e497
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January 27,
2012 |
Prospectus
BlackRock Balanced Capital Fund,
Inc. ï Investor,
Institutional and Class R Shares
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Investor A
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Investor B
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Investor C
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Institutional
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Class R
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Fund
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Shares
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Shares
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Shares
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Shares
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Shares
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BlackRock Balanced Capital Fund, Inc.
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MDCPX
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MBCPX
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MCCPX
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MACPX
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MRBPX
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This
Prospectus contains information you should know before
investing, including information about risks. Please read it
before you invest and keep it for future reference.
The Securities and Exchange Commission has not approved or
disapproved these securities or passed upon the adequacy of this
Prospectus. Any representation to the contrary is a criminal
offense.
Not
FDIC Insured No Bank
Guarantee May Lose Value
Table of Contents
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Fund Overview
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Key facts and details about the Fund listed in this
prospectus including investment objectives, fee and expense
information, principal investment strategies, principal risks
and historical performance information
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Investment Objective
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3
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Fees and Expenses of the Fund
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3
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Principal Investment Strategies of the Fund
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4
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Principal Risks of Investing in the Fund
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5
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Performance Information
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7
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Investment Manager
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8
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Portfolio Managers
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9
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Purchase and Sale of Fund Shares
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9
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Tax Information
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10
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Payments to Broker/Dealers and Other Financial Intermediaries
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10
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Details about the Fund
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How the Fund Invests
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11
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Investment Risks
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14
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Account Information
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Information about account services, sales charges &
waivers, shareholder transactions, and distributions and other
payments
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How to Choose the Share Class that Best Suits Your Needs
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22
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Details about the Share Classes
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25
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Distribution and Service Payments
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29
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How to Buy, Sell, Exchange and Transfer Shares
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30
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Account Services and Privileges
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36
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Funds Rights
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37
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Participation in Fee-Based Programs
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37
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Short-Term Trading Policy
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38
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Management of the Fund
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Information about BlackRock and the Portfolio Managers
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BlackRock
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40
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Portfolio Manager Information
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41
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Conflicts of Interest
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42
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Fund Structure
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43
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Valuation of Fund Investments
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43
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Dividends, Distributions and Taxes
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44
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Financial Highlights
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Financial Performance of the Fund
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46
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General Information
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Shareholder Documents
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51
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Certain Fund Policies
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51
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Statement of Additional Information
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52
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Glossary
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Glossary of Investment Terms
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53
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For More Information
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Fund and Service Providers
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Inside Back Cover
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Additional Information
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Back Cover
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Key Facts
about BlackRock Balanced Capital Fund, Inc.
The investment objective of BlackRock Balanced Capital Fund,
Inc. (the Fund) is to seek the highest total
investment return through a fully managed investment policy
utilizing equity, debt (including money market) and convertible
securities.
Fees and
Expenses of the Fund
This table describes the fees and expenses that you may pay if
you buy and hold shares of the Fund. You may qualify for sales
charge discounts if you and your family invest, or agree to
invest in the future, at least $25,000 in the BlackRock-advised
fund complex. More information about these and other discounts
is available from your financial professional and in the
Details about the Share Classes section on
page 25 of the Funds prospectus and in the
Purchase of Shares section on
page II-73
of the Funds statement of additional information.
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Shareholder Fees
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Investor A
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Investor B
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Investor C
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Institutional
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Class R
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(fees paid directly from your investment)
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Shares
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Shares
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Shares
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Shares
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Shares
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Maximum Sales Charge (Load) Imposed on Purchases
(as percentage of offering price)
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5.25
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%
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None
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None
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None
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None
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Maximum Deferred Sales Charge (Load) (as percentage of offering
price or redemption proceeds, whichever is lower)
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None
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1
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4.50
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%2
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1.00
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%2
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None
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None
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Annual Fund Operating
Expenses
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(expenses that you pay each year as a percentage of
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Investor A
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Investor B
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Investor C
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Institutional
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Class R
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the value of your investment)
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Shares
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Shares
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Shares
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Shares
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Shares
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Management
Fee3
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0.43
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%
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0.43
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%
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0.43
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%
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0.43
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%
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0.43
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%
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Distribution
and/or
Service
(12b-1) Fees
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0.25
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%
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1.00
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1.00
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%
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None
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0.50
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%
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Other Expenses
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0.71
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%
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0.93
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%
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0.76
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%4
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0.65
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%4
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0.85
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%4
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Total Annual Fund Operating Expenses
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1.39
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%
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2.36
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%
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2.19
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%
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1.08
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%
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1.78
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%
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Fee Waivers
and/or
Expense
Reimbursements3
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(0.32)
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%
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(0.32)
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%
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(0.32)
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%
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(0.32)
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%
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(0.32)
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%
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Total Annual Fund Operating Expenses After Fee
Waivers
and/or
Expense Reimbursements
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1.07
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%
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2.04
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%
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1.87
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%
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0.76
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%
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1.46
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%
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1 |
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A contingent deferred sales charge
(CDSC) of 0.75% is assessed on certain redemptions
of Investor A Shares made within 18 months after
purchase where no initial sales charge was paid at time of
purchase as part of an investment of $1,000,000 or more.
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2 |
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The CDSC for Investor B Shares is
4.50% if shares are redeemed in less than one year. The CDSC for
Investor B Shares decreases for redemptions made in
subsequent years. After six years there is no CDSC on
Investor B Shares. (See the section Details about the
Share Classes Investor B Shares for the
complete schedule of CDSCs.) There is no CDSC on Investor C
Shares after one year.
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3 |
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As described in the Funds
prospectus on pages 40-41, BlackRock has contractually
agreed to waive its management fee by the amount of any
management fees the Fund pays the manager of the Master
Portfolios (defined below) indirectly through its investment in
the Master Portfolios for as long as the Fund invests in the
Master Portfolios. The contractual agreement may be terminated
upon 90 days notice by a majority of the non-interested
directors of the Fund or by a vote of a majority of the
outstanding voting securities of the Fund.
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4 |
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Other expenses have been restated
to reflect current fees.
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3
Example:
This Example is intended to help you compare the cost of
investing in the Fund with the cost of investing in other mutual
funds. The Example assumes that you invest $10,000 in the Fund
for the time periods indicated and then redeem all of your
shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the
Funds operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions
your costs would be:
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1 Year
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3 Years
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5 Years
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10 Years
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Investor A Shares
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$
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628
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$
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847
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$
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1,084
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$
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1,762
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Investor B Shares
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$
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657
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$
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990
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$
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1,298
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$
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2,119
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Investor C Shares
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$
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290
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$
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588
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$
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1,011
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$
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2,190
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Institutional Shares
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$
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78
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$
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243
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$
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422
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$
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942
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Class R Shares
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$
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149
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$
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462
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$
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797
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$
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1,746
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You would pay the following expenses if you did not redeem your
shares:
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1 Year
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3 Years
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5 Years
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10 Years
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Investor B Shares
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$
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207
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$
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640
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$
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1,098
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$
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2,119
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Investor C Shares
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$
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190
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$
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588
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$
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1,011
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$
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2,190
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Portfolio
Turnover:
The Total Return Portfolio (defined below) and the Core
Portfolio (defined below) pay transaction costs, such as
commissions, when they buy and sell securities (or turn
over their portfolios). A higher portfolio turnover may
indicate higher transaction costs and may result in higher taxes
when shares are held in a taxable account. These costs, which
are not reflected in annual fund operating expenses or in the
example, affect the performance of the Total Return Portfolio
and the Core Portfolio. During the most recent fiscal year, the
Total Return Portfolios turnover rate was 1,771% of the
average value of its portfolio and the Core Portfolios
turnover rate was 129% of the average value of its portfolio.
Principal
Investment Strategies of the Fund
The Fund invests in equity securities (including common stock,
preferred stock, securities convertible into common stock, or
securities or other instruments whose price is linked to the
value of common stock) and fixed-income securities (including
debt securities, convertible securities and short term
securities). The Fund may make investments directly in equity
and fixed-income securities, indirectly through one or more
funds that invest in such securities, or in a combination of
securities and funds. Fund management shifts the allocation
among these securities types. The proportion the Fund invests in
each category at any given time depends on Fund
managements view of how attractive that category appears
relative to the others. This flexibility is the keystone of the
Funds investment strategy. The Fund intends to invest at
least 25% of its assets in equity securities and at least 25% of
its assets in senior fixed-income securities, such as U.S.
government debt securities, corporate debt securities, and
mortgage-backed and asset-backed securities. The Fund may also
enter into dollar rolls. Fund management expects that, as a
general rule, a majority of the Funds equity investments
will be equity securities of large cap companies selected from
the Russell
1000®
Index. Large cap companies are companies that at the time of
purchase have a market capitalization equal to or greater than
the top 80% of the companies that comprise the Russell
1000®
Index. As of June 24, 2011, the most recent rebalance date,
the lowest market capitalization in this group was
$1.6 billion. The market capitalizations of companies in
the index change with market conditions and the composition of
the index. The Fund may also invest in mid cap companies.
Management of the Core Portfolio (defined below) chooses equity
securities for the Fund using quantitative factor models
generated by third party research firms. Through our
amalgamating process, we combine the final rankings provided by
external third party models for each stock. The Fund may invest
up to 30% of its net assets in securities of foreign issuers, of
which 20% (as a percentage of the Funds net assets) may be
in emerging markets issuers. Investments in
U.S. dollar-denominated securities of foreign issuers,
excluding issuers from emerging markets, are permitted beyond
the 30% limit. This means that the Fund may invest in such U.S.
dollar-denominated securities of foreign issuers without limit.
The Fund may invest in debt securities of any duration or
maturity. The Fund will invest primarily in fixed-income
securities that are rated investment grade, but may also invest
in fixed-income securities rated below investment grade or
unrated securities of equivalent credit quality.
The Fund intends to invest all of its fixed-income assets in the
Master Total Return Portfolio (the Total Return
Portfolio) of Master Bond LLC (Master Bond
LLC). The primary objective of the Total Return Portfolio
is to realize
4
total return that exceeds that of the Barclays Capital U.S.
Aggregate Bond Index. The Fund intends to invest all of its
equity assets in the Master Large Cap Core Portfolio (the
Core Portfolio and together with the Total Return
Portfolio, the Master Portfolios) of Master Large
Cap Series LLC (Master Large Cap LLC). The Core
Portfolio utilizes a blended investment strategy that emphasizes
a mix of both growth and value and will seek to outperform the
Russell
1000®
Index. The Total Return Portfolio may use derivatives,
including, but not limited to, interest rate, total return and
credit default swaps, indexed and inverse floating rate
securities, options, futures, option on futures and swaps, for
hedging purposes, as well as to increase the return on its
portfolio investments. The Total Return Portfolio may also
invest in
credit-linked
or structured notes or other instruments evidencing interests in
entities that hold or represent interests in
fixed-income
securities.
The investment results of the fixed-income and equity portions
of the Funds portfolio will correspond directly to the
investment results of (i) the Total Return Portfolio
together with those of any fixed-income investments held
directly by the Fund and (ii) the Core Portfolio together
with those of any equity investments held directly by the Fund,
respectively. For simplicity, this Prospectus uses the term
Fund to include the underlying Total Return
Portfolio and Core Portfolio in which the Fund invests.
Principal
Risks of Investing in the Fund
Risk is inherent in all investing. The value of your investment
in the Fund, as well as the amount of return you receive on your
investment, may fluctuate significantly from day to day and over
time. You may lose part or all of your investment in the Fund or
your investment may not perform as well as other similar
investments. The following is a summary description of certain
risks of investing in the Fund.
Convertible Securities Risk The market
value of a convertible security performs like that of a regular
debt security; that is, if market interest rates rise, the value
of a convertible security usually falls. In addition,
convertible securities are subject to the risk that the issuer
will not be able to pay interest or dividends when due, and
their market value may change based on changes in the
issuers credit rating or the markets perception of
the issuers creditworthiness. Since it derives a portion
of its value from the common stock into which it may be
converted, a convertible security is also subject to the same
types of market and issuer risks that apply to the underlying
common stock.
Credit Risk Credit risk refers to the
possibility that the issuer of a security will not be able to
make payments of interest and principal when due. Changes in an
issuers credit rating or the markets perception of
an issuers creditworthiness may also affect the value of
the Funds investment in that issuer.
Derivatives Risk The Funds use
of derivatives may reduce the Funds returns
and/or
increase volatility. Volatility is defined as the characteristic
of a security, an index or a market to fluctuate significantly
in price within a short time period. Derivatives are also
subject to counterparty risk, which is the risk that the other
party in the transaction will not fulfill its contractual
obligation. A risk of the Funds use of derivatives is that
the fluctuations in their values may not correlate perfectly
with the overall securities markets. The possible lack of a
liquid secondary market for derivatives and the resulting
inability of the Fund to sell or otherwise close a derivatives
position could expose the Fund to losses and could make
derivatives more difficult for the Fund to value accurately.
Derivatives may give rise to a form of leverage and may expose
the Fund to greater risk and increase its costs. Recent
legislation calls for new regulation of the derivatives markets.
The extent and impact of the regulation is not yet known and may
not be known for some time. New regulation may make derivatives
more costly, may limit the availability of derivatives, or may
otherwise adversely affect the value or performance of
derivatives.
Dollar Rolls Risk Dollar rolls involve
the risk that the market value of the securities that the Fund
is committed to buy may decline below the price of the
securities the Fund has sold. These transactions may involve
leverage.
Emerging Markets Risk Emerging markets
are riskier than more developed markets because they tend to
develop unevenly and may never fully develop. Investments in
emerging markets may be considered speculative. Emerging markets
are more likely to experience hyperinflation and currency
devaluations, which adversely affect returns to U.S. investors.
In addition, many emerging securities markets have far lower
trading volumes and less liquidity than developed markets.
Equity Securities Risk Stock markets
are volatile. The price of equity securities fluctuates based on
changes in a companys financial condition and overall
market and economic conditions.
Extension Risk When interest rates
rise, certain obligations will be paid off by the obligor more
slowly than anticipated, causing the value of these securities
to fall.
5
Foreign Securities Risk Foreign
investments often involve special risks not present in U.S.
investments that can increase the chances that the Fund will
lose money. These risks include:
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n
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The Fund generally holds its foreign securities and cash in
foreign banks and securities depositories, which may be recently
organized or new to the foreign custody business and may be
subject to only limited or no regulatory oversight.
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n
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Changes in foreign currency exchange rates can affect the value
of the Funds portfolio.
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n
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The economies of certain foreign markets may not compare
favorably with the economy of the United States with respect to
such issues as growth of gross national product, reinvestment of
capital, resources and balance of payments position.
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n
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The governments of certain countries may prohibit or impose
substantial restrictions on foreign investments in their capital
markets or in certain industries.
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n
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Many foreign governments do not supervise and regulate stock
exchanges, brokers and the sale of securities to the same extent
as does the United States and may not have laws to protect
investors that are comparable to U.S. securities laws.
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|
n
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Settlement and clearance procedures in certain foreign markets
may result in delays in payment for or delivery of securities
not typically associated with settlement and clearance of U.S.
investments.
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High Portfolio Turnover Risk The Fund
may engage in active and frequent trading of its portfolio
securities. High portfolio turnover (more than 100%) may result
in increased transaction costs to the Fund, including brokerage
commissions, dealer
mark-ups and
other transaction costs on the sale of the securities and on
reinvestment in other securities. The sale of Fund portfolio
securities may result in the realization
and/or
distribution to shareholders of higher capital gains or losses
as compared to a fund with less active trading policies. These
effects of higher than normal portfolio turnover may adversely
affect Fund performance. In addition, investment in mortgage
dollar rolls and participation in TBA transactions may
significantly increase the Funds portfolio turnover rate.
A TBA transaction is a method of trading mortgage-backed
securities where the buyer and seller agree upon general trade
parameters such as agency, settlement date, par amount, and
price.
Interest Rate Risk Interest rate risk
is the risk that prices of bonds and other fixed-income
securities will increase as interest rates fall, and decrease as
interest rates rise.
Investment Style Risk Because
different kinds of stocks go in and out of favor depending on
market conditions, the Funds performance may be better or
worse than other funds with different investment styles
(e.g., growth vs. value, large cap vs. small cap).
Junk Bonds Risks Although junk bonds
generally pay higher rates of interest than investment grade
bonds, junk bonds are high risk investments that may cause
income and principal losses for the Fund.
Market Risk and Selection Risk Market
risk is the risk that one or more markets in which the Fund
invests will go down in value, including the possibility that
the markets will go down sharply and unpredictably. Selection
risk is the risk that the securities selected by Fund management
will underperform the markets, the relevant indices or the
securities selected by other funds with similar investment
objectives and investment strategies. This means you may lose
money.
Mid Cap Securities Risk The securities
of mid cap companies generally trade in lower volumes and are
generally subject to greater and less predictable price changes
than the securities of larger capitalization companies.
Mortgage- and Asset-Backed Securities
Risks Mortgage- and asset-backed securities
represent interests in pools of mortgages or other
assets, including consumer loans or receivables held in trust.
Mortgage- and asset-backed securities are subject to credit,
interest rate, prepayment and extension risks. These securities
also are subject to risk of default on the underlying mortgage
or asset, particularly during periods of economic downturn.
Small movements in interest rates (both increases and decreases)
may quickly and significantly reduce the value of certain
mortgage-backed securities.
Prepayment Risk When interest rates
fall, certain obligations will be paid off by the obligor more
quickly than originally anticipated, and the Fund may have to
invest the proceeds in securities with lower yields.
6
Sovereign Debt Risk Sovereign debt
instruments are subject to the risk that a governmental entity
may delay or refuse to pay interest or repay principal on its
sovereign debt, due, for example, to cash flow problems,
insufficient foreign currency reserves, political
considerations, the relative size of the governmental
entitys debt position in relation to the economy or the
failure to put in place economic reforms required by the
International Monetary Fund or other multilateral agencies.
Structured Notes Risk Structured notes
and other related instruments purchased by the Fund are
generally privately negotiated debt obligations where the
principal
and/or
interest is determined by reference to the performance of a
specific asset, benchmark asset, market or interest rate
(reference measure). The purchase of structured
notes exposes a Fund to the credit risk of the issuer of the
structured product. Structured notes may be leveraged,
increasing the volatility of each structured notes value
relative to the change in the reference measure. Structured
notes may also be less liquid and more difficult to price
accurately than less complex securities and instruments or more
traditional debt securities.
U.S. Government Issuer Risk
Treasury obligations may differ in their interest rates,
maturities, times of issuance and other characteristics.
Obligations of U.S. Government agencies and authorities are
supported by varying degrees of credit but generally are not
backed by the full faith and credit of the U.S. Government.
No assurance can be given that the U.S. Government will
provide financial support to its agencies and authorities if it
is not obligated by law to do so.
U.S. Government Mortgage-Related Securities
Risk There are a number of important
differences among the agencies and instrumentalities of the
U.S. Government that issue mortgage-related securities and
among the securities that they issue. Mortgage-related
securities guaranteed by the Government National Mortgage
Association (GNMA or Ginnie Mae) are
guaranteed as to the timely payment of principal and interest by
GNMA and such guarantee is backed by the full faith and credit
of the United States. GNMA securities also are supported by the
right of GNMA to borrow funds from the U.S. Treasury to
make payments under its guarantee. Mortgage-related securities
issued by Fannie Mae or Freddie Mac are solely the obligations
of Fannie Mae or Freddie Mac, as the case may be, and are not
backed by or entitled to the full faith and credit of the United
States but are supported by the right of the issuer to borrow
from the Treasury.
