03/08/18 | $ | 20,902 | $ | 136,517 | ||||||||||
| SPI 200 Index |
82 | 03/15/18 | 9,629 | (7,197 | ) | |||||||||||
| Euro Stoxx 50 Index |
804 | 03/16/18 | 33,696 | (375,541 | ) | |||||||||||
| FTSE 100 Index |
191 | 03/16/18 | 19,697 | 543,256 | ||||||||||||
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| $ | 297,035 | |||||||||||||||
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Derivative Financial Instruments Categorized by Risk Exposure
As of period end, the fair values of derivative financial instruments located in the Statements of Assets and Liabilities were as follows:
| Commodity Contracts |
Credit Contracts |
Equity Contracts |
Foreign Currency Exchange Contracts |
Interest Rate Contracts |
Other Contracts |
Total | ||||||||||||||||||||||
| Assets — Derivative Financial Instruments |
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| Futures contracts |
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| Net unrealized appreciation(a) |
$ | — | $ | — | $ | 679,773 | $ | — | $ | — | $ | — | $ | 679,773 | ||||||||||||||
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| Liabilities — Derivative Financial Instruments |
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| Futures contracts |
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| Net unrealized depreciation(a) |
$ | — | $ | — | $ | 382,738 | $ | — | $ | — | $ | — | $ | 382,738 | ||||||||||||||
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| (a) | Includes cumulative appreciation (depreciation) on futures contracts, if any, as reported in the Schedule of Investments. Only current day’s variation margin is reported within the Statement of Assets and Liabilities. |
| 18 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
| Schedule of Investments (continued) December 31, 2017 |
iShares MSCI EAFE International Index Fund |
For the year ended December 31, 2017, the effect of derivative financial instruments in the Statements of Operation was as follows:
| Commodity Contracts |
Credit Contracts |
Equity Contracts |
Foreign Currency Exchange Contracts |
Interest Rate Contracts |
Other Contracts |
Total | ||||||||||||||||||||||
| Net Realized Gain (Loss) from: |
||||||||||||||||||||||||||||
| Futures contracts |
$ | — | $ | — | $ | 14,589,667 | $ | — | $ | — | $ | — | $ | 14,589,667 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Commodity Contracts |
Credit Contracts |
Equity Contracts |
Foreign Currency Exchange Contracts |
Interest Rate Contracts |
Other Contracts |
Total | ||||||||||||||||||||||
| Net Change in Unrealized Appreciation (Depreciation) on: |
||||||||||||||||||||||||||||
| Futures contracts |
$ | — | $ | — | $ | (1,217,588 | ) | $ | — | $ | — | $ | — | $ | (1,217,588 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Average Quarterly Balances of Outstanding Derivative Financial Instruments
| Futures contracts: |
| |||
| Average notional value of contracts — long |
$ | 120,996,829 | ||
For more information about the Fund investment risks regarding derivative financial instruments, refer to the Notes to Financial Statements.
Fair Value Hierarchy as of Period End
Various inputs are used in determining the fair value of investments and derivative financial instruments. For information about the Fund’s policy regarding valuation of investments and derivative financial instruments, refer to the Notes to Financial Statements.
The following tables summarize the Fund’s investments and derivative financial instruments categorized in the disclosure hierarchy:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: |
||||||||||||||||
| Investments: |
||||||||||||||||
| Common Stocks: |
||||||||||||||||
| Australia |
$ | — | $ | 751,012,903 | $ | 9 | $ | 751,012,912 | ||||||||
| Austria |
10,381,762 | 17,085,703 | — | 27,467,465 | ||||||||||||
| Belgium |
3,299,932 | 112,143,281 | — | 115,443,213 | ||||||||||||
| China |
— | 3,090,933 | — | 3,090,933 | ||||||||||||
| Denmark |
24,630,758 | 167,309,808 | — | 191,940,566 | ||||||||||||
| Finland |
9,830,051 | 88,519,689 | — | 98,349,740 | ||||||||||||
| France |
32,406,258 | 1,061,696,813 | — | 1,094,103,071 | ||||||||||||
| Germany |
37,444,686 | 935,617,378 | — | 973,062,064 | ||||||||||||
| Hong Kong |
45,382,458 | 327,896,063 | — | 373,278,521 | ||||||||||||
| Ireland |
30,108,407 | 32,965,705 | — | 63,074,112 | ||||||||||||
| Israel |
24,008,531 | 25,315,048 | — | 49,323,579 | ||||||||||||
| Italy |
10,082,828 | 208,564,668 | — | 218,647,496 | ||||||||||||
| Japan |
34,326,463 | 2,494,557,783 | — | 2,528,884,246 | ||||||||||||
| Jersey |
— | 14,732,900 | — | 14,732,900 | ||||||||||||
| Luxembourg |
— | 21,664,348 | — | 21,664,348 | ||||||||||||
| Mexico |
— | 3,027,197 | — | 3,027,197 | ||||||||||||
| Netherlands |
38,239,446 | 423,521,294 | — | 461,760,740 | ||||||||||||
| New Zealand |
6,319,285 | 11,855,982 | — | 18,175,267 | ||||||||||||
| Norway |
— | 69,580,161 | — | 69,580,161 | ||||||||||||
| Portugal |
8,818,657 | 6,270,818 | — | 15,089,475 | ||||||||||||
| Singapore |
7,141,955 | 133,043,172 | — | 140,185,127 | ||||||||||||
| Spain |
— | 333,881,605 | — | 333,881,605 | ||||||||||||
| Sweden |
3,146,139 | 279,800,665 | — | 282,946,804 | ||||||||||||
| Switzerland |
18,884,582 | 899,179,515 | — | 918,064,097 | ||||||||||||
| United Arab Emirates |
2,021,307 | — | — | 2,021,307 | ||||||||||||
| United Kingdom |
135,716,321 | 1,557,417,904 | — | 1,693,134,225 | ||||||||||||
| Preferred Stocks |
— | 57,624,103 | — | 57,624,103 | ||||||||||||
| Rights |
368,634 | — | — | 368,634 | ||||||||||||
| Short-Term Securities |
80,736,716 | — | — | 80,736,716 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Subtotal |
$ | 563,295,176 | $ | 10,037,375,439 | $ | 9 | $ | 10,600,670,624 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| SCHEDULES OF INVESTMENTS | 19 |
| Schedule of Investments (continued) December 31, 2017 |
iShares MSCI EAFE International Index Fund |
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Derivative Financial Instruments(a) |
| |||||||||||||||
| Assets: |
| |||||||||||||||
| Equity contracts |
$ | 679,773 | $ | — | $ | — | $ | 679,773 | ||||||||
| Liabilities: |
| |||||||||||||||
| Equity contracts |
(382,738 | ) | — | — | (382,738 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Subtotal |
$ | 297,035 | $ | — | $ | — | $ | 297,035 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (a) | Derivative financial instruments are futures contracts which are valued at the unrealized appreciation (depreciation) on the instrument. |
Transfers between Level 1 and Level 2 were as follows:
| Transfers Into Level 1 (a) |
Transfers Out of Level 1 (a) |
Transfers Into Level 2 (a) |
Transfers Out of Level 2 (a) |
|||||||||||||
| Assets: |
| |||||||||||||||
| Investments: |
| |||||||||||||||
| Common Stocks: |
| |||||||||||||||
| Austria |
$ | 2,732,059 | — | — | $ | (2,732,059 | ) | |||||||||
| Belgium |
1,948,918 | $ | (32,031,252 | ) | $ | 32,031,252 | (1,948,918 | ) | ||||||||
| Denmark |
8,934,105 | — | — | (8,934,105 | ) | |||||||||||
| Finland |
3,986,038 | — | — | (3,986,038 | ) | |||||||||||
| France |
13,844,786 | — | — | (13,844,786 | ) | |||||||||||
| Germany |
1,234,748 | (1,770,063 | ) | 1,770,063 | (1,234,748 | ) | ||||||||||
| Hong Kong |
12,605,029 | — | — | (12,605,029 | ) | |||||||||||
| Ireland |
3,533,770 | (142,823 | ) | 142,823 | (3,533,770 | ) | ||||||||||
| Israel |
1,522,875 | — | — | (1,522,875 | ) | |||||||||||
| Italy |
3,859,532 | (1,681,706 | ) | 1,681,706 | (3,859,532 | ) | ||||||||||
| Japan |
17,351,918 | — | — | (17,351,918 | ) | |||||||||||
| Netherlands |
1,746,683 | — | — | (1,746,683 | ) | |||||||||||
| New Zealand |
2,697,506 | — | — | (2,697,506 | ) | |||||||||||
| Portugal |
4,407,654 | — | — | (4,407,654 | ) | |||||||||||
| Singapore |
1,809,184 | — | — | (1,809,184 | ) | |||||||||||
| Sweden |
960,060 | — | — | (960,060 | ) | |||||||||||
| Switzerland |
8,075,908 | — | — | (8,075,908 | ) | |||||||||||
| United Arab Emirates |
1,193,906 | — | — | (1,193,906 | ) | |||||||||||
| United Kingdom |
72,672,289 | — | — | (72,672,289 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | 165,116,968 | $ | (35,625,844 | ) | $ | 35,625,844 | $ | (165,116,968 | ) | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (a) | External pricing service used to reflect any significant market movements between the time the Fund valued such foreign securities and the earlier closing of foreign markets. |
See notes to financial statements.
| 20 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
Statements of Assets and Liabilities
December 31, 2017
| iShares MSCI EAFE International Index Fund |
iShares Russell 2000 Small-Cap Index Fund |
|||||||
| ASSETS |
||||||||
| Investments at value — unaffiliated (including securities loaned at value of $47,306,747)(a) |
$ | 10,519,933,908 | $ | — | ||||
| Investments at value — Master Small Cap Index Series(b) |
— | 892,226,284 | ||||||
| Investments at value — affiliated(c) |
80,736,716 | — | ||||||
| Foreign currency at value(d) |
109,244,737 | — | ||||||
| Receivables: |
||||||||
| Investments sold |
86,537 | — | ||||||
| Capital shares sold |
15,638,719 | 4,060,985 | ||||||
| Dividends — unaffiliated |
19,878,562 | — | ||||||
| Dividends — affiliated |
19,616 | — | ||||||
| Investment adviser |
87,999 | — | ||||||
| Variation margin on futures contracts |
7,066,538 | — | ||||||
| From the Administrator |
— | 36,205 | ||||||
| Securities lending income — affiliated |
67,033 | — | ||||||
| Prepaid expenses |
162,110 | 47,196 | ||||||
|
|
|
|
|
|||||
| Total assets |
10,752,922,475 | 896,370,670 | ||||||
|
|
|
|
|
|||||
| LIABILITIES |
||||||||
| Cash collateral on securities loaned at value |
49,369,120 | — | ||||||
| Payables: |
||||||||
| Contributions to the Master Small Cap Index Series |
— | 798,213 | ||||||
| Capital shares redeemed |
48,532,718 | 3,263,238 | ||||||
| Investment advisory fees |
— | 27 | ||||||
| Investments purchased |
64,631,862 | — | ||||||
| Officer’s and Directors’ fees |
54,402 | — | ||||||
| Professional fees |
98,170 | — | ||||||
| Service fees |
78,343 | 51,396 | ||||||
| Other affiliates |
12,763 | — | ||||||
| Other accrued expenses |
1,054,946 | 96,481 | ||||||
|
|
|
|
|
|||||
| Total liabilities |
163,832,324 | 4,209,355 | ||||||
|
|
|
|
|
|||||
| NET ASSETS |
$ | 10,589,090,151 | $ | 892,161,315 | ||||
|
|
|
|
|
|||||
| NET ASSETS CONSIST OF |
||||||||
| Paid-in capital |
$ | 9,377,428,775 | $ | 753,419,820 | ||||
| Undistributed (distributions in excess of) net investment income |
(20,382,772 | ) | 402,544 | |||||
| Accumulated net realized gain (loss) |
(229,718,005 | ) | 22,709,980 | |||||
| Net unrealized appreciation (depreciation) |
1,461,762,153 | 115,628,971 | ||||||
|
|
|
|
|
|||||
| NET ASSETS |
$ | 10,589,090,151 | $ | 892,161,315 | ||||
|
|
|
|
|
|||||
| NET ASSET VALUE |
||||||||
| Institutional: |
||||||||
| Net assets |
$ | 705,986,309 | $ | 167,351,176 | ||||
|
|
|
|
|
|||||
| Shares outstanding |
49,795,689 | 8,484,636 | ||||||
|
|
|
|
|
|||||
| Net asset value |
$ | 14.18 | $ | 19.72 | ||||
|
|
|
|
|
|||||
| Shares Authorized |
1.208 billion | 208 million | ||||||
|
|
|
|
|
|||||
| Investor A: |
||||||||
| Net assets |
$ | 373,846,454 | $ | 249,980,044 | ||||
|
|
|
|
|
|||||
| Shares outstanding |
26,536,329 | 12,664,759 | ||||||
|
|
|
|
|
|||||
| Net asset value |
$ | 14.09 | $ | 19.74 | ||||
|
|
|
|
|
|||||
| Shares Authorized |
208 million | 208 million | ||||||
|
|
|
|
|
|||||
| Class K: |
||||||||
| Net assets |
$ | 9,509,257,388 | $ | 474,830,095 | ||||
|
|
|
|
|
|||||
| Shares outstanding |
670,428,047 | 24,014,592 | ||||||
|
|
|
|
|
|||||
| Net asset value |
$ | 14.18 | $ | 19.77 | ||||
|
|
|
|
|
|||||
| Shares Authorized |
1.208 billion | 1.208 billion | ||||||
|
|
|
|
|
|||||
| (a) Investments at cost — unaffiliated |
$ | 9,059,924,704 | $ | — | ||||
| (b) Investments at cost — from the Master Small Cap Index Series |
$ | — | $ | 776,597,313 | ||||
| (c) Investments at cost — affiliated |
$ | 80,738,343 | $ | — | ||||
| (d) Foreign currency at cost |
$ | 108,223,492 | $ | — | ||||
See notes to financial statements.
| FINANCIAL STATEMENTS | 21 |
Year Ended December 31, 2017
| iShares MSCI EAFE International Index Fund |
iShares Russell 2000 Small-Cap Index Fund |
|||||||
| INVESTMENT INCOME |
| |||||||
| Dividends — unaffiliated |
$ | 248,705,165 | $ | — | ||||
| Securities lending income — affiliated — net |
626,882 | — | ||||||
| Dividends — affiliated |
318,164 | — | ||||||
| Interest — unaffiliated |
4,983 | — | ||||||
| Other income — affiliated |
12,066 | — | ||||||
| Foreign taxes withheld |
(18,038,524 | ) | — | |||||
| Net investment income allocated from the Master Small Cap Index Series: |
| |||||||
| Dividends — unaffiliated |
— | 8,186,236 | ||||||
| Securities lending income — affiliated — net |
— | 936,951 | ||||||
| Dividends — affiliated |
— | 88,534 | ||||||
| Interest — unaffiliated |
— | 1,484 | ||||||
| Foreign taxes withheld |
— | (1,065 | ) | |||||
| Expenses |
— | (395,925 | ) | |||||
| Fees waived |
— | 79,572 | ||||||
|
|
|
|
|
|||||
| Total investment income |
231,628,736 | 8,895,787 | ||||||
|
|
|
|
|
|||||
| EXPENSES |
| |||||||
| Investment advisory |
808,370 | — | ||||||
| Administration |
— | 249,638 | ||||||
| Service and distribution — class specific |
772,164 | 433,288 | ||||||
| Transfer agent — class specific |
1,204,942 | 196,737 | ||||||
| Accounting services |
1,231,609 | — | ||||||
| Custodian |
805,785 | — | ||||||
| Directors and Officer |
186,374 | 342 | ||||||
| Printing |
94,509 | 29,545 | ||||||
| Registration |
651,623 | 107,177 | ||||||
| Professional |
157,096 | 69,525 | ||||||
| Miscellaneous |
138,072 | 12,870 | ||||||
|
|
|
|
|
|||||
| Total expenses |
6,050,544 | 1,099,122 | ||||||
| Less: |
| |||||||
| Fees waived by the Manager |
(117,839 | ) | — | |||||
| Other expenses reimbursed |
(87,999 | ) | — | |||||
| Fees waived and/or reimbursed by the Administrator |
— | (348,037 | ) | |||||
| Transfer agent fees waived and/or reimbursed — class specific |
(190,895 | ) | (41,396 | ) | ||||
|
|
|
|
|
|||||
| Total expenses after fees waived and/or reimbursed |
5,653,811 | 709,689 | ||||||
|
|
|
|
|
|||||
| Net investment income |
225,974,925 | 8,186,098 | ||||||
|
|
|
|
|
|||||
| REALIZED AND UNREALIZED GAIN (LOSS) |
| |||||||
| Net realized gain (loss) allocated from the Master Small Cap Index Series from: |
||||||||
| Investments — unaffiliated |
— | 15,724,033 | ||||||
| Futures contracts |
— | 923,009 | ||||||
| Net realized gain (loss) from: |
||||||||
| Investments — unaffiliated |
(17,610,850 | ) | — | |||||
| Investments — affiliated |
(2,227,155 | ) | — | |||||
| Futures contracts |
14,589,667 | — | ||||||
| Foreign currency transactions |
11,565,455 | — | ||||||
|
|
|
|
|
|||||
| 6,317,117 | 16,647,042 | |||||||
|
|
|
|
|
|||||
| Net change in unrealized appreciation (depreciation) allocated from the Master Small Cap Index Series from: |
||||||||
| Investments — unaffiliated |
— | 70,870,016 | ||||||
| Futures contracts |
— | 21,681 | ||||||
| Net change in unrealized appreciation (depreciation) from: |
||||||||
| Investments — unaffiliated |
1,445,320,184 | — | ||||||
| Investments — affiliated |
(1,639 | ) | — | |||||
| Futures contracts |
(1,217,588 | ) | — | |||||
| Foreign currency translations |
1,607,020 | — | ||||||
|
|
|
|
|
|||||
| 1,445,707,977 | 70,891,697 | |||||||
|
|
|
|
|
|||||
| Net realized and unrealized gain |
1,452,025,094 | 87,538,739 | ||||||
|
|
|
|
|
|||||
| NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS |
$ | 1,678,000,019 | $ | 95,724,837 | ||||
|
|
|
|
|
|||||
See notes to financial statements.
| 22 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
Statements of Changes in Net Assets
| iShares MSCI EAFE International Index Fund |
iShares Russell 2000 Small-Cap Index Fund |
|||||||||||||||||||
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||||||
| INCREASE (DECREASE) IN NET ASSETS |
||||||||||||||||||||
| OPERATIONS |
||||||||||||||||||||
| Net investment income |
$ | 225,974,925 | $ | 119,045,030 | $ | 8,186,098 | $ | 4,010,895 | ||||||||||||
| Net realized gain (loss) |
6,317,117 | (155,993,697 | ) | 16,647,042 | 3,092,483 | |||||||||||||||
| Net change in unrealized appreciation (depreciation) |
1,445,707,977 | 157,381,963 | 70,891,697 | 58,844,843 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net increase in net assets resulting from operations |
1,678,000,019 | 120,433,296 | 95,724,837 | 65,948,221 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| DISTRIBUTIONS TO SHAREHOLDERS(a) |
||||||||||||||||||||
| From net investment income: |
||||||||||||||||||||
| Institutional |
(16,771,562 | ) | (17,200,955 | ) | (1,680,080 | ) | (2,573,983 | ) | ||||||||||||
| Investor A |
(8,109,165 | ) | (5,855,782 | ) | (2,063,099 | ) | (1,110,447 | ) | ||||||||||||
| Class K |
(227,191,990 | ) | (109,944,264 | ) | (4,819,656 | ) | (571,127 | ) | ||||||||||||
| From net realized gain: |
||||||||||||||||||||
| Institutional |
— | — | (3,410,143 | ) | (7,238,603 | ) | ||||||||||||||
| Investor A |
— | — | (5,150,199 | ) | (3,836,781 | ) | ||||||||||||||
| Class K |
— | — | (9,528,915 | ) | (1,583,983 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Decrease in net assets resulting from distributions to shareholders |
(252,072,717 | ) | (133,001,001 | ) | (26,652,092 | ) | (16,914,924 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| CAPITAL SHARE TRANSACTIONS |
||||||||||||||||||||
| Net increase in net assets derived from capital share transactions |
4,232,876,805 | 1,958,596,053 | 416,788,798 | 112,849,771 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| NET ASSETS |
||||||||||||||||||||
| Total increase in net assets |
5,658,804,107 | 1,946,028,348 | 485,861,543 | 161,883,068 | ||||||||||||||||
| Beginning of year |
4,930,286,044 | 2,984,257,696 | 406,299,772 | 244,416,704 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| End of year |
$ | 10,589,090,151 | $ | 4,930,286,044 | $ | 892,161,315 | $ | 406,299,772 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Undistributed (distributions in excess of) net investment income, end of year |
$ | (20,382,772 | ) | $ | (5,856,612 | ) | $ | 402,544 | $ | 362,733 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| (a) | Distributions for annual periods determined in accordance with U.S. federal income tax regulations. |
See notes to financial statements.