The information shows you how the Funds performance has
varied year by year and provides some indication of the risks of
investing in the Fund. The table compares the Funds
performance to that of the Russell
1000®
Index, the Barclays Capital U.S. Aggregate Bond Index and
a customized weighted index comprised of the returns of the
Russell 1000 Index (60%) and the Barclays Capital U.S. Aggregate
Bond Index (40%), which are relevant to the Fund because they
have characteristics similar to the Funds investment
strategies. The returns for Class R shares prior to
January 3, 2003, the commencement of operations of
Class R shares, are based upon performance of the
Funds Institutional shares. The returns for Class R
shares, however, are adjusted to reflect the distribution and
service (12b-1) fees applicable to Class R shares. As with
all such investments, past performance (before and after taxes)
is not an indication of future results. The information in the
chart and table for periods prior to October 1, 2003 does
not reflect any investment by the Fund in the Total Return
Portfolio. The information in the chart and table for periods
prior to February 2009 does not reflect any investment by the
Fund in the Core Portfolio. Sales charges are not reflected in
the bar chart. If they were, returns would be less than those
shown. However, the table includes all applicable fees and sales
charges. If the Funds investment manager and its
affiliates had not waived or reimbursed certain Fund expenses
7
during these periods, the Funds returns would have been
lower. Updated information on the Funds performance can be
obtained by visiting http://www.blackrock.com/funds or can be
obtained by phone at
800-882-0052.
Investor A
Shares
ANNUAL TOTAL
RETURNS1
BlackRock Balanced Capital Fund, Inc.
As of 12/31
During the ten-year period shown in the bar chart, the highest
return for a quarter was 11.81% (quarter ended
June 30, 2003) and the lowest return for a quarter was
15.23% (quarter ended December 31, 2008).
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As of 12/31/11
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Average Annual Total Returns
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1 Year
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5
Years1
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10
Years1
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BlackRock Balanced Capital Fund, Inc. Investor A
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Return Before Taxes
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(2.81)%
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(0.78)%
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2.62%
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Return After Taxes on Distributions
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(3.45)%
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(2.01)%
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1.32%
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Return After Taxes on Distributions and Sale of Shares
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(1.82)%
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(1.20)%
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1.68%
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BlackRock Balanced Capital Fund, Inc. Investor B
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Return Before Taxes
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(2.88)%
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(0.94)%
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2.50%
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BlackRock Balanced Capital Fund, Inc. Investor C
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Return Before Taxes
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0.80%
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(0.49)%
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2.36%
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BlackRock Balanced Capital Fund, Inc. Institutional
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Return Before Taxes
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2.90%
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0.60%
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3.46%
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BlackRock Balanced Capital Fund, Inc. Class R
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Return Before Taxes
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2.18%
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(0.12)%
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2.90%
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Russell
1000®
Index (Reflects no deduction for fees, expenses or taxes)
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1.50%
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(0.02)%
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3.34%
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Barclays Capital U.S. Aggregate Bond Index (Reflects no
deduction for fees, expenses or taxes)
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7.84%
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6.50%
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5.78%
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60% Russell 1000 Index/40% Barclays Capital U.S. Aggregate Bond
Index (Reflects no deduction for fees, expenses or taxes)
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4.34%
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3.01%
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4.67%
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1 |
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A portion of the Funds total
return was attributable to proceeds received in a settlement of
a litigation seeking recovery of investment losses previously
realized by the Fund.
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After-tax returns are calculated using the historical highest
individual Federal marginal income tax rates and do not reflect
the impact of state and local taxes. Actual after-tax returns
depend on the investors tax situation and may differ from
those shown, and the after-tax returns shown are not relevant to
investors who hold their shares through tax-deferred
arrangements such as 401(k) plans or individual retirement
accounts. After-tax returns are shown for Investor A Shares
only, and the after-tax returns for Investor B,
Investor C, Institutional and Class R Shares will vary.
The Funds investment manager is BlackRock Advisors, LLC
(BlackRock). The Funds
sub-adviser
is BlackRock Investment Management, LLC. Where applicable, the
use of the term BlackRock also refers to the Funds
sub-adviser.
8
The asset allocation of the equity and fixed-income portions of
the Funds portfolio is managed by Philip Green.
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Portfolio Manager of the
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Name
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Fund Since
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Title
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Phillip Green
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2006
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Managing Director of BlackRock, Inc.
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The Total Return Portfolio in which the Fund invests a portion
of its assets is managed by a team of investment professionals
comprised of Rick Rieder, Bob Miller, Matthew Marra and Eric
Pellicciaro. The team works collectively with each member
primarily responsible for his area of expertise.
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Portfolio Manager of the
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Total Return Portfolio
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Name
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Since
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Title
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Rick Rieder
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2010
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Chief Investment Officer of Fixed Income, Fundamental Portfolios
BlackRock, Inc.
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Bob Miller
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2011
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Managing Director of BlackRock, Inc.
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Matthew Marra
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2006
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Managing Director of BlackRock, Inc.
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Eric Pellicciaro
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2010
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Managing Director of BlackRock, Inc.
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The Core Portfolio in which the Fund invests a portion of its
assets is managed by a team of investment professionals
comprised of Robert Doll, Jr., Daniel Hanson and Peter
Stournaras.
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Portfolio Manager of the
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Name
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Core Portfolio Since
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Title
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Robert Doll, Jr., CFA, CPA
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2006
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Senior Managing Director and Chief Equity Strategist of
BlackRock, Inc.
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Daniel Hanson, CFA
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2006
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Managing Director of BlackRock, Inc.
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Peter Stournaras, CFA
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2010
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Managing Director of BlackRock, Inc.
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Purchase and
Sale of Fund Shares
You may purchase or redeem shares of the Fund each day the New
York Stock Exchange (NYSE) is open. To purchase or
sell shares you should contact your financial intermediary or
financial professional, or, if you hold your shares through the
Fund, you should contact the Fund by phone at
(800) 441-7762,
by mail (c/o BlackRock Funds, P.O. Box 9819, Providence, Rhode
Island
02940-8019),
or by the Internet at www.blackrock.com/funds. The Funds
initial and subsequent investment minimums generally are as
follows, although the Fund may reduce or waive the minimums in
some cases:
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Investor A and
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Investor C Shares
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Investor B Shares
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Institutional Shares
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Class R Shares
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Minimum Initial Investment
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$1,000 for all accounts except:
$250 for certain fee-based programs
$100 for retirement plans
$50, if establishing an Automatic Investment Plan (AIP)
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Available only for exchanges and dividend reinvestments by
current holders and for purchase by certain qualified employee
benefit plans.
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$2 million for institutions and individuals.
Institutional Shares are available to clients of registered
investment advisors who have $250,000 invested in the Fund.
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$100 for all accounts.
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Minimum Additional Investment
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$50 for all accounts except certain retirement plans and payroll
deduction programs may have a lower minimum.
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N/A
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No subsequent minimum.
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No subsequent minimum.
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9
The Funds dividends and distributions may be subject to
Federal income taxes and may be taxed as ordinary income or
capital gains, unless you are a tax-exempt investor or are
investing through a retirement plan, in which case you may be
subject to Federal income tax upon withdrawal from such tax
deferred arrangements.
Payments to
Broker/Dealers and Other Financial Intermediaries
If you purchase shares of the Fund through a broker-dealer or
other financial intermediary, the Fund and BlackRock
Investments, LLC, the Funds distributor, or its affiliates
may pay the intermediary for the sale of Fund shares and other
services. These payments may create a conflict of interest by
influencing the broker-dealer or other financial intermediary
and your individual financial professional to recommend the Fund
over another investment. Ask your individual financial
professional or visit your financial intermediarys website
for more information.
10
Included in this prospectus are sections that tell you about
buying and selling shares, management information, shareholder
features of BlackRock Balanced Capital Fund, Inc. (the
Fund) and your rights as a shareholder.
Investment
Objective
The investment objective of the Fund is to seek the highest
total investment return through a fully managed investment
policy utilizing equity, debt (including money market) and
convertible securities.
This investment objective is a fundamental policy of the Fund
and may not be changed without approval of a majority of the
Funds outstanding voting securities, as defined in the
Investment Company Act of 1940, as amended (the Investment
Company Act).
Investment
Process
The Fund may make investments directly in equity and
fixed-income securities, indirectly through one or more funds
that invest in such securities, or in a combination of
securities and funds. Fund management will select the
percentages of the total portfolio invested in equity securities
and fixed-income securities based on its perception of the
relative valuation of each asset class compared with that asset
class historical valuation levels. When Fund management
believes equity securities generally are reasonably valued or
undervalued, Fund management will focus on equity investments.
When Fund management believes equity securities generally are
valued at high levels, however, Fund management may increase the
percentage of the Funds portfolio invested in fixed-income
securities. Fund management may increase the Funds
investments in fixed-income securities whenever it believes that
it is appropriate to do so in order to seek to reduce the level
of risk in the Funds portfolio or because it believes that
investments in fixed-income securities could potentially provide
higher total returns than equity investments.
Management of the Master Large Cap Core Portfolio (previously
defined as the Core Portfolio) chooses equity
securities from the Russell
1000®
Index using quantitative factor models generated by third party
research firms. Through our amalgamating process, we combine the
final ranking provided by external third party models for each
stock. The factors employed by the model include stock
valuation, quality of earnings and potential future earnings
growth. Management of the Core Portfolio looks for strong
relative earnings growth, earnings quality and good relative
valuation. A companys stock price relative to its earnings
and book value, among other factors, is also
examined if management believes that a company is
overvalued, it will not be considered as an investment for the
Core Portfolio. After the initial quantitative screening is
complete, management of the Core Portfolio relies on fundamental
analysis, using both internal and external research, to validate
the output of the quantitative model. Companies that pass both
the quantitative and the fundamental screens will be included in
the portfolio.
Because the Core Portfolio generally will not hold all of the
stocks in the Russell
1000®
Index and because the Core Portfolios investments may be
allocated in amounts that vary from the proportional weightings
of the various stocks in that index, the Core Portfolio is not
an index fund. In seeking to outperform the
applicable benchmark, however, management of the Core Portfolio
reviews potential investments using certain criteria that are
based on the securities in the applicable index. These criteria
currently include the following:
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Relative price to earnings and price to book ratios
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Stability and quality of earnings
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Earnings momentum and growth
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Weighted median market capitalization of the portfolio
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Allocation among the economic sectors of the portfolio as
compared to the applicable index
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Weighted individual stocks within the applicable index
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The Master Total Return Portfolio (previously defined as the
Total Return Portfolio and together with the Core
Portfolio, the Master Portfolios) invests primarily
in a diversified portfolio of fixed-income securities, such as
corporate bonds and notes, mortgage-backed and asset-backed
securities, convertible securities, preferred securities and
government debt obligations.
11
The Fund has no minimum holding period for investments, and will
buy or sell securities whenever Fund management sees an
appropriate opportunity.
Principal
Investment Strategies
The Fund may invest in both equity securities (including common
stock, preferred stock, securities convertible into common
stock, or securities or other instruments whose price is linked
to the value of common stock) and fixed-income securities
(including the debt securities listed below and money market
securities). Fund management expects that as a general rule a
majority of the Funds equity investments will be invested
in equity securities of large cap companies but may be invested
in mid cap companies as well. The Fund presently has a policy
(which may be changed by the Board of Directors) of investing at
least 25% of its assets in senior fixed-income securities. The
Fund intends at all times to invest no less than 25% of its
assets in equity securities. The Fund, with respect to its
equity investments, follows an investing style that favors both
growth companies and value companies.
Under normal circumstances, the Core Portfolio invests at least
80% of its assets in equity securities of large cap companies
BlackRock selects from among those that are, at the time of
purchase, included in the Core Portfolios applicable
benchmark, the Russell
1000®
Index. Large cap companies are companies that at the time of
purchase have a market capitalization equal to or greater than
the top 80% of the companies that comprise the Russell
1000®
Index. As of June 24, 2011, the most recent rebalance date,
the lowest market capitalization in this group was
$1.6 billion. The market capitalizations of companies in
the index change with market conditions and the composition of
the index.
The Total Return Portfolio typically invests more than 90% of
its assets in a diversified portfolio of fixed-income securities.
The fixed-income securities in which the Fund may invest include:
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U.S. Government debt securities
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Corporate debt securities issued by U.S. and foreign companies
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Asset-backed securities
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Mortgage-backed securities
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Preferred securities issued by U.S. and foreign companies
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n
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Corporate debt securities and preferred securities convertible
into common stock
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n
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Foreign sovereign debt instruments
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Money market securities
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Under normal circumstances, the Total Return Portfolio invests
at least 80% of its assets in bonds. This policy is a
nonfundamental policy of the Total Return Portfolio and may not
be changed without 60 days prior notice to shareholders.
The Fund may invest in fixed-income securities of any duration
or maturity. The Total Return Portfolio invests primarily in
fixed-income securities that are rated in the four highest
rating categories by at least one of the recognized rating
agencies (including Baa or better by Moodys Investors
Service, Inc. (Moodys) or BBB or better by
S&P or Fitch Ratings (Fitch). Securities rated
in any of the four highest rating categories are known as
investment grade securities.
The Fund may invest in various types of mortgage-backed
securities. Mortgage-backed securities represent the right to
receive a portion of principal
and/or
interest payments made on a pool of residential or commercial
mortgage loans. Mortgage-backed securities frequently react
differently to changes in interest rates compared to other debt
securities. The Fund may also enter into dollar rolls.
The Fund may invest up to 30% of its net assets in securities of
foreign issuers, of which 20% (as a percentage of the
Funds net assets) may be in emerging markets issuers.
Investments in U.S. dollar-denominated securities of
foreign issuers, excluding issuers from emerging markets, are
permitted beyond the 30% limit. This means that the Fund may
invest in such U.S. dollar-denominated securities of
foreign issuers without limit. (The Funds investments in
American Depositary Receipts also are not subject to the 30%
foreign issuer limitation.) The Fund may invest in issuers from
any country.
The Total Return Portfolio may use derivatives, including, but
not limited to, interest rate, total return and credit default
swaps, indexed and inverse floating rate securities, options,
futures, options on futures and swaps, for hedging purposes, as
well as to increase the return on its portfolio investments.
Derivatives are financial instruments whose
12
value is derived from another security or an index such as the
Barclays Capital U.S. Aggregate Bond Index or the CSFB High
Yield Index. The Total Return Portfolio may also invest in
credit-linked notes, credit-linked trust certificates,
structured notes, or other instruments evidencing interests in
special purpose vehicles, trusts, or other entities that hold or
represent interests in fixed-income securities.
The Total Return Portfolio may invest up to 20% of its net
assets in fixed-income securities that are rated below
investment grade by at least one of the recognized rating
agencies, including Moodys, S&P or Fitch or in
unrated securities of equivalent credit quality.
Other
Strategies
In addition to the main strategies discussed above, the Fund may
use certain other investment strategies. The Fund may also
invest or engage in the following investments/strategies:
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Borrowing The Fund may borrow for
temporary or emergency purposes, including to meet redemptions,
for the payment of dividends, for share repurchases or for the
clearance of transactions.
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n
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Depositary Receipts The Fund may
invest in securities of foreign issuers in the form of
depositary receipts, including unsponsored depositary receipts,
or other securities that are convertible into securities of
foreign issuers.
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n
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Illiquid/Restricted Securities The
Fund may invest up to 15% of its net assets in illiquid
securities that it cannot sell within seven days at
approximately current value. Restricted securities are
securities that cannot be offered for public resale unless
registered under the applicable securities laws or that have a
contractual restriction that prohibits or limits their resale
(i.e., Rule 144A securities). They may include private
placement securities that have not been registered under the
applicable securities laws. Restricted securities may not be
listed on an exchange and may have no active trading market.
Rule 144A securities are restricted securities that can be
resold to qualified institutional buyers but not to the general
public.
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Indexed and Inverse Securities The
Fund may invest in securities the potential return of which is
directly related to changes in an underlying index or interest
rate, known as indexed securities. The Fund may also invest in
securities the return of which is inversely related to changes
in an interest rate (inverse floaters). The Fund may also
purchase synthetically created inverse floating rate bonds
evidenced by custodial or trust receipts.
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n
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Investment Companies The Fund has the
ability to invest in other investment companies, such as
exchange- traded funds, unit investment trusts, and open-end and
closed-end funds. The Fund may invest in affiliated investment
companies, including affiliated money market funds and
affiliated exchange-traded funds.
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n
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Master Limited Partnerships The Fund
may invest in publicly traded master limited partnerships
(MLPs), which are limited partnerships or limited
liability companies taxable as partnerships. MLPs generally have
two classes of owners, the general partner and limited partners.
If investing in an MLP, the Fund intends to purchase publicly
traded common units issued to limited partners of the MLP.
Limited partners have a limited role in the operations and
management of the MLP.
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Repurchase Agreements The Fund may
enter into repurchase agreements. Under a repurchase agreement,
the seller agrees to repurchase a security at a mutually
agreed-upon time and price.
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n
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Securities Lending The Fund may lend
securities with a value up to
331/3%
of its total assets to financial institutions that provide cash
or securities issued or guaranteed by the U.S. Government as
collateral.
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Short Sales The Fund may make short
sales of securities, either as a hedge against potential
declines in value of a portfolio security or to realize
appreciation when a security that the Fund does not own declines
in value. The Fund will not make a short sale if, after giving
effect to such sale, the market value of all securities sold
short exceeds 10% of the value of its total assets. The Fund may
also make short sales against-the-box without regard
to this restriction. In this type of short sale, at the time of
the sale, the Fund owns or has the immediate and unconditional
right to acquire the identical security at no additional cost.
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Small Cap and Emerging Growth
Securities The Fund may invest in equity
securities of issuers with limited product lines or markets.
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Standby Commitment Agreements Standby
commitment agreements commit the Fund, for a stated period of
time, to purchase a stated amount of securities that may be
issued and sold to the Fund at the option of the issuer.
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Temporary Defensive Strategies For
temporary defensive purposes, the Fund may restrict the markets
in which it invests and may invest without limitation in cash,
cash equivalents, money market securities, such as U.S. Treasury
and agency obligations, other U.S. Government securities, short
term debt obligations of corporate issuers, certificates of
deposit, bankers acceptances, commercial paper (short
term, unsecured, negotiable promissory notes of a domestic or
foreign issuer) or other high quality fixed-income securities.
Normally a portion of the Funds assets would be held in
these securities in anticipation of investment in equities or to
meet redemptions.
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Investments in money market securities can be sold easily and
have limited risk of loss. These investments may affect the
Funds ability to achieve its investment objective.
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When-Issued and Delayed Delivery Securities and Forward
Commitments The purchase or sale of
securities on a when issued basis or on a delayed delivery basis
or through a forward commitment involves the purchase or sale of
securities by the Fund at an established price with payment and
delivery taking place in the future. The Fund enters into these
transactions to obtain what is considered an advantageous price
to the Fund at the time of entering into the transaction.
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ABOUT THE PORTFOLIO MANAGEMENT OF THE FUND
The Fund is managed by a team of financial professionals. Philip
Green is responsible for the asset allocation of the equity and
fixed-income portions of the Funds portfolio. Robert
Doll, Jr., CFA, CPA, Daniel Hanson, CFA and Peter
Stournaras, CFA, are jointly and primarily responsible for the
day-to-day management of the equity portion of the Funds
portfolio. The investment professionals responsible for the
day-to-day management of the fixed-income portion of the
Funds portfolio are Rick Rieder, Bob Miller, Matthew Marra
and Eric Pellicciaro. Please see Management of the
Fund Portfolio Manager Information for
additional information on the portfolio management team.
This section contains a summary discussion of the general risks
of investing in the Fund. Investment Objectives and
Policies in the Statement of Additional Information (the
SAI) also includes more information about the Fund,
its investments and the related risks. As with any fund, there
can be no guarantee that the Fund will meet its objective or
that the Funds performance will be positive for any period
of time. An investment in the Fund is not insured or guaranteed
by the Federal Deposit Insurance Corporation or by any bank or
governmental agency.
Principal Risks of Investing in the Fund:
Convertible Securities Risk The market
value of a convertible security performs like that of a regular
debt security; that is, if market interest rates rise, the value
of a convertible security usually falls. In addition,
convertible securities are subject to the risk that the issuer
will not be able to pay interest or dividends when due, and
their market value may change based on changes in the
issuers credit rating or the markets perception of
the issuers creditworthiness. Since it derives a portion
of its value from the common stock into which it may be
converted, a convertible security is also subject to the same
types of market and issuer risks that apply to the underlying
common stock.