| FINANCIAL STATEMENTS | 23 |
(For a share outstanding throughout each period)
| iShares MSCI EAFE International Index Fund | ||||||||||||||||||||||||
| Institutional | ||||||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||||||
| Net asset value, beginning of year |
$ | 11.60 | $ | 11.81 | $ | 12.21 | $ | 13.11 | $ | 11.06 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net investment income(a) |
0.39 | 0.28 | 0.34 | 0.24 | 0.32 | |||||||||||||||||||
| Net realized and unrealized gain (loss) |
2.53 | (0.16 | ) | (0.46 | ) | (1.04 | ) | 2.04 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net increase (decrease) from investment operations |
2.92 | 0.12 | (0.12 | ) | (0.80 | ) | 2.36 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Distributions from net investment income(b) |
(0.34 | ) | (0.33 | ) | (0.28 | ) | (0.10 | ) | (0.31 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net asset value, end of year |
$ | 14.18 | $ | 11.60 | $ | 11.81 | $ | 12.21 | $ | 13.11 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total Return(c) |
| |||||||||||||||||||||||
| Based on net asset value |
25.24 | % | 0.99 | % | (0.91 | )% | (6.13 | )% | 21.52 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Ratios to Average Net Assets |
| |||||||||||||||||||||||
| Total expenses |
0.09 | % | 0.15 | %(d)(e) | 0.12 | %(d)(e) | 0.16 | %(d)(e) | 0.40 | %(d)(e) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total expenses after fees waived and/or reimbursed and/or paid indirectly |
0.09 | % | 0.11 | %(d)(e) | 0.09 | %(d)(e) | 0.11 | %(d)(e) | 0.35 | %(d)(e) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net investment income |
2.92 | % | 2.44 | %(d)(e) | 2.68 | %(d)(e) | 1.91 | %(d)(e) | 2.64 | %(d)(e) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Supplemental Data |
| |||||||||||||||||||||||
| Net assets, end of year (000) |
$ | 705,986 | $ | 649,763 | $ | 2,702,936 | $ | 1,764,794 | $ | 71,826 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Portfolio turnover rate |
23 | % | 42 | %(f) | 9 | %(g) | 6 | %(g) | 8 | %(g) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| (a) | Based on average shares outstanding. |
| (b) | Distributions for annual periods determined in accordance with U.S. federal income tax regulations. |
| (c) | Where applicable, assumes the reinvestment of distributions. |
| (d) | Includes the Fund’s share of Master International Index’s allocated expenses and/or net investment income. |
| (e) | Includes the Fund’s share of Master International Index’s allocated fees waived of less than 0.01%. |
| (f) | Portfolio turnover rate includes transactions from Master International Index prior to August 1, 2016. |
| (g) | Portfolio turnover rate of Master International Index. |
See notes to financial statements.
| 24 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
Financial Highlights (continued)
(For a share outstanding throughout each period)
| iShares MSCI EAFE International Index Fund (continued) | ||||||||||||||||||||||||
| Investor A | ||||||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||||||
| Net asset value, beginning of year |
$ | 11.54 | $ | 11.75 | $ | 12.12 | $ | 13.02 | $ | 10.99 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net investment income(a) |
0.34 | 0.32 | 0.32 | 0.41 | 0.29 | |||||||||||||||||||
| Net realized and unrealized gain (loss) |
2.52 | (0.23 | ) | (0.46 | ) | (1.25 | ) | 2.02 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net increase (decrease) from investment operations |
2.86 | 0.09 | (0.14 | ) | (0.84 | ) | 2.31 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Distributions from net investment income(b) |
(0.31 | ) | (0.30 | ) | (0.23 | ) | (0.06 | ) | (0.28 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net asset value, end of year |
$ | 14.09 | $ | 11.54 | $ | 11.75 | $ | 12.12 | $ | 13.02 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total Return(c) |
| |||||||||||||||||||||||
| Based on net asset value |
24.84 | % | 0.78 | % | (1.14 | )% | (6.45 | )% | 21.20 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Ratios to Average Net Assets |
| |||||||||||||||||||||||
| Total expenses |
0.36 | % | 0.38 | %(d)(e) | 0.42 | %(d)(e) | 0.52 | %(d)(e) | 0.69 | %(d)(e) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total expenses after fees waived and/or reimbursed and/or paid indirectly |
0.35 | % | 0.37 | %(d)(e) | 0.37 | %(d)(e) | 0.43 | %(d)(e) | 0.60 | %(d)(e) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net investment income |
2.60 | % | 2.78 | %(d)(e) | 2.54 | %(d)(e) | 3.13 | %(d)(e) | 2.41 | %(d)(e) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Supplemental Data |
| |||||||||||||||||||||||
| Net assets, end of year (000) |
$ | 373,846 | $ | 238,053 | $ | 168,008 | $ | 332,475 | $ | 308,624 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Portfolio turnover rate |
23 | % | 42 | %(f) | 9 | %(g) | 6 | %(g) | 8 | %(g) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| (a) | Based on average shares outstanding. |
| (b) | Distributions for annual periods determined in accordance with U.S. federal income tax regulations. |
| (c) | Where applicable, assumes the reinvestment of distributions. |
| (d) | Includes the Fund’s share of Master International Index’s allocated expenses and/or net investment income. |
| (e) | Includes the Fund’s share of Master International Index’s allocated fees waived of less than 0.01%. |
| (f) | Portfolio turnover rate includes transactions from Master International Index prior to August 1, 2016. |
| (g) | Portfolio turnover rate of Master International Index. |
See notes to financial statements.
| FINANCIAL HIGHLIGHTS | 25 |
Financial Highlights (continued)
(For a share outstanding throughout each period)
| iShares MSCI EAFE International Index Fund (continued) | ||||||||||||||||||||||||
| Class K | ||||||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||||||
| Net asset value, beginning of year |
$ | 11.61 | $ | 11.82 | $ | 12.21 | $ | 13.11 | $ | 11.06 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net investment income(a) |
0.38 | 0.38 | 0.28 | 0.34 | 0.28 | |||||||||||||||||||
| Net realized and unrealized gain (loss) |
2.54 | (0.26 | ) | (0.38 | ) | (1.14 | ) | 2.09 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net increase (decrease) from investment operations |
2.92 | 0.12 | (0.10 | ) | (0.80 | ) | 2.37 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Distributions:(b) | ||||||||||||||||||||||||
| From net investment income |
(0.35 | ) | (0.33 | ) | (0.29 | ) | (0.10 | ) | (0.32 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total distributions |
(0.35 | ) | (0.33 | ) | (0.29 | ) | (0.10 | ) | (0.32 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net asset value, end of year |
$ | 14.18 | $ | 11.61 | $ | 11.82 | $ | 12.21 | $ | 13.11 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total Return(c) |
| |||||||||||||||||||||||
| Based on net asset value |
25.17 | % | 1.03 | % | (0.81 | )% | (6.12 | )% | 21.57 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Ratios to Average Net Assets |
| |||||||||||||||||||||||
| Total expenses |
0.06 | % | 0.07 | %(d)(e) | 0.12 | %(d)(e) | 0.15 | %(d)(e) | 0.36 | %(d)(e) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total expenses after fees waived and/or reimbursed and/or paid indirectly |
0.06 | % | 0.07 | %(d)(e) | 0.07 | %(d)(e) | 0.11 | %(d)(e) | 0.30 | %(d)(e) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net investment income |
2.80 | % | 3.25 | %(d)(e) | 2.25 | %(d)(e) | 2.65 | %(d)(e) | 2.29 | %(d)(e) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Supplemental Data |
| |||||||||||||||||||||||
| Net assets, end of year (000) |
$ | 9,509,257 | $ | 4,042,470 | $ | 113,314 | $ | 16,014 | $ | 2,336 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Portfolio turnover rate |
23 | % | 42 | %(f) | 9 | %(g) | 6 | %(g) | 8 | %(g) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| (a) | Based on average shares outstanding. |
| (b) | Distributions for annual periods determined in accordance with U.S. federal income tax regulations. |
| (c) | Where applicable, assumes the reinvestment of distributions. |
| (d) | Includes the Fund’s share of Master International Index’s allocated expenses and/or net investment income. |
| (e) | Includes the Fund’s share of Master International Index’s allocated fees waived of less than 0.01%. |
| (f) | Portfolio turnover rate includes transactions from Master International Index prior to August 1, 2016. |
| (g) | Portfolio turnover rate of Master International Index. |
See notes to financial statements.
| 26 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
Financial Highlights (continued)
(For a share outstanding throughout each period)
| iShares Russell 2000 Small-Cap Index Fund | ||||||||||||||||||||||||
| Institutional | ||||||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||||||
| Net asset value, beginning of year |
$ | 17.76 | $ | 15.32 | $ | 16.60 | $ | 17.51 | $ | 12.99 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net investment income(a) |
0.25 | 0.23 | 0.24 | 0.20 | 0.22 | |||||||||||||||||||
| Net realized and unrealized gain (loss) |
2.34 | 3.03 | (0.97 | ) | 0.56 | 4.83 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net increase (decrease) from investment operations |
2.59 | 3.26 | (0.73 | ) | 0.76 | 5.05 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Distributions:(b) | ||||||||||||||||||||||||
| From net investment income |
(0.21 | ) | (0.22 | ) | (0.14 | ) | (0.26 | ) | (0.19 | ) | ||||||||||||||
| From net realized gain |
(0.42 | ) | (0.60 | ) | (0.41 | ) | (1.41 | ) | (0.34 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total distributions |
(0.63 | ) | (0.82 | ) | (0.55 | ) | (1.67 | ) | (0.53 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net asset value, end of year |
$ | 19.72 | $ | 17.76 | $ | 15.32 | $ | 16.60 | $ | 17.51 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total Return(c) |
| |||||||||||||||||||||||
| Based on net asset value |
14.55 | % | 21.33 | % | (4.43 | )% | 4.81 | % | 39.14 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Ratios to Average Net Assets(d)(e) |
| |||||||||||||||||||||||
| Total expenses |
0.18 | % | 0.19 | %(f) | 0.22 | % | 0.35 | % | 0.51 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total expenses after fees waived and/or reimbursed |
0.11 | % | 0.14 | %(f) | 0.16 | % | 0.23 | % | 0.29 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net investment income |
1.36 | % | 1.44 | %(f) | 1.47 | % | 1.17 | % | 1.45 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Supplemental Data |
| |||||||||||||||||||||||
| Net assets, end of year (000) |
$ | 167,351 | $ | 229,491 | $ | 148,148 | $ | 46,988 | $ | 60,707 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Portfolio turnover rate of the Series |
30 | % | 39 | % | 37 | % | 21 | % | 22 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| (a) | Based on average shares outstanding. |
| (b) | Distributions for annual periods determined in accordance with U.S. federal income tax regulations. |
| (c) | Where applicable, assumes the reinvestment of distributions. |
| (d) | Includes the Fund’s share of the Series’ allocated expenses and/or net investment income. |
| (e) | Includes the Fund’s share of the Series’ allocated fees waived of less than 0.01%. |
| (f) | Excludes expenses incurred indirectly of 0.01% as a result of the Series’ investments in underlying funds. |
See notes to financial statements.
| FINANCIAL HIGHLIGHTS | 27 |
Financial Highlights (continued)
(For a share outstanding throughout each period)
| iShares Russell 2000 Small-Cap Index Fund (continued) | ||||||||||||||||||||||||
| Investor A | ||||||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||||||
| Net asset value, beginning of year |
$ | 17.78 | $ | 15.34 | $ | 16.61 | $ | 17.52 | $ | 13.01 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net investment income(a) |
0.21 | 0.18 | 0.18 | 0.16 | 0.19 | |||||||||||||||||||
| Net realized and unrealized gain (loss) |
2.34 | 3.03 | (0.95 | ) | 0.56 | 4.82 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net increase (decrease) from investment operations |
2.55 | 3.21 | (0.77 | ) | 0.72 | 5.01 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Distributions:(b) | ||||||||||||||||||||||||
| From net investment income |
(0.17 | ) | (0.17 | ) | (0.09 | ) | (0.22 | ) | (0.16 | ) | ||||||||||||||
| From net realized gain |
(0.42 | ) | (0.60 | ) | (0.41 | ) | (1.41 | ) | (0.34 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total distributions |
(0.59 | ) | (0.77 | ) | (0.50 | ) | (1.63 | ) | (0.50 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net asset value, end of year |
$ | 19.74 | $ | 17.78 | $ | 15.34 | $ | 16.61 | $ | 17.52 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total Return(c) |
| |||||||||||||||||||||||
| Based on net asset value |
14.35 | % | 21.04 | % | (4.66 | )% | 4.54 | % | 38.72 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Ratios to Average Net Assets(d)(e) |
| |||||||||||||||||||||||
| Total expenses |
0.45 | % | 0.49 | %(f) | 0.53 | % | 0.63 | % | 0.77 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total expenses after fees waived and/or reimbursed |
0.37 | % | 0.41 | %(f) | 0.43 | % | 0.48 | % | 0.55 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net investment income |
1.13 | % | 1.14 | %(f) | 1.09 | % | 0.95 | % | 1.20 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Supplemental Data |
| |||||||||||||||||||||||
| Net assets, end of year (000) |
$ | 249,980 | $ | 116,722 | $ | 87,930 | $ | 83,859 | $ | 83,118 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Portfolio turnover rate of the Series |
30 | % | 39 | % | 37 | % | 21 | % | 22 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| (a) | Based on average shares outstanding. |
| (b) | Distributions for annual periods determined in accordance with U.S. federal income tax regulations. |
| (c) | Where applicable, assumes the reinvestment of distributions. |
| (d) | Includes the Fund’s share of the Series’ allocated expenses and/or net investment income. |
| (e) | Includes the Fund’s share of the Series’ allocated fees waived of less than 0.01%. |
| (f) | Excludes expenses incurred indirectly of 0.01% as a result of the Series’ investments in underlying funds. |
See notes to financial statements.
| 28 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
Financial Highlights (continued)
(For a share outstanding throughout each period)
| iShares Russell 2000 Small-Cap Index Fund (continued) | ||||||||||||||||||||||||
| Class K | ||||||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||||||
| Net asset value, beginning of year |
$ | 17.79 | $ | 15.35 | $ | 16.62 | $ | 17.53 | $ | 13.01 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net investment income(a) |
0.27 | 0.24 | 0.25 | 0.23 | 0.25 | |||||||||||||||||||
| Net realized and unrealized gain (loss) |
2.34 | 3.02 | (0.97 | ) | 0.54 | 4.81 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net increase (decrease) from investment operations |
2.61 | 3.26 | (0.72 | ) | 0.77 | 5.06 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Distributions:(b) | ||||||||||||||||||||||||
| From net investment income |
(0.21 | ) | (0.22 | ) | (0.14 | ) | (0.27 | ) | (0.20 | ) | ||||||||||||||
| From net realized gain |
(0.42 | ) | (0.60 | ) | (0.41 | ) | (1.41 | ) | (0.34 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total distributions |
(0.63 | ) | (0.82 | ) | (0.55 | ) | (1.68 | ) | (0.54 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net asset value, end of year |
$ | 19.77 | $ | 17.79 | $ | 15.35 | $ | 16.62 | $ | 17.53 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total Return(c) |
| |||||||||||||||||||||||
| Based on net asset value |
14.69 | % | 21.32 | % | (4.41 | )% | 4.87 | % | 39.14 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Ratios to Average Net Assets(d)(e) |
| |||||||||||||||||||||||
| Total expenses |
0.14 | % | 0.17 | %(f) | 0.21 | % | 0.32 | % | 0.49 | % | ||||||||||||||
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| Total expenses after fees waived and/or reimbursed |
0.07 | % | 0.10 | %(f) | 0.13 | % | 0.18 | % | 0.25 | % | ||||||||||||||
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| Net investment income |
1.40 | % | 1.48 | %(f) | 1.50 | % | 1.35 | % | 1.57 | % | ||||||||||||||
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| Supplemental Data |
| |||||||||||||||||||||||
| Net assets, end of year (000) |
$ | 474,830 | $ | 60,086 | $ | 8,338 | $ | 2,617 | $ | 1,196 | ||||||||||||||
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| Portfolio turnover rate of the Series |
30 | % | 39 | % | 37 | % | 21 | % | 22 | % | ||||||||||||||
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| (a) | Based on average shares outstanding. |
| (b) | Distributions for annual periods determined in accordance with U.S. federal income tax regulations. |
| (c) | Where applicable, assumes the reinvestment of distributions. |
| (d) | Includes the Fund’s share of the Series’ allocated expenses and/or net investment income. |
| (e) | Includes the Fund’s share of the Series’ allocated fees waived of less than 0.01%. |
| (f) | Excludes expenses incurred indirectly of 0.01% as a result of the Series’ investments in underlying funds. |
See notes to financial statements.
| FINANCIAL HIGHLIGHTS | 29 |
| Notes to Financial Statements | BlackRock Index Funds, Inc. |
| 1. | ORGANIZATION |
iShares MSCI EAFE International Index Fund and iShares Russell 2000 Small-Cap Index Fund are each a series of BlackRock Index Funds, Inc. (the “Corporation”), which is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. The Corporation is organized as a Maryland corporation. The following are referred to herein collectively as the “Funds” or individually, a “Fund”:
| Fund Name | Herein Referred To As | Diversification Classification | ||
| iShares MSCI EAFE International Index Fund |
International Index | Diversified | ||
| iShares Russell 2000 Small-Cap Index Fund |
Small Cap Index | Diversified |
Effective June 19, 2017, BlackRock International Index Fund changed its name to iShares MSCI EAFE International Index Fund.
Effective June 19, 2017, BlackRock Small-Cap Index Fund changed its name to iShares Russell 2000 Small-Cap Index Fund.
Small Cap Index seeks to achieve its investment objectives by investing all of its assets in Master Small Cap Index Series (the “Series”), a series of Quantitative Master Series LLC (the “Master LLC”), an affiliate of Small Cap Index, which has the same investment objectives and strategies as Small Cap Index. The value of Small Cap Index’s investment in the Series reflects Small Cap Index’s proportionate interest in the net assets of the Series. The performance of Small Cap Index is directly affected by the performance of the Series. As of December 31, 2017, the percentage of Series owned by the Small Cap Index was 69.8%. The financial statements of the Series, including the Schedule of Investments, are included elsewhere in this report and should be read in conjunction with the Small Cap Index’s financial statements.
Prior to August 1, 2016, International Index invested all of its assets in Master International Index Series (“Master International Index”), an affiliate of International Index, which had the same investment objective and strategies as International Index. The value of International Index’s investment in Master International Index reflected International Index’s proportionate interest in the net assets of Master International Index. The performance of International Index was directly affected by the performance of Master International Index.