Credit Risk Credit risk refers to the
possibility that the issuer of a security will not be able to
make principal and interest payments when due. Changes in an
issuers credit rating or the markets perception of
an issuers creditworthiness may also affect the value of
the Funds investment in that issuer. The degree of credit
risk depends on both the financial condition of the issuer and
the terms of the obligation.
Derivatives Risk The Funds use
of derivatives may reduce the Funds returns
and/or
increase volatility. Volatility is defined as the characteristic
of a security, an index or a market to fluctuate significantly
in price within a short time period. A risk of the Funds
use of derivatives is that the fluctuations in their values may
not correlate perfectly with the overall securities markets.
Derivatives are also subject to counterparty risk, which is the
risk that the other party in the transaction will not fulfill
its contractual obligation. In addition, some derivatives are
more sensitive to interest rate changes and market price
fluctuations than other securities. The possible lack of a
liquid secondary market for derivatives and the resulting
inability of the Fund to sell or otherwise close a derivatives
position could expose the Fund to losses and could make
derivatives more difficult for the Fund to value accurately. The
Fund could also suffer losses related to its derivatives
positions as a result of unanticipated market movements, which
losses are potentially unlimited. Finally, BlackRock may not be
able to predict correctly the direction of securities prices,
interest rates and other economic factors, which could cause the
Funds derivatives positions to lose value. When a
derivative is used as a hedge against a position that the Fund
holds, any loss generated by the derivative generally should be
substantially offset by gains on the hedged investment, and vice
versa. While hedging can reduce or eliminate losses, it can also
reduce or eliminate gains. Hedges are sometimes subject to
imperfect matching between the derivative and the underlying
security, and there can be no assurance that the Funds
hedging transactions will be effective. The income from certain
derivatives may be subject to Federal income tax. Swap
agreements involve the risk that the party with whom the Fund
has entered into the swap will default on its obligation to pay
the Fund and the risk that the Fund will not be able to meet its
obligations to pay the other party to the agreement. Recent
legislation calls for new regulation of the derivatives markets.
The extent and impact of the regulation is not yet known and may
not be known for some
14
time. New regulation may make derivatives more costly, may
limit the availability of derivatives, or may otherwise
adversely affect the value or performance of derivatives.
Dollar Rolls Risk A dollar roll
transaction involves a sale by the Fund of a mortgage-backed or
other security concurrently with an agreement by the Fund to
repurchase a similar security at a later date at an
agreed-upon
price. Dollar roll transactions involve the risk that the market
value of the securities the Fund is required to purchase may
decline below the agreed upon repurchase price of those
securities. If the broker/dealer to whom the Fund sells
securities becomes insolvent, the Funds right to purchase
or repurchase securities may be restricted. Successful use of
mortgage dollar rolls may depend upon the advisers ability
to correctly predict interest rates and prepayments. There is no
assurance that dollar rolls can be successfully employed.
Emerging Markets Risk The risks of
foreign investments are usually much greater for emerging
markets. Investments in emerging markets may be considered
speculative. Emerging markets include those in countries defined
as emerging or developing by the World Bank, the International
Finance Corporation or the United Nations. Emerging markets are
riskier than more developed markets because they tend to develop
unevenly and may never fully develop. They are more likely to
experience hyperinflation and currency devaluations, which
adversely affect returns to U.S. investors. In addition,
many emerging markets have far lower trading volumes and less
liquidity than developed markets. Since these markets are often
small, they may be more likely to suffer sharp and frequent
price changes or long-term price depression because of adverse
publicity, investor perceptions or the actions of a few large
investors. In addition, traditional measures of investment value
used in the United States, such as price to earnings ratios, may
not apply to certain small markets. Also, there may be less
publicly available information about issuers in emerging markets
than would be available about issuers in more developed capital
markets, and such issuers may not be subject to accounting,
auditing and financial reporting standards and requirements
comparable to those to which U.S. companies are subject.
Many emerging markets have histories of political instability
and abrupt changes in policies. As a result, their governments
are more likely to take actions that are hostile or detrimental
to private enterprise or foreign investment than those of more
developed countries, including expropriation of assets,
confiscatory taxation, high rates of inflation or unfavorable
diplomatic developments. In the past, governments of such
nations have expropriated substantial amounts of private
property, and most claims of the property owners have never been
fully settled. There is no assurance that such expropriations
will not reoccur. In such an event, it is possible that the Fund
could lose the entire value of its investments in the affected
market. Some countries have pervasiveness of corruption and
crime that may hinder investments. Certain emerging markets may
also face other significant internal or external risks,
including the risk of war, and ethnic, religious and racial
conflicts. In addition, governments in many emerging market
countries participate to a significant degree in their economies
and securities markets, which may impair investment and economic
growth. National policies that may limit the Funds
investment opportunities include restrictions on investment in
issuers or industries deemed sensitive to national interests.
Emerging markets may also have differing legal systems and the
existence or possible imposition of exchange controls, custodial
restrictions or other foreign or U.S. governmental laws or
restrictions applicable to such investments. Sometimes, they may
lack or be in the relatively early development of legal
structures governing private and foreign investments and private
property. In addition to withholding taxes on investment income,
some countries with emerging markets may impose differential
capital gains taxes on foreign investors.
Practices in relation to settlement of securities transactions
in emerging markets involve higher risks than those in developed
markets, in part because the Fund will need to use brokers and
counterparties that are less well capitalized, and custody and
registration of assets in some countries may be unreliable. The
possibility of fraud, negligence, undue influence being exerted
by the issuer or refusal to recognize ownership exists in some
emerging markets, and, along with other factors, could result in
ownership registration being completely lost. The Fund would
absorb any loss resulting from such registration problems and
may have no successful claim for compensation. In addition,
communications between the United States and emerging market
countries may be unreliable, increasing the risk of delayed
settlements or losses of security certificates.
Equity Securities Risk Common and
preferred stocks represent equity ownership in a company. Stock
markets are volatile. The price of equity securities will
fluctuate and can decline and reduce the value of a portfolio
investing in equities. The value of equity securities purchased
by the Fund could decline if the financial condition of the
companies the Fund invests in decline or if overall market and
economic conditions deteriorate. They may also decline due to
factors that affect a particular industry or industries, such as
labor shortages or an increase in production costs and
competitive conditions within an industry. In addition, they may
decline due to general market conditions that are not
15
specifically related to a company or industry, such as real or
perceived adverse economic conditions, changes in the general
outlook for corporate earnings, changes in interest or currency
rates or generally adverse investor sentiment.
Extension Risk When interest rates
rise, certain obligations will be paid off by the obligor more
slowly than anticipated, causing the value of these securities
to fall. Rising interest rates tend to extend the duration of
securities, making them more sensitive to changes in interest
rates. The value of longer-term securities generally changes
more in response to changes in interest rates than shorter-term
securities. As a result, in a period of rising interest rates,
securities may exhibit additional volatility and may lose value.
Foreign Securities Risk Securities
traded in foreign markets have often (though not always)
performed differently from securities traded in the United
States. However, such investments often involve special risks
not present in U.S. investments that can increase the chances
that the Fund will lose money. In particular, the Fund is
subject to the risk that because there may be fewer investors on
foreign exchanges and a smaller number of securities traded each
day, it may be more difficult for the Fund to buy and sell
securities on those exchanges. In addition, prices of foreign
securities may go up and down more than prices of securities
traded in the United States.
Certain Risks of Holding Fund Assets Outside the United
States The Fund generally holds its foreign
securities and cash in foreign banks and securities
depositories. Some foreign banks and securities depositories may
be recently organized or new to the foreign custody business. In
addition, there may be limited or no regulatory oversight of
their operations. Also, the laws of certain countries limit the
Funds ability to recover its assets if a foreign bank,
depository or issuer of a security, or any of their agents, goes
bankrupt. In addition, it is often more expensive for the Fund
to buy, sell and hold securities in certain foreign markets than
in the United States. The increased expense of investing in
foreign markets reduces the amount the Fund can earn on its
investments and typically results in a higher operating expense
ratio for the Fund than for investment companies invested only
in the United States.
Currency Risk Securities and other
instruments in which the Fund invests may be denominated or
quoted in currencies other than the U.S. dollar. For this
reason, changes in foreign currency exchange rates can affect
the value of the Funds portfolio.
Generally, when the U.S. dollar rises in value against a foreign
currency, a security denominated in that currency loses value
because the currency is worth fewer U.S. dollars. Conversely,
when the U.S. dollar decreases in value against a foreign
currency, a security denominated in that currency gains value
because the currency is worth more U.S. dollars. This risk,
generally known as currency risk, means that a
strong U.S. dollar will reduce returns for U.S. investors while
a weak U.S. dollar will increase those returns.
Foreign Economy Risk The economies of certain
foreign markets may not compare favorably with the economy of
the United States with respect to such issues as growth of gross
national product, reinvestment of capital, resources and balance
of payments position. Certain foreign economies may rely heavily
on particular industries or foreign capital and are more
vulnerable to diplomatic developments, the imposition of
economic sanctions against a particular country or countries,
changes in international trading patterns, trade barriers and
other protectionist or retaliatory measures. Investments in
foreign markets may also be adversely affected by governmental
actions such as the imposition of capital controls,
nationalization of companies or industries, expropriation of
assets or the imposition of punitive taxes. In addition, the
governments of certain countries may prohibit or impose
substantial restrictions on foreign investments in their capital
markets or in certain industries. Any of these actions could
severely affect securities prices or impair the Funds
ability to purchase or sell foreign securities or transfer the
Funds assets or income back into the United States, or
otherwise adversely affect the Funds operations.
Other potential foreign market risks include foreign exchange
controls, difficulties in pricing securities, defaults on
foreign government securities, difficulties in enforcing legal
judgments in foreign courts and political and social
instability. Diplomatic and political developments, including
rapid and adverse political changes, social instability,
regional conflicts, terrorism and war, could affect the
economies, industries and securities and currency markets, and
the value of the Funds investments, in
non-U.S.
countries. These factors are extremely difficult, if not
impossible, to predict and take into account with respect to the
Funds investments.
Governmental Supervision and Regulation/Accounting
Standards Many foreign governments do not
supervise and regulate stock exchanges, brokers and the sale of
securities to the same extent as such regulations exist in the
United States. They also may not have laws to protect investors
that are comparable to U.S. securities laws. For example, some
foreign countries may have no laws or rules against insider
trading. Insider trading occurs when a person buys or sells a
companys securities based on material non-public
information about that company. In addition, some countries may
have legal systems that may make it difficult for the Fund to
vote proxies, exercise shareholder rights, and pursue legal
remedies with respect to its foreign investments. Accounting
standards in other countries are not necessarily the same as in
the United States. If the accounting standards in another
country do
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not require as much detail as U.S. accounting standards, it may
be harder for Fund management to completely and accurately
determine a companys financial condition.
Settlement Risk Settlement and clearance
procedures in certain foreign markets differ significantly from
those in the United States. Foreign settlement and clearance
procedures and trade regulations also may involve certain risks
(such as delays in payment for or delivery of securities) not
typically associated with the settlement of U.S. investments.
At times, settlements in certain foreign countries have not kept
pace with the number of securities transactions. These problems
may make it difficult for the Fund to carry out transactions. If
the Fund cannot settle or is delayed in settling a purchase of
securities, it may miss attractive investment opportunities and
certain of its assets may be uninvested with no return earned
thereon for some period. If the Fund cannot settle or is delayed
in settling a sale of securities, it may lose money if the value
of the security then declines or, if it has contracted to sell
the security to another party, the Fund could be liable for any
losses incurred.
High Portfolio Turnover Risk The Fund
may engage in active and frequent trading of its portfolio
securities. High portfolio turnover (more than 100%) may result
in increased transaction costs to the Fund, including brokerage
commissions, dealer
mark-ups and
other transaction costs on the sale of the securities and on
reinvestment in other securities. The sale of Fund portfolio
securities may result in the realization
and/or
distribution to shareholders of higher capital gains or losses
as compared to a fund with less active trading policies. These
effects of higher than normal portfolio turnover may adversely
affect Fund performance. In addition, investment in mortgage
dollar rolls and participation in TBA transactions may
significantly increase the Funds portfolio turnover rate.
A TBA transaction is a method of trading mortgage-backed
securities where the buyer and seller agree upon general trade
parameters such as agency, settlement date, par amount, and
price.
Interest Rate Risk Interest rate risk
is the risk that prices of fixed-income securities generally
increase when interest rates decline and decrease when interest
rates increase. Prices of longer-term securities generally
change more in response to interest rate changes than prices of
shorter-term securities. The Fund may lose money if short-term
or long-term interest rates rise sharply or otherwise change in
a manner not anticipated by Fund management.
Investment Style Risk Under certain
market conditions, growth investments have performed better
during the later stages of economic expansion and value
investments have performed better during periods of economic
recovery. Therefore, these investment styles may over time go in
and out of favor. At times when the investment styles used by
the Fund are out of favor, the Fund may underperform other
equity funds that use different investment styles.
Junk Bond Risks Although junk bonds
generally pay higher rates of interest than investment grade
bonds, junk bonds are high risk investments that may cause
income and principal losses for the Fund. The major risks of
junk bond investments include:
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Junk bonds may be issued by less creditworthy issuers. Issuers
of junk bonds may have a larger amount of outstanding debt
relative to their assets than issuers of investment grade bonds.
In the event of an issuers bankruptcy, claims of other
creditors may have priority over the claims of junk bond
holders, leaving few or no assets available to repay junk bond
holders.
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Prices of junk bonds are subject to extreme price fluctuations.
Adverse changes in an issuers industry and general
economic conditions may have a greater impact on the prices of
junk bonds than on other higher rated fixed-income securities.
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Issuers of junk bonds may be unable to meet their interest or
principal payment obligations because of an economic downturn,
specific issuer developments, or the unavailability of
additional financing.
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Junk bonds frequently have redemption features that permit an
issuer to repurchase the security from the Fund before it
matures. If the issuer redeems junk bonds, the Fund may have to
invest the proceeds in bonds with lower yields and may lose
income.
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Junk bonds may be less liquid than higher rated fixed-income
securities, even under normal economic conditions. There are
fewer dealers in the junk bond market, and there may be
significant differences in the prices quoted for junk bonds by
the dealers. Because they are less liquid, judgment may play a
greater role in valuing certain of the Funds securities
than is the case with securities trading in a more liquid market.
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The Fund may incur expenses to the extent necessary to seek
recovery upon default or to negotiate new terms with a
defaulting issuer.
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The credit rating of a high yield security does not necessarily
address its market value risk. Ratings and market value may
change from time to time, positively or negatively, to reflect
new developments regarding the issuer.
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Market Risk and Selection Risk Market
risk is the risk that one or more markets in which the Fund
invests will go down in value, including the possibility that
the markets will go down sharply and unpredictably. Selection
risk is the risk that the securities selected by Fund management
will underperform the markets, the relevant indices or the
securities selected by other funds with similar investment
objectives and investment strategies. This means you may lose
money.
Mid Cap Securities Risk The securities
of mid cap companies generally trade in lower volumes and are
generally subject to greater and less predictable price changes
than the securities of larger capitalization companies.
Mortgage- and Asset-Backed Securities
Risks Mortgage-backed securities
(residential and commercial) and asset-backed securities
represent interests in pools of mortgages or other
assets, including consumer loans or receivables held in trust.
Although asset-backed and commercial mortgage-backed securities
(CMBS) generally experience less prepayment than
residential mortgage-backed securities, mortgage-backed and
asset-backed securities, like traditional fixed-income
securities, are subject to credit, interest rate, prepayment and
extension risks.
Small movements in interest rates (both increases and decreases)
may quickly and significantly reduce the value of certain
mortgage-backed securities. The Funds investments in
asset-backed securities are subject to risks similar to those
associated with mortgage-related securities, as well as
additional risks associated with the nature of the assets and
the servicing of those assets. These securities also are subject
to the risk of default on the underlying mortgage or assets,
particularly during periods of economic downturn. Certain CMBS
are issued in several classes with different levels of yield and
credit protection. The Funds investments in CMBS with
several classes may be in the lower classes that have greater
risks than the higher classes, including greater interest rate,
credit and prepayment risks.
Mortgage-backed securities may be either pass-through securities
or collateralized mortgage obligations (CMOs).
Pass-through securities represent a right to receive principal
and interest payments collected on a pool of mortgages, which
are passed through to security holders. CMOs are created by
dividing the principal and interest payments collected on a pool
of mortgages into several revenue streams (tranches) with
different priority rights to portions of the underlying mortgage
payments. Certain CMO tranches may represent a right to receive
interest only (IOs), principal only
(POs) or an amount that remains after floating-rate
tranches are paid (an inverse floater). These securities are
frequently referred to as mortgage derivatives and
may be extremely sensitive to changes in interest rates.
Interest rates on inverse floaters, for example, vary inversely
with a short-term floating rate (which may be reset
periodically). Interest rates on inverse floaters will decrease
when short-term rates increase, and will increase when
short-term rates decrease. These securities have the effect of
providing a degree of investment leverage. In response to
changes in market interest rates or other market conditions, the
value of an inverse floater may increase or decrease at a
multiple of the increase or decrease in the value of the
underlying securities. If the Fund invests in CMO tranches
(including CMO tranches issued by government agencies) and
interest rates move in a manner not anticipated by Fund
management, it is possible that the Fund could lose all or
substantially all of its investment.
The mortgage market in the United States recently has
experienced difficulties that may adversely affect the
performance and market value of certain of the Funds
mortgage-related investments. Delinquencies and losses on
mortgage loans (including subprime and second-lien mortgage
loans) generally have increased recently and may continue to
increase, and a decline in or flattening of real-estate values
(as has recently been experienced and may continue to be
experienced in many housing markets) may exacerbate such
delinquencies and losses. Also, a number of mortgage loan
originators have recently experienced serious financial
difficulties or bankruptcy. Reduced investor demand for mortgage
loans and mortgage-related securities and increased investor
yield requirements have caused limited liquidity in the
secondary market for mortgage-related securities, which can
adversely affect the market value of mortgage-related
securities. It is possible that such limited liquidity in such
secondary markets could continue or worsen.
Asset-backed securities entail certain risks not presented by
mortgage-backed securities, including the risk that in certain
states it may be difficult to perfect the liens securing the
collateral backing certain asset-backed securities. In addition,
certain asset-backed securities are based on loans that are
unsecured, which means that there is no collateral to seize if
the underlying borrower defaults. Certain mortgage-backed
securities in which the Fund may invest may also provide a
degree of investment leverage, which could cause the Fund to
lose all or substantially all of its investment.
Prepayment Risk When interest rates
fall, certain obligations will be paid off by the obligor more
quickly than originally anticipated, and the Fund may have to
invest the proceeds in securities with lower yields. In periods
of falling interest rates, the rate of prepayments tends to
increase (as does price fluctuation) as borrowers are motivated
to pay off debt and refinance at new lower rates. During such
periods, reinvestment of the prepayment proceeds by the
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management team will generally be at lower rates of return than
the return on the assets that were prepaid. Prepayment reduces
the yield to maturity and the average life of the security.
Sovereign Debt Risk Sovereign debt
instruments are subject to the risk that a governmental entity
may delay or refuse to pay interest or repay principal on its
sovereign debt, due, for example, to cash flow problems,
insufficient foreign currency reserves, political
considerations, the relative size of the governmental
entitys debt position in relation to the economy or the
failure to put in place economic reforms required by the
International Monetary Fund or other multilateral agencies. If a
governmental entity defaults, it may ask for more time in which
to pay or for further loans. There is no legal process for
collecting sovereign debt that a government does not pay nor are
there bankruptcy proceedings through which all or part of the
sovereign debt that a governmental entity has not repaid may be
collected.
Structured Notes Risk Structured notes
and other related instruments purchased by the Fund are
generally privately negotiated debt obligations where the
principal
and/or
interest is determined by reference to the performance of a
specific asset, benchmark asset, market or interest rate
(reference measure). The interest rate or the
principal amount payable upon maturity or redemption may
increase or decrease, depending upon changes in the value of the
reference measure. The terms of a structured note may provide
that, in certain circumstances, no principal is due at maturity
and, therefore, may result in a loss of invested capital by a
Fund. The interest
and/or
principal payments that may be made on a structured product may
vary widely, depending on a variety of factors, including the
volatility of the reference measure.
Structured notes may be positively or negatively indexed, so the
appreciation of the reference measure may produce an increase or
a decrease in the interest rate or the value of the principal at
maturity. The rate of return on structured notes may be
determined by applying a multiplier to the performance or
differential performance of reference measures. Application of a
multiplier involves leverage that will serve to magnify the
potential for gain and the risk of loss.
The purchase of structured notes exposes a Fund to the credit
risk of the issuer of the structured product. Structured notes
may also be more volatile, less liquid, and more difficult to
price accurately than less complex securities and instruments or
more traditional debt securities.
U.S. Government Issuer Risk
Treasury obligations may differ in their interest rates,
maturities, times of issuance and other characteristics.
Obligations of U.S. Government agencies and authorities are
supported by varying degrees of credit but generally are not
backed by the full faith and credit of the U.S. Government.
No assurance can be given that the U.S. Government will
provide financial support to its agencies and authorities if it
is not obligated by law to do so.
U.S. Government Mortgage-Related Securities
Risk There are a number of important
differences among the agencies and instrumentalities of the
U.S. Government that issue mortgage-related securities and
among the securities that they issue. Mortgage-related
securities guaranteed by the Government National Mortgage
Association (GNMA or Ginnie Mae) are
guaranteed as to the timely payment of principal and interest by
GNMA and such guarantee is backed by the full faith and credit
of the United States. GNMA securities also are supported by the
right of GNMA to borrow funds from the U.S. Treasury to make
payments under its guarantee. Mortgage-related securities issued
by Fannie Mae or Freddie Mac are solely the obligations of
Fannie Mae or Freddie Mac, as the case may be, and are not
backed by or entitled to the full faith and credit of the United
States but are supported by the right of the issuer to borrow
from the Treasury.
The Fund may also be subject to certain other risks
associated with its investments and investment strategies,
including:
Borrowing Risk Borrowing may
exaggerate changes in the net asset value of Fund shares and in
the return on the Funds portfolio. Borrowing will cost the
Fund interest expense and other fees. The costs of borrowing may
reduce the Funds return. Borrowing may cause the Fund to
liquidate positions when it may not be advantageous to do so to
satisfy its obligations.
Depositary Receipts Risk The issuers
of unsponsored depositary receipts are not obligated to disclose
information that is, in the United States, considered material.
Therefore, there may be less information available regarding
these issuers and there may not be a correlation between such
information and the market value of the depositary receipts.
Depositary receipts are generally subject to the same risks as
the foreign securities that they evidence or into which they may
be converted.
Expense Risk Fund expenses are subject
to a variety of factors, including fluctuations in the
Funds net assets. Accordingly, actual expenses may be
greater or less than those indicated. For example, to the extent
that the Funds net
19
assets decrease due to market declines or redemptions, the
Funds expenses will increase as a percentage of Fund net
assets. During periods of high market volatility, these
increases in the Funds expense ratio could be significant.
Indexed and Inverse Securities Risks
Certain indexed and inverse securities have greater sensitivity
to changes in interest rates or index levels than other
securities, and the Funds investment in such instruments
may decline significantly in value if interest rates or index
levels move in a way Fund management does not anticipate.
Investment in Other Investment Companies
Risk As with other investments, investments
in other investment companies are subject to market and
selection risk. In addition, if the Fund acquires shares of
investment companies, including ones affiliated with the Fund
shareholders bear both their proportionate share of expenses in
the Fund (including management and advisory fees) and,
indirectly, the expenses of the investment companies. To the
extent the Fund is held by an affiliated fund, the ability of
the Fund itself to hold other investment companies may be
limited.
Leverage Risk Some transactions may
give rise to a form of economic leverage. These transactions may
include, among others, derivatives, and may expose the Fund to
greater risk and increase its costs. As an open-end investment
company registered with the Securities and Exchange Commission
(the SEC), the Fund is subject to the federal
securities laws, including the Investment Company Act of 1940,
as amended (the Investment Company Act), the rules
thereunder, and various SEC and SEC staff interpretive
positions. In accordance with these laws, rules and positions,
the Fund must set aside liquid assets (often
referred to as asset segregation), or engage in
other SEC- or staff-approved measures, to cover open
positions with respect to certain kinds of instruments. The use
of leverage may cause the Fund to liquidate portfolio positions
when it may not be advantageous to do so to satisfy its
obligations or to meet any required asset segregation
requirements. Increases and decreases in the value of the
Funds portfolio will be magnified when the Fund uses
leverage.
Liquidity Risk Liquidity risk exists
when particular investments are difficult to purchase or sell.
The Funds investments in illiquid securities may reduce
the returns of the Fund because it may be difficult to sell the
illiquid securities at an advantageous time or price. To the
extent that the Funds principal investment strategies
involve derivatives or securities with substantial market
and/or
credit risk, the Fund will tend to have the greatest exposure to
liquidity risk. Liquid investments may become illiquid after
purchase by the Fund, particularly during periods of market
turmoil. Illiquid investments may be harder to value, especially
in changing markets, and if the Fund is forced to sell these
investments to meet redemption requests or for other cash needs,
the Fund may suffer a loss. In addition, when there is
illiquidity in the market for certain securities, the Fund, due
to limitations on illiquid investments, may be subject to
purchase and sale restrictions.
Master Limited Partnership Risks The
common units of an MLP are listed and traded on U.S. securities
exchanges and their value fluctuates predominantly based on
prevailing market conditions and the success of the MLP. Unlike
owners of common stock of a corporation, owners of common units
have limited voting rights and have no ability annually to elect
directors. In the event of liquidation, common units have
preference over subordinated units, but not over debt or
preferred units, to the remaining assets of the MLP.
Repurchase Agreements, Purchase and Sale Contracts
Risks If the other party to a repurchase
agreement or purchase and sale contract defaults on its
obligation under the agreement, the Fund may suffer delays and
incur costs or lose money in exercising its rights under the
agreement. If the seller fails to repurchase the security in
either situation and the market value of the security declines,
the Fund may lose money.
Securities Lending Risk Securities
lending involves the risk that the borrower may fail to return
the securities in a timely manner or at all. As a result, the
Fund may lose money and there may be a delay in recovering the
loaned securities. The Fund could also lose money if it does not
recover the securities
and/or the
value of the collateral falls, including the value of
investments made with cash collateral. These events could
trigger adverse tax consequences for the Fund.
Short Sales Risk Because making short
sales in securities that it does not own exposes the Fund to the
risks associated with those securities, such short sales involve
speculative exposure risk. The Fund will incur a loss as a
result of a short sale if the price of the security increases
between the date of the short sale and the date on which the
Fund replaces the security sold short. The Fund will realize a
gain if the security declines in price between those dates. As a
result, if the Fund makes short sales in securities that
increase in value, it will likely underperform similar funds
that do not make short sales in securities they do not own.
There can be no assurance that the Fund will be able to close
out a short sale position at any particular time or at an
acceptable price. Although the Funds gain is limited to
the amount at which it sold a security short, its potential loss
is limited only by the maximum attainable price of the security,
less the price at which the security was sold. The Fund may also
pay transaction costs and borrowing fees in connection with
short sales.
20
Small Cap and Emerging Growth Securities
Risk Small cap or emerging growth companies
may have limited product lines or markets. They may be less
financially secure than larger, more established companies. They
may depend on a small number of key personnel. If a product
fails or there are other adverse developments, or if management
changes, the Funds investment in a small cap company may
lose substantial value. In addition, it is more difficult to get
information on smaller companies, which tend to be less well
known, have shorter operating histories, do not have significant
ownership by large investors and are followed by relatively few
securities analysts.
The securities of small cap or emerging growth companies
generally trade in lower volumes and are subject to greater and
more unpredictable price changes than larger cap securities or
the market as a whole. In addition, small cap securities may be
particularly sensitive to changes in interest rates, borrowing
costs and earnings. Investing in small cap securities requires a
longer term view.
Standby Commitment Agreements Risk
Standby commitment agreements involve the risk that the security
the Fund buys will lose value prior to its delivery to the Fund
and will no longer be worth what the Fund has agreed to pay for
it. These agreements also involve the risk that if the security
goes up in value, the counterparty will decide not to issue the
security. In this case, the Fund loses both the investment
opportunity for the assets it set aside to pay for the security
and any gain in the securitys price.
When-Issued and Delayed Delivery Securities and Forward
Commitments Risks When-issued and delayed
delivery securities and forward commitments involve the risk
that the security the Fund buys will lose value prior to its
delivery. There also is the risk that the security will not be
issued or that the other party to the transaction will not meet
its obligation. If this occurs, the Fund loses both the
investment opportunity for the assets it set aside to pay for
the security and any gain in the securitys price.
21
How to Choose
the Share Class that Best Suits Your Needs
The Fund currently offers multiple share classes
(Investor A, Investor B, Investor C,
Institutional and Class R Shares in this prospectus), each
with its own sales charge and expense structure, allowing you to
invest in the way that best suits your needs. Each share class
represents the same ownership interest in the portfolio
investments of the Fund. When you choose your class of shares,
you should consider the size of your investment and how long you
plan to hold your shares. Your financial adviser or financial
intermediary can help you determine which share class is best
suited to your personal financial goals.
For example, if you select Institutional Shares, you will not
pay any sales charge. However, only certain investors may buy
Institutional Shares. If you select Investor A Shares, you
generally pay a sales charge at the time of purchase and an
ongoing service fee of 0.25% per year. You may be eligible for a
sales charge reduction or waiver.
If you select Investor C or Class R Shares, you will
invest the full amount of your purchase price, but you will be
subject to a distribution fee of 0.75% per year for
Investor C Shares and 0.25% per year for Class R
Shares and a service fee of 0.25% per year for both classes of
shares under plans adopted pursuant to
Rule 12b-1
under the Investment Company Act. Because these fees are paid
out of the Funds assets on an ongoing basis, over time
these fees increase the cost of your investment and may cost you
more than paying other types of sales charges. In addition, you
may be subject to a deferred sales charge when you sell
Investor C Shares. Classes with lower expenses will have
higher net asset values and dividends relative to other share
classes.
Investor B Shares are offered on a very limited basis as
described below. Investor B Shares are subject to ongoing
service and distribution fees and may be subject to a deferred
sales charge.
The Funds shares are distributed by BlackRock Investments,
LLC (the Distributor), an affiliate of BlackRock.
22
The table below summarizes key features of each of the share
classes of the Fund.
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Share Classes at a
Glance1
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Investor A
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Investor B
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Investor C2,3
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Institutional
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Class R
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Availability
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Generally available through other financial intermediaries.
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Available only for exchanges, dividend reinvestments by current
holders and for purchase by certain qualified employee benefit
plans.
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Generally available through other financial intermediaries.
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Limited to certain investors, including: Current Institutional shareholders that meet certain requirements
Certain retirement plans
Participants in certain programs sponsored by BlackRock or its affiliates or financial intermediaries
Certain employees and affiliates of BlackRock or its affiliates
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Available only to certain retirement plans.
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Minimum Investment
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$1,000 for all accounts except:
$250 for certain fee-based programs
$100 for retirement plans
$50, if establishing an Automatic Investment Plan (AIP)
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Investor B Shares are not generally available for purchase
(see above).
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$1,000 for all accounts except:
$250 for certain
fee-based programs
$100 for
retirement plans
$50, if
establishing an Automatic Investment Plan (AIP)
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$2 million for institutions and individuals.
Institutional Shares are available to clients of registered investment advisors who have $250,000 invested in the Fund.
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$100 for all accounts.
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Initial Sales Charge?
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Yes. Payable at time of purchase. Lower sales charges are
available for larger investments.
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No. Entire purchase price is invested in shares of the Fund.
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No. Entire purchase price is invested in shares of the Fund.
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No. Entire purchase price is invested in shares of the Fund.
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No. Entire purchase price is invested in shares of the Fund.
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Deferred Sales Charge?
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No. (May be charged for purchases of $1 million or more that are
redeemed within eighteen months).
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Yes. Payable if you redeem within six years of purchase.
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Yes. Payable if you redeem within one year of purchase.
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No.
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No.
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Distribution and Service (12b-1) Fees?
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No Distribution Fee. 0.25% Annual Service Fee.
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0.75% Annual Distribution Fee. 0.25% Annual Service Fee.
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0.75% Annual Distribution Fee. 0.25% Annual Service Fee.
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No.
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0.25% Annual Distribution Fee. 0.25% Annual Service Fee.
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Redemption Fees?
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No.
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No.
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No.
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No.
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No.
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Conversion to Investor A Shares?
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N/A
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Yes, automatically after approximately eight years.
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No.
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No.
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No.
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23
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Share Classes at a
Glance1
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Investor A
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Investor B
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Investor C2,3
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Institutional
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Class R
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Advantage
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Makes sense for investors who are eligible to have the sales
charge reduced or eliminated or who have a long-term investment
horizon because there are no ongoing distribution fees.
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No up-front sales charge so you start off owning more shares.
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No up-front sales charge so you start off owning more shares.
These shares may make sense for investors who have a shorter
investment horizon relative to Investor A Shares.
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No up-front sales charge so you start off owning more shares.
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No up-front sales charge so you start off owning more shares.
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Disadvantage
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You pay a sales charge up-front, and therefore you start off
owning fewer shares.
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You pay ongoing distribution fees each year you own
Investor B Shares, which means that you can expect lower
total performance than Investor A Shares.
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You pay ongoing distribution fees each year you own shares,
which means that you can expect lower total performance per
share than Investor A Shares. Investor C Shares do not
convert to Investor A Shares so you will continue paying
the ongoing distribution fees as long as you hold
Investor C Shares. Over the long term, this can add up to
higher total fees than Investor A Shares.
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Limited availability.
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You pay ongoing distribution fees each year you own shares,
which means that you can expect lower total performance per
share than Investor A Shares. Class R Shares do not convert
to Investor A Shares, so you will continue paying the
ongoing distribution fees as long as you hold the Class R
Shares. Over the long term, this can add up to higher total fees
than Investor A Shares. There is limited availability of
these shares.
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1 |
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Please see Details about the
Share Classes for more information about each share class.
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2 |
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If you establish a new account
directly with the Fund and do not have a financial intermediary
associated with your account, you may only invest in
Investor A Shares. Applications without a financial
intermediary that select Investor C Shares will not be
accepted.
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3 |
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The Fund will not accept a purchase
order of $500,000 or more for Investor C Shares. Your
financial professional may set a lower maximum for
Investor C Shares.
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The following pages will cover the additional details of each
share class, including the Institutional Shares requirements,
the sales charge table for Investor A Shares, reduced sales
charge information, Investor B and Investor C Share
CDSC information, and sales charge waivers.
More information about existing sales charge reductions and
waivers is available free of charge in a clear and prominent
format via hyperlink at www.blackrock.com and in the SAI, which
is available on the website or on request.
24
Details about
the Share Classes
Investor A
Shares Initial Sales Charge Option
The following table shows the front-end sales charges that you
may pay if you buy Investor A Shares. The offering price
for Investor A Shares includes any front-end sales charge.
The front-end sales charge expressed as a percentage of the
offering price may be higher or lower than the charge described
below due to rounding. Similarly, any contingent deferred sales
charge paid upon certain redemptions of Investor A Shares
expressed as a percentage of the applicable redemption amount
may be higher or lower than the charge described below due to
rounding. You may qualify for a reduced front-end sales charge.
Purchases of Investor A Shares at certain fixed dollar
levels, known as breakpoints, cause a reduction in
the front-end sales charge. Once you achieve a breakpoint, you
pay that sales charge on your entire purchase amount (and not
just the portion above the breakpoint). If you select
Investor A Shares, you will pay a sales charge at the time
of purchase as shown in the following table.
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Dealer
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Sales Charge
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Sales Charge
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Compensation
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As a % of
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As a % of Your
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as a % of
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Your Investment
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Offering Price
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Investment1
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Offering Price
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Less than $25,000
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5.25%
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5.54%
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5.00%
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$25,000 but less than $50,000
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4.75%
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4.99%
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4.50%
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$50,000 but less than $100,000
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4.00%
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4.17%
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3.75%
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$100,000 but less than $250,000
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3.00%
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3.09%
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2.75%
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$250,000 but less than $500,000
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2.50%
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2.56%
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2.25%
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$500,000 but less than $750,000
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2.00%
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2.04%
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1.75%
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$750,000 but less than $1,000,000
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1.50%
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1.52%
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1.25%
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$1,000,000 and
over2
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0.00%
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0.00%
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2
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1 |
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Rounded to the nearest
one-hundredth percent.
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2 |
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If you invest $1,000,000 or more in
Investor A Shares, you will not pay an initial sales
charge. In that case, BlackRock compensates the financial
intermediary from its own resources. However, if you redeem your
shares within 18 months after purchase, you may be charged
a deferred sales charge of 0.75% of the lesser of the original
cost of the shares being redeemed or your redemption proceeds.
Such deferred sales charge may be waived in connection with
certain fee-based programs.
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No initial sales charge applies to Investor A Shares that
you buy through reinvestment of Fund dividends or capital gains.
Sales Charges
Reduced or Eliminated for Investor A Shares
There are several ways in which the sales charge can be reduced
or eliminated. Purchases of Investor A Shares at certain
fixed dollar levels, known as breakpoints, cause a
reduction in the front-end sales charge (as described above in
the Investor A Shares Initial
Shares Charge Option section). Additionally, the
front-end sales charge can be reduced or eliminated through one
or a combination of the following: a Letter of Intent, right of
accumulation, the reinstatement privilege (described under
Account Services and Privileges), or a waiver of the
sales charge (described below). Reductions or eliminations
through the right of accumulation or Letter of Intent will apply
to the value of all qualifying holdings in shares of mutual
funds sponsored and advised by BlackRock or its affiliates
(BlackRock Funds) owned by (a) the investor,
(b) the investors spouse and any children under the
age of 21, or (c) a trustee or fiduciary of a single trust
estate or single fiduciary account. For this purpose, the value
of an investors holdings means the offering price of the
newly purchased shares (including any applicable sales charge)
plus the current value (including any sales charges paid) of all
other shares the investor already holds taken together. These
may include shares held in accounts held at a financial
intermediary, including personal accounts, certain retirement
accounts, UGMA/UTMA accounts, Joint Tenancy accounts, trust
accounts and Transfer on Death accounts, as well as shares
purchased by a trust of which the investor is a beneficiary. For
purposes of the right of accumulation and Letter of Intent the
investor may not combine with the investors other holdings
shares held in pension, profit sharing or other employee benefit
plans if those shares are held in the name of a nominee or
custodian.
In order to receive a reduced sales charge, at the time an
investor purchases shares of the Fund, the investor should
inform the financial professional, financial intermediary or
BlackRock Funds of any other shares of the Fund or any other
BlackRock Fund owned by (a) the investor, (b) the
investors spouse and any children under the age of 21, or
(c) a trustee or fiduciary of a single trust estate or
single fiduciary account. Failure by the investor to notify the
financial professional, financial intermediary or BlackRock
Funds, may result in the investor not receiving the sales charge
reduction to which the investor is otherwise entitled.
25
The financial professional, financial intermediary or BlackRock
Funds may request documentation including account
statements and records of the original cost of the shares owned
by the investor, the investors spouse
and/or
children under the age of 21 showing that the
investor qualifies for a reduced sales charge. The investor
should retain these records because depending on
where an account is held or the type of account the
Fund and/or
the investors financial professional, financial
intermediary or BlackRock Funds may not be able to maintain this
information.
For more information, see the SAI or contact your financial
professional or financial intermediary.
Letter of
Intent
An investor may qualify for a reduced front-end sales charge
immediately by signing a Letter of Intent stating
the investors intention to buy a specified amount of
Investor A, Investor B, Investor C or
Institutional Shares in one or more BlackRock Funds within the
next 13 months that would, if bought all at once, qualify
the investor for a reduced sales charge. The initial investment
must meet the minimum initial purchase requirement. The
13-month
Letter of Intent period commences on the day that the Letter of
Intent is received by the Fund, and the investor must tell the
Fund that later purchases are subject to the Letter of Intent.