Each Fund offers multiple classes of shares. All classes of shares have identical voting, dividend, liquidation and other rights and are subject to the same terms and conditions, except that certain classes bear expenses related to the shareholder servicing and distribution of such shares. Institutional and Class K Shares are sold without a sales charge and only to certain eligible investors. Investor A Shares are sold without a sales charge and are generally available through financial intermediaries. Each class has exclusive voting rights with respect to matters relating to its shareholder servicing and distribution expenditures. The Board of Directors of the Corporation and Board of Directors of the Master LLC are referred to throughout this report as the “Board of Directors” or the “Board” and the members are referred to as “Directors.”
| Share Class | Initial Sales Charge | CDSC | Conversion Privilege | |||
| Institutional Shares |
No | No | None | |||
| Investor A Shares |
No | No | None | |||
| Class K Shares |
No | No | None |
The Funds, together with certain other registered investment companies advised by BlackRock Advisors, LLC (the “Manager” and/or the “Administrator”) or its affiliates, are included in a complex of open-end funds referred to as the Equity-Liquidity Complex.
| 2. | SIGNIFICANT ACCOUNTING POLICIES |
The financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which may require management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. Each Fund is considered an investment company under U.S. GAAP and follows the accounting and reporting guidance applicable to investment companies. Below is a summary of significant accounting policies:
Investment Transactions and Income Recognition: For International Index, for financial reporting purposes, investment transactions are recorded on the dates the transactions are entered into (the trade dates). Realized gains and losses on investment transactions are determined on the identified cost basis. Dividend income is recorded on the ex-dividend date. Dividends from foreign securities where the ex-dividend date may have passed are subsequently recorded when International Index is informed of the ex-dividend date. Under the applicable foreign tax laws, a withholding tax at various rates may be imposed on capital gains, dividends and interest. Upon notification from issuers, some of the dividend income received from a real estate investment trust may be redesignated as a reduction of cost of the related investment and/or realized gain. For Small Cap Index, for financial reporting purposes, contributions to and withdrawals from the Series are accounted for on a trade date basis. Small Cap Index records its proportionate share of the Series’ income, expenses and realized and unrealized gains and losses on a daily basis.
Foreign Currency Translation: International Index’s books and records are maintained in U.S. dollars. Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates determined as of the close of trading on the New York Stock Exchange (“NYSE”). Purchases and sales of investments are recorded at the rates of exchange prevailing on the respective dates of such transactions. Generally, when the U.S. dollar rises in value against a foreign currency, the investments denominated in that currency will lose value; the opposite effect occurs if the U.S. dollar falls in relative value.
International Index does not isolate the portion of the results of operations arising as a result of changes in the exchange rates from the changes in the market prices of investments held or sold for financial reporting purposes. Accordingly, the effects of changes in exchange rates on investments are not segregated in the Statements of Operations from the effects of changes in market prices of those investments, but are included as a component of net realized and unrealized gain (loss) from investments.
| 30 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
| Notes to Financial Statements (continued) | BlackRock Index Funds, Inc. |
International Index reports realized currency gains (losses) on foreign currency related transactions as components of net realized gain (loss) for financial reporting purposes, whereas such components are generally treated as ordinary income for U.S. federal income tax purposes.
Segregation and Collateralization: In cases where International Index enters into certain investments (e.g., futures contracts) that would be treated as “senior securities” for 1940 Act purposes, International Index may segregate or designate on its books and records cash or liquid assets having a market value at least equal to the amount of its future obligations under such investments. Doing so allows the investment to be excluded from treatment as a “senior security.” Furthermore, if required by an exchange or counterparty agreement, International Index may be required to deliver/deposit cash and/or securities to/with an exchange, or broker-dealer or custodian as collateral for certain investments or obligations.
Distributions: Distributions paid by the Funds are recorded on the ex-dividend date. The character and timing of distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP.
Indemnifications: In the normal course of business, a Fund enters into contracts that contain a variety of representations that provide general indemnification. A Fund’s maximum exposure under these arrangements is unknown because it involves future potential claims against a Fund, which cannot be predicted with any certainty.
Other: Expenses directly related to a Fund or its classes are charged to that Fund or the applicable class. Other operating expenses shared by several funds, including other funds managed by the Manager and/or Administrator, are prorated among those funds on the basis of relative net assets or other appropriate methods. Expenses directly related to the Funds and other shared expenses prorated to the Funds are allocated daily to each class based on their relative net assets or other appropriate methods.
| 3. | INVESTMENT VALUATION AND FAIR VALUE MEASUREMENTS |
Investment Valuation Policies: The Funds’ investments are valued at fair value (also referred to as “market value” within the financial statements) as of the close of trading on the NYSE (or if the reporting date falls on a day the NYSE is closed, investments are valued at fair value as of the period end). U.S. GAAP defines fair value as the price the Funds would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. The Funds determine the fair value of their financial instruments using various independent dealers or pricing services under policies approved by the Board. The BlackRock Global Valuation Methodologies Committee (the “Global Valuation Committee”) is the committee formed by management to develop global pricing policies and procedures and to oversee the pricing function for all financial instruments.
Small Cap Index’s policy is to value its financial instruments at fair value. Small Cap Index records its investment in the Series at fair value based on the Small Cap Index’s proportionate interest in the net assets of the Series. Valuation of securities held by the Series is discussed in Note 3 of the Series Notes to Financial Statements, which are included elsewhere in this report.
Fair Value Inputs and Methodologies: The following methods and inputs are used to establish the fair value of International Index’s assets and liabilities:
| • | Equity investments traded on a recognized securities exchange are valued at the official closing price each day, if available. For equity investments traded on more than one exchange, the official closing price on the exchange where the stock is primarily traded is used. Equity investments traded on a recognized exchange for which there were no sales on that day may be valued at the last available bid (long positions) or ask (short positions) price. |
| • | Generally, trading in foreign instruments is substantially completed each day at various times prior to the close of trading on the NYSE. Occasionally, events affecting the values of such instruments may occur between the foreign market close and the close of trading on the NYSE that may not be reflected in the computation of the International Index’s net assets. Each business day, International Index uses a pricing service to assist with the valuation of certain foreign exchange-traded equity securities and foreign exchange-traded and over-the-counter (“OTC”) options (the “Systematic Fair Value Price”). Using current market factors, the Systematic Fair Value Price is designed to value such foreign securities and foreign options at fair value as of the close of trading on the NYSE, which follows the close of the local markets. |
| • | Investments in open-end U.S. mutual funds are valued at net asset value (“NAV”) each business day. |
| • | International Index values its investment in SL Liquidity Series, LLC, Money Market Series (the “Money Market Series”) at fair value, which is ordinarily based upon its pro rata ownership in the underlying fund’s net assets. The Money Market Series seeks current income consistent with maintaining liquidity and preserving capital. Although the Money Market Series is not registered under the 1940 Act, its investments may follow the parameters of investments by a money market fund that is subject to Rule 2a-7 under the 1940 Act. |
| • | Futures contracts traded on exchanges are valued at their last sale price. |
| • | Forward foreign currency exchange contracts are valued at the mean between the bid and ask prices and are determined as of the close of trading on the NYSE. Interpolated values are derived when the settlement date of the contract is an interim date for which quotations are not available. |
If events (e.g., a company announcement, market volatility or a natural disaster) occur that are expected to materially affect the value of such investments, or in the event that the application of these methods of valuation results in a price for an investment that is deemed not to be representative of the market value of such investment, or if a price is not available, the investment will be valued by the Global Valuation Committee, or its delegate, in accordance with a policy approved by the Board as reflecting fair value (“Fair Valued Investments”). The fair valuation approaches that may be used by the Global Valuation Committee will include market approach, income approach and cost approach. Valuation techniques such as discounted cash flow, use of market comparables and matrix pricing are types of valuation approaches and are typically used in determining fair value. When determining the price for Fair Valued Investments, the Global Valuation Committee, or its delegate, seeks to determine the price that International Index might reasonably expect to receive or pay from the current sale or purchase of that asset or liability in an arm’s-length transaction. Fair value determinations shall be based upon all available factors that the Global Valuation Committee, or its delegate, deems relevant and consistent with the principles of fair value measurement.
| NOTES TO FINANCIAL STATEMENTS | 31 |
| Notes to Financial Statements (continued) | BlackRock Index Funds, Inc. |
The Global Valuation Committee, or its delegate, employs various methods for calibrating valuation approaches for investments where an active market does not exist, including regular due diligence of International Index’s pricing vendors, regular reviews of key inputs and assumptions, transactional back-testing or disposition analysis to compare unrealized gains and losses to realized gains and losses, reviews of missing or stale prices and large movements in market values and reviews of any market related activity. The pricing of all Fair Valued Investments is subsequently reported to the Board or a committee thereof on a quarterly basis. As a result of the inherent uncertainty in valuation of these investments, the fair values may differ from the values that would have been used had an active market existed.
For investments in equity or debt issued by privately held companies or funds (“Private Company” or collectively, the “Private Companies”) and other Fair Valued Investments, the fair valuation approaches that are used by third party pricing services utilize one or a combination of, but not limited to, the following inputs.
| Standard Inputs Generally Considered By Third Party Pricing Services | ||
| Market approach |
(i) recent market transactions, including subsequent rounds of financing, in the underlying investment or comparable issuers; (ii) recapitalizations and other transactions across the capital structure; and (iii) market multiples of comparable issuers. | |
| Income approach |
(i) future cash flows discounted to present and adjusted as appropriate for liquidity, credit, and/or market risks; (ii) quoted prices for similar investments or assets in active markets; and (iii) other risk factors, such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks, recovery rates, liquidation amounts and/or default rates. | |
| Cost approach |
(i) audited or unaudited financial statements, investor communications and financial or operational metrics issued by the Private Company; (ii) changes in the valuation of relevant indices or publicly traded companies comparable to the Private Company; (iii) relevant news and other public sources; and (iv) known secondary market transactions in the Private Company’s interests and merger or acquisition activity in companies comparable to the Private Company. |
Investments in series of preferred stock issued by Private Companies are typically valued utilizing market approach in determining the enterprise value of the company. Such investments often contain rights and preferences that differ from other series of preferred and common stock of the same issuer. Valuation techniques such as an option pricing model (“OPM”), a probability weighted expected return model (“PWERM”) or a hybrid of those techniques are used in allocating enterprise value of the company, as deemed appropriate under the circumstances. The use of OPM and PWERM techniques involve a determination of the exit scenarios of the investment in order to appropriately allocate the enterprise value of the company among the various parts of its capital structure.
The Private Companies are not subject to the public company disclosure, timing, and reporting standards as other investments held by International Index. Typically, the most recently available information by a Private Company is as of a date that is earlier than the date International Index is calculating its NAV. This factor may result in a difference between the value of the investment and the price International Index could receive upon the sale of the investment.
Fair Value Hierarchy: Various inputs are used in determining the fair value of investments and derivative financial instruments. These inputs to valuation techniques are categorized into a fair value hierarchy consisting of three broad levels for financial statement purposes as follows:
| • | Level 1 — Unadjusted price quotations in active markets/exchanges for identical assets or liabilities that International Index has the ability to access |
| • | Level 2 — Other observable inputs (including, but not limited to, quoted prices for similar assets or liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market — corroborated inputs) |
| • | Level 3 — Unobservable inputs based on the best information available in the circumstances, to the extent observable inputs are not available (including International Index’s own assumptions used in determining the fair value of investments and derivative financial instruments) |
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3. The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the fair value hierarchy classification is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Investments classified within Level 3 have significant unobservable inputs used by the Global Valuation Committee in determining the price for Fair Valued Investments. Level 3 investments include equity or debt issued by Private Companies. There may not be a secondary market, and/or there are a limited number of investors. Level 3 investments may also be adjusted to reflect illiquidity and/or non-transferability, with the amount of such discount estimated by the Global Valuation Committee in the absence of market information.
Changes in valuation techniques may result in transfers into or out of an assigned level within the hierarchy. In accordance with International Index’s policy, transfers between different levels of the fair value hierarchy are deemed to have occurred as of the beginning of the reporting period. The categorization of a value determined for investments and derivative financial instruments is based on the pricing transparency of the investments and derivative financial instruments and is not necessarily an indication of the risks associated with investing in those securities.
| 4. | SECURITIES AND OTHER INVESTMENTS |
Preferred Stocks: Preferred stock has a preference over common stock in liquidation (and generally in receiving 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
| 32 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
| Notes to Financial Statements (continued) | BlackRock Index Funds, Inc. |
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 issuer’s board of directors. Preferred stock also may be subject to optional or mandatory redemption provisions.
Securities Lending: International Index may lend its securities to approved borrowers, such as brokers, dealers and other financial institutions. The borrower pledges and maintains with International Index collateral consisting of cash, an irrevocable letter of credit issued by a bank, or securities issued or guaranteed by the U.S. Government. The initial collateral received by International Index is required to have a value of at least 102% of the current value of the loaned securities for securities traded on U.S. exchanges and a value of at least 105% for all other securities. The collateral is maintained thereafter at a value equal to at least 100% of the current market value of the securities on loan. The market value of the loaned securities is determined at the close of each business day of International Index and any additional required collateral is delivered to International Index, or excess collateral returned by International Index, on the next business day. During the term of the loan, International Index is entitled to all distributions made on or in respect of the loaned securities, but does not receive interest income on securities received as collateral. 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 market value of any securities on loan, all of which were classified as common stocks in International Index’s Schedule of Investments, and the value of any related collateral are shown separately in the Statements of Assets and Liabilities as a component of investments at value-unaffiliated, and collateral on securities loaned at value, respectively. As of period end, any securities on loan were collateralized by cash and/or U.S. Government obligations. Cash collateral invested by the securities lending agent, BlackRock Institutional Trust Company, N.A. (“BTC”), if any, is disclosed in the Schedule of Investments.
Securities lending transactions are entered into by International Index under Master Securities Lending Agreements (each, an “MSLA”), which provide the right, in the event of default (including bankruptcy or insolvency), for the non-defaulting party to liquidate the collateral and calculate a net exposure to the defaulting party or request additional collateral. In the event that a borrower defaults, International Index, as lender, would offset the market value of the collateral received against the market value of the securities loaned. When the value of the collateral is greater than that of the market value of the securities loaned, the lender is left with a net amount payable to the defaulting party. However, bankruptcy or insolvency laws of a particular jurisdiction may impose restrictions on or prohibitions against such a right of offset in the event of an MSLA counterparty’s bankruptcy or insolvency. Under the MSLA, absent an event of default, the borrower can resell or re-pledge the loaned securities, and International Index can reinvest cash collateral received in connection with loaned securities. Upon an event of default, the parties’ obligations to return the securities or collateral to the other party are extinguished, and the parties can resell or re-pledge the loaned securities or the collateral received in connection with the loaned securities in order to satisfy the defaulting party’s net payment obligation for all transactions under the MSLA. The defaulting party remains liable for any deficiency.
As of period end, the following table is a summary of International Index’s securities lending agreements by counterparty which are subject to offset under an MSLA:
| Counterparty | Securities Loaned at Value |
Cash Collateral Received (a) |
Non-cash Collateral Received, at Fair Value (a) |
Net Amount |
||||||||||||
| JP Morgan Securities LLC |
$ | 30,178,143 | $ | (30,178,143 | ) | $ | — | $ | — | |||||||
| Credit Suisse Securities (USA) LLC |
5,530,872 | (5,530,872 | ) | — | — | |||||||||||
| Citigroup Global Markets Inc. |
9,882,283 | (9,882,283 | ) | — | — | |||||||||||
| Macquarie Bank Limited |
1,629,494 | (1,629,494 | ) | — | — | |||||||||||
| Jefferies LLC |
85,955 | (85,955 | ) | — | — | |||||||||||
|
|
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|
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|
|
|
|
|||||||||
| $ | 47,306,747 | $ | (47,306,747 | ) | $ | — | $ | — | ||||||||
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|
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|
|
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| (a) | Cash collateral with a value of $ 49,369,120 has been received in connection with securities lending agreements. Collateral received in excess of the value of securities loaned from the individual counterparty is not shown for financial reporting purposes in the table above. |
The risks of securities lending include the risk that the borrower may not provide additional collateral when required or may not return the securities when due. To mitigate these risks, International Index benefits from a borrower default indemnity provided by BlackRock, Inc. (“BlackRock”). BlackRock’s indemnity allows for full replacement of the securities loaned if the collateral received does not cover the value on the securities loaned in the event of borrower default. International Index could incur a loss if the value of an investment purchased with cash collateral falls below the market value of loaned securities or if the value of an investment purchased with cash collateral falls below the value of the original cash collateral received.
| 5. | DERIVATIVE FINANCIAL INSTRUMENTS |
International Index engages in various portfolio investment strategies using derivative contracts both to increase the returns of International Index and/or to manage its exposure to certain risks such as credit risk, equity risk, interest rate risk, foreign currency exchange rate risk, commodity price risk or other risks (e.g., inflation risk). Derivative financial instruments categorized by risk exposure are included in the Schedule of Investments. These contracts may be transacted on an exchange or OTC.
Futures Contracts: Futures contracts are purchased or sold to gain exposure to, or manage exposure to, changes in interest rates (interest rate risk), changes in the value of equity securities (equity risk) or foreign currencies (foreign currency exchange rate risk).
Futures contracts are agreements between International Index and a counterparty to buy or sell a specific quantity of an underlying instrument at a specified price and on a specified date. Depending on the terms of a contract, it is settled either through physical delivery of the underlying instrument on the settlement date or by payment of a cash amount on the settlement date. Upon entering into a futures contract, International Index is required to deposit initial margin with the broker in the form of cash or securities in an amount that varies depending on a contract’s size and risk profile. The initial margin deposit must then be maintained at an established level over the life of the contract.
Securities deposited as initial margin are designated in the Schedule of Investments and cash deposited, if any, is shown as cash pledged for futures contracts in the Statements of Assets and Liabilities. Pursuant to the contract, International Index agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in market value of the contract (“variation margin”). Variation margin is recorded as unrealized appreciation (depreciation) and, if any, shown as variation margin
| NOTES TO FINANCIAL STATEMENTS | 33 |
| Notes to Financial Statements (continued) | BlackRock Index Funds, Inc. |
receivable (or payable) on futures contracts in the Statements of Assets and Liabilities. When the contract is closed, a realized gain or loss is recorded in the Statements of Operations equal to the difference between the notional amount of the contract at the time it was opened and the notional amount at the time it was closed. The use of futures contracts involves the risk of an imperfect correlation in the movements in the price of futures contracts and interest, foreign currency exchange rates or underlying assets.
| 6. | INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENTS AND OTHER TRANSACTIONS WITH AFFILIATES |
The PNC Financial Services Group, Inc. is the largest stockholder and an affiliate of BlackRock, Inc. (“BlackRock”) for 1940 Act purposes.
Investment Advisory: The Corporation, on behalf of International Index, entered into an Investment Advisory Agreement with the Manager, International Index’s investment adviser, an indirect, wholly-owned subsidiary of BlackRock, to provide investment advisory and administrative services. The Manager is responsible for the management of International Index’s portfolio and provides the personnel, facilities, equipment and certain other services necessary to the operations of International Index. For such services, International Index pays the Manager a monthly fee at an annual rate of 0.01% of the average daily value of International Index net assets.
With respect to International Index, the Manager entered into a separate sub-advisory agreement with BlackRock Fund Advisors (“BFA”), an affiliate of the Manager. The Manager pays BFA, for services it provides, for that portion of International Index for which BFA acts as sub-adviser a monthly fee that is a percentage of the investment advisory fees paid by the International Index to the Manager.