Purchases submitted prior to the date the Letter of Intent is
received by the Fund are not counted toward the sales charge
reduction. During the term of the Letter of Intent, the Fund
will hold Investor A Shares representing up to 5% of the
indicated amount in an escrow account for payment of a higher
sales load if the full amount indicated in the Letter of Intent
is not purchased. If the full amount indicated is not purchased
within the
13-month
period, and the investor does not pay the higher sales load
within 20 days, the Fund will redeem enough of the
Investor A Shares held in escrow to pay the difference.
Right of
Accumulation
Investors have a right of accumulation under which
the current value of an investors existing Investor A and
A1, Investor B, B1, B2 and B3, Investor C, C1, C2 and C3 and
Institutional Shares in most BlackRock Funds and the investment
in the BlackRock CollegeAdvantage 529 Program by the
investor or by or on behalf of the investors spouse and
minor children may be combined with the amount of the current
purchase in determining whether an investor qualifies for a
breakpoint and a reduced front-end sales charge. Financial
intermediaries may value current holdings of their customers
differently for purposes of determining whether an investor
qualifies for a breakpoint and a reduced front-end sales charge,
although customers of the same financial intermediary will be
treated similarly. In order to use this right, the investor must
alert BlackRock to the existence of any previously purchased
shares.
Other Front-End
Sales Charge Waivers
A sales charge waiver on a purchase of Investor A Shares
may also apply for:
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n |
Authorized qualified employee benefit plans or savings plans and
rollovers of current investments in the Fund through such plans;
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n |
Persons investing through an authorized payroll deduction plan;
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n |
Persons investing through an authorized investment plan for
organizations that operate under Section 501(c)(3) of the
Internal Revenue Code of 1986, as amended (Internal
Revenue Code);
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n |
Registered investment advisers, trust companies and bank trust
departments exercising discretionary investment authority with
respect to amounts to be invested in the Fund;
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n |
Persons associated with the Fund, the Funds Distributor,
BlackRock or the Funds
sub-adviser,
and their affiliates;
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n |
Persons participating in a fee-based program under which they
(i) pay advisory fees to a broker-dealer or other financial
institution or (ii) pay fees to a broker-dealer or other
financial institution for providing transaction processing and
other administrative services, but not investment advisory
services; and
|
Investor A
Shares at Net Asset Value
If you invest $1,000,000 or more in Investor A Shares, you
will not pay any initial sales charge. However, if you redeem
your Investor A Shares within 18 months after
purchase, you may be charged a deferred sales charge of 0.75% of
the lesser of the original cost of the shares being redeemed or
your redemption proceeds. For a discussion on waivers, see
Contingent Deferred Sales Charge Waivers.
If you are eligible to buy both Investor A and
Institutional Shares, you should buy Institutional Shares since
Investor A Shares are subject to a front end sales charge
and an annual 0.25% service fee, while Institutional Shares are
not. The Distributor normally pays the annual Investor A
Shares service fee to dealers as a shareholder servicing fee on
a monthly basis.
26
Investor B
and Investor C Shares Deferred Sales Charge
Options
Investor B Shares are currently available for purchase only
through exchanges and dividend reinvestments by current holders
of Investor B Shares and for purchases by certain employee
benefit plans. If you select Investor C Shares, you do not
pay an initial sales charge at the time of purchase. However, if
you redeem your Investor B Shares within six years after
purchase or your Investor C Shares within one year after
purchase, you may be required to pay a deferred sales charge.
The charge will apply to the lesser of the original cost of
shares being redeemed or the proceeds of your redemption. No
deferred sales charge applies to shares that you buy through
reinvestment of dividends or capital gains.
You will also pay distribution fees of 0.75% and service fees of
0.25% for both classes of shares each year. Because these fees
are paid out of the Funds assets on an ongoing basis, over
time these fees increase the cost of your investment and may
cost you more than paying other types of sales charges. The
Distributor uses the money that it receives from the deferred
sales charges and the distribution fees to cover the costs of
marketing, advertising and compensating the financial
professional or financial intermediary who assists you in
purchasing Fund shares.
The Distributor currently pays dealers a sales concession of
4.00% of the purchase price of Investor B Shares from its
own resources at the time of sale. The Distributor also normally
pays the annual Investor B Shares service fee to dealers as
a shareholder servicing fee on a monthly basis. The Distributor
normally retains the Investor B Shares distribution fee.
The Distributor currently pays dealers a sales concession of
1.00% of the purchase price of Investor C Shares from its
own resources at the time of sale. The Distributor pays the
annual Investor C Shares distribution fee and the annual
Investor C Shares service fee as an ongoing concession and
as a shareholder servicing fee, respectively, to dealers for
Investor C Shares held for over a year and normally retains
the Investor C Shares distribution fee and service fee
during the first year after purchase. For certain qualified
employee benefit plans, the Distributor will pay the full
Investor C Shares distribution fee and service fee to
dealers beginning in the first year after purchase in lieu of
paying the sales concession.
Investor B
Shares
If you redeem Investor B Shares within six years after
purchase, you may be charged a deferred sales charge. No
deferred sales charge applies to shares that you buy through
reinvestment of dividends or capital gains. When you redeem
Investor B Shares, the redemption order is processed so
that the lowest deferred sales charge is charged.
Investor B Shares that are not subject to the deferred
sales charge are redeemed first. After that, the Fund redeems
the Shares that have been held the longest. The amount of the
charge gradually decreases as you hold your shares over time,
according to the following schedule:
|
|
|
|
|
Years Since Purchase
|
|
Sales
Charge1
|
|
|
0 - 1
|
|
4.50%
|
|
|
|
|
|
|
|
1 - 2
|
|
4.00%
|
|
|
|
|
|
|
|
2 - 3
|
|
3.50%
|
|
|
|
|
|
|
|
3 - 4
|
|
3.00%
|
|
|
|
|
|
|
|
4 - 5
|
|
2.00%
|
|
|
|
|
|
|
|
5 - 6
|
|
1.00%
|
|
|
|
|
|
|
|
6 and thereafter
|
|
0.00%
|
|
|
|
|
|
|
|
|
|
|
1 |
|
The percentage charge will apply to
the lesser of the original cost of the shares being redeemed or
the proceeds of your redemption. Shares purchased prior to
October 2, 2006 are subject to the 4.00% six-year
contingent deferred sales charge schedule in effect at that
time. Not all BlackRock Funds have identical deferred sales
charge schedules. If you exchange your shares for shares of
another BlackRock Fund, the original deferred sales charge
schedule will apply.
|
Any CDSC paid on a redemption of Investor B Shares
expressed as a percentage of the applicable redemption amount
may be higher or lower than the charge described due to rounding.
Your Investor B Shares convert automatically into
Investor A Shares approximately eight years after purchase.
Any Investor B Shares received through reinvestment of
dividends paid on converting shares will also convert pro rata
based on the amount of shares being converted. Investor A
Shares are subject to lower annual expenses than Investor B
Shares. The conversion of Investor B Shares to
Investor A Shares is not a taxable event for Federal income
tax purposes.
Different conversion schedules apply to Investor B Shares
of different BlackRock Funds. For example, Investor B
Shares of fixed-income funds typically convert approximately ten
years after purchase compared to approximately eight years for
equity funds. If you acquire your Investor B Shares in an
exchange from another BlackRock fund with a
27
different conversion schedule, the conversion schedule that
applies to the shares you acquire in the exchange will apply.
The length of time that you hold both the original and exchanged
Investor B Shares in both funds will count toward the
conversion schedule. The conversion schedule may be modified in
certain other cases as well.
Investor C
Shares
If you redeem Investor C Shares within one year after
purchase, you may be charged a deferred sales charge of 1.00%.
The charge will apply to the lesser of the original cost of the
shares being redeemed or the proceeds of your redemption and
will be calculated without regards to any redemption fee. When
you redeem Investor C Shares, the redemption order is
processed so that the lowest deferred sales charge is charged.
Investor C Shares that are not subject to the deferred
sales charge are redeemed first. In addition, you will not be
charged a deferred sales charge when you redeem shares that you
acquire through reinvestment of Fund dividends or capital gains.
Any CDSC paid on the redemptions of Investor C Shares
expressed as a percentage of the applicable redemption amount
may be higher or lower than the charge described due to rounding.
Investor C Shares do not offer a conversion privilege.
Contingent
Deferred Sales Charge Waivers
The deferred sales charge relating to Investor A,
Investor B and Investor C Shares may be reduced or
waived in certain circumstances, such as:
|
|
n
|
Redemptions of shares purchased through authorized qualified
employee benefit plans or savings plans and rollovers of current
investments in the Fund through such plans;
|
|
n
|
Exchanges pursuant to the exchange privilege, as described in
How to Exchange Shares or Transfer your Account;
|
|
n
|
Redemptions made in connection with minimum required
distributions from IRA or 403(b)(7) accounts due to the
shareholder reaching the age of
701/2;
|
|
n
|
Certain post-retirement withdrawals from an IRA or other
retirement plan if you are over
591/2 years
old and you purchased your shares prior to October 2, 2006;
|
|
n
|
Redemptions made with respect to certain retirement plans
sponsored by the Fund, BlackRock or an affiliate;
|
|
n
|
Redemptions resulting from shareholder death as long as the
waiver request is made within one year of death or, if later,
reasonably promptly following completion of probate (including
in connection with the distribution of account assets to a
beneficiary of the decedent);
|
|
n
|
Withdrawals resulting from shareholder disability (as defined in
the Internal Revenue Code) as long as the disability arose
subsequent to the purchase of the shares;
|
|
n
|
Involuntary redemptions made of shares in accounts with low
balances;
|
|
n
|
Certain redemptions made through the Systematic Withdrawal Plan
offered by the Fund, BlackRock or an affiliate;
|
|
|
n |
Redemptions related to the payment of BNY Mellon Investment
Servicing Trust Company custodial IRA fees; and
|
|
|
n |
Redemptions when a shareholder can demonstrate hardship, in the
absolute discretion of the Fund.
|
More information about existing sales charge reductions and
waivers is available free of charge in a clear and prominent
format via hyperlink at www.blackrock.com and in the SAI, which
is available on the website or on request.
Institutional
Shares
Institutional Shares are not subject to any sales charge. Only
certain investors are eligible to buy Institutional Shares. Your
financial professional or other financial intermediary can help
you determine whether you are eligible to buy Institutional
Shares. The Fund may permit a lower initial investment for
certain investors if their purchase, combined with purchases by
other investors received together by the Fund, meets the minimum
investment requirement.
Eligible Institutional investors include the following:
|
|
n
|
Investors who currently own Institutional Shares of the Fund may
make additional purchases of Institutional Shares of the Fund
directly from the Fund;
|
|
n
|
Institutional and individual retail investors with a minimum
investment of $2 million who purchase directly from the
Fund;
|
|
n
|
Certain qualified retirement plans;
|
|
n
|
Investors in selected fee-based programs;
|
|
n
|
Clients of registered investment advisers who have $250,000
invested in the Fund;
|
28
|
|
n
|
Trust department clients of PNC Bank and Bank of America, N.A.
and their affiliates for whom they (i) act in a fiduciary
capacity (excluding participant directed employee benefit
plans); (ii) otherwise have investment discretion; or
(iii) act as custodian for at least $2 million in
assets;
|
|
n
|
Unaffiliated banks, thrifts or trust companies that have
agreements with the Distributor;
|
|
n
|
Holders of certain Merrill Lynch & Co., Inc.
(Merrill Lynch) sponsored unit investment trusts
(UITs) who reinvest dividends received from such
UITs in shares of the Fund; and
|
|
n
|
Employees, officers and directors/trustees of BlackRock, Inc.,
BlackRock Funds, Merrill Lynch, The PNC Financial Services
Group, Inc. (PNC), Barclays PLC
(Barclays) or their respective affiliates.
|
Class R
Shares
Class R Shares are available only to certain retirement and
other similar plans. If you buy Class R Shares, you will
pay neither an initial sales charge nor a CDSC. However,
Class R Shares are subject to a distribution fee of 0.25%
per year and a service fee of 0.25% per year. Because these fees
are paid out of the Funds assets on an ongoing basis, over
time these fees increase the cost of your investment and may
cost you more than paying other types of sales charges.
Class R Shares do not offer a conversion privilege.
The Distributor currently pays the annual Class R Shares
distribution fee and annual Class R Shares service fee to
dealers as an ongoing concession and as a shareholder servicing
fee, respectively, on a monthly basis.
Distribution
and Service Payments
The Fund has adopted plans (the Plans) that allow
the Fund to pay distribution fees for the sale of its shares
under
Rule 12b-1
of the Investment Company Act and shareholder servicing fees for
certain services provided to its shareholders.
Plan
Payments
Under the Plans, Investor B, Investor C and Class R Shares
pay a distribution fee to the Distributor,
and/or its
affiliates including PNC and its affiliates and to Barclays and
its affiliates, for distribution and sales support services. The
distribution fees may be used to pay the Distributor for
distribution services and to pay the Distributor and affiliates
of BlackRock and PNC or Barclays for sales support services
provided in connection with the sale of Investor B, Investor C
and Class R Shares. The distribution fees may also be used
to pay brokers, dealers, financial institutions and industry
professionals (including BlackRock, PNC, Barclays and their
respective affiliates) (each a Financial
Intermediary) for sales support services and related
expenses. All Investor B, Investor C and Class R Shares pay
a maximum distribution fee per year that is a percentage of the
average daily net asset value of the Fund attributable to
Investor B, Investor C and Class R Shares, as
applicable. Institutional and Investor A Shares do not pay a
distribution fee.
Under the Plans, the Fund also pays shareholder servicing fees
(also referred to as shareholder liaison services fees) to
Financial Intermediaries for providing support services to their
customers who own Investor A, Investor B,
Investor C and Class R Shares. The shareholder
servicing fee payment is calculated as a percentage of the
average daily net asset value of Investor A,
Investor B, Investor C and Class R Shares of the
Fund. All Investor A, Investor B, Investor C and
Class R Shares pay this shareholder servicing fee.
Institutional Shares do not pay a shareholder servicing fee.
In return for the shareholder servicing fee, Financial
Intermediaries (including BlackRock) may provide one or more of
the following services to their customers who own
Investor A, Investor B, Investor C and
Class R Shares:
|
|
n
|
Responding to customer questions on the services performed by
the Financial Intermediary and investments in Investor A,
Investor B, Investor C and Class R Shares;
|
|
n
|
Assisting customers in choosing and changing dividend options,
account designations and addresses; and
|
|
n
|
Providing other similar shareholder liaison services.
|
The shareholder servicing fees payable pursuant to the Plans are
paid to compensate Financial Intermediaries for the
administration and servicing of shareholder accounts and are not
costs which are primarily intended to result in the sale of the
Funds shares. Because the fees paid by the Fund under the
Plans are paid out of Fund assets on an ongoing basis, over time
these fees will increase the cost of your investment and may
cost you more than paying other types of sales charges. In
addition, the distribution fees paid by Investor B,
Investor C and Class R Shares may over time cost
investors more than the front-end sales charge on
Investor A Shares. For more information on the Plans,
including a complete list of services provided thereunder, see
the SAI.
29
Other Payments by
the Fund
In addition to, rather than in lieu of, distribution and
shareholder servicing fees that the Fund may pay to a Financial
Intermediary pursuant to the Plans and fees the Fund pays to its
transfer agent, BNY Mellon Investment Servicing (US) Inc. (the
Transfer Agent), BlackRock, on behalf of the Fund,
may enter into non-Plan agreements with a Financial Intermediary
pursuant to which the Fund will pay a Financial Intermediary for
administrative, networking, recordkeeping, sub-transfer agency
and shareholder services. These non-Plan payments are generally
based on either (1) a percentage of the average daily net
assets of Fund shareholders serviced by a Financial Intermediary
or (2) a fixed dollar amount for each account serviced by a
Financial Intermediary. The aggregate amount of these payments
may be substantial.
Other Payments by
BlackRock
The Plans permit BlackRock, the Distributor and their affiliates
to make payments relating to distribution and sales support
activities out of their past profits or other sources available
to them (and not as an additional charge to the Fund). From time
to time, BlackRock, the Distributor or their affiliates also may
pay a portion of the fees for administrative, networking,
recordkeeping,
sub-transfer
agency and shareholder services described above at its or their
own expense and out of its or their profits. BlackRock, the
Distributor and their affiliates may compensate affiliated and
unaffiliated Financial Intermediaries for the sale and
distribution of shares of the Fund or for these other services
to the Fund and shareholders. These payments would be in
addition to the Fund payments described in this prospectus and
may be a fixed dollar amount, may be based on the number of
customer accounts maintained by the Financial Intermediary, or
may be based on a percentage of the value of shares sold to, or
held by, customers of the Financial Intermediary. The aggregate
amount of these payments by BlackRock, the Distributor and their
affiliates may be substantial. Payments by BlackRock may include
amounts that are sometimes referred to as revenue
sharing payments. In some circumstances, these revenue
sharing payments may create an incentive for a Financial
Intermediary, its employees or associated persons to recommend
or sell shares of the Fund to you. Please contact your Financial
Intermediary for details about payments it may receive from the
Fund or from BlackRock, the Distributor or their affiliates. For
more information, see the SAI.
How to Buy,
Sell, Exchange and Transfer Shares
The chart on the following pages summarizes how to buy, sell,
exchange and transfer shares through your financial professional
or financial intermediary. You may also buy, sell, exchange and
transfer shares through BlackRock, if your account is held
directly with BlackRock. To learn more about buying, selling,
transferring or exchanging shares through BlackRock, call
(800) 441-7762.
Because the selection of a mutual fund involves many
considerations, your financial professional or financial
intermediary may help you with this decision.
The Fund may reject any purchase order, modify or waive the
minimum initial or subsequent investment requirements for any
shareholders and suspend and resume the sale of any share class
of the Fund at any time for any reason.
In addition, the Fund may waive certain requirements regarding
the purchase, sale, exchange or transfer of shares described
below.
Under certain circumstances, if no activity occurs in an account
within a time period specified by state law, a
shareholders shares in the Fund may be transferred to that
state.
30
|
|
|
|
|
How to Buy Shares
|
|
|
Your Choices
|
|
Important Information for You to
Know
|
Initial Purchase
|
|
First, select the share class appropriate for you
|
|
Refer to the Share Classes at a Glance table in this
prospectus (be sure to read this prospectus carefully). When you
place your initial order, you must indicate which share class
you select (if you do not specify a share class and do not
qualify to purchase Institutional Shares, you will receive
Investor A Shares).
Certain factors, such as the amount of your investment, your
time frame for investing, and your financial goals, may affect
which share class you choose. Your financial professional can
help you determine which share class is appropriate for you.
Class R Shares are available only to certain retirement and
other similar plans.
|
|
|
|
|
|
|
|
Next, determine the amount of your investment
|
|
Refer to the minimum initial investment in the Share Classes at a Glance table of this prospectus. Be sure to note the maximum investment amounts in Investor C Shares.
See Account Information Details about the Share Classes for information on a lower initial investment requirement for certain Fund investors if their purchase, combined with purchases by other investors received together by the Fund, meets the minimum investment requirement.
|
|
|
|
|
|
|
|
Have your financial professional or financial intermediary
submit your purchase order
|
|
The price of your shares is based on the next calculation of the
Funds net asset value after your order is placed. Any
purchase orders placed prior to the close of business on the
NYSE (generally 4:00 p.m. Eastern time) will be priced at the
net asset value determined that day. Certain financial
intermediaries, however, may require submission of orders prior
to that time. Purchase orders placed after that time will be
priced at the net asset value determined on the next business
day. A broker-dealer or financial institution maintaining the
account in which you hold shares may charge a separate account,
service or transaction fee on the purchase or sale of Fund
shares that would be in addition to the fees and expenses shown
in the Funds Fees and Expenses table.