Administration: The Corporation, on behalf of Small Cap Index, entered into an Administration Agreement with the Administrator, an indirect, wholly-owned subsidiary of BlackRock, to provide administrative services (other than investment advice and related portfolio activities). For such services, Small Cap Index pays the Administrator a monthly fee at an annual rate of 0.04% of the average daily net assets of Small Cap Index. Small Cap Index does not pay an investment advisory fee or investment management fee.
Service Fees: The Corporation, on behalf of the Funds, entered into a Distribution Agreement and a Distribution Plan with BlackRock Investments, LLC (“BRIL”), an affiliate of the Manager and/or Administrator. Pursuant to the Distribution Plan and in accordance with Rule 12b-1 under the 1940 Act, each Fund pays BRIL ongoing service and distribution fees. The fees are accrued daily and paid monthly at annual rates based upon the average daily net assets of the relevant share class of each Fund as follows:
| International Index | Small Cap Index | |||||||
| Investor A |
0.25 | % | 0.25 | % | ||||
BRIL and broker-dealers, pursuant to sub-agreements with BRIL, provide shareholder servicing to the Funds. The ongoing service fee compensates BRIL and each broker-dealer for providing shareholder servicing related services to shareholders.
For the year ended December 31, 2017, the following table shows the class specific service fees borne directly by each share class of each Fund:
| International Index | Small Cap Index | |||||||
| Investor A |
$ | 772,164 | $ | 433,288 | ||||
Transfer Agent: The Manager and/or Administrator maintains a call center that is responsible for providing certain shareholder services to the Funds. Shareholder services include responding to inquiries and processing subscriptions and redemptions transactions based upon instructions from shareholders. For the year ended December 31, 2017, each Fund reimbursed the Manager and/or Administrator the following amounts for costs incurred in running the call center, which are included in transfer agent — class specific in the Statements of Operations:
| Institutional | Investor A | Class K | Total | |||||||||||||
| International Index |
— | — | $ | 20,038 | $ | 20,038 | ||||||||||
| Small Cap Index |
$ | 983 | $ | 3,378 | 451 | 4,812 | ||||||||||
For the year ended December 31, 2017, the following table shows the class specific transfer agent fees borne directly by each class of each Fund:
| Institutional | Investor A | Class K | Total | |||||||||||||
| International Index |
$ | 255,693 | $ | 176,433 | $ | 772,816 | $ | 1,204,942 | ||||||||
| Small Cap Index |
78,724 | 109,971 | 8,042 | 196,737 | ||||||||||||
Expense Limitations, Waivers and Reimbursements: With respect to International Index, the Manager voluntarily agreed to waive its investment advisory fees by the amount of investment advisory fees the Fund pays to the Manager indirectly through its investment in affiliated money market funds (the “affiliated money market fund waiver”). The amount of waivers and/or reimbursements of fees and expenses made pursuant to the expense limitations will be reduced by the amount of the affiliated money market fund waiver. This amount is included in fees waived and/or reimbursed by the Manager in the Statements of Operations. For the year ended December 31, 2017, the Manager waived $29,770 in advisory fees pursuant to this agreement.
The Manager has contractually agreed to waive its investment advisory fee with respect to any portion of the International Index’s assets invested in affiliated equity and fixed-income mutual funds and affiliated exchange-traded funds that have a contractual management fee through April 30, 2018. The contractual agreement may be terminated upon 90 days’ notice by a majority of the directors who are not “interested persons” of the Corporation, as defined in the 1940 Act (“Independent Directors”) or by a vote of a majority of the outstanding voting securities of International Index. This amount is included in fees waived by the Manager in the Statements of Operations. For the year ended December 31, 2017, there was $801 fees waived by the Manager.
| 34 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
| Notes to Financial Statements (continued) | BlackRock Index Funds, Inc. |
With respect to each Fund, the Manager and/or Administrator contractually agreed to waive and/or reimburse fees or expenses in order to limit expenses, excluding interest expense, dividend expense, tax expense, acquired fund fees and expenses, and certain other fund expenses, which constitute extraordinary expenses not incurred in the ordinary course of each Fund’s business (“expense limitation”). The expense limitations as a percentage of each Fund’s average daily net assets are as follows:
| Institutional |
0.12 | % | ||
| Investor A |
0.37 | |||
| Class K |
0.07 |
The Manager and/or Administrator has agreed not to reduce or discontinue these contractual expense limitations through April 30, 2018, unless approved by the Board, including a majority of the Independent Directors or by a vote of a majority of the outstanding voting securities of the Funds. For the year ended December 31, 2017, the Manager and/or Administrator waived and/or reimbursed the following amounts, which are shown as fees waived and/or reimbursed by the Administrator in the Statements of Operations.
| Institutional | Investor A | Class K | Total | |||||||||||||
| International Index |
$ | 5,883 | $ | 3,107 | $ | 79,009 | $ | 87,999 | ||||||||
| Small Cap Index |
99,282 | 97,049 | 151,706 | 348,037 | ||||||||||||
For the year ended December 31, 2017, for International Index, the Manager waived and/or reimbursed $87,268, which is included in fees waived and/or reimbursed by the Manager in the Statements of Operations.
These amounts waived and/or reimbursed are shown as fees waived and/or reimbursed by the Administrator and transfer agent fees waived and/or reimbursed — class specific, respectively, in the Statements of Operations. For the year ended December 31, 2017, class specific expense waivers and/or reimbursements are as follows:
Transfer Agent fees waived and/or reimbursed
| Institutional | Investor A | Class K | Total | |||||||||||||
| International Index |
$ | 2,108 | $ | 9,617 | $ | 179,170 | $ | 190,895 | ||||||||
| Small Cap Index |
9,855 | 23,501 | 8,040 | 41,396 | ||||||||||||
Securities Lending: The U.S. Securities and Exchange Commission (“SEC”) has issued an exemptive order which permits BTC, an affiliate of the Manager, to serve as securities lending agent for International Index, subject to applicable conditions. As securities lending agent, BTC bears all operational costs directly related to securities lending. International Index is responsible for fees in connection with the investment of cash collateral received for securities on loan (the “collateral investment fees”). The cash collateral is invested in a money market fund managed by the Manager or its affiliates. However, BTC has agreed to reduce the amount of securities lending income it receives in order to effectively limit the collateral investment fees International Index bears to an annual rate of 0.04%. Such money market fund shares will not be subject to a sales load, distribution fee or service fee. The money market fund in which the cash collateral has been invested may, under certain circumstances, impose a liquidity fee of up to 2% of the value redeemed or temporarily restrict redemptions for up to 10 business days during a 90 day period, in the event that the money market fund’s weekly liquid assets fall below certain thresholds.
Securities lending income is equal to the total of income earned from the reinvestment of cash collateral, net of fees and other payments to and from borrowers of securities, and less the collateral investment fees. International Index retains a portion of securities lending income and remits a remaining portion to BTC as compensation for its services as securities lending agent.
Pursuant to a securities lending agreement, International Index retains 80% of securities lending income (which excludes collateral investment fees); and this amount can never be less than 70% of the sum of securities lending income plus the collateral investment fees. Under the securities lending program, International Index is categorized into a specific asset class. The determination of International Index’s asset class category (fixed-income, domestic equity, international equity, or fund of funds), each of which may be subject to a different fee arrangement, is based on a methodology agreed to between the Corporation and BTC. In addition, commencing the business day following the date that the aggregate securities lending income earned across certain funds in the Equity-Liquidity Complex in a calendar year exceeds a specified threshold, International Index, pursuant to the securities lending agreement, will receive for the remainder of the calendar year securities lending income as follows: 85% of securities lending income; and this amount can never be less than 70% of the sum of securities lending income plus collateral investment fees.
Prior to June 12, 2017, BlackRock Investment Management, LLC (“BIM”) was International Index’s securities lending agent.
Prior to June 12, 2017, the Series retains 80% of securities lending income. In addition, commencing the business day following the date that the aggregate securities lending income earned across certain funds in the Equity-Liquidity Complex in a calendar year exceeds a specified threshold, the Series, pursuant to the securities lending agreement, will retain for the remainder of the calendar year securities lending income in an amount equal to 85% of securities lending income.
The share of securities lending income earned by International Index is shown as securities lending — affiliated — net in the Statements of Operations. For the year ended December 31, 2017, International Index paid BIM $51,872 and BTC $78,683 for securities lending agent services.
Interfund Lending: In accordance with an exemptive order (the “Order”) from the SEC, each Fund may participate in a joint lending and borrowing facility for temporary purposes (the “Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by each Fund’s investment policies and restrictions. Each Fund is currently permitted to borrow and lend under the Interfund Lending Program.
A lending BlackRock fund may lend in aggregate up to 15% of its net assets, but may not lend more than 5% of its net assets to any one borrowing fund through the Interfund Lending Program. A borrowing BlackRock fund may not borrow through the Interfund Lending Program or from any other source more than 33 1/3% of its total assets (or any lower threshold provided for by the fund’s investment restrictions). If a borrowing BlackRock fund’s total outstanding borrowings exceed 10% of its total assets, each of its outstanding interfund loans will be subject to collateralization of at least 102% of the outstanding principal value of the loan. All interfund loans are for temporary or emergency purposes and the interest rate to be charged will be the average of the highest current overnight repurchase agreement rate available to a lending fund and the bank loan rate, as calculated according to a formula established by the Board.
| NOTES TO FINANCIAL STATEMENTS | 35 |
| Notes to Financial Statements (continued) | BlackRock Index Funds, Inc. |
During the year ended December 31, 2017, the Funds did not participate in the Interfund Lending Program.
Directors and Officers: Certain directors and/or officers of the Corporation are directors and/or officers of BlackRock or its affiliates. The Funds reimburse the Manager and/or Administrator for a portion of the compensation paid to the Corporation’s Chief Compliance Officer, which is included in Directors and Officer in the Statements of Operations.
Other Transactions: During the year ended December 31, 2017, International Index received a reimbursement of $12,066 from an affiliate, which is included in other income — affiliated in the Statements of Operations, related to an operating error.
International Index may purchase securities from, or sell securities to, an affiliated fund provided the affiliation is due solely to having a common investment adviser, common officers, or common trustees. For the year ended December 31, 2017, the purchase and sale transactions and any net realized gains (losses) with affiliated funds in compliance with Rule 17a-7 under the 1940 Act were as follows:
| Purchases | Sales | Net Realized Gain (Loss) | ||||||||||||
| $ | 477,149,535 | $ | 9,200,859 | $ | (2,350,648 | ) | ||||||||
| 7. | PURCHASES AND SALES |
For International Index, for the year ended December 31, 2017, purchases and sales of investments, excluding short-term securities were $6,140,681,346 and $1,809,252,806, respectively.
| 8. | INCOME TAX INFORMATION |
It is each Fund’s policy to comply with the requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies, and to distribute substantially all of its taxable income to its shareholders. Therefore, no U.S. federal income tax provision is required.
Each Fund files U.S. federal and various state and local tax returns. No income tax returns are currently under examination. The statute of limitations on each Fund’s U.S. federal tax returns generally remains open for each of the four years ended December 31, 2017. The statutes of limitations on each Fund’s state and local tax returns may remain open for an additional year depending upon the jurisdiction.
Management has analyzed tax laws and regulations and their application to the Funds as of December 31, 2017, inclusive of the open tax return years, and does not believe that there are any uncertain tax positions that require recognition of a tax liability in the Funds’ financial statements.
US GAAP requires that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset values per share. As of period end, the following permanent differences attributable to the income recognized from partnership interests, the characterization of corporate actions, the sale of stock of passive foreign investment companies, the use of equalization, foreign currency transactions, and the expiration of capital loss carryforwards were reclassified to the following accounts:
|
iShares MSCI EAFE |
iShares Russell 2000 |
|||||||
| Paid-in capital |
$ | (6,596,186 | ) | $ | 2,833,506 | |||
| Undistributed (distributions in excess of) net investment income |
11,571,632 | 416,548 | ||||||
| Accumulated net realized gain (loss) |
(4,975,446 | ) | (3,250,054 | ) | ||||
The tax character of distributions paid was as follows:
| iShares MSCI EAFE International Index |
iShares Russell 2000 |
|||||||
| Ordinary income |
||||||||
| 12/31/17 |
$ | 252,072,717 | $ | 14,051,708 | ||||
| 12/31/16 |
133,001,001 | 7,403,968 | ||||||
| Long-term capital gains |
||||||||
| 12/31/17 |
— | 15,439,669 | ||||||
| 12/31/16 |
— | 12,080,673 | ||||||
|
|
|
|
|
|||||
| Total |
||||||||
| 12/31/17 |
$ | 252,072,717 | $ | 29,491,377 | ||||
|
|
|
|
|
|||||
| 12/31/16 |
$ | 133,001,001 | $ | 19,484,641 | ||||
|
|
|
|
|
|||||
| (a) | Distribution amounts may include a portion of the proceeds from redeemed shares. |
| 36 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
| Notes to Financial Statements (continued) | BlackRock Index Funds, Inc. |
As of period end, the tax components of accumulated net earnings (losses) were as follows:
|
iShares MSCI EAFE |
iShares Russell 2000 Small-Cap Index |
|||||||
| Undistributed net investment income |
$ | 5,734,307 | $ | 709,012 | ||||
| Undistributed long-term capital gains |
— | 305,084 | ||||||
| Capital loss carryforwards |
(150,288,997 | ) | — | |||||
| Net unrealized gains (losses)(b) |
1,356,216,066 | 137,727,399 | ||||||
|
|
|
|
|
|||||
| $ | 1,211,661,376 | $ | 138,741,495 | |||||
|
|
|
|
|
|||||
| (b) | The difference between book-basis and tax-basis net unrealized gains (losses) was attributable primarily to the timing of income recognition on partnership interests, the tax deferral of losses on wash sales, the realization for tax purposes of unrealized gains / (losses) on certain futures and foreign currency contracts, and the realization for tax purposes of unrealized gains on investments in passive foreign investment companies. |
As of December 31, 2017, iShares MSCI EAFE International Index Fund had a capital loss carryforward of $150,288,997, with no expiration dates, available to offset future realized capital gains.
During the year ended December 31, 2017, iShares MSCI EAFE International Index Fund utilized $9,780,483 of its capital loss carryforward.
As of December 31, 2017, iShares MSCI EAFE International Index Fund’s gross unrealized appreciation and depreciation for investments and derivatives based on cost for U.S. federal income tax purposes were as follows
| Tax cost |
$ | 9,246,013,671 | ||
|
|
|
|||
| Gross unrealized appreciation |
$ | 1,531,319,246 | ||
| Gross unrealized depreciation |
(176,560,721 | ) | ||
|
|
|
|||
| Net unrealized appreciation (depreciation) |
$ | 1,354,758,525 | ||
|
|
|
| 9. | BANK BORROWINGS |
International Index, along with certain other funds managed by the Manager and its affiliates (“Participating Funds”), is a party to a 364-day, $2.1 billion credit agreement with a group of lenders. Under this agreement, International Index may borrow to fund shareholder redemptions. Excluding commitments designated for certain individual funds, the Participating Funds, including International Index, can borrow up to an aggregate commitment amount of $1.6 billion at any time outstanding, subject to asset coverage and other limitations as specified in the agreement. The credit agreement has the following terms: a fee of 0.12% per annum on unused commitment amounts and interest at a rate equal to the higher of (a) one-month LIBOR (but, in any event, not less than 0.00%) on the date the loan is made plus 0.80% per annum or (b) the Fed Funds rate (but, in any event, not less than 0.00%) in effect from time to time plus 0.80% per annum on amounts borrowed. The agreement expires in April 2018 unless extended or renewed. Participating Funds paid administration, legal and arrangement fees, which, if applicable, are included in miscellaneous expenses in the Statements of Operations. These fees were allocated among such funds based upon portions of the aggregate commitment available to them and relative net assets of Participating Funds. During the year ended December 31, 2017, International Index did not borrow under the credit agreement.
| 10. | PRINCIPAL RISKS |
In the normal course of business, International Index invests in securities or other instruments and may enter into certain transactions, and such activities subject International Index to various risks, including among others, fluctuations in the market (market risk) or failure of an issuer to meet all of its obligations. The value of securities or other instruments may also be affected by various factors, including, without limitation: (i) the general economy; (ii) the overall market as well as local, regional or global political and/or social instability; (iii) regulation, taxation or international tax treaties between various countries; or (iv) currency, interest rate and price fluctuations. International Index’s prospectus provides details of the risks to which International Index is subject.
International Index may be exposed to additional risks when reinvesting cash collateral in money market funds that do not seek to maintain a stable NAV per share of $1.00 and which may be subject to redemption gates or liquidity fees under certain circumstances.
Valuation Risk: The market values of equities, such as common stocks and preferred securities or equity related investments, such as futures and options, may decline due to general market conditions which are not specifically related to a particular company. They may also decline due to factors which affect a particular industry or industries. International Index may invest in illiquid investments and may experience difficulty in selling those investments in a timely manner at the price that it believes the investments are worth. Prices may fluctuate widely over short or extended periods in response to company, market or economic news. Markets also tend to move in cycles, with periods of rising and falling prices. This volatility may cause International Index’s NAV to experience significant increases or decreases over short periods of time. If there is a general decline in the securities and other markets, the NAV of International Index may lose value, regardless of the individual results of the securities and other instruments in which International Index invests.
The price International Index could receive upon the sale of any particular portfolio investment may differ from International Index’s valuation of the investment, particularly for securities that trade in thin or volatile markets or that are valued using a fair valuation technique or a price provided by an independent pricing service. Changes to significant unobservable inputs and assumptions (i.e., publicly traded company multiples, growth rate, time to exit) due to the lack of observable inputs may significantly impact the resulting fair value and therefore International Index’s results of operations. As a result, the price received upon the sale of an investment may be less than the value ascribed by International Index, and International Index could realize a greater than expected loss or lesser than expected gain upon the sale of the investment. International Index’s ability to value its investments may also be impacted by technological issues and/or errors by pricing services or other third party service providers.
Counterparty Credit Risk: International Index may be exposed to counterparty credit risk, or the risk that an entity may fail to or be unable to perform on its commitments related to unsettled or open transactions. International Index manages counterparty credit risk by entering into transactions only with counterparties that the Manager
| NOTES TO FINANCIAL STATEMENTS | 37 |
| Notes to Financial Statements (continued) | BlackRock Index Funds, Inc. |
believes have the financial resources to honor their obligations and by monitoring the financial stability of those counterparties. Financial assets, which potentially expose International Index to market, issuer and counterparty credit risks, consist principally of financial instruments and receivables due from counterparties. The extent of the International Index’s exposure to market, issuer and counterparty credit risks with respect to these financial assets is approximately their value recorded in the Statements of Assets and Liabilities, less any collateral held by International Index.
A derivative contract may suffer a mark-to-market loss if the value of the contract decreases due to an unfavorable change in the market rates or values of the underlying instrument. Losses can also occur if the counterparty does not perform under the contract.
With exchange-traded futures, there is less counterparty credit risk to International Index since the exchange or clearinghouse, as counterparty to such instruments, guarantees against a possible default. The clearinghouse stands between the buyer and the seller of the contract; therefore, credit risk is limited to failure of the clearinghouse. While offset rights may exist under applicable law, International Index does not have a contractual right of offset against a clearing broker or clearinghouse in the event of a default (including the bankruptcy or insolvency). Additionally, credit risk exists in exchange-traded futures with respect to initial and variation margin that is held in a clearing broker’s customer accounts. While clearing brokers are required to segregate customer margin from their own assets, in the event that a clearing broker becomes insolvent or goes into bankruptcy and at that time there is a shortfall in the aggregate amount of margin held by the clearing broker for all its clients, typically the shortfall would be allocated on a pro rata basis across all the clearing broker’s customers, potentially resulting in losses to International Index.
Concentration Risk:
International Index invests a significant portion of its assets in securities of issuers located in Europe or with significant exposure to European issuers or countries. The European financial markets have recently experienced volatility and adverse trends due to concerns about economic downturns in, or rising government debt levels of, several European countries. These events may spread to other countries in Europe and may affect the value and liquidity of certain of the International Index’s investments.
The United Kingdom voted on June 23, 2016 to withdraw from the European Union, which may introduce significant new uncertainties and instability in the financial markets across Europe.
International Index invests a significant portion of its assets in securities of issuers located in Asia or with significant exposure to Asian issuers or countries. The Asian financial markets have recently experienced volatility and adverse trends due to concerns in several Asian countries regarding monetary policy, government intervention in the markets, rising government debt levels or economic downturns. These events may spread to other countries in Asia and may affect the value and liquidity of certain of the International Index’s investments.
| 11. | CAPITAL SHARE TRANSACTIONS |
Transactions in capital shares for each class were as follows:
| Year Ended 12/31/17 |
Year Ended 12/31/16 |
|||||||||||||||
| International Index | Shares | Amount | Shares | Amount | ||||||||||||
| Institutional |
||||||||||||||||
| Shares sold |
30,738,054 | $ | 398,951,656 | 46,940,980 | $ | 539,320,569 | ||||||||||
| Shares issued in reinvestment of distributions |
1,130,219 | 15,777,865 | 1,417,534 | 16,387,510 | ||||||||||||
| Shares redeemed |
(38,067,918 | ) | (484,936,705 | ) | (221,253,679 | ) | (2,359,024,651 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net decrease |
(6,199,645 | ) | $ | (70,207,184 | ) | (172,895,165 | ) | $ | (1,803,316,572 | ) | ||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Investor A |
||||||||||||||||
| Shares sold |
13,993,190 | $ | 183,930,491 | 12,259,774 | $ | 140,963,736 | ||||||||||
| Shares issued in reinvestment of distributions |
582,140 | 8,074,281 | 506,036 | 5,814,683 | ||||||||||||
| Shares redeemed |
(8,668,305 | ) | (113,718,058 | ) | (6,435,224 | ) | (74,118,861 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net increase |
5,907,025 | $ | 78,286,714 | 6,330,586 | $ | 72,659,558 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Class K |
||||||||||||||||
| Shares sold |
392,934,379 | $ | 5,166,209,906 | 470,599,166 | $ | 5,227,329,648 | ||||||||||
| Shares issued in reinvestment of distributions |
15,812,889 | 220,747,921 | 7,791,229 | 90,071,735 | ||||||||||||
| Shares redeemed |
(86,492,579 | ) | (1,162,160,552 | ) | (139,807,306 | ) | (1,628,148,316 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net increase |
322,254,689 | $ | 4,224,797,275 | 338,583,089 | $ | 3,689,253,067 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Net Increase |
321,962,069 | $ | 4,232,876,805 | 172,018,510 | $ | 1,958,596,053 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 38 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
| Notes to Financial Statements (continued) | BlackRock Index Funds, Inc. |
| Year Ended 12/31/17 |
Year Ended 12/31/16 |
|||||||||||||||
| Small Cap Index | Shares | Amount | Shares | Amount | ||||||||||||
| Institutional |
||||||||||||||||
| Shares sold |
5,506,971 | $ | 102,815,594 | 9,719,997 | $ | 152,952,403 | ||||||||||
| Shares issued in reinvestment of distributions |
254,423 | 4,993,789 | 548,537 | 9,697,642 | ||||||||||||
| Shares redeemed |
(10,197,970 | ) | (187,582,203 | ) | (7,016,158 | ) | (110,173,690 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net increase (decrease) |
(4,436,576 | ) | $ | (79,772,820 | ) | 3,252,376 | $ | 52,476,355 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Investor A |
||||||||||||||||
| Shares sold |
8,622,112 | $ | 159,274,178 | 2,332,975 | $ | 36,799,680 | ||||||||||
| Shares issued in reinvestment of distributions |
360,085 | 7,076,447 | 269,661 | 4,760,921 | ||||||||||||
| Shares redeemed |
(2,883,561 | ) | (54,280,644 | ) | (1,768,237 | ) | (28,054,830 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net increase |
6,098,636 | $ | 112,069,981 | 834,399 | $ | 13,505,771 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Class K |
||||||||||||||||
| Shares sold |
22,566,145 | $ | 420,218,465 | 3,338,773 | $ | 54,919,479 | ||||||||||
| Shares issued in reinvestment of distributions |
729,051 | 14,348,570 | 121,360 | 2,155,111 | ||||||||||||
| Shares redeemed |
(2,657,575 | ) | (50,075,398 | ) | (626,556 | ) | (10,206,945 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net increase |
20,637,621 | $ | 384,491,637 | 2,833,577 | $ | 46,867,645 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Net Increase |
22,299,681 | $ | 416,788,798 | 6,920,352 | $ | 112,849,771 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 12. | SUBSEQUENT EVENTS |
Management has evaluated the impact of all subsequent events on the Funds through the date the financial statements were issued and has determined that there were no subsequent events requiring adjustment or additional disclosure in the financial statements.
| NOTES TO FINANCIAL STATEMENTS | 39 |
| Report of Independent Registered Public Accounting Firm |
To the Shareholders of iShares MSCI EAFE International Index Fund and iShares Russell 2000 Small-Cap Index Fund and the Board of Directors of BlackRock Index Funds, Inc.:
Opinion on the Financial Statements and Financial Highlights
We have audited the accompanying statements of assets and liabilities of iShares MSCI EAFE International Index Fund (formerly BlackRock International Index Fund) and iShares Russell 2000 Small-Cap Index Fund (formerly BlackRock Small Cap Index Fund) of BlackRock Index Funds, Inc. (the “Funds”), including the schedule of investments of iShares MSCI EAFE International Index Fund as of December 31, 2017, the related statements of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, the financial highlights for each of the five years in the period then ended, and the related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of the Funds as of December 31, 2017, and the results of their operations for the year then ended, the changes in their net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements and financial highlights are the responsibility of the Funds’ management. Our responsibility is to express an opinion on Funds’ financial statements and financial highlights based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Funds in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. The Funds are not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Funds’ internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial highlights. Our procedures included confirmation of securities owned as of December 31, 2017, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
Deloitte & Touche LLP
Boston, Massachusetts
February 23, 2018
We have served as the auditor of one or more BlackRock investment companies since 1992.
| 40 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
| Important Tax Information (unaudited) | BlackRock Index Funds, Inc. |
During the fiscal year ended December 31, 2017, the following information is provided with respect to the ordinary income distributions paid by the Funds:
| Payable Date | iShares MSCI EAFE International Index Fund |
iShares Russell 2000 Small-Cap Index Fund |
||||||||
| Qualified Dividend Income for Individuals(a)(b) |
07/21/2017 | — | % | 67.97 | % | |||||
| 12/18/2017 | 80.82 | 43.63 | ||||||||
| Dividends Qualifying for the Dividend Received Deduction for Corporations(a) |
07/21/2017 | — | 40.99 | |||||||
| 12/18/2017 | — | 40.99 | ||||||||
| Foreign Source Income(b) |
12/18/2017 | 83.53 | — | |||||||
| Foreign Taxes Paid Per Share(c) |
12/18/2017 | $ | 0.024648 | — | ||||||
| (a) | The Fund hereby designates the percentage indicated above or the maximum amount allowable by law. |
| (b) | Expressed as a percentage of the cash distribution grossed-up for foreign taxes. |
| (c) | The foreign taxes paid represent taxes incurred by the Funds on income received by the Fund from foreign sources. Foreign taxes paid may be included in taxable income with an offsetting deduction from gross income or may be taken as a credit for taxes paid to foreign governments. You should consult your tax advisor regarding the appropriate treatment of foreign taxes paid. |
Additionally, iShares Russell 2000 Small-Cap Index Fund distributed long-term capital gains of $0.289726 per share to shareholders of record on December 14, 2017.
| IMPORTANT TAX INFORMATION | 41 |
| Series Portfolio Information as of December 31, 2017 | Master Small Cap Index Series |
| 42 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
|
December 31, 2017 |
Master Small Cap Index Series (Percentages shown are based on Net Assets) |
| SCHEDULES OF INVESTMENTS | 43 |
| Schedule of Investments (continued) December 31, 2017 |
Master Small Cap Index Series (Percentages shown are based on Net Assets) |
| 44 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
| Schedule of Investments (continued) December 31, 2017 |
Master Small Cap Index Series (Percentages shown are based on Net Assets) |
| SCHEDULES OF INVESTMENTS | 45 |
| Schedule of Investments (continued) December 31, 2017 |
Master Small Cap Index Series (Percentages shown are based on Net Assets) |
| 46 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
| Schedule of Investments (continued) December 31, 2017 |
Master Small Cap Index Series (Percentages shown are based on Net Assets) |
| SCHEDULES OF INVESTMENTS | 47 |
| Schedule of Investments (continued) December 31, 2017 |
Master Small Cap Index Series (Percentages shown are based on Net Assets) |
| 48 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
| Schedule of Investments (continued) December 31, 2017 |
Master Small Cap Index Series (Percentages shown are based on Net Assets) |
| SCHEDULES OF INVESTMENTS | 49 |
| Schedule of Investments (continued) December 31, 2017 |
Master Small Cap Index Series (Percentages shown are based on Net Assets) |
| 50 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
| Schedule of Investments (continued) December 31, 2017 |
Master Small Cap Index Series (Percentages shown are based on Net Assets) |
| SCHEDULES OF INVESTMENTS | 51 |
| Schedule of Investments (continued) December 31, 2017 |
Master Small Cap Index Series (Percentages shown are based on Net Assets) |
| 52 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
| Schedule of Investments (continued) December 31, 2017 |
Master Small Cap Index Series (Percentages shown are based on Net Assets) |
| SCHEDULES OF INVESTMENTS | 53 |
| Schedule of Investments (continued) December 31, 2017 |
Master Small Cap Index Series (Percentages shown are based on Net Assets) |
| 54 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
| Schedule of Investments (continued) December 31, 2017 |
Master Small Cap Index Series (Percentages shown are based on Net Assets) |
| SCHEDULES OF INVESTMENTS | 55 |
| Schedule of Investments (continued) December 31, 2017 |
Master Small Cap Index Series (Percentages shown are based on Net Assets) |
| 56 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
| Schedule of Investments (continued) December 31, 2017 |
Master Small Cap Index Series (Percentages shown are based on Net Assets) |
| SCHEDULES OF INVESTMENTS | 57 |
| Schedule of Investments (continued) December 31, 2017 |
Master Small Cap Index Series (Percentages shown are based on Net Assets) |
| 58 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
| Schedule of Investments (continued) December 31, 2017 |
Master Small Cap Index Series (Percentages shown are based on Net Assets) |
| SCHEDULES OF INVESTMENTS | 59 |
| Schedule of Investments (continued) December 31, 2017 |
Master Small Cap Index Series (Percentages shown are based on Net Assets) |
| 60 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
| Schedule of Investments (continued) December 31, 2017 |
Master Small Cap Index Series (Percentages shown are based on Net Assets) |
| (f) | During the year ended December 31, 2017, investments in issuers considered to be affiliates of the Series for purposes of Section 2(a)(3) of the Investment Company Act of 1940, as amended, were as follows: |
| Affiliate | Shares Held at |
Shares Purchased |
Shares Sold |
Shares Held at |
Value at 12/31/17 |
Income |
Net Realized Gain (Loss) (a) |
Change in Unrealized Appreciation (Depreciation) |
||||||||||||||||||||||||
| BlackRock Cash Funds: Institutional, SL Agency Shares |
— | 102,254,881 | (b) | — | 102,254,881 | $ | 102,265,106 | $ | 1,417,545 | (c) | $ | (10,299 | ) | $ | (12,944 | ) | ||||||||||||||||
| BlackRock Cash Funds: Treasury, SL Agency Shares |
— | 17,833,717 | (b) | — | 17,833,717 | 17,833,717 | 74,206 | — | — | |||||||||||||||||||||||
| BlackRock Liquidity Funds, T-Fund, Institutional Class |
37,279,916 | — | (37,279,916 | )(d) | — | — | 52,623 | — | — | |||||||||||||||||||||||
| PennyMac Financial Services, Inc. |
3,162 | — | — | 3,162 | 70,671 | — | — | 18,023 | ||||||||||||||||||||||||
| PennyMac Mortgage Investment Trust |
22,641 | 16,483 | — | 39,124 | 628,722 | 58,458 | — | (24,104 | ) | |||||||||||||||||||||||
| SL Liquidity Series, LLC, Money Market Series |
8,714,553 | — | (8,714,553 | )(d) | — | — | — | 1,735 | (580 | ) | ||||||||||||||||||||||
| iShares Russell 2000 ETF |
— | 791,755 | (753,531 | ) | 38,224 | 5,827,631 | 35,932 | (2,488 | ) | 257,591 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
| Total |
$ | 126,625,847 | $ | 1,638,764 | $ | (11,052 | ) | $ | 237,986 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||
| (a) | Includes net capital gain distributions, if applicable. |
| (b) | Represents net shares purchased. |
| (c) | Represents securities lending income earned from the reinvestment of cash collateral from loaned securities, net of fees and collateral investment expenses, and other payments to and from borrowers of securities. |
| (d) | Represents net shares sold. |
Derivative Financial Instruments Outstanding as of Period End
Futures Contracts
| Description | Number of Contracts |
Expiration Date |
Notional Amount (000) |
Value/ Unrealized Appreciation (Depreciation) |
||||||||||||
| Long Contracts |
||||||||||||||||
| Russell 2000 E-Mini Index |
230 | 03/16/18 | $ | 17,670 | $ | (26,695 | ) | |||||||||
|
|
|
|
|
|||||||||||||
| SCHEDULES OF INVESTMENTS | 61 |
| Schedule of Investments (continued) December 31, 2017 |
Master Small Cap Index Series |
Derivative Financial Instruments Categorized by Risk Exposure
As of period end, the fair values of derivative financial instruments located in the Statements of Assets and Liabilities as follows:
| Commodity Contracts |
Credit Contracts |
Equity Contracts |
Foreign Currency Exchange Contracts |
Interest Rate Contracts |
Other Contracts |
Total | ||||||||||||||||||||||
| Liabilities — Derivative Financial Instruments |
||||||||||||||||||||||||||||
| Futures contracts |
||||||||||||||||||||||||||||
| Net unrealized depreciation(a) |
$ | — | $ | — | $ | 26,695 | $ | — | $ | — | $ | — | $ | 26,695 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| (a) | Includes cumulative appreciation (depreciation) on futures contracts, if any, as reported in the Schedule of Investments. Only current day’s variation margin is reported within the Statements of Assets and Liabilities. |
For the year ended December 31, 2017, the effect of derivative financial instruments in the Statements of Operations was as follows:
| Commodity Contracts |
Credit Contracts |
Equity Contracts |
Foreign Currency Exchange Contracts |
Interest Rate Contracts |
Other Contracts |
Total | ||||||||||||||||||||||
| Net Realized Gain (Loss) from: |
||||||||||||||||||||||||||||
| Futures contracts |
$ | — | $ | — | $ | 1,413,110 | $ | — | $ | — | $ | — | $ | 1,413,110 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net Change in Unrealized Appreciation (Depreciation) on: | ||||||||||||||||||||||||||||
| Futures contracts |
$ | — | $ | — | $ | 39,536 | $ | — | $ | — | $ | — | $ | 39,536 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Average Quarterly Balances of Outstanding Derivative Financial Instruments
| Futures contracts: |
||||||||||||||
| Average notional value of contracts — long |
$ | 9,299,711 | ||||||||||||
For more information about the Series’ investment risks regarding derivative financial instruments, refer to the Notes to Financial Statements.
Fair Value Hierarchy as of Period End
Various inputs are used in determining the fair value of investments and derivative financial instruments. For information about the Series’ policy regarding valuation of investments and derivative financial instruments, refer to the Notes to Financial Statements.
The following tables summarize the Series’ investments and derivative financial instruments categorized in the disclosure hierarchy:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: |
||||||||||||||||
| Investments: |
| |||||||||||||||
| Long-Term Investments:(a) |
| |||||||||||||||
| Common Stocks |
$ | 1,253,164,215 | $ | — | $ | — | $ | 1,253,164,215 | ||||||||
| Investment Companies |
5,827,631 | — | — | 5,827,631 | ||||||||||||
| Other Interests |
— | — | 129 | 129 | ||||||||||||
| Rights |
— | — | 89,331 | 89,331 | ||||||||||||
| Short-Term Securities |
120,098,823 | — | — | 120,098,823 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| $ | 1,379,090,669 | $ | — | $ | 89,460 | $ | 1,379,180,129 | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Derivative Financial Instruments(b) |
| |||||||||||||||
| Liabilities: |
| |||||||||||||||
| Equity contracts |
$ | (26,695 | ) | $ | — | $ | — | $ | (26,695 | ) | ||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (a) | See above Schedule of Investments for values in each industry. |
| (b) | Derivative financial instruments are futures contracts which are valued at the unrealized appreciation (depreciation) on the instrument. |
During the year ended December 31, 2017, there were no transfers between levels.