The Fund may reject any order to buy shares and may suspend the
sale of shares at any time. Other financial intermediaries may
charge a processing fee to confirm a purchase.
|
|
|
|
|
|
|
|
Or contact BlackRock (for accounts held directly with BlackRock)
|
|
To purchase shares directly with BlackRock, call (800) 441-7762
and request a new account application. Mail the completed
application along with a check payable to BlackRock
Funds to the Transfer Agent at the address on the
application.
|
|
|
|
|
|
Add to Your Investment
|
|
Purchase additional shares
|
|
For Investor A and Investor C Shares, the minimum
investment for additional purchases is generally $50 for all
accounts except that certain retirement plans and payroll
deduction programs may have a lower minimum for additional
purchases. (The minimums for additional purchases may be waived
under certain circumstances.)
|
|
|
|
|
|
|
|
Have your financial professional or financial intermediary
submit your purchase order for additional shares
|
|
To purchase additional shares you may contact your financial
professional or financial intermediary.
For more details on purchasing by Internet see below.
|
|
|
|
|
|
31
|
|
|
|
|
How to Buy Shares
(continued)
|
|
|
Your Choices
|
|
Important Information for You to
Know
|
Add to Your Investment (continued)
|
|
Or contact BlackRock (for accounts held directly with BlackRock)
|
|
Purchase by Telephone: Call (800) 441-7762 and speak with
one of our representatives. The Fund has the right to reject any
telephone request for any reason.
|
|
|
|
|
Purchase in Writing: You may send a written request to
BlackRock at the address on the back cover of this prospectus.
|
|
|
|
|
Purchase by VRU: Investor Shares may also be
purchased by use of the Funds automated voice response
unit service (VRU) at
(800) 441-7762.
|
|
|
|
|
Purchase by Internet: You may purchase your shares, and
view activity in your account, by logging onto the BlackRock
website at www.blackrock.com/funds. Purchases made on the
Internet using Automated Clearing House Network
(ACH) will have a trade date that is the day after
the purchase is made.
|
|
|
|
|
Certain institutional clients purchase orders of
Institutional Shares placed by wire prior to the close of
business on the NYSE will be priced at the net asset value
determined that day. Contact your financial intermediary or
BlackRock for further information. The Fund limits Internet
purchases in shares of the Fund to $25,000 per trade. Different
maximums may apply to certain institutional investors.
|
|
|
|
|
Please read the On-Line Services Disclosure Statement and User
Agreement, the Terms and Conditions page and the Consent to
Electronic Delivery Agreement (if you consent to electronic
delivery), before attempting to transact online.
|
|
|
|
|
The Fund employs reasonable procedures to confirm that
transactions entered over the Internet are genuine. By entering
into the User Agreement with the Fund in order to open an
account through the website, the shareholder waives any right to
reclaim any losses from the Fund or any of its affiliates,
incurred through fraudulent activity.
|
|
|
|
|
|
|
|
Acquire additional shares by reinvesting dividends and capital
gains
|
|
All dividends and capital gains distributions are automatically
reinvested without a sales charge. To make any changes to your
dividend
and/or
capital gains distributions options, please call (800) 441-7762,
or contact your financial professional (if your account is not
held directly with BlackRock).
|
|
|
|
|
|
|
|
Participate in the Automatic Investment Plan (AIP)
|
|
BlackRocks Automatic Investment Plan (AIP)
allows you to invest a specific amount on a periodic basis from
your checking or savings account into your investment account.
|
|
|
|
|
Refer to the Account Services and Privileges section
of this prospectus for additional information.
|
|
|
|
|
|
How to Pay for Shares
|
|
Making payment for purchases
|
|
Payment for an order must be made in Federal funds or other
immediately available funds by the time specified by your
financial professional or financial intermediary, but in no
event later than 4:00 p.m. (Eastern time) on the third
business day (in the case of Investor Shares) or first
business day (in the case of Institutional Shares) following
BlackRocks receipt of the order. If payment is not
received by this time, the order will be canceled and you and
your financial professional or financial intermediary will be
responsible for any loss to the Fund.
|
|
|
|
|
For shares purchased directly from the Fund, a check payable to
BlackRock Funds which bears the name of the fund you are
purchasing must accompany a completed purchase application.
There is a $20 fee for each purchase check that is returned due
to insufficient funds. The Fund does not accept third-party
checks. You may also wire Federal funds to the Fund to purchase
shares, but you must call (800) 441-7762 before doing so to
confirm the wiring instructions.
|
|
|
|
|
|
32
|
|
|
|
|
How to Sell Shares
|
|
|
Your Choices
|
|
Important Information for You to
Know
|
Full or Partial Redemption of Shares
|
|
Have your financial professional or other financial intermediary
submit your sales order
|
|
You can make redemption requests through your financial
professional. Shareholders should indicate whether they are
redeeming Investor A, Investor B, Investor C,
Institutional or Class R Shares. The price of your shares is
based on the next calculation of the Funds net asset value
after your order is placed. For your redemption request to be
priced at the net asset value on the day of your request, you
must submit your request to your financial professional or
financial intermediary prior to that days close of
business on the NYSE (generally 4 p.m. Eastern time). Certain
financial intermediaries, however, may require submission of
orders prior to that time. Any redemption request placed after
that time will be priced at the net asset value at the close of
business on the next business day.
|
|
|
|
|
Financial intermediaries may charge a fee to process a
redemption of shares. Shareholders should indicate which class
of shares they are redeeming. The Fund may reject an order to
sell shares under certain circumstances.
|
|
|
|
|
|
|
|
Selling shares held directly with BlackRock
|
|
Methods of Redeeming Redeem by Telephone: You may sell
Investor Shares held at BlackRock by telephone request if
certain conditions are met and if the amount being sold is less
than (i) $100,000 for payments by check or (ii) $250,000 for
payments through the ACH or wire transfer. Certain redemption
requests, such as those in excess of these amounts, must be in
writing with a medallion signature guarantee. For Institutional
Shares, certain redemption requests may require written
instructions with a medallion signature guarantee. Call (800)
441-7762 for details.
|
|
|
|
|
You can obtain a medallion signature guarantee stamp from a
bank, securities dealer, securities broker, credit union,
savings and loan association, national securities exchange or
registered securities association. A notary public seal will not
be acceptable.
|
|
|
|
|
The Fund, its administrators and the Distributor will employ
reasonable procedures to confirm that instructions communicated
by telephone are genuine. The Fund and its service providers
will not be liable for any loss, liability, cost or expense for
acting upon telephone instructions that are reasonably believed
to be genuine in accordance with such procedures. The Fund may
refuse a telephone redemption request if it believes it is
advisable to do so.
|
|
|
|
|
During periods of substantial economic or market change,
telephone redemptions may be difficult to complete. Please find
below alternative redemption methods.
|
|
|
|
|
Redeem by VRU: Investor Shares may also be redeemed
by use of the Funds automated voice response unit service
(VRU). Payment for Investor Shares redeemed by VRU may be
made for non-retirement accounts in amounts up to $25,000,
either through check, ACH or wire.
|
|
|
|
|
Redeem by Internet: You may redeem in your account, by
logging onto the BlackRock website at www.blackrock.com/funds.
Proceeds from Internet redemptions may be sent via check, ACH or
wire to the bank account of record. Payment for
Investor Shares redeemed by Internet may be made for
non-retirement accounts in amounts up to $25,000, either through
check, ACH or wire. Different maximums may apply to investors in
Institutional Shares.
|
|
|
|
|
Redeem in Writing: You may sell shares held at BlackRock
by writing to BlackRock, P.O. Box 9819, Providence,
Rhode Island 02940-8019 or for overnight delivery,
4400 Computer Drive, Westborough, Massachusetts 01588. All
shareholders on the account must sign the letter. A medallion
signature guarantee will generally be required but may be waived
in certain limited circumstances. You can obtain a medallion
signature guarantee stamp from a bank, securities dealer,
securities broker, credit union, savings and loan association,
national securities exchange or registered securities
association. A notary public seal will not be acceptable. If you
hold stock certificates, return the certificates with the
letter. Proceeds from redemptions may be sent via check, ACH or
wire to the bank account of record.
|
|
|
|
|
|
33
|
|
|
|
|
How to Sell Shares
(continued)
|
|
|
Your Choices
|
|
Important Information for You to
Know
|
Full or Partial Redemption of Shares (continued)
|
|
Selling shares held directly with BlackRock (continued)
|
|
Payment of Redemption Proceeds: Redemption proceeds may
be paid by check or, if the Fund has verified banking
information on file, through ACH or by wire transfer.
|
|
|
|
|
Payment by Check: BlackRock will normally mail redemption
proceeds within seven days following receipt of a properly
completed request. Shares can be redeemed by telephone and the
proceeds sent by check to the shareholder at the address on
record. Shareholders will pay $15 for redemption proceeds sent
by check via overnight mail. You are responsible for any
additional charges imposed by your bank for this service.
|
|
|
|
|
Payment by Wire Transfer: Payment for redeemed shares for
which a redemption order is received before 4:00 p.m.
(Eastern time) on a business day is normally made in Federal
funds wired to the redeeming shareholder on the next business
day, provided that the Funds custodian is also open for
business. Payment for redemption orders received after
4:00 p.m. (Eastern time) or on a day when the Funds
custodian is closed is normally wired in Federal funds on the
next business day following redemption on which the Funds
custodian is open for business. The Fund reserves the right to
wire redemption proceeds within seven days after receiving a
redemption order if, in the judgment of the Fund, an earlier
payment could adversely affect the Fund.
|
|
|
|
|
If a shareholder has given authorization for expedited
redemption, shares can be redeemed by Federal wire transfer to a
single previously designated bank account. Shareholders will pay
$7.50 for redemption proceeds sent by Federal wire transfer. You
are responsible for any additional charges imposed by your bank
for this service. No charge for wiring redemption payments with
respect to Institutional Shares is imposed by the Fund.
|
|
|
|
|
The Fund is not responsible for the efficiency of the Federal
wire system or the shareholders firm or bank. To change
the name of the single, designated bank account to receive wire
redemption proceeds, it is necessary to send a written request
to the Fund at the address on the back cover of this prospectus.
|
|
|
|
|
Payment by ACH: Redemption proceeds may be sent to the
shareholders bank account (checking or savings) via ACH.
Payment for redeemed shares for which a redemption order is
received before 4:00 p.m. (Eastern time) on a business day
is normally sent to the redeeming shareholder the next business
day, with receipt at the receiving bank within the next two
business days (48-72 hours); provided that the Funds
custodian is also open for business. Payment for redemption
orders received after 4:00 p.m. (Eastern time) or on a day
when the Funds custodian is closed is normally sent on the
next business day following redemption on which the Funds
custodian is open for business.
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The Fund reserves the right to send redemption proceeds within
seven days after receiving a redemption order if, in the
judgment of the Fund, an earlier payment could adversely affect
the Fund. No charge for sending redemption payments via ACH is
imposed by the Fund.
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* * *
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If you make a redemption request before the Fund has collected
payment for the purchase of shares, the Fund may delay mailing
your proceeds. This delay will usually not exceed ten days.
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34
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How to Exchange Shares or
Transfer your Account
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Your Choices
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Important Information for You to
Know
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Exchange Privilege
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Selling shares of one fund to purchase shares of another
BlackRock Fund (exchanging)
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Investor A, Investor B, Investor C, and
Institutional Shares of the Fund are generally exchangeable for
shares of the same class of another BlackRock Fund. No exchange
privilege is available for Class R Shares.
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You can exchange $1,000 or more of Investor A,
Investor B or Investor C Shares from one fund into the
same class of another fund which offers that class of shares
(you can exchange less than $1,000 of Investor A,
Investor B or Investor C Shares if you already have an
account in the fund into which you are exchanging). Investors
who currently own Institutional Shares of the Fund may make
exchanges into Institutional Shares of other BlackRock Funds
except for investors holding shares through certain client
accounts at financial professionals that are omnibus with the
Fund and do not meet applicable minimums. There is no required
minimum amount with respect to exchanges of Institutional Shares.
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You may only exchange into a share class and fund that are open
to new investors or in which you have a current account if the
fund is closed to new investors.
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Some of the BlackRock Funds impose a different deferred sales
charge schedule. The CDSC will continue to be measured from the
date of the original purchase. The CDSC schedule applicable to
your original purchase will apply to the shares you receive in
the exchange and any subsequent exchange.
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To exercise the exchange privilege, you may contact your
financial professional or financial intermediary. Alternatively,
if your account is held directly with BlackRock, you may: (i)
call (800) 441-7762 and speak with one of our representatives,
(ii) make the exchange via the Internet by accessing your
account online at www.blackrock.com/funds, or (iii) send a
written request to the Fund at the address on the back cover of
this prospectus. Please note, if you indicated on your New
Account Application that you did not want the Telephone Exchange
Privilege, you will not be able to place exchanges via the
telephone until you update this option either in writing or by
calling (800) 441-7762. The Fund has the right to reject any
telephone request for any reason.
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Although there is currently no limit on the number of exchanges
that you can make, the exchange privilege may be modified or
terminated at any time in the future. The Fund may suspend or
terminate your exchange privilege at any time for any reason,
including if the Fund believes, in its sole discretion, that you
are engaging in market timing activities. See Short Term
Trading Policy below. For Federal income tax purposes a
share exchange is a taxable event and a capital gain or loss may
be realized. Please consult your tax adviser or other financial
professional before making an exchange request.
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Transfer Shares to Another Financial Intermediary
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Transfer to a participating financial intermediary
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You may transfer your shares of the Fund only to another
securities dealer that has entered into an agreement with the
Distributor. Certain shareholder services may not be available
for the transferred shares. All future trading of these assets
must be coordinated by the receiving firm.
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If your account is held directly with BlackRock, you may call
(800) 441-7762
with any questions; otherwise please contact your financial
intermediary to accomplish the transfer of shares.
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Transfer to a non-participating financial intermediary
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You must either:
Transfer
your shares to an account with the Fund; or
Sell
your shares, paying any applicable deferred sales charge.
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If your account is held directly with BlackRock, you may call
(800) 441-7762 with any questions; otherwise please contact your
financial intermediary to accomplish the transfer of shares.
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35
Account
Services and Privileges
The following table provides examples of account services and
privileges available in your BlackRock account. Certain of these
account services and privileges are only available to
shareholders of Investor Shares whose accounts are held
directly with BlackRock. If your account is held directly with
BlackRock, please call
(800) 441-7762
or visit www.blackrock.com/funds for additional information as
well as forms and applications. Otherwise, please contact your
financial professional for assistance in requesting one or more
of the following services and privileges.
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Automatic Investment Plan (AIP)
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Allows systematic investments on a periodic basis from checking
or savings account.
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BlackRocks Automatic Investment Plan (AIP) allows you to
invest a specific amount on a periodic basis from your checking
or savings account into your investment account. You may apply
for this option upon account opening or by completing the
Automatic Investment Plan application. The minimum investment
amount for an automatic investment plan is $50 per portfolio.
There is no AIP for Investor B Shares.
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Dividend Allocation Plan
|
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Automatically invests your distributions into another BlackRock
Fund of your choice pursuant to your instructions, without any
fees or sales charges.
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Dividend and capital gains distributions may be reinvested in
your account to purchase additional shares or paid in cash.
Using the Dividend Allocation Plan, you can direct your
distributions to your bank account (checking or savings), to
purchase shares of another fund at BlackRock without any fees or
sales charges, or by check to special payee. Please call (800)
441-7762 for details. If investing into another fund at
BlackRock, the receiving fund must be open to new purchases.
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EZ Trader
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Allows an investor to purchase or sell Investor class shares by
telephone or over the Internet through ACH.
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(NOTE: This option is offered to shareholders whose accounts are
held directly with BlackRock. Please speak with your financial
professional if your account is held elsewhere).
Prior to establishing an EZ Trader account, please contact your
bank to confirm that it is a member of the ACH system. Once
confirmed, complete an application, making sure to include the
appropriate bank information, and return the application to the
address listed on the form.
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Prior to placing a telephone or internet purchase or sale order,
please call (800) 441-7762 to confirm that your bank information
has been updated on your account. Once this is established, you
may place your request to sell shares with the Fund by telephone
or Internet. Proceeds will be sent to your pre-designated bank
account.
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Systematic Exchange
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This feature can be used by investors to systematically exchange
money from one fund to up to four other funds.
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A minimum of $10,000 in the initial BlackRock Fund is required
and investments in any additional funds must meet minimum
initial investment requirements.
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Systematic Withdrawal Plan (SWP)
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This feature can be used by investors who want to receive
regular distributions from their accounts.
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To start a Systematic Withdrawal Plan (SWP) a shareholder must
have a current investment of $10,000 or more in a BlackRock
Fund.
Shareholders can elect to receive cash payments of $50 or more
at any interval they choose. Shareholders may sign up by
completing the SWP Application Form which may be obtained from
BlackRock. Shareholders should realize that if withdrawals
exceed income the invested principal in their account will be
depleted.
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To participate in the SWP, shareholders must have their
dividends reinvested. Shareholders may change or cancel the SWP
at any time, with a minimum of 24 hours notice. If a shareholder
purchases additional Investor A Shares of a fund at the
same time he or she redeems shares through the SWP, that
investor may lose money because of the sales charge involved. No
CDSC will be assessed on redemptions of Investor A,
Investor B or Investor C Shares made through the SWP
that do not exceed 12% of the accounts net asset value on
an annualized basis. For example, monthly, quarterly, and
semi-annual SWP redemptions of Investor A, Investor B
or Investor C Shares will not be subject to the CDSC if
they do not exceed 1%, 3% and 6%, respectively, of an
accounts net asset value on the redemption date. SWP
redemptions of Investor A, Investor B or
Investor C Shares in excess of this limit will still pay
any applicable CDSC.
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Ask your financial adviser or financial intermediary for details.
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36
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Reinstatement Privilege
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If you redeem Investor A or Institutional Shares, and
within 60 days buy new Investor A Shares of the same or
another BlackRock fund (equal to all or a portion of the
redemption amount), you will not pay a sales charge on the new
purchase amount. This right may be exercised once a year and
within 60 days of the redemption, provided that the
Investor A Share class of that fund is currently open to
new investors or the shareholder has a current account in that
closed fund. Shares will be purchased at the net asset value
calculated at the close of trading on the day the request is
received. To exercise this privilege, the Fund must receive
written notification from the shareholder of record or the
financial professional of record, at the time of purchase.
Investors should consult a tax adviser concerning the tax
consequences of exercising this reinstatement privilege.
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The Fund may:
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n
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Suspend the right of redemption if trading is halted or
restricted on the NYSE or under other emergency conditions
described in the Investment Company Act;
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n
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Postpone date of payment upon redemption if trading is halted or
restricted on the NYSE or under other emergency conditions
described in the Investment Company Act or if a redemption
request is made before the Fund has collected payment for the
purchase of shares;
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n
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Redeem shares for property other than cash if conditions exist
which make cash payments undesirable in accordance with its
rights under the Investment Company Act; and
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n
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Redeem shares involuntarily in certain cases, such as when the
value of a shareholder account falls below a specified level.
|
Note on Low Balance Accounts. Because of the high cost of
maintaining smaller shareholder accounts, BlackRock has set a
minimum balance of $500 in each Fund position you hold within
your account (Fund Minimum), and may take one
of two actions if the balance in your Fund falls below the
Fund Minimum.
First, the Fund may redeem the shares in your account (without
charging any deferred sales charge) if the net asset value of
your account falls below $250 for any reason, including market
fluctuation. You will be notified that the value of your account
is less than $250 before the Fund makes an involuntary
redemption. The notification will provide you with a 90 calendar
day period to make an additional investment in order to bring
the value of your account to at least $250 before the Fund makes
an involuntary redemption or to the Fund Minimum in order
not to be assessed an annual low balance fee of $20, as set
forth below. This involuntary redemption may not apply to
accounts of authorized qualified employee benefit plans,
selected fee-based programs, accounts established under the
Uniform Gifts or Transfers to Minors Acts, and certain
intermediary accounts.
Second, the Fund charges an annual $20 low balance fee on all
Fund accounts that have a balance below the Fund Minimum
for any reason, including market fluctuation. The fee will be
deducted from the Fund account only once per calendar year. You
will be notified that the value of your account is less than the
Fund Minimum before the fee is imposed. You will then have
a 90 calendar day period to make an additional investment to
bring the value of your account to the Fund Minimum before
the Fund imposes the low balance fee. This low balance fee does
not apply to accounts of authorized qualified employee benefit
plans, selected fee-based programs, or, accounts established
under the Uniform Gifts or Transfers to Minors Acts.