See Notes to Financial Statements.
| 62 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
Statement of Assets and Liabilities
December 31, 2017
| Master Small Cap Index Series |
||||
| ASSETS |
| |||
| Investments at value — unaffiliated (including securities loaned at value of $98,219,539) (cost — $995,545,054) |
$ | 1,252,554,282 | ||
| Investments at value — affiliated (cost — $126,468,612) |
126,625,847 | |||
| Cash |
113,465 | |||
| Cash pledged for futures contracts |
686,000 | |||
| Receivables: |
| |||
| Dividends — unaffiliated |
1,783,213 | |||
| Investments sold |
972,256 | |||
| Contributions from investors |
1,354,048 | |||
| Securities lending income — affiliated |
162,734 | |||
| Investment adviser |
92,400 | |||
| Dividends — affiliated |
12,295 | |||
| Prepaid expenses |
2,856 | |||
|
|
|
|||
| Total assets |
1,384,359,396 | |||
|
|
|
|||
| LIABILITIES |
| |||
| Cash collateral on securities loaned at value |
102,288,350 | |||
| Payables: |
| |||
| Investments purchased |
3,047,035 | |||
| Withdrawals to investors |
548,460 | |||
| Other accrued expenses |
159,919 | |||
| Variation margin on futures contracts |
150,650 | |||
| Directors’ fees |
7,829 | |||
| Other affiliates |
1,891 | |||
|
|
|
|||
| Total liabilities |
106,204,134 | |||
|
|
|
|||
| NET ASSETS |
$ | 1,278,155,262 | ||
|
|
|
|||
| NET ASSETS CONSIST OF: |
| |||
| Investors’ capital |
$ | 1,021,015,494 | ||
| Net unrealized appreciation (depreciation) |
257,139,768 | |||
|
|
|
|||
| NET ASSETS |
$ | 1,278,155,262 | ||
|
|
|
|||
See notes to financial statements.
| FINANCIAL STATEMENTS | 63 |
Year Ended December 31, 2017
| Master Small Cap Index Series |
||||
| INVESTMENT INCOME |
| |||
| Dividends — unaffiliated |
$ | 12,261,000 | ||
| Securities lending income — affiliated — net |
1,417,545 | |||
| Dividends — affiliated |
221,219 | |||
| Interest — unaffiliated |
2,015 | |||
| Other income — affiliated |
13,478 | |||
| Foreign taxes withheld |
(1,667 | ) | ||
|
|
|
|||
| Total investment income |
13,913,590 | |||
|
|
|
|||
| EXPENSES |
| |||
| Investment advisory |
95,105 | |||
| Custodian |
213,531 | |||
| Accounting services |
188,467 | |||
| Professional |
64,614 | |||
| Directors |
28,191 | |||
| Printing |
2,901 | |||
| Miscellaneous |
3,595 | |||
|
|
|
|||
| Total expenses |
596,404 | |||
| Less fees waived and/or reimbursed by the Manager |
(114,964 | ) | ||
|
|
|
|||
| Total expenses after fees waived and/or reimbursed |
481,440 | |||
|
|
|
|||
| Net investment income |
13,432,150 | |||
|
|
|
|||
| REALIZED AND UNREALIZED GAIN (LOSS) |
| |||
| Net realized gain (loss) from: |
| |||
| Investments — unaffiliated |
25,863,967 | |||
| Investments — affiliated |
(11,052 | ) | ||
| Futures contracts |
1,413,110 | |||
|
|
|
|||
| 27,266,025 | ||||
|
|
|
|||
| Net change in unrealized appreciation (depreciation) on: |
||||
| Investments — unaffiliated |
102,344,649 | |||
| Investments — affiliated |
237,986 | |||
| Futures contracts |
39,536 | |||
|
|
|
|||
| 102,622,171 | ||||
|
|
|
|||
| Net realized and unrealized gain |
129,888,196 | |||
|
|
|
|||
| NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS |
$ | 143,320,346 | ||
|
|
|
|||
See notes to financial statements.
| 64 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
Statement of Changes in Net Assets
| Master Small Cap Index Series | ||||||||
| Year Ended December 31, | ||||||||
| 2017 | 2016 | |||||||
| INCREASE (DECREASE) IN NET ASSETS |
| |||||||
| OPERATIONS |
| |||||||
| Net investment income |
$ | 13,432,150 | $ | 8,078,099 | ||||
| Net realized gain |
27,266,025 | 2,722,256 | ||||||
| Net change in unrealized appreciation (depreciation) |
102,622,171 | 108,591,011 | ||||||
|
|
|
|
|
|||||
| Net increase in net assets resulting from operations |
143,320,346 | 119,391,366 | ||||||
|
|
|
|
|
|||||
| CAPITAL TRANSACTIONS |
| |||||||
| Proceeds from contributions |
800,555,671 | 368,640,654 | ||||||
| Value of withdrawals |
(332,410,762 | ) | (286,783,928 | ) | ||||
|
|
|
|
|
|||||
| Net increase in net assets derived from capital share transactions |
468,144,909 | 81,856,726 | ||||||
|
|
|
|
|
|||||
| NET ASSETS |
| |||||||
| Total increase in net assets |
611,465,255 | 201,248,092 | ||||||
| Beginning of year |
666,690,007 | 465,441,915 | ||||||
|
|
|
|
|
|||||
| End of year |
$ | 1,278,155,262 | $ | 666,690,007 | ||||
|
|
|
|
|
|||||
See notes to financial statements.
| FINANCIAL STATEMENTS | 65 |
| Master Small Cap Index Series | ||||||||||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
| Total Return |
| |||||||||||||||||||
| Total return |
14.69 | % | 21.49 | % | (4.33 | )% | 5.05 | % | 39.11 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Ratios to Average Net Assets |
| |||||||||||||||||||
| Total expenses |
0.06 | % | 0.07 | %(a) | 0.08 | % | 0.09 | % | 0.07 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total expenses after fees waived and/or reimbursed and/or paid indirectly |
0.05 | % | 0.06 | %(a) | 0.07 | % | 0.08 | % | 0.06 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Net investment income |
1.41 | % | 1.49 | %(a) | 1.39 | % | 1.45 | % | 1.46 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Supplemental Data |
| |||||||||||||||||||
| Net assets, end of year (000) |
$ | 1,278,155 | $ | 666,690 | $ | 465,442 | $ | 700,935 | $ | 859,398 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Portfolio turnover rate |
30 | % | 39 | % | 37 | % | 21 | % | 22 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| (a) | Excludes expenses incurred indirectly of 0.01% as a result of the series’ investments in underlying funds. |
See notes to financial statements.
| 66 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
| Notes to Financial Statements | Master Small Cap Index Series |
| 1. | ORGANIZATION |
Master Small Cap Index Series (“Master Small Cap Index” or the “Series”) is a series of Quantitative Master Series LLC (the “Master LLC”) which is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. The Master LLC is classified as diversified. The Series Limited Liability Company Agreement permits the Board of Directors of the Master LLC ( the “Board”) to issue non-transferable interests, subject to certain limitations.
The Series, together with certain other registered investment companies advised by BlackRock Advisors, LLC ( the “Manager”) or its affiliates, is included in a complex of open-end funds referred to as the Equity-Liquidity Complex.
| 2. | SIGNIFICANT ACCOUNTING POLICIES |
The financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which may require management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. The Series is considered an investment company under U.S. GAAP and follows the accounting and reporting guidance applicable to investment companies. Below is a summary of significant accounting policies:
Investment Transactions and Income Recognition: For financial reporting purposes, investment transactions are recorded on the dates the transactions are entered into (the “trade dates”). Realized gains and losses on investment transactions are determined on the identified cost basis. Dividend income is recorded on the ex-dividend date. Dividends from foreign securities where the ex-dividend date may have passed are subsequently recorded when the Series is informed of the ex-dividend date. Under the applicable foreign tax laws, a withholding tax at various rates may be imposed on capital gains, dividends and interest. Upon notification from issuers, some of the dividend income received from a real estate investment trust may be redesignated as a reduction of cost of the related investment and/or realized gain.
Foreign Currency Translation: The Series’ books and records are maintained in U.S. dollars. Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates determined as of the close of trading on the New York Stock Exchange (“NYSE”). Purchases and sales of investments are recorded at the rates of exchange prevailing on the respective dates of such transactions. Generally, when the U.S. dollar rises in value against a foreign currency, the investments denominated in that currency will lose value; the opposite effect occurs if the U.S. dollar falls in relative value.
The Series does not isolate the portion of the results of operations arising as a result of changes in the exchange rates from the changes in the market prices of investments held or sold for financial reporting purposes. Accordingly, the effects of changes in exchange rates on investments are not segregated in the Statement of Operations from the effects of changes in market prices of those investments, but are included as a component of net realized and unrealized gain (loss) from investments. The Series reports realized currency gains (losses) on foreign currency related transactions as components of net realized gain (loss) for financial reporting purposes, whereas such components are generally treated as ordinary income for U.S. federal income tax purposes.
Segregation and Collateralization: In cases where the Series enters into certain investments (e.g., futures contracts) that would be treated as “senior securities” for 1940 Act purposes, the Series may segregate or designate on its books and records cash or liquid assets having a market value at least equal to the amount of its future obligations under such investments. Doing so allows the investment to be excluded from treatment as a “senior security.” Furthermore, if required by an exchange or counterparty agreement, the Series may be required to deliver/deposit cash and/or securities to/with an exchange, or broker-dealer or custodian as collateral for certain investments or obligations.
Indemnifications: In the normal course of business, the Series enters into contracts that contain a variety of representations that provide general indemnification. The Series’ maximum exposure under these arrangements is unknown because it involves future potential claims against the Series, which cannot be predicted with any certainty.
Other: Expenses directly related to the Series are charged to the Series. Other operating expenses shared by several funds, including other funds managed by the Manager, are prorated among those funds on the basis of relative net assets or other appropriate methods.
| 3. | INVESTMENT VALUATION AND FAIR VALUE MEASUREMENTS: |
Investment Valuation Policies: The Series’ investments are valued at fair value (also referred to as “market value” within the financial statements) as of the close of trading on the NYSE (generally 4:00 p.m., Eastern time) (or if the reporting date falls on a day the NYSE is closed, investments are valued at fair value as of the period end). U.S. GAAP defines fair value as the price the Series would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. The Series determines the fair values of its financial instruments using various independent dealers or pricing services under policies approved by the Board. The BlackRock Global Valuation Methodologies Committee (the “Global Valuation Committee”) is the committee formed by management to develop global pricing policies and procedures and to oversee the pricing function for all financial instruments.
Fair Value Inputs and Methodologies: The following methods and inputs are used to establish the fair value of the Series’ assets and liabilities:
| • | Equity investments traded on a recognized securities exchange are valued at the official closing price each day, if available. For equity investments traded on more than one exchange, the official closing price on the exchange where the stock is primarily traded is used. Equity investments traded on a recognized exchange for which there were no sales on that day may be valued at the last available bid (long positions) or ask (short positions) price. |
| NOTES TO FINANCIAL STATEMENTS | 67 |
| Notes to Financial Statements (continued) | Master Small Cap Index Series |
| • | Generally, trading in foreign instruments is substantially completed each day at various times prior to the close of trading on the NYSE. Occasionally, events affecting the values of such instruments may occur between the foreign market close and the close of trading on the NYSE that may not be reflected in the computation of the Series’ net assets. Each business day, the Series uses a pricing service to assist with the valuation of certain foreign exchange-traded equity securities and foreign exchange-traded and over-the-counter (“OTC”) options (the “Systematic Fair Value Price”). Using current market factors, the Systematic Fair Value Price is designed to value such foreign securities and foreign options at fair value as of the close of trading on the NYSE, which follows the close of the local markets. |
| • | Investments in open-end U.S. mutual funds are valued at net asset value (“NAV”) each business day. |
| • | The Series values its investment in SL Liquidity Series, LLC, Money Market Series (the “Money Market Series”) at fair value, which is ordinarily based upon its pro rata ownership in the underlying fund’s net assets. The Money Market Series seeks current income consistent with maintaining liquidity and preserving capital. Although the Money Market Series is not registered under the 1940 Act, its investments may follow the parameters of investments by a money market fund that is subject to Rule 2a-7 under the 1940 Act. |
| • | Futures contracts traded on exchanges are valued at their last sale price. |
If events (e.g., a company announcement, market volatility or a natural disaster) occur that are expected to materially affect the value of such investments, or in the event that the application of these methods of valuation results in a price for an investment that is deemed not to be representative of the market value of such investment, or if a price is not available, the investment will be valued by the Global Valuation Committee, or its delegate, in accordance with a policy approved by the Board as reflecting fair value (“Fair Valued Investments”). The fair valuation approaches that may be used by the Global Valuation Committee will include market approach, income approach and cost approach. Valuation techniques such as discounted cash flow, use of market comparables and matrix pricing are types of valuation approaches and are typically used in determining fair value. When determining the price for Fair Valued Investments, the Global Valuation Committee, or its delegate, seeks to determine the price that the Series might reasonably expect to receive or pay from the current sale or purchase of that asset or liability in an arm’s-length transaction. Fair value determinations shall be based upon all available factors that the Global Valuation Committee, or its delegate, deems relevant and consistent with the principles of fair value measurement.
The Global Valuation Committee, or its delegate, employs various methods for calibrating valuation approaches for investments where an active market does not exist, including regular due diligence of the Series’ pricing vendors, regular reviews of key inputs and assumptions, transactional back-testing or disposition analysis to compare unrealized gains and losses to realized gains and losses, reviews of missing or stale prices and large movements in market values and reviews of any market related activity. The pricing of all Fair Valued Investments is subsequently reported to the Board or a committee thereof on a quarterly basis. As a result of the inherent uncertainty in valuation of these investments, the fair values may differ from the values that would have been used had an active market existed.
For investments in equity or debt issued by privately held companies or funds (“Private Company” or collectively, the “Private Companies”) and other Fair Valued Investments, the fair valuation approaches that are used by third party pricing services utilize one or a combination of, but not limited to, the following inputs.
| Standard Inputs Generally Considered By Third Party Pricing Services | ||
| Market approach |
(i) recent market transactions, including subsequent rounds of financing, in the underlying investment or comparable issuers; (ii) recapitalizations and other transactions across the capital structure; and (iii) market multiples of comparable issuers. | |
| Income approach |
(i) future cash flows discounted to present and adjusted as appropriate for liquidity, credit, and/or market risks; (ii) quoted prices for similar investments or assets in active markets; and (iii) other risk factors, such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks, recovery rates, liquidation amounts and/or default rates. | |
| Cost approach |
(i) audited or unaudited financial statements, investor communications and financial or operational metrics issued by the Private Company; (ii) changes in the valuation of relevant indices or publicly traded companies comparable to the Private Company; (iii) relevant news and other public sources; and (iv) known secondary market transactions in the Private Company’s interests and merger or acquisition activity in companies comparable to the Private Company. |
Investments in series of preferred stock issued by Private Companies are typically valued utilizing market approach in determining the enterprise value of the company. Such investments often contain rights and preferences that differ from other series of preferred and common stock of the same issuer. Valuation techniques such as an option pricing model (“OPM”), a probability weighted expected return model (“PWERM”) or a hybrid of those techniques are used in allocating enterprise value of the company, as deemed appropriate under the circumstances. The use of OPM and PWERM techniques involve a determination of the exit scenarios of the investment in order to appropriately allocate the enterprise value of the company among the various parts of its capital structure.
The Private Companies are not subject to the public company disclosure, timing, and reporting standards as other investments held by the Series. Typically, the most recently available information by a Private Company is as of a date that is earlier than the date the Series is calculating its NAV. This factor may result in a difference between the value of the investment and the price the Series could receive upon the sale of the investment.
Fair Value Hierarchy: Various inputs are used in determining the fair value of investments and derivative financial instruments. These inputs to valuation techniques are categorized into a fair value hierarchy consisting of three broad levels for financial statement purposes as follows:
| • | Level 1 — Unadjusted price quotations in active markets/exchanges for identical assets or liabilities that the Series has the ability to access |
| • | Level 2 — Other observable inputs (including, but not limited to, quoted prices for similar assets or liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market–corroborated inputs) |
| 68 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
| Notes to Financial Statements (continued) | Master Small Cap Index Series |
| • | Level 3 — Unobservable inputs based on the best information available in the circumstances, to the extent observable inputs are not available (including the Series’ own assumptions used in determining the fair value of investments and derivative financial instruments) |
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3. The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the fair value hierarchy classification is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Investments classified within Level 3 have significant unobservable inputs used by the Global Valuation Committee in determining the price for Fair Valued Investments. Level 3 investments include equity or debt issued by Private Companies. There may not be a secondary market, and/or there are a limited number of investors. Level 3 investments may also be adjusted to reflect illiquidity and/or non-transferability, with the amount of such discount estimated by the Global Valuation Committee in the absence of market information.
Changes in valuation methodologies may result in transfers into or out of an assigned level within the hierarchy. In accordance with the Series’ policy, transfers between different levels of the fair value hierarchy are deemed to have occurred as of the beginning of the reporting period. The categorization of a value determined for investments and derivative financial instruments is based on the pricing transparency of the investments and derivative financial instruments and is not necessarily an indication of the risks associated with investing in those securities.
| 4. | SECURITIES AND OTHER INVESTMENTS: |
Securities Lending: The Series may lend its securities to approved borrowers, such as brokers, dealers and other financial institutions. The borrower pledges and maintains with the Series collateral consisting of cash, an irrevocable letter of credit issued by a bank, or securities issued or guaranteed by the U.S. Government. The initial collateral received by the Series is required to have a value of at least 102% of the current value of the loaned securities for securities traded on U.S. exchanges and a value of at least 105% for all other securities. The collateral is maintained thereafter at a value equal to at least 100% of the current market value of the securities on loan. The market value of the loaned securities is determined at the close of each business day of the Series and any additional required collateral is delivered to the Series, or excess collateral returned by the Series, on the next business day. During the term of the loan, the Series is entitled to all distributions made on or in respect of the loaned securities, but does not receive interest income on securities received as collateral. 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 market value of any securities on loan, all of which were classified as common stocks in the Series’ Schedule of Investments, and the value of any related collateral are shown separately in the Statement of Assets and Liabilities as a component of investments at value-unaffiliated, and collateral on securities loaned at value, respectively. As of period end, any securities on loan were collateralized by cash and/or U.S. Government obligations. Cash collateral invested by the securities lending agent, BlackRock Institutional Trust Company, N.A. (“BTC”), if any, is disclosed in the Schedule of Investments.
Securities lending transactions are entered into by the Series under Master Securities Lending Agreements (each, an “MSLA”), which provide the right, in the event of default (including bankruptcy or insolvency), for the non-defaulting party to liquidate the collateral and calculate a net exposure to the defaulting party or request additional collateral. In the event that a borrower defaults, the Series, as lender, would offset the market value of the collateral received against the market value of the securities loaned. When the value of the collateral is greater than that of the market value of the securities loaned, the lender is left with a net amount payable to the defaulting party. However, bankruptcy or insolvency laws of a particular jurisdiction may impose restrictions on or prohibitions against such a right of offset in the event of an MSLA counterparty’s bankruptcy or insolvency. Under the MSLA, absent an event of default, the borrower can resell or re-pledge the loaned securities, and the Series can reinvest cash collateral received in connection with loaned securities. Upon an event of default, the parties’ obligations to return the securities or collateral to the other party are extinguished, and the parties can resell or re-pledge the loaned securities or the collateral received in connection with the loaned securities in order to satisfy the defaulting party’s net payment obligation for all transactions under the MSLA. The defaulting party remains liable for any deficiency.
As of period end, the following table is a summary of the Series’ securities lending agreements by counterparty which are subject to offset under an MSLA:
| Counterparty | Securities Loaned at Value |
Cash Collateral Received (a) |
Net Amount |
|||||||||
| Citigroup Global Markets, Inc. |
$ | 23,785,657 | $ | (23,785,657 | ) | $ | — | |||||
| HSBC Bank PLC |
2,894,973 | (2,847,385 | ) | 47,588 | ||||||||
| Jefferies LLC |
4,303,722 | (4,303,722 | ) | — | ||||||||
| JP Morgan Securities LLC |
41,308,783 | (41,308,783 | ) | — | ||||||||
| Merrill Lynch, Pierce, Fenner & Smith, Inc. |
25,926,403 | (25,926,403 | ) | — | ||||||||
|
|
|
|
|
|
|
|||||||
| $ | 98,219,539 | $ | (98,171,950 | ) | $ | 47,588 | ||||||
|
|
|
|
|
|
|
|||||||
| (a) | Cash collateral with a value of $102,288,350 has been received in connection with securities lending agreements. Collateral received in excess of the value of securities loaned from the individual counterparty is not shown for financial reporting purposes. |
The risks of securities lending include the risk that the borrower may not provide additional collateral when required or may not return the securities when due. To mitigate these risks, the Series benefits from a borrower default indemnity provided by BlackRock, Inc. (“BlackRock”). BlackRock’s indemnity allows for full replacement of the securities loaned if the collateral received does not cover the value on the securities loaned in the event of borrower default. The Series could incur a loss if the value of an investment purchased with cash collateral falls below the market value of loaned securities or if the value of an investment purchased with cash collateral falls below the value of the original cash collateral received.
| NOTES TO FINANCIAL STATEMENTS | 69 |
| Notes to Financial Statements (continued) | Master Small Cap Index Series |
| 5. | DERIVATIVE FINANCIAL INSTRUMENTS |
The Series engages in various portfolio investment strategies using derivative contracts both to increase the returns of the Series and/or to manage its exposure to certain risks such as credit risk, equity risk, interest rate risk, foreign currency exchange rate risk, commodity price risk or other risks (e.g., inflation risk). Derivative financial instruments categorized by risk exposure are included in the Schedule of Investments. These contracts may be transacted on an exchange or OTC.
Futures Contracts: Futures contracts are purchased or sold to gain exposure to, or manage exposure to, changes in interest rates (interest rate risk), changes in the value of equity securities (equity risk) or foreign currencies (foreign currency exchange rate risk).
Futures contracts are agreements between the Series and a counterparty to buy or sell a specific quantity of an underlying instrument at a specified price and on a specified date. Depending on the terms of a contract, it is settled either through physical delivery of the underlying instrument on the settlement date or by payment of a cash amount on the settlement date. Upon entering into a futures contract, the Series is required to deposit initial margin with the broker in the form of cash or securities in an amount that varies depending on a contract’s size and risk profile. The initial margin deposit must then be maintained at an established level over the life of the contract.