Participation
in Fee-Based Programs
If you participate in certain fee-based programs offered by
BlackRock or an affiliate of BlackRock, or financial
intermediaries that have agreements with the Distributor, you
may be able to buy Institutional Shares, including by exchange
from other share classes. Sales charges on the shares being
exchanged may be reduced or waived under certain circumstances.
You generally cannot transfer shares held through a fee-based
program into another account. Instead, you will have to redeem
your shares held through the program and purchase shares of
another class, which may be subject to distribution and service
fees. This may be a taxable event and you will pay any
applicable sales charges or redemption fee.
37
Shareholders that participate in a fee-based program generally
have two options at termination. The program can be terminated
and the shares liquidated or the program can be terminated and
the shares held in an account. In general, when a shareholder
chooses to continue to hold the shares, whatever share class was
held in the program can be held after termination. Shares that
have been held for less than specified periods within the
program may be subject to a fee upon redemption. Shareholders
that held Investor A or Institutional Shares in the program
are eligible to purchase additional shares of the respective
share class of the Fund, but may be subject to upfront sales
charges. Additional purchases of Institutional Shares are
permitted only if you have an existing position at the time of
purchase or are otherwise eligible to purchase Institutional
Shares.
Details about these features and the relevant charges are
included in the client agreement for each fee-based program and
are available from your financial professional or financial
intermediary.
Short-Term
Trading Policy
The Board of Directors (the Board) has determined
that the interests of long-term shareholders and the Funds
ability to manage its investments may be adversely affected when
shares are repeatedly bought, sold or exchanged in response to
short-term market fluctuations also known as
market timing. The Fund is not designed for market
timing organizations or other entities using programmed or
frequent purchases and sales or exchanges. The exchange
privilege for Investor Shares and Institutional Shares is
not intended as a vehicle for short-term trading. Excessive
purchase and sale or exchange activity may interfere with
portfolio management, increase expenses and taxes and may have
an adverse effect on the performance of the Fund and its
shareholders. For example, large flows of cash into and out of
the Fund may require the management team to allocate a
significant amount of assets to cash or other short-term
investments or sell securities, rather than maintaining such
assets in securities selected to achieve the Funds
investment objective. Frequent trading may cause the Fund to
sell securities at less favorable prices, and transaction costs,
such as brokerage commissions, can reduce the Funds
performance.
A fund that invests in
non-U.S.
securities is subject to the risk that an investor may seek to
take advantage of a delay between the change in value of the
Funds portfolio securities and the determination of the
Funds net asset value as a result of different closing
times of U.S. and
non-U.S.
markets by buying or selling Fund shares at a price that does
not reflect their true value. A similar risk exists for funds
that invest in securities of small capitalization companies,
securities of issuers located in emerging markets or high yield
securities (junk bonds) that are thinly traded and therefore may
have actual values that differ from their market prices. This
short-term arbitrage activity can reduce the return received by
long-term shareholders. The Fund will seek to eliminate these
opportunities by using fair value pricing, as described in
Valuation of Fund Investments below.
The Fund discourages market timing and seeks to prevent frequent
purchases and sales or exchanges of Fund shares that it
determines may be detrimental to the Fund or long-term
shareholders. The Board has approved the policies discussed
below to seek to deter market timing activity. The Board has not
adopted any specific numerical restrictions on purchases, sales
and exchanges of Fund shares because certain legitimate
strategies will not result in harm to the Fund or shareholders.
If as a result of its own investigation, information provided by
a financial intermediary or other third party, or otherwise, the
Fund believes, in its sole discretion, that your short-term
trading is excessive or that you are engaging in market timing
activity, it reserves the right to reject any specific purchase
or exchange order. If the Fund rejects your purchase or exchange
order, you will not be able to execute that transaction, and the
Fund will not be responsible for any losses you therefore may
suffer. For transactions placed directly with the Fund, the Fund
may consider the trading history of accounts under common
ownership or control for the purpose of enforcing these
policies. Transactions placed through the same financial
intermediary on an omnibus basis may be deemed part of a group
for the purpose of this policy and may be rejected in whole or
in part by the Fund. Certain accounts, such as omnibus accounts
and accounts at financial intermediaries, however, include
multiple investors and such accounts typically provide the Fund
with net purchase or redemption and exchange requests on any
given day where purchases, redemptions and exchanges of shares
are netted against one another and the identity of individual
purchasers, redeemers and exchangers whose orders are aggregated
may not be known by the Fund. While the Fund monitors for market
timing activity, the Fund may be unable to identify such
activities because the netting effect in omnibus accounts often
makes it more difficult to locate and eliminate market timers
from the Fund. The Distributor has entered into agreements with
respect to financial professionals, and other financial
intermediaries that maintain omnibus accounts with the Transfer
Agent pursuant to which such financial professionals and other
financial intermediaries undertake to cooperate with the
Distributor in monitoring purchase, exchange and redemption
orders by their customers in order to detect and prevent
short-term or excessive trading in the Funds shares
through such accounts. Identification of market timers may also
38
be limited by operational systems and technical limitations. In
the event that a financial intermediary is determined by the
Fund to be engaged in market timing or other improper trading
activity, the Funds Distributor may terminate such
financial intermediarys agreement with the Distributor,
suspend such financial intermediarys trading privileges or
take other appropriate actions.
There is no assurance that the methods described above will
prevent market timing or other trading that may be deemed
abusive.
The Fund may from time to time use other methods that it
believes are appropriate to deter market timing or other trading
activity that may be detrimental to a fund or long-term
shareholders.
39
BlackRock, the Funds investment adviser, manages the
Funds investments and its business operations subject to
the oversight of the Board of the Fund. While BlackRock is
ultimately responsible for the management of the Fund, it is
able to draw upon the trading, research and expertise of its
asset management affiliates for portfolio decisions and
management with respect to certain portfolio securities.
BlackRock is an indirect, wholly owned subsidiary of BlackRock,
Inc.
BlackRock, a registered investment adviser, was organized in
1994 to perform advisory services for investment companies.
BlackRock Investment Management, LLC, the Funds
sub-adviser
(the
Sub-Adviser),
is a registered investment adviser and a commodity pool operator
organized in 1999. BlackRock and its affiliates had
approximately $3.513 trillion in investment company and
other portfolio assets under management as of December 31,
2011.
The Fund has entered into a management agreement (the
Management Agreement) with BlackRock under which
BlackRock receives for its services to the Fund a monthly fee
based on the average daily value of the Funds net assets
at the annual rates of 0.50% of that portion of average daily
net assets not exceeding $250 million; 0.45% of that
portion of average daily net assets exceeding $250 million
but not exceeding $300 million; 0.425% of that portion of
average daily net assets exceeding $300 million but not
exceeding $400 million; and 0.40% of that portion of
average daily net assets exceeding $400 million. BlackRock
has contractually agreed to waive its management fee by the
amount of any management fees the Fund pays the manager of the
Master Portfolios indirectly through its investment in the
respective Master Portfolios. The contractual agreement may be
terminated upon 90 days notice by a majority of the
non-interested directors of the Fund or by a vote of a majority
of the outstanding voting securities of the Fund.
BlackRock has entered into a
sub-advisory
agreement with the
Sub-Adviser,
an affiliate of BlackRock, under which BlackRock pays the
Sub-Adviser
for services it provides a fee equal to a percentage of the
management fee paid to BlackRock under the Management Agreement.
The
Sub-Adviser
is responsible for the
day-to-day
management of the Funds portfolio.
For the fiscal year ended September 30, 2011, BlackRock
received a fee, net of any applicable waivers, at the annual
rate of 0.11% of the Funds average daily net assets.
Master Bond LLC, on behalf of the Total Return Portfolio, has
entered into an investment management agreement with its manager
pursuant to which the manager receives as compensation for its
services to the Total Return Portfolio, at the end of each month
a management fee with respect to the Total Return Portfolio.
Master Bond LLC pays the management fee at annual rates that
decrease as the total net assets of the Total Return Portfolio
increase above certain levels. The fee rates are applied to the
average daily net assets of the Total Return Portfolio, with the
reduced rates applicable to portions of the assets of the Total
Return Portfolio to the extent that the aggregate average daily
net assets of the Total Return Portfolio exceeds certain levels
(each such amount being a breakpoint level). The fee
with respect to the Total Return Portfolio shall be 0.20% of the
Total Return Portfolios average daily net assets not
exceeding $250 million; 0.15% of the Total Return
Portfolios average daily net assets in excess of
$250 million but not exceeding $500 million; 0.10% of
the Total Return Portfolios average daily net assets in
excess of $500 million but not exceeding $750 million
and 0.05% of the Total Return Portfolios average daily net
assets in excess of $750 million.
Master Large Cap LLC, on behalf of the Core Portfolio, has
entered into an investment management agreement with its manager
pursuant to which the manager receives as compensation for its
services to the Core Portfolio, at the end of each month a
management fee with respect to the Core Portfolio. Master Large
Cap LLC pays the management fee at annual rates that decrease as
the total net assets of the Core Portfolio increase above
certain levels. The fee rates are applied to the average daily
net assets of the Core Portfolio, with the reduced rates
applicable to portions of the assets of the Core Portfolio to
the extent that the aggregate average daily net assets of the
Core Portfolio exceeds certain levels. The fee with respect to
the Core Portfolio shall be 0.50% of the Core Portfolios
average daily net assets
40
not exceeding $1 billion; 0.45% of the Core
Portfolios average daily net assets in excess of
$1 billion but not exceeding $5 billion; and 0.40% of
the Core Portfolios average daily net assets in excess of
$5 billion.
For the fiscal year ended September 30, 2011, the Total
Return Portfolios manager received a fee, net of any
applicable waivers, at the annual rate of 0.07% of the Total
Return Portfolios average daily net assets. For the fiscal
year ended September 30, 2011, the Core Portfolios
manager received a fee, net of any applicable waivers, at the
annual rate of 0.47% of the Core Portfolios average daily
net assets.
A discussion of the basis for the Boards approval of the
Management Agreement with BlackRock and the
sub-advisory
agreement between BlackRock and the
Sub-Adviser
is included in the Funds annual shareholder report for the
fiscal period ended September 30, 2011.
From time to time, a manager, analyst, or other employee of
BlackRock or its affiliates may express views regarding a
particular asset class, company, security, industry, or market
sector. The views expressed by any such person are the views of
only that individual as of the time expressed and do not
necessarily represent the views of BlackRock or any other person
within the BlackRock organization. Any such views are subject to
change at any time based upon market or other conditions and
BlackRock disclaims any responsibility to update such views.
These views may not be relied on as investment advice and,
because investment decisions for the Fund are based on numerous
factors, may not be relied on as an indication of trading intent
on behalf of the Fund.
Portfolio Manager Information
Information regarding the portfolio managers of the Fund is set
forth below. Further information regarding the portfolio
managers, including other accounts managed, compensation,
ownership of Fund shares, and possible conflicts of interest, is
available in the Funds SAI.
The asset allocation of the equity and fixed-income portions of
the Funds portfolio is managed by Philip Green.
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Portfolio Manager
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|
Primary Role
|
|
Since
|
|
|
Title and Recent Biography
|
Phillip Green
|
|
Responsible for the asset allocation of the equity and
fixed-income portions of the Funds portfolio.
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|
2006
|
|
|
Managing Director of BlackRock, Inc. since 2006; Vice President
of Merrill Lynch Investment Managers L.P. (MLIM)
from 1999 to 2006.
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The Total Return Portfolio in which the Fund invests the
fixed-income portion of its assets is managed by a team of
investment professionals comprised of Rick Rieder, Bob Miller,
Matthew Marra and Eric Pellicciaro. The team works collectively
with each member primarily responsible for his area of expertise.
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Total Return
|
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Portfolio Manager
|
|
Primary Role
|
|
Since
|
|
|
Title and Recent Biography
|
Rick Rieder
|
|
Responsible for the day-to-day management of the Funds
portfolio including setting the Funds overall investment
strategy and overseeing the management of the Fund.
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|
|
2010
|
|
|
Chief Investment Officer of Fixed Income, Fundamental Portfolios
of BlackRock Inc. and Head of its Global Credit Business and
Credit Strategies, Multi-Sector, and Mortgage Groups since 2010;
Managing Director of BlackRock, Inc. since 2009; President and
Chief Executive Officer of R3 Capital Partners from 2008 to
2009; Managing Director of Lehman Brothers from 1994 to 2008.
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Bob Miller
|
|
Jointly and primarily responsible for the
day-to-day
management of the Fixed-income portion of the Funds
portfolio.
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|
2011
|
|
|
Managing Director of BlackRock, Inc. since 2011;
Co-Founder
and Partner of Round Table Investment Management Company from
2007 to 2009; Managing Director of Bank of America from 1999 to
2007.
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|
Matthew Marra
|
|
Responsible for the day-to-day management of the Funds
portfolio including setting the Funds overall investment
strategy and overseeing the management of the Fund.
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|
|
2006
|
|
|
Managing Director of BlackRock, Inc. since 2006; Director of
BlackRock, Inc. from 2002 to 2005.
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Eric Pellicciaro
|
|
Responsible for the day-to-day management of the Funds
portfolio including setting the Funds overall investment
strategy and overseeing the management of the Fund.
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|
|
2010
|
|
|
Managing Director of BlackRock, Inc. since 2005; Head of the
Global Rates Investment Team within BlackRocks Fundamental
Fixed Income Portfolio Management Group.
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41
The Core Portfolio in which the Fund invests the equity portion
of its assets is managed by a team of investment professionals
comprised of Robert Doll, Jr., Daniel Hanson and Peter
Stournaras.
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Core Portfolio
|
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Managers
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|
Primary Role
|
|
Since
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|
Title and Recent Biography
|
Robert Doll, Jr., CFA, CPA,
|
|
Jointly responsible for the day-to-day management of the Core
Portfolios portfolio including setting the overall
investment strategy and overseeing the management of the Core
Portfolio.
|
|
|
2006
|
|
|
Senior Managing Director and Chief Equity Strategist of
BlackRock, Inc. since 2010; Vice Chairman and Global Chief
Investment Officer for Equities of BlackRock, Inc. from 2006 to
2010; President and Chief Investment Officer of MLIM and its
affiliate, Fund Asset Management, L.P., from 2001 to 2006;
President and a member of the Board of the funds advised by MLIM
and its affiliates from 2005 to 2006.
|
|
|
|
|
|
|
|
|
|
Daniel Hanson, CFA,
|
|
Jointly responsible for the day-to-day management of the Core
Portfolios portfolio including setting the overall
investment strategy and overseeing the management of the Core
Portfolio.
|
|
|
2006
|
|
|
Managing Director of BlackRock, Inc. since 2009; Director of
BlackRock, Inc. from 2007 to 2008; Vice President of BlackRock,
Inc. in 2006; Vice President of MLIM from 2003 to 2006.
|
|
|
|
|
|
|
|
|
|
Peter Stournaras, CFA,
|
|
Jointly responsible for the day-to-day management of the Core
Portfolios portfolio including setting the overall
investment strategy and overseeing the management of the Core
Portfolio.
|
|
|
2010
|
|
|
Managing Director of BlackRock, Inc. since 2010; Director at
Northern Trust Company from 2006 to 2010; Portfolio Manager at
Smith Barney/Legg Mason from 2005 to 2006; Director at Citigroup
Asset Management from 1998 to 2005.
|
|
|
|
|
|
|
|
|
|
The investment activities of BlackRock and its affiliates
(including BlackRock, Inc. and PNC and their affiliates,
directors, partners, trustees, managing members, officers and
employees (collectively, the Affiliates)) and of
BlackRock, Inc.s significant shareholder Barclays Bank PLC
and its affiliates, including Barclays (each a Barclays
Entity, and collectively, the Barclays Entities) in
the management of, or their interest in, their own accounts and
other accounts they manage, may present conflicts of interest
that could disadvantage the Fund and its shareholders. BlackRock
and its Affiliates or the Barclays Entities provide investment
management services to other funds and discretionary managed
accounts that follow an investment program similar to that of
the funds. BlackRock and its Affiliates or the Barclays Entities
are involved worldwide with a broad spectrum of financial
services and asset management activities and may engage in the
ordinary course of business in activities in which their
interests or the interests of their clients may conflict with
those of the Fund. One or more Affiliates or Barclays Entities
act or may act as an investor, investment banker, research
provider, investment manager, financier, advisor, market maker,
trader, prime broker, lender, agent and principal, and have
other direct and indirect interests, in securities, currencies
and other instruments in which the Fund directly and indirectly
invests. Thus, it is likely that the Fund will have multiple
business relationships with and will invest in, engage in
transactions with, make voting decisions with respect to, or
obtain services from entities for which an Affiliate or an
Barclays Entity performs or seeks to perform investment banking
or other services. One or more Affiliates or Barclays Entities
may engage in proprietary trading and advise accounts and funds
that have investment objectives similar to those of the Fund
and/or that
engage in and compete for transactions in the same types of
securities, currencies and other instruments as the Fund. The
trading activities of these Affiliates or Barclays Entities are
carried out without reference to positions held directly or
indirectly by the Fund and may result in an Affiliate or an
Barclays Entity having positions that are adverse to those of
the Fund. No Affiliate or Barclays Entity is under any
obligation to share any investment opportunity, idea or strategy
with the Fund. As a result, an Affiliate or an Barclays Entity
may compete with the Fund for appropriate investment
opportunities. The results of the Funds investment
activities, therefore, may differ from those of an Affiliate or
an Barclays Entity and of other accounts managed by an Affiliate
or an Barclays Entity, and it is possible that the Fund could
sustain losses during periods in which one or more Affiliates or
Barclays Entities and other accounts achieve profits on their
trading for proprietary or other accounts. The opposite result
is also possible. In addition, the Fund may, from time to time,
enter into transactions in which an Affiliate or an Barclays
Entity or its other clients have an adverse interest.
Furthermore, transactions undertaken by Affiliate-advised
clients may adversely impact the Fund. Transactions by one or
more Affiliate- or Barclays Entity-advised clients or BlackRock
may have the effect of diluting or otherwise disadvantaging the
values, prices or investment strategies of the Fund. The
Funds activities may be limited because of regulatory
restrictions applicable to one or more Affiliates or Barclays
Entities,
and/or their
internal policies designed
42
to comply with such restrictions. In addition, the Fund may
invest in securities of companies with which an Affiliate or an
Barclays Entity has or is trying to develop investment banking
relationships or in which an Affiliate or an Barclays Entity has
significant debt or equity investments. The Fund also may invest
in securities of companies for which an Affiliate or an Barclays
Entity provides or may some day provide research coverage. An
Affiliate or an Barclays Entity may have business relationships
with and purchase or distribute or sell services or products
from or to distributors, consultants or others who recommend the
Fund or who engage in transactions with or for the Fund, and may
receive compensation for such services. The Fund may also make
brokerage and other payments to Affiliates or Entities in
connection with the Funds portfolio investment
transactions.
Under a securities lending program approved by the Funds
Board, the Fund has retained an Affiliate of BlackRock to serve
as the securities lending agent for the Fund to the extent that
the Fund participates in the securities lending program. For
these services, the lending agent will receive a fee from the
Fund, including a fee based on the returns earned on the
Funds investment of the cash received as collateral for
the loaned securities. In addition, one or more Affiliates may
be among the entities to which the Fund may lend its portfolio
securities under the securities lending program.
The activities of Affiliates may give rise to other conflicts of
interest that could disadvantage the Fund and its shareholders.
BlackRock has adopted policies and procedures designed to
address these potential conflicts of interest. See the SAI for
further information.
The Fund intends to invest a portion of its assets in the Total
Return Portfolio of Master Bond LLC and a portion of its assets
in the Core Portfolio of Master Large Cap LLC. Investors in the
Fund will acquire an indirect interest in the Master Portfolios.