Securities deposited as initial margin are designated in the Schedule of Investments and cash deposited, if any, is shown as cash pledged for futures contracts in the Statement of Assets and Liabilities. Pursuant to the contract, the Series agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in market value of the contract (“variation margin”). Variation margin is recorded as unrealized appreciation (depreciation) and, if any, shown as variation margin receivable (or payable) on futures contracts in the Statement of Assets and Liabilities. When the contract is closed, a realized gain or loss is recorded in the Statement of Operations equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. The use of futures contracts involves the risk of an imperfect correlation in the movements in the price of futures contracts and interest, foreign currency exchange rates or underlying assets.
| 6. | INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES |
The PNC Financial Services Group, Inc. is the largest stockholder and an affiliate of BlackRock, Inc. (“BlackRock”) for 1940 Act purposes.
Investment Advisory: The Master LLC, on behalf of the Series, entered into an Investment Advisory Agreement with the Manager, the Series’ investment adviser, an indirect, wholly-owned subsidiary of BlackRock, to provide investment advisory and administrative services. The Manager is responsible for the management of the Series’ portfolio and provides the personnel, facilities, equipment and certain other services necessary to the operations of the Series.
With respect to the Series, the Manager entered into a separate sub-advisory agreement with Blackrock Fund Advisors (“BFA”), an affiliate of the Manager. The Manager pays BFA, for services it provides, for that portion of the Series for which BFA acts as sub-adviser a monthly fee that is a percentage of the investment advisory fees paid by the Series to the Manager.
For such services, the Series pays the Manager a monthly fee at an annual rate equal to 0.01% of the average daily value of the Series’ net assets.
Waivers and Reimbursements: The Manager voluntarily agreed to waive its investment advisory fees by the amount of investment advisory fees the Series pays to the Manager indirectly through its investment in affiliated money market funds (the “affiliated money market fund waiver”). The amount of waivers and/or reimbursements of fees and expenses made pursuant to the expense limitation caps, will be reduced by the amount of the affiliated money market fund waiver. This amount is included in fees waived and/or reimbursed by the Manager in the Statement of Operations. For the year ended December 31, 2017, the amount waived was $12,237.
The Manager has contractually agreed to waive its investment advisory fee with respect to any portion of the Series’ assets invested in affiliated equity and fixed-income mutual funds and affiliated exchange-traded funds that have a contractual management fee through April 30, 2018. The contractual agreement may be terminated upon 90 days’ notice by a majority of the non-interested directors of the Master LLC or by a vote of a majority of the outstanding voting securities of the Series. This amount is included in fees waived and/or reimbursed by the Manager in the Statement of Operations. For the year ended December 31, 2017, the Manager waived $442 in investment advisory fees pursuant to this arrangement.
For the year ended December 31, 2017, the Series reimbursed the Manager for certain accounting services, which is included in accounting services in the Statement of Operations. The reimbursement was $8,698.
With respect to the Series, the Manager contractually agreed to waive and/or reimburse fees or expenses in order to limit expenses, excluding interest expense, dividend expense, tax expense, acquired fund fees and expenses, and certain other fund expenses, which constitute extraordinary expenses not incurred in the ordinary course of the Series’ business (“expense limitation”). The expense limitation as a percentage of average daily net assets is 0.07%.
The Manager has agreed not to reduce or discontinue this contractual expense limitation prior to May 1, 2018, unless approved by the Board, including a majority of the independent directors who are not “interested persons” of the Series, as defined in the 1940 Act (“Independent Directors”) or by a vote of a majority of the outstanding voting securities of the Series.
Securities Lending: The U.S. Securities and Exchange Commission has issued an exemptive order which permits BTC, an affiliate of the Manager, to serve as securities lending agent for the Series, subject to applicable conditions. As securities lending agent, BTC bears all operational costs directly related to securities lending. The Series is responsible for fees in connection with the investment of cash collateral received for securities on loan (the “collateral investment expenses”). The cash collateral is invested in a money market fund managed by the Manager or its affiliates. However, BTC has agreed to reduce the amount of securities lending income it receives in order to effectively limit the collateral investment fees the Series bears to an annual rate of 0.04%. Such money market fund shares will not be subject to a sales load, distribution fee or service fee. The money market fund in which the cash collateral has been invested may, under certain circumstances, impose a liquidity fee of up to 2% of the value redeemed or temporarily restrict redemptions for up to 10 business days during a 90 day period, in the event that the money market fund’s weekly liquid assets fall below certain thresholds.
| 70 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
| Notes to Financial Statements (continued) | Master Small Cap Index Series |
Securities lending income is equal to the total of income earned from the reinvestment of cash collateral, net of fees and other payments to and from borrowers of securities, and less the collateral investment fees. The Series retains a portion of securities lending income and remits a remaining portion to BTC as compensation for its services as securities lending agent.
Pursuant to a securities lending such agreement, the Series retains 71.5% of securities lending income (which excludes collateral investment fees); and this amount can never be less than 65% of the total of securities lending income plus the collateral investment fees. Under the securities lending program, the Series is categorized into specific asset classes. The determination of the Series’ asset class category (fixed-income, domestic equity, international equity, or fund of funds), each of which may be subject to a different fee arrangement, is based on a methodology agreed to between the Master LLC and BTC. In addition, commencing the business day following the date that the aggregate securities lending income earned across certain funds in the Equity-Liquidity Complex in a calendar year exceeds a specified threshold, the Series, pursuant to the securities lending agreement, will receive for the remainder of the calendar year securities lending income as follows: 75% of securities lending income; and this amount can never be less than 65% of the sum of securities lending income plus collateral investment fees.
Prior to June 12, 2017, BlackRock Investment Management, LLC (“BIM”) was the Series’ securities lending agent.
Prior to June 12, 2017, the Series retains 80% of securities lending income. In addition, commencing the business day following the date that the aggregate securities lending income earned across certain funds in the Equity-Liquidity Complex in a calendar year exceeds a specified threshold, the Series, pursuant to the securities lending agreement, will retain for the remainder of the calendar year securities lending income in an amount equal to 85% of securities lending income.
The share of securities lending income earned by the Series is shown as securities lending — affiliated — net in the Statement of Operations. For the year ended December 31, 2017, the Series paid BIM $113,280 and BTC $337,840 for securities lending agent services.
Interfund Lending: In accordance with an exemptive order (the “Order”) from the SEC, the Series may participate in a joint lending and borrowing facility for temporary purposes (the “Interfund Lending Program”), subject to compliance with the terms and conditions of the Order, and to the extent permitted by the Series’ investment policies and restrictions. The Series is currently permitted to borrow and lend under the Interfund Lending Program.
A lending BlackRock fund may lend in aggregate up to 15% of its net assets, but may not lend more than 5% of its net assets to any one borrowing fund through the Interfund Lending Program. A borrowing BlackRock fund may not borrow through the Interfund Lending Program or from any other source more than 33 1/3% of its total assets (or any lower threshold provided for by the fund’s investment restrictions). If a borrowing BlackRock fund’s total outstanding borrowings exceed 10% of its total assets, each of its outstanding interfund loans will be subject to collateralization of at least 102% of the outstanding principal value of the loan. All interfund loans are for temporary or emergency purposes and the interest rate to be charged will be the average of the highest current overnight repurchase agreement rate available to a lending fund and the bank loan rate, as calculated according to a formula established by the Board.
During the year ended December 31, 2017, the Series did not participate in the Interfund Lending Program.
Directors and Officers: Certain directors and/or officers of the Master LLC are directors and/or officers of BlackRock or its affiliates.
Other Transactions: During the year ended December 31, 2017, the Series received a reimbursement of $13,478 from an affiliate, which is included in other income — affiliated in the Statement of Operations, related to an operating error.
The Series may purchase securities from, or sell securities to, an affiliated fund provided the affiliation is due solely to having a common investment adviser, common officers, or common directors. For the year ended December 31, 2017, the purchase and sale transactions and any net realized gains (losses) with an affiliated fund in compliance with Rule 17a-7 under the 1940 Act were as follows:
| Purchases | Sales | Net Realized Gain (Loss) | ||||||||||||
| $ | 32,647,437 | $ | 37,202,403 | $ | 8,129,003 | |||||||||
| 7. | PURCHASE AND SALES |
For the year ended December 31, 2017, purchases and sales of investments, excluding short-term securities were $768,773,337 and $279,311,170, respectively.
| 8. | INCOME TAX INFORMATION |
The Series is classified as a partnership for U.S. federal income tax purposes. As such, each investor in the Series is treated as the owner of its proportionate share of net assets, income, expenses and realized and unrealized gains and losses of the Series. Therefore, no U.S. federal income tax provision is required. It is intended that the Series assets will be managed so an investor in the Series can satisfy the requirements of Subchapter M of the Internal Revenue Code of 1986, as amended.
The Series files U.S. federal and various state and local tax returns. No income tax returns are currently under examination. The statute of limitations on the Series’ U.S. federal tax returns generally remains open for each of the four years ended December 31, 2017. The statutes of limitations on the Series’ state and local tax returns may remain open for an additional year depending upon the jurisdiction.
Management has analyzed tax laws and regulations and their application to the Series as of December 31,2017 inclusive of the open tax return years, and does not believe that there are any uncertain tax positions that require recognition of a tax liability in the Series’ financial statements.
| NOTES TO FINANCIAL STATEMENTS | 71 |
| Notes to Financial Statements (continued) | Master Small Cap Index Series |
As of December 31, 2017, gross unrealized appreciation and depreciation for investments and derivative based on cost for U.S. federal income tax purposes were as follows:
| Tax cost |
$ | 1,134,924,052 | ||
|
|
|
|||
| Gross unrealized appreciation |
$ | 299,634,113 | ||
| Gross unrealized depreciation |
(55,378,036 | ) | ||
|
|
|
|||
| Net unrealized appreciation (depreciation) |
$ | 244,256,077 | ||
|
|
|
| 9. | BANK BORROWINGS |
The Master LLC, on behalf of the Series, along with certain other funds managed by the Manager and its affiliates (“Participating Funds”), is a party to a 364-day, $2.1 billion credit agreement with a group of lenders. Under this agreement, the Series may borrow to fund shareholder redemptions. Excluding commitments designated for certain individual funds, the Participating Funds, including the Series, can borrow up to an aggregate commitment amount of $1.6 billion at any time outstanding, subject to asset coverage and other limitations as specified in the agreement. The credit agreement has the following terms: a fee of 0.12% per annum on unused commitment amounts and interest at a rate equal to the higher of (a) one-month LIBOR (but, in any event, not less than 0.00%) on the date the loan is made plus 0.80% per annum or (b) the Fed Funds rate (but, in any event, not less than 0.00%) in effect from time to time plus 0.80% per annum on amounts borrowed. The agreement expires in April 2018 unless extended or renewed. Participating Funds paid administration, legal and arrangement fees, which, if applicable, are included in miscellaneous expenses in the Statement of Operations. These fees were allocated among such funds based upon portions of the aggregate commitment available to them and relative net assets of Participating Funds. During the year ended December 31, 2017, the Series did not borrow under the credit agreement.
| 10. | PRINCIPAL RISKS |
In the normal course of business, the Series invests in securities or other instruments and may enter into certain transactions, and such activities subject the Series to various risks, including among others, fluctuations in the market (market risk) or failure of an issuer to meet all of its obligations. The value of securities or other instruments may also be affected by various factors, including, without limitation: (i) the general economy; (ii) the overall market as well as local, regional or global political and/or social instability; (iii) regulation, taxation or international tax treaties between various countries; or (iv) currency, interest rate and price fluctuations. The Series’ prospectus provides details of the risks to which the Series is subject.
The Series may be exposed to additional risks when reinvesting cash collateral in money market funds that do not seek to maintain a stable NAV per share of $1.00 and which may be subject to redemption gates or liquidity fees under certain circumstances.
Valuation Risk: The market values of equities, such as common stocks and preferred securities or equity related investments, such as futures and options, may decline due to general market conditions which are not specifically related to a particular company. They may also decline due to factors which affect a particular industry or industries. The Series may invest in illiquid investments and may experience difficulty in selling those investments in a timely manner at the price that it believes the investments are worth. Prices may fluctuate widely over short or extended periods in response to company, market or economic news. Markets also tend to move in cycles, with periods of rising and falling prices. This volatility may cause the Series’ NAV to experience significant increases or decreases over short periods of time. If there is a general decline in the securities and other markets, the NAV of the Series may lose value, regardless of the individual results of the securities and other instruments in which the Series invests.
The price the Series could receive upon the sale of any particular portfolio investment may differ from the Series’ valuation of the investment, particularly for securities that trade in thin or volatile markets or that are valued using a fair valuation technique or a price provided by an independent pricing service. Changes to significant unobservable inputs and assumptions (i.e., publicly traded company multiples, growth rate, time to exit) due to the lack of observable inputs may significantly impact the resulting fair value and therefore the Series’ results of operations. As a result, the price received upon the sale of an investment may be less than the value ascribed by the Series, and the Series could realize a greater than expected loss or lesser than expected gain upon the sale of the investment. The Series’ ability to value its investments may also be impacted by technological issues and/or errors by pricing services or other third party service providers.
Counterparty Credit Risk: The Series may be exposed to counterparty credit risk, or the risk that an entity may fail to or be unable to perform on its commitments related to unsettled or open transactions. The Series manages counterparty credit risk by entering into transactions only with counterparties that the Manager believes have the financial resources to honor their obligations and by monitoring the financial stability of those counterparties. Financial assets, which potentially expose the Series to market, issuer and counterparty credit risks, consist principally of financial instruments and receivables due from counterparties. The extent of the Series’ exposure to market, issuer and counterparty credit risks with respect to these financial assets is approximately their value recorded in the Statement of Assets and Liabilities, less any collateral held by the Series.
A derivative contract may suffer a mark-to-market loss if the value of the contract decreases due to an unfavorable change in the market rates or values of the underlying instrument. Losses can also occur if the counterparty does not perform under the contract.
With exchange-traded futures, there is less counterparty credit risk to the Series since the exchange or clearinghouse, as counterparty to such instruments, guarantees against a possible default. The clearinghouse stands between the buyer and the seller of the contract; therefore, credit risk is limited to failure of the clearinghouse. While offset rights may exist under applicable law, the Series does not have a contractual right of offset against a clearing broker or clearinghouse in the event of a default (including the bankruptcy or insolvency). Additionally, credit risk exists in exchange-traded futures with respect to initial and variation margin that is held in a clearing broker’s customer accounts. While clearing brokers are required to segregate customer margin from their own assets, in the event that a clearing broker becomes insolvent or goes into bankruptcy and at that time there is a shortfall in the aggregate amount of margin held by the clearing broker for all its clients, typically the shortfall would be allocated on a pro rata basis across all the clearing broker’s customers, potentially resulting in losses to the Series.
| 11. | SUBSEQUENT EVENTS |
Management has evaluated the impact of all subsequent events on the Series through the date the financial statements were issued and has determined that there were no subsequent events requiring adjustment or additional disclosure in the financial statements.
| 72 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
| Report of Independent Registered Public Accounting Firm |
To the Investors of Master Small Cap Index Series and the Board of Directors of Quantitative Master Series LLC:
Opinion on the Financial Statements and Financial Highlights
We have audited the accompanying statement of assets and liabilities, including the schedule of investments of Master Small Cap Index Series of Quantitative Master Series LLC (the “Series”), as of December 31, 2017, the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, the financial highlights for each of the five years in the period then ended, and the related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of the Series as of December 31, 2017 and the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements and financial highlights are the responsibility of the Series’ management. Our responsibility is to express an opinion on the Series’ financial statements and financial highlights based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Series in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. The Series is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Series’ internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial highlights. Our procedures included confirmation of securities owned as of December 31, 2017, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
Deloitte & Touche LLP
Boston, Massachusetts
February 23, 2018
We have served as the auditor of one or more BlackRock investment companies since 1992.
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | 73 |
Director and Officer Information
| Independent Directors | ||||||||
| Name Year of Birth (a)(b) |
Position(s) Held (Length of Service) (c) |
Principal Occupation(s) During Past Five Years | Number of BlackRock- Advised Registered Investment Companies (“RICs”) Consisting of Investment Portfolios (“Portfolios”) Overseen |
Public Company and Investment Company Directorships During Past Five Years | ||||
| Rodney D. Johnson 1941 |
Chair of the Board and Director (Since 2007) |
President, Fairmount Capital Advisors, Inc. from 1987 to 2013; Member of the Archdiocesan Investment Committee of the Archdiocese of Philadelphia from 2004 to 2012; Director, The Committee of Seventy (civic) from 2006 to 2012; Director, Fox Chase Cancer Center from 2004 to 2011; Director, The Mainstay (non-profit) since 2016. | 26 RICs consisting of 144 Portfolios | None | ||||
| Mark Stalnecker 1951 |
Chair Elect of the Board (since 2018) (d) (Since 2015) |
Chief Investment Officer, University of Delaware from 1999 to 2013; Trustee, Winterthur Museum and Country Estate from 2001 to 2015; Member of the Investment Committee, Delaware Public Employees’ Retirement System since 2002; Member of the Investment Committee, Christiana Care Health System since 2009; Member of the Investment Committee, Delaware Community Foundation from 2013 to 2014; Director, SEI Private Trust Co. from 2001 to 2014. | 26 RICs consisting of 144 Portfolios | None | ||||
| Susan J. Carter 1956 |
Director (Since 2016) |
Director, Pacific Pension Institute since 2014; Advisory Board Member, Center for Private Equity and Entrepreneurship at Tuck School of Business since 1997; Senior Advisor, Commonfund Capital, Inc. (“CCI”) (investment adviser) in 2015; Chief Executive Officer, CCI from 2013 to 2014; President & Chief Executive Officer, CCI from 1997 to 2013; Advisory Board Member, Girls Who Invest since 2015; Advisory Board Member, Bridges Ventures since 2016; Trustee, Financial Accounting Foundation since 2017. | 26 RICs consisting of 144 Portfolios | None | ||||
| Collette Chilton 1958 |
Director (Since 2015) |
Chief Investment Officer, Williams College since 2006; Chief Investment Officer, Lucent Asset Management Corporation from 1998 to 2006. | 26 RICs consisting of 144 Portfolios | None | ||||
| Neil A. Cotty 1954 |
Director (Since 2016) |
Bank of America Corporation from 1996 to 2015, serving in various senior finance leadership roles, including Chief Accounting Officer, from 2009 to 2015, Chief Financial Officer of Global Banking, Markets and Wealth Management from 2008 to 2009, Chief Accounting Officer from 2004 to 2008, Chief Financial Officer of Consumer Bank from 2003 to 2004, Chief Financial Officer of Global Corporate Investment Bank from 1999 to 2002. | 26 RICs consisting of 144 Portfolios | None | ||||
| Cynthia A. Montgomery 1952 |
Director (Since 2007) |
Professor, Harvard Business School since 1989; Director, McLean Hospital from 2005 to 2012. | 26 RICs consisting of 144 Portfolios | Newell Rubbermaid, Inc. (manufacturing) | ||||
| Joseph P. Platt 1947 |
Director (Since 2007) |
General Partner, Thorn Partners, LP (private investments) since 1998; Director, WQED Multi-Media (public broadcasting not-for-profit) since 2001; Chair, Basic Health International (non-profit) since 2015. | 26 RICs consisting of 144 Portfolios | Greenlight Capital Re, Ltd. (reinsurance company); Consol Energy Inc. | ||||
| Robert C. Robb, Jr. 1945 |
Director (Since 2007) |
Partner, Lewis, Eckert, Robb and Company (management and financial consulting firm) since 1981 and Principal since 2010. | 26 RICs consisting of 144 Portfolios | None | ||||
| 74 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
Director and Officer Information (continued)
| Independent Directors | ||||||||
| Name Year of Birth (a)(b) |
Position(s) Held (Length of Service) (c) |
Principal Occupation(s) During Past Five Years | Number of BlackRock- Advised Registered Investment Companies (“RICs”) Consisting of Investment Portfolios (“Portfolios”) Overseen |
Public Company and Investment Company Directorships During Past Five Years | ||||
| Kenneth L. Urish 1951 |
Director (Since 2007) |
Managing Partner, Urish Popeck & Co., LLC (certified public accountants and consultants) since 1976; Past-Chairman of the Professional Ethics Committee of the Pennsylvania Institute of Certified Public Accountants and Committee Member thereof since 2007; Member of External Advisory Board, The Pennsylvania State University Accounting Department since founding in 2001; Principal, UP Strategic Wealth Investment Advisors, LLC since 2013; Trustee, The Holy Family Institute from 2001 to 2010; President and Trustee, Pittsburgh Catholic Publishing Associates from 2003 to 2008; Director, Inter-Tel from 2006 to 2007. | 26 RICs consisting of 144 Portfolios | None | ||||
| Claire A. Walton 1957 |
Director (Since 2016) |
Chief Operating Officer and Chief Financial Officer of Liberty Square Asset Management, LP from 1998 to 2015; General Partner of Neon Liberty Capital Management, LLC since 2003; Director, Boston Hedge Fund Group since 2009; Director, Woodstock Ski Runners since 2013; Director, Massachusetts Council on Economic Education from 2013 to 2015. | 26 RICs consisting of 144 Portfolios | None | ||||
| Frederick W. Winter 1945 |
Director (Since 2007) |
Director, Alkon Corporation since 1992; Dean Emeritus of the Joseph M. Katz School of Business, University of Pittsburgh, Dean and Professor from 1997 to 2005, Professor until 2013. | 26 RICs consisting of 144 Portfolios | None | ||||
| Interested Directors (e) | ||||||||
| Barbara G. Novick 1960 |
Director (Since 2015) |
Vice Chairman of BlackRock, Inc. since 2006; Chair of BlackRock’s Government Relations Steering Committee since 2009; Head of the Global Client Group of BlackRock, Inc. from 1988 to 2008. | 100 RICs consisting of 218 Portfolios | None | ||||
| John M. Perlowski 1964 |
Director (Since 2015)
and (Since 2010) |
Managing Director of BlackRock, Inc. since 2009; Head of BlackRock Global Accounting and Product Services 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; Advisory Director of Family Resource Network (charitable foundation) since 2009. | 127 RICs consisting of 316 Portfolios | None | ||||
| (a) The address of each Director is c/o BlackRock, Inc., 55 East 52nd Street, New York, NY 10055. (b) Independent Directors serve until their resignation, retirement, removal or death, or until December 31 of the year in which they turn 75. The Board may determine to extend the terms of Independent Directors on a case-by-case basis, as appropriate. The Board has approved extending the mandatory retirement age of Rodney D. Johnson until December 31, 2018. (c) Following the combination of Merrill Lynch Investment Managers, L.P. (“MLIM”) and BlackRock, Inc. (“BlackRock”) 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 Independent Directors as joining the Board in 2007, those Independent Directors first became members of the boards of other legacy MLIM or legacy BlackRock funds as follows: Rodney D. Johnson, 1995; Cynthia A. Montgomery, 1994; Joseph P. Platt, 1999; Robert C. Robb, Jr., 1999; Kenneth L. Urish, 1999; and Frederick W. Winter, 1999. (d) Mr. Stainecker was approved as Chair of the Board effective January 1, 2018. It is expected that, effective January 1, 2019, Mr. Stainecker will assume the position of Chair of the Board and Mr. Johnson will retire as Chair of the Board. (e) Ms. Novick and Mr. Perlowski are both “interested persons,” as defined in the 1940 Act, of the Corporation/Master LLC based on their positions with BlackRock and its affiliates. Ms. Novick and Mr. Perlowski are also board members of certain complexes of BlackRock registered open-end and closed-end funds. Ms. Novick is a board member of the BlackRock Closed-End Complex and Mr. Perlowski is also a board member of the BlackRock Equity-Bond Complex and the BlackRock Closed-End Complex. | ||||||||
| DIRECTOR AND OFFICER INFORMATION | 75 |
Director and Officer Information (continued)
| Officers Who Are Not Directors | ||||
| Name Year of Birth (a)(b) |
Position(s) Held (Length of Service) |
Principal Occupation(s) During Past Five Years | ||
| Thomas Callahan 1968 |
Vice President (Since 2016) |
Managing Director of BlackRock, Inc. since 2013; Head of BlackRock’s Global Cash Management Business since 2016; Co-Head of the Global Cash Management Business from 2014 to 2016; Deputy Head of the Global Cash Management Business from 2013 to 2014; Member of the Cash Management Group Executive Committee since 2013; Chief Executive Officer of NYSE Liffe U.S. from 2008 to 2013. | ||
| Jennifer McGovern 1977 |
Vice President (Since 2014) |
Managing Director of BlackRock, Inc. since 2016; Director of BlackRock, Inc. from 2011 to 2015; Head of Product Structure and Oversight for BlackRock’s U.S. Wealth Advisory Group since 2013; Vice President of BlackRock, Inc. from 2008 to 2010. | ||
| Neal J. Andrews 1966 |
Chief Financial Officer (Since 2007) |
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. | ||
| Jay M. Fife 1970 |
Treasurer (Since 2007) |
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. | ||
| Charles Park 1967 |
Chief Compliance Officer (Since 2014) |
Anti-Money Laundering Compliance Officer for the BlackRock-advised Funds in the Equity-Bond Complex, the Equity-Liquidity Complex and the Closed-End Complex from 2014 to 2015; Chief Compliance Officer of BlackRock Advisors, LLC and the BlackRock-advised Funds in the Equity-Bond Complex, the Equity-Liquidity Complex and the Closed-End Complex since 2014; Principal of and Chief Compliance Officer for iShares® Delaware Trust Sponsor LLC since 2012 and BlackRock Fund Advisors (“BFA”) since 2006; Chief Compliance Officer for the BFA-advised iShares® exchange traded funds since 2006; Chief Compliance Officer for BlackRock Asset Management International Inc. since 2012. | ||
| Fernanda Piedra 1969 |
Anti-Money Laundering Compliance Officer (Since 2015) |
Director of BlackRock, Inc. since 2014; Anti-Money Laundering Compliance Officer and Regional Head of Financial Crime for the Americas at BlackRock, Inc. since 2014; Head of Regulatory Changes and Remediation for the Asset Wealth Management Division of Deutsche Bank from 2010 to 2014; Vice President of Goldman Sachs (Anti-Money Laundering/Suspicious Activities Group) from 2004 to 2010. | ||
| Benjamin Archibald 1975 |
Secretary (Since 2012) |
Managing Director of BlackRock, Inc. since 2014; Director of BlackRock, Inc. from 2010 to 2013; Secretary of the iShares® exchange traded funds since 2015; Secretary of the BlackRock-advised mutual funds since 2012. | ||
| (a) The address of each Officer is c/o BlackRock, Inc., 55 East 52nd Street, New York, NY 10055. (b) Officers of the Corporation/Master LLC serve at the pleasure of the Board. | ||||
Further information about the Corporation’s/Master LLC’s Directors and Officers is available in the Fund’s Statement of Additional Information, which can be obtained without charge by calling (800) 441-7762.
| Investment Adviser and Administrator(a) | Transfer Agent | |
| BlackRock Advisors, LLC | BNY Mellon Investment Servicing (US) Inc. | |
| Wilmington, DE 19809 | Wilmington, DE 19809 | |
| Sub-Adviser | Independent Registered Public Accounting Firm | |
| BlackRock Fund Advisors | Deloitte & Touche LLP | |
| San Francisco, CA 94105 | Boston, MA 02116 | |
| Accounting Agent and Custodian | Distributor | |
| State Street Bank and Trust Company | BlackRock Investments, LLC | |
| Boston, MA 02111 | New York, NY 10022 | |
| Legal Counsel | ||
| Sidley Austin LLP | ||
| New York, NY 10019 | ||
| Address of the Funds | ||
| 100 Bellevue Parkway | ||
| Wilmington, DE 19809 |
| (a) | iShares Russell 2000 Small-Cap Index Fund. |
| 76 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
General Information
Householding
The Funds will mail only one copy of shareholder documents, including prospectuses, annual and semi-annual reports and proxy statements, to shareholders with multiple accounts at the same address. This practice is commonly called “householding” and is intended to reduce expenses and eliminate duplicate mailings of shareholder documents. 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 call the Funds at (800) 441-7762.
Availability of Quarterly Schedule of Investments
The Funds/Series file their complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Funds’/Series’ Forms N-Q are available on the SEC’s website at http://www.sec.gov and may also be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room or how to access documents on the SEC’s website without charge may be obtained by calling (800) SEC-0330. The Funds’/Series’ Forms N-Q may also be obtained upon request and without charge by calling (800) 441-7762.
Availability of Proxy Voting Policies and Procedures
A description of the policies and procedures that the Funds/Series use to determine how to vote proxies relating to portfolio securities is available upon request and without charge (1) by calling (800) 441-7762; (2) at http://www.blackrock.com; and (3) on the SEC’s website at http://www.sec.gov.
Availability of Proxy Voting Record
Information about how the Funds/Series voted proxies relating to securities held in the Funds’/Series’ portfolio during the most recent 12-month period ended June 30 is available upon request and without charge (1) at http://www.blackrock.com or by calling (800) 441-7762; and (2) on the SEC’s website at http://www.sec.gov.
BlackRock’s Mutual Fund Family
BlackRock offers a diverse lineup of open-end mutual funds crossing all investment styles and managed by experts in equity, fixed income and tax-exempt investing. Visit http://www.blackrock.com for more information.
Shareholder Privileges
Account Information
Call us at (800) 441-7762 from 8:00 AM to 6:00 PM ET on any business day to get information about your account balances, recent transactions and share prices. You can also reach us on the Web at http://www.blackrock.com.
Automatic Investment Plans
Investor Class shareholders who want to invest regularly can arrange to have $50 or more automatically deducted from their checking or savings account and invested in any of the BlackRock funds.
Systematic Withdrawal Plans
Investor Class shareholders can establish a systematic withdrawal plan and receive periodic payments of $50 or more from their BlackRock funds, as long as their account balance is at least $10,000.
Retirement Plans
Shareholders may make investments in conjunction with Traditional, Rollover, Roth, Coverdell, Simple IRAs, SEP IRAs and 403(b) Plans.
| ADDITIONAL INFORMATION | 77 |
Additional Information (continued)
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 non-public 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 non-public 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 websites.
BlackRock does not sell or disclose to non-affiliated third parties any non-public 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 non-affiliated 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 non-public 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 non-public personal information of its Clients, including procedures relating to the proper storage and disposal of such information.
| 78 | 2017 BLACKROCK ANNUAL REPORT TO SHAREHOLDERS |
This report is intended for current holders. It is not authorized for use as an offer of sale or a solicitation of an offer to buy shares of a Fund unless preceded or accompanied by that Fund’s current prospectus. Past performance results shown in this report should not be considered a representation of future performance. Investment returns and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Statements and other information herein are as dated and are subject to change.
| Index2-12/17-AR |
|
| Item 2 – | Code of Ethics – Each registrant (or each, a “Fund”) has adopted a code of ethics, as of the end of the period covered by this report, applicable to the registrants’ principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. During the period covered by this report, the code of ethics was amended to clarify an inconsistency as to whom persons covered by the code should report suspected violations of the code. The amendment clarifies that such reporting should be made to BlackRock Advisors, LLC’s (“Investment Adviser” or “BlackRock”) General Counsel, and retains the alternative option of anonymous reporting following “whistleblower” policies. Other non-material changes were also made in connection with this amendment. During the period covered by this report, there have been no waivers granted under the code of ethics. The registrants undertake to provide a copy of the code of ethics to any person upon request, without charge, who calls 1-800-441-7762. |
| Item 3 – | Audit Committee Financial Expert – Each registrant’s board of directors (the “board of directors”), has determined that (i) the registrant has the following audit committee financial expert serving on its audit committee and (ii) each audit committee financial expert is independent: |
Kenneth L. Urish
Under applicable securities laws, a person determined to be an audit committee financial expert will not be deemed an “expert” for any purpose, including without limitation for the purposes of Section 11 of the Securities Act of 1933, as a result of being designated or identified as an audit committee financial expert. The designation or identification of a person as an audit committee financial expert does not impose on such person any duties, obligations, or liabilities greater than the duties, obligations, and liabilities imposed on such person as a member of the audit committee and board of directors in the absence of such designation or identification.
| Item 4 – | Principal Accountant Fees and Services |
The following table presents fees billed by Deloitte & Touche LLP (“D&T”) in each of the last two fiscal years for the services rendered to the Funds:
| (a) Audit Fees | (b)
Audit-Related Fees1 |
(c) Tax Fees2 | (d) All Other Fees | |||||||||||||
| Entity Name | Current Fiscal |
Previous Fiscal End |
Current Fiscal End |
Previous Fiscal End |
Current Fiscal End |
Previous Fiscal End |
Current Fiscal End |
Previous Fiscal Year End | ||||||||
| iShares MSCI EAFE International Index Fund of BlackRock Index Funds, Inc. | $32,440 | $33,660 | $6,000 | $0 | $14,765 | $9,282 | $0 | $0 | ||||||||
| iShares Russell 2000 Small-Cap Index Fund of BlackRock Index Funds, Inc. | $8,339 | $7,689 | $0 | $0 | $12,062 | $11,424 | $0 | $0 | ||||||||
| Master Small Cap Index Series of Quantitative Master Series LLC | $29,380 | $30,600 | $0 | $0 | $17,379 | $17,640 | $0 | $0 | ||||||||
The following table presents fees billed by D&T that were required to be approved by each registrant’s audit committee (each a “Committee”) for services that relate directly to the operations or financial reporting of the Fund and that are rendered on behalf of BlackRock and entities controlling, controlled by, or under common control with BlackRock (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser) that provide ongoing services to the Fund (“Affiliated Service Providers”):
2
| Current Fiscal Year End | Previous Fiscal Year End | |||
| (b) Audit-Related Fees1 | $0 | $0 | ||
| (c) Tax Fees2 | $0 | $0 | ||
| (d) All Other Fees3 | $2,129,000 | $2,154,000 |
1 The nature of the services includes assurance and related services reasonably related to the performance of the audit or review of financial statements not included in Audit Fees, including accounting consultations, agreed-upon procedure reports, attestation reports, comfort letters, out-of-pocket expenses and internal control reviews not required by regulators.
2 The nature of the services includes tax compliance and/or tax preparation, including services relating to the filing or amendment of federal, state or local income tax returns, regulated investment company qualification reviews, taxable income and tax distribution calculations.
3 Non-audit fees of $2,129,000 and $2,154,000 for the current fiscal year and previous fiscal year, respectively, were paid to each Fund’s principal accountant in their entirety by BlackRock, in connection with services provided to the Affiliated Service Providers of each Fund and of certain other funds sponsored and advised by BlackRock or its affiliates for a service organization review and an accounting research tool subscription. These amounts represent aggregate fees paid by BlackRock and were not allocated on a per fund basis.
(e)(1) Audit Committee Pre-Approval Policies and Procedures:
Each Committee has adopted policies and procedures with regard to the pre-approval of services. Audit, audit-related and tax compliance services provided to the registrant on an annual basis require specific pre-approval by the registrant’s Committee. The Committee also must approve other non-audit services provided to the registrant and those non-audit services provided to the Investment Adviser and Affiliated Service Providers that relate directly to the operations and the financial reporting of the registrant. Certain of these non-audit services that the Committee believes are (a) consistent with the SEC’s auditor independence rules and (b) routine and recurring services that will not impair the independence of the independent accountants may be approved by the Committee without consideration on a specific case-by-case basis (“general pre-approval”). The term of any general pre-approval is 12 months from the date of the pre-approval, unless the Committee provides for a different period. Tax or other non-audit services provided to the registrants which have a direct impact on the operations or financial reporting of the registrant will only be deemed pre-approved provided that any individual project does not exceed $10,000 attributable to the registrant or $50,000 per project. For this purpose, multiple projects will be aggregated to determine if they exceed the previously mentioned cost levels.
Any proposed services exceeding the pre-approved cost levels will require specific pre-approval by the registrant’s Committee, as will any other services not subject to general pre-approval (e.g., unanticipated but permissible services). The Committee is informed of each service approved subject to general pre-approval at the next regularly scheduled in-person board meeting. At this meeting, an analysis of such services is presented to the Committee for ratification. The Committee may delegate to the Committee Chairman the authority to approve the provision of and fees for any specific engagement of permitted non-audit services, including services exceeding pre-approved cost levels.
(e)(2) None of the services described in each of Items 4(b) through (d) were approved by either Committee pursuant to the de minimus exception in paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Not Applicable
(g) The aggregate non-audit fees, defined as the sum of the fees shown under “Audit-Related Fees,” “Tax Fees” and “All Other Fees,” paid to the accountant for services rendered by the accountant to the registrant, the Investment Adviser and the Affiliated Service Providers were:
| Entity Name |
Current Fiscal Year End |
Previous Fiscal Year End |
| |||
| iShares MSCI EAFE International Index Fund of BlackRock Index Funds, Inc. | $20,765 | $9,282 | ||||
| iShares Russell 2000 Small-Cap Index Fund of BlackRock Index Funds, Inc. | $12,062 | $11,424 |
3
| Master Small Cap Index Series of Quantitative Master Series LLC | $17,379 | $17,340 |
Additionally, the amounts billed by D&T in connection with services provided to the Affiliated Service Providers of the Funds and of other funds sponsored and advised by BlackRock or its affiliates during the current and previous fiscal years for a service organization review and an accounting research tool subscription were:
|
Current Fiscal Year End |
Previous Fiscal Year End | |
| $2,129,000 | $2,154,000 |
These amounts represent aggregate fees paid by BlackRock and were not allocated on a per fund basis.
(h) The Committee has considered and determined that the provision of non-audit services that were rendered to the Investment Adviser and the Affiliated Service Providers that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant’s independence.
| Item 5 – | Audit Committee of Listed Registrants – Not Applicable |
| Item 6 – | Investments |
(a) The registrants’ Schedules of Investments are included as part of the Report to Stockholders filed under Item 1 of this Form.
(b) Not Applicable due to no such divestments during the semi-annual period covered since the previous Form N-CSR filing.
| Item 7 – | Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies – Not Applicable |
| Item 8 – | Portfolio Managers of Closed-End Management Investment Companies – Not Applicable |
| Item 9 – | Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers – Not Applicable |
| Item 10 – | Submission of Matters to a Vote of Security Holders – There have been no material changes to these procedures. |
| Item 11 – | Controls and Procedures |
(a) – The registrants’ principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrants’ disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective as of a date within 90 days of the filing of this report based on the evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act and Rule 15(d)-15(b) under the Securities Exchange Act of 1934, as amended.
(b) – There were no changes in the registrants’ internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the registrants’ internal control over financial reporting.
| Item 12 – | Disclosure of Securities Lending Activities for Closed-End Management Investment Companies – Not Applicable to the registrants. |
4
| Item 13 – | Exhibits attached hereto |
(a)(1) – Code of Ethics – See Item 2
(a)(2) – Certifications – Attached hereto
(a)(3) – Not Applicable
(a)(4) – Not Applicable
(b) – Certifications – Attached hereto
5
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, each registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BlackRock Index Funds, Inc. and Quantitative Master Series LLC
| By: | /s/ John M. Perlowski | |
| John M. Perlowski | ||
| Chief Executive Officer (principal executive officer) of BlackRock Index Funds, Inc. and Quantitative Master Series LLC | ||
Date: March 8, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of each registrant and in the capacities and on the dates indicated.
| By: | /s/ John M. Perlowski | |
| John M. Perlowski | ||
| Chief Executive Officer (principal executive officer) of BlackRock Index Funds, Inc. and Quantitative Master Series LLC |
Date: March 8, 2018
| By: | /s/ Neal J. Andrews | |
| Neal J. Andrews | ||
| Chief Financial Officer (principal financial officer) of BlackRock Index Funds, Inc. and Quantitative Master Series LLC |
Date: March 8, 2018
6