Each Master Portfolio accepts investments from other funds, and
all the funds of a given Master Portfolio bear the Master
Portfolios expenses in proportion to their assets. This
structure may enable the Fund to reduce costs through economies
of scale. A larger investment portfolio may also reduce certain
transaction costs to the extent that contributions to and
redemptions from a given Master Portfolio from different funds
may offset each other and produce a lower net cash flow.
However, each fund can set its own transaction minimums,
fund-specific expenses, and other conditions. This means that
one fund could offer access to the same Master Portfolio on more
attractive terms, or could experience better performance, than
another fund. In addition, large purchases or redemptions by one
fund could negatively affect the performance of other feeder
funds that invest in the same Master Portfolio. Information
about other feeders, if any, is available by calling
1-800-441-7762.
Whenever a Master Portfolio holds a vote of its funds, the Fund
will pass the vote through to its own shareholders. Smaller
funds may be harmed by the actions of larger funds. For example,
a larger fund could have more voting power than the Fund over
the operations of its Master Portfolio. The Fund may withdraw
from each Master Portfolio at any time and may invest all of its
assets in another pooled investment vehicle or retain BlackRock
to manage the Funds assets directly.
Valuation of Fund Investments
When you buy shares, you pay the net asset value, plus any
applicable sales charge. This is the offering price. Shares are
also redeemed at their net asset value, minus any applicable
deferred sales charge. The Fund calculates the net asset value
of each class of its shares (generally by using market
quotations) each day the NYSE is open as of the close of
business on the NYSE, based on prices at the time of closing.
The NYSE generally closes at 4 p.m. (Eastern time). The net
asset value used in determining your share price is the next one
calculated after your purchase or redemption order is placed.
Generally, Institutional Shares will have the highest net asset
value because that class has the lowest expenses,
Investor A Shares will have a higher net asset value than
Investor B, Investor C or Class R Shares, and
Class R Shares will have a higher net asset value than
Investor B or Investor C Shares. Also, dividends paid
on Investor A, Institutional and Class R Shares will
generally be higher than dividends paid on Investor B and
Investor C Shares because Investor A, Institutional
and Class R Shares have lower expenses.
43
The Funds assets and liabilities are valued primarily on
the basis of market quotations. Equity investments and other
instruments for which market quotations are readily available
are valued at market value, which is generally determined using
the last reported sale price on the exchange or market on which
the security is primarily traded at the time of valuation. The
Fund values fixed-income portfolio securities and non-exchange
traded derivatives using market prices provided directly from
one or more broker-dealers, market makers, or independent
third-party pricing services which may use matrix pricing and
valuation models to derive values, each in accordance with
valuation procedures approved by the Funds Board.
Short-term debt securities with remaining maturities of sixty
days or less are valued on the basis of amortized cost.
Foreign currency exchange rates are generally determined as of
the close of business on the NYSE. Foreign securities owned by
the Fund may trade on weekends or other days when the Fund do
not price its shares. As a result, the Funds net asset
value may change on days when you will not be able to purchase
or redeem the Funds shares. Shares of underlying open-end
funds are valued at NAV. Generally, trading in foreign
securities, U.S. government securities and money market
instruments and certain fixed-income securities is substantially
completed each day at various times prior to the close of
business on the exchange. The values of such securities used in
computing the net asset value of the Funds shares are
determined as of such times.
When market quotations are not readily available or are not
believed by BlackRock to be reliable, the Funds
investments are valued at fair value. Fair value determinations
are made by BlackRock in accordance with procedures approved by
the Funds Board. BlackRock may conclude that a market
quotation is not readily available or is unreliable if a
security or other asset or liability does not have a price
source due to its lack of liquidity, if BlackRock believes a
market quotation from a broker-dealer or other source is
unreliable, where the security or other asset or other liability
is thinly traded (e.g., municipal securities, certain
small cap and emerging growth companies and certain
non-U.S.
securities) or where there is a significant event subsequent to
the most recent market quotation. For this purpose, a
significant event is deemed to occur if BlackRock
determines, in its business judgment prior to or at the time of
pricing the Funds assets or liabilities, that it is likely
that the event will cause a material change to the last closing
market price of one or more assets or liabilities held by the
Fund. For instance significant events may occur between the
foreign market close and the close of business on the NYSE that
may not be reflected in the computation of the Funds net
assets. If such event occurs, those instruments may be fair
valued. Similarly, foreign securities whose values are affected
by volatility that occurs in U.S. markets on a trading day after
the close of foreign securities markets may be fair valued.
For certain foreign securities, a third-party vendor supplies
evaluated, systematic fair value pricing based upon the movement
of a proprietary multi-factor model after the relevant foreign
markets have closed. This systematic fair value pricing
methodology is designed to correlate the prices of foreign
securities following the close of the local markets to the price
that might have prevailed as of the Funds pricing time.
Fair value represents a good faith approximation of the value of
a security. The fair value of one or more securities may not, in
retrospect, be the price at which those assets could have been
sold during the period in which the particular fair values were
used in determining the Funds net asset value.
The Fund may accept orders from certain authorized Financial
Intermediaries or their designees. The Fund will be deemed to
receive an order when accepted by the intermediary or designee
and the order will receive the net asset value next computed by
the Fund after such acceptance. If the payment for a purchase
order is not made by a designated later time, the order will be
canceled and the Financial Intermediary could be held liable for
any losses.
Dividends, Distributions and Taxes
BUYING A DIVIDEND
Unless your investment is in a tax deferred account, you may
want to avoid buying shares shortly before the Fund pays a
dividend. The reason? If you buy shares when a fund has declared
but not yet distributed ordinary income or capital gains, you
will pay the full price for the shares and then receive a
portion of the price back in the form of a taxable dividend.
Before investing you may want to consult your tax adviser.
The Fund will distribute net investment income, if any, and net
realized capital gain, if any, at least annually. The Fund may
also pay a special distribution at the end of the calendar year
to comply with Federal tax requirements. Dividends may be
reinvested automatically in shares of the Fund at net asset
value without a sales charge or may be taken in cash. If you
would like to receive dividends in cash, contact your financial
professional, financial intermediary or the Fund. Although this
cannot be predicted with any certainty, the Fund anticipates
that the majority of its dividends, if
44
any, will consist of capital gains. Capital gains may be taxable
to you at different rates depending on how long the Fund held
the assets sold.
You will pay tax on dividends from the Fund whether you receive
them in cash or additional shares. If you redeem Fund shares or
exchange them for shares of another fund, you generally will be
treated as having sold your shares and any gain on the
transaction may be subject to tax. Certain dividend income
received by the Fund during the taxable years beginning before
January 1, 2013, including dividends received from
qualifying foreign corporations, and long-term capital gains are
eligible for taxation at a reduced rate that applies to
non-corporate shareholders. To the extent the Fund makes any
distributions derived from long-term capital gains and
qualifying dividend income, such distributions will be eligible
for taxation at the reduced rate.
A 3.8% Medicare contribution tax will be imposed on net
investment income (which includes interest, dividends and
capital gain) of U.S. individuals with income exceeding $200,000
or $250,000 if married filing jointly, and of trusts and
estates, for taxable years beginning after December 31,
2012.
If you are neither a lawful permanent resident nor a citizen of
the U.S. or if you are a foreign entity, the Funds
ordinary income dividends (which include distributions of net
short-term capital gain) will generally be subject to a 30% U.S.
withholding tax, unless a lower treaty rate applies.
A 30% withholding tax will be imposed on dividends paid after
December 31, 2013, and redemption proceeds paid after
December 31, 2014, to (i) certain foreign financial
institutions and investment funds unless they agree to collect
and disclose to the IRS information regarding their direct and
indirect U.S. account holders and (ii) certain other
foreign entities unless they certify certain information
regarding their direct and indirect U.S. owners. Under some
circumstances, a foreign shareholder may be eligible for refunds
or credits of such taxes.
Dividends and interest received by the Fund may give rise to
withholding and other taxes imposed by foreign countries. Tax
conventions between certain countries and the United States may
reduce or eliminate such taxes. You may be able to claim a
credit or take a deduction for foreign taxes paid by the Fund if
certain requirements are met.
By law, your dividends and redemption proceeds will be subject
to a withholding tax if you have not provided a taxpayer
identification number or social security number or the number
you have provided is incorrect.
This Section summarizes some of the consequences under current
Federal tax law of an investment in the Fund. It is not a
substitute for personal tax advice. Consult your personal tax
adviser about the potential tax consequences of an investment in
the Fund under all applicable tax laws.
45
The Financial Highlights table is intended to help you
understand the Funds financial performance for the past
five years. Certain information reflects the financial results
for a single Fund share. The total returns in the table
represent the rate an investor would have earned or lost on an
investment in the Fund (assuming reinvestment of all dividends
and/or distributions). The information has been audited by
Deloitte & Touche LLP, whose report, along with the
Funds financial statements, is included in the Funds
Annual Report, which is available upon request.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional
|
|
|
|
Year Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Per Share Operating Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of year
|
|
$
|
20.28
|
|
|
$
|
19.17
|
|
|
$
|
21.96
|
|
|
$
|
29.29
|
|
|
$
|
27.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment
income1
|
|
|
0.51
|
|
|
|
0.46
|
|
|
|
0.54
|
|
|
|
0.71
|
|
|
|
0.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized gain (loss)
|
|
|
(0.13
|
)
|
|
|
1.20
|
|
|
|
(1.60
|
)
|
|
|
(5.31
|
)
|
|
|
2.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) from investment operations
|
|
|
0.38
|
|
|
|
1.66
|
|
|
|
(1.06
|
)
|
|
|
(4.60
|
)
|
|
|
3.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends and distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.48
|
)
|
|
|
(0.55
|
)
|
|
|
(0.62
|
)
|
|
|
(0.76
|
)
|
|
|
(0.77
|
)
|
Net realized gain
|
|
|
|
|
|
|
|
|
|
|
(1.11
|
)
|
|
|
(1.97
|
)
|
|
|
(1.34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total dividends and distributions
|
|
|
(0.48
|
)
|
|
|
(0.55
|
)
|
|
|
(1.73
|
)
|
|
|
(2.73
|
)
|
|
|
(2.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year
|
|
$
|
20.18
|
|
|
$
|
20.28
|
|
|
$
|
19.17
|
|
|
$
|
21.96
|
|
|
$
|
29.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment
Return2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value
|
|
|
1.67
|
%
|
|
|
8.75
|
%3
|
|
|
(3.53
|
)%4
|
|
|
(16.99
|
)%
|
|
|
13.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net
Assets5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1.07
|
%
|
|
|
1.08
|
%
|
|
|
0.85
|
%
|
|
|
0.58
|
%
|
|
|
0.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived
|
|
|
0.76
|
%
|
|
|
0.76
|
%
|
|
|
0.64
|
%
|
|
|
0.56
|
%
|
|
|
0.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
2.33
|
%
|
|
|
2.28
|
%
|
|
|
3.12
|
%
|
|
|
2.72
|
%
|
|
|
2.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of year (000)
|
|
$
|
511,458
|
|
|
$
|
547,721
|
|
|
$
|
626,711
|
|
|
$
|
806,612
|
|
|
$
|
1,271,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover of the
Fund6
|
|
|
|
|
|
|
|
|
|
|
94
|
%7
|
|
|
27
|
%
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover of Master Total Return Portfolio
|
|
|
1,771
|
%8
|
|
|
1,754
|
%9
|
|
|
708
|
%10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover of Master Large Cap Core Portfolio
|
|
|
129
|
%
|
|
|
173
|
%
|
|
|
168
|
%11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Based on average shares outstanding.
|
|
|
|
2 |
|
Where applicable, total investment
returns exclude the effects of any sales charges and include the
reinvestment of dividends and distributions.
|
|
|
|
3 |
|
Includes proceeds received from a
settlement of litigation, through its investment in Master Large
Cap Core Portfolio, which impacted the Funds total return.
Not including these proceeds, the total return would have been
8.32%.
|
|
|
|
4 |
|
Includes proceeds received from a
settlement of litigation, through its investment in Master Large
Cap Core Portfolio, which impacted the Funds total return.
Not including these proceeds, the total return would have been
(3.88)%.
|
|
|
|
5 |
|
Includes the Funds share of
the Master Portfolios allocated expenses and/or net
investment income.
|
|
|
|
6 |
|
Excludes transactions in the Master
Portfolios.
|
|
|
|
7 |
|
Represents portfolio turnover for
the period October 1, 2008 to January 30, 2009.
|
|
|
|
8 |
|
Includes mortgage dollar roll
transactions. Excluding these transactions, the portfolio
turnover would have been 1,379%.
|
|
|
|
9 |
|
Includes mortgage dollar roll
transactions. Excluding these transactions, the portfolio
turnover would have been 1,248%.
|
|
|
|
10 |
|
Includes mortgage dollar roll
transactions. Excluding these transactions, the portfolio
turnover would have been 469%.
|
|
|
|
11 |
|
Represents portfolio turnover for
the period November 1, 2008 to September 30, 2009.
|
46
Financial
Highlights
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investor A
|
|
|
|
Year Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Per Share Operating Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of year
|
|
$
|
20.21
|
|
|
$
|
19.11
|
|
|
$
|
21.88
|
|
|
$
|
29.19
|
|
|
$
|
27.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment
income1
|
|
|
0.40
|
|
|
|
0.39
|
|
|
|
0.48
|
|
|
|
0.62
|
|
|
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized gain (loss)
|
|
|
(0.10
|
)
|
|
|
1.19
|
|
|
|
(1.58
|
)
|
|
|
(5.28
|
)
|
|
|
2.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) from investment operations
|
|
|
0.30
|
|
|
|
1.58
|
|
|
|
(1.10
|
)
|
|
|
(4.66
|
)
|
|
|
3.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends and distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.41
|
)
|
|
|
(0.48
|
)
|
|
|
(0.56
|
)
|
|
|
(0.68
|
)
|
|
|
(0.70
|
)
|
Net realized gain
|
|
|
|
|
|
|
|
|
|
|
(1.11
|
)
|
|
|
(1.97
|
)
|
|
|
(1.34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total dividends and distributions
|
|
|
(0.41
|
)
|
|
|
(0.48
|
)
|
|
|
(1.67
|
)
|
|
|
(2.65
|
)
|
|
|
(2.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year
|
|
$
|
20.10
|
|
|
$
|
20.21
|
|
|
$
|
19.11
|
|
|
$
|
21.88
|
|
|
$
|
29.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment
Return2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value
|
|
|
1.31
|
%
|
|
|
8.38
|
%3
|
|
|
(3.79
|
)%4
|
|
|
(17.25
|
)%
|
|
|
13.52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net
Assets5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1.39
|
%
|
|
|
1.40
|
%
|
|
|
1.17
|
%
|
|
|
0.88
|
%
|
|
|
0.84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived
|
|
|
1.07
|
%
|
|
|
1.08
|
%
|
|
|
0.95
|
%
|
|
|
0.85
|
%
|
|
|
0.82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
1.83
|
%
|
|
|
1.96
|
%
|
|
|
2.80
|
%
|
|
|
2.42
|
%
|
|
|
2.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of year (000)
|
|
$
|
426,819
|
|
|
$
|
488,087
|
|
|
$
|
529,120
|
|
|
$
|
655,429
|
|
|
$
|
913,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover of the
Fund6
|
|
|
|
|
|
|
|
|
|
|
94
|
%7
|
|
|
27
|
%
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover of Master Total Return Portfolio
|
|
|
1,771
|
%8
|
|
|
1,754
|
%9
|
|
|
708
|
%10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover of Master Large Cap Core Portfolio
|
|
|
129
|
%
|
|
|
173
|
%
|
|
|
168
|
%11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Based on average shares outstanding.
|
|
|
|
2 |
|
Where applicable, total investment
returns exclude the effects of any sales charges and include the
reinvestment of dividends and distributions.
|
|
|
|
3 |
|
Includes proceeds received from a
settlement of litigation, through its investment in Master Large
Cap Core Portfolio, which impacted the Funds total return.
Not including these proceeds, the total return would have been
7.95%.
|
|
|
|
4 |
|
Includes proceeds received from a
settlement of litigation, through its investment in Master Large
Cap Core Portfolio, which impacted the Funds total return.
Not including these proceeds, the total return would have been
(4.19)%.
|
|
|
|
5 |
|
Includes the Funds share of
the Master Portfolios allocated expenses and/or net
investment income.
|
|
|
|
6 |
|
Excludes transactions in the Master
Portfolios.
|
|
|
|
7 |
|
Represents portfolio turnover for
the period October 1, 2008 to January 30, 2009.
|
|
|
|
8 |
|
Includes mortgage dollar roll
transactions. Excluding these transactions, the portfolio
turnover would have been 1,379%.
|
|
|
|
9 |
|
Includes mortgage dollar roll
transactions. Excluding these transactions, the portfolio
turnover would have been 1,248%.
|
|
|
|
10 |
|
Includes mortgage dollar roll
transactions. Excluding these transactions, the portfolio
turnover would have been 469%.
|
|
|
|
11 |
|
Represents portfolio turnover for
the period November 1, 2008 to September 30, 2009.
|
47
Financial
Highlights
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investor B
|
|
|
|
Year Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Per Share Operating Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of year
|
|
$
|
19.65
|
|
|
$
|
18.56
|
|
|
$
|
21.24
|
|
|
$
|
28.36
|
|
|
$
|
26.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment
income1
|
|
|
0.18
|
|
|
|
0.20
|
|
|
|
0.32
|
|
|
|
0.39
|
|
|
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized gain (loss)
|
|
|
(0.10
|
)
|
|
|
1.16
|
|
|
|
(1.55
|
)
|
|
|
(5.13
|
)
|
|
|
2.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) from investment operations
|
|
|
0.08
|
|
|
|
1.36
|
|
|
|
(1.23
|
)
|
|
|
(4.74
|
)
|
|
|
3.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends and distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.18
|
)
|
|
|
(0.27
|
)
|
|
|
(0.34
|
)
|
|
|
(0.41
|
)
|
|
|
(0.43
|
)
|
Net realized gain
|
|
|
|
|
|
|
|
|
|
|
(1.11
|
)
|
|
|
(1.97
|
)
|
|
|
(1.34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total dividends and distributions
|
|
|
(0.18
|
)
|
|
|
(0.27
|
)
|
|
|
(1.45
|
)
|
|
|
(2.38
|
)
|
|
|
(1.77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year
|
|
$
|
19.55
|
|
|
$
|
19.65
|
|
|
$
|
18.56
|
|
|
$
|
21.24
|
|
|
$
|
28.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment
Return2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value
|
|
|
0.34
|
%
|
|
|
7.37
|
%3
|
|
|
(4.69
|
)%4
|
|
|
(17.96
|
)%
|
|
|
12.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net
Assets5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
2.36
|
%
|
|
|
2.34
|
%
|
|
|
2.09
|
%
|
|
|
1.75
|
%
|
|
|
1.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived
|
|
|
2.04
|
%
|
|
|
2.02
|
%
|
|
|
1.90
|
%
|
|
|
1.73
|
%
|
|
|
1.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.86
|
%
|
|
|
1.03
|
%
|
|
|
1.93
|
%
|
|
|
1.56
|
%
|
|
|
1.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of year (000)
|
|
$
|
8,786
|
|
|
$
|
14,374
|
|
|
$
|
23,963
|
|
|
$
|
51,371
|
|
|
$
|
100,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover of the
Fund6
|
|
|
|
|
|
|
|
|
|
|
94
|
%7
|
|
|
27
|
%
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover of Master Total Return Portfolio
|
|
|
1,771
|
%8
|
|
|
1,754
|
%9
|
|
|
708
|
%10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover of Master Large Cap Core Portfolio
|
|
|
129
|
%
|
|
|
173
|
%
|
|
|
168
|
%11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Based on average shares outstanding.
|
|
|
|
2 |
|
Where applicable, total investment
returns exclude the effects of any sales charges and include the
reinvestment of dividends and distributions.
|
|
|
|
3 |
|
Includes proceeds received from a
settlement of litigation, through its investment in Master Large
Cap Core Portfolio, which impacted the Funds total return.
Not including these proceeds, the total return would have been
6.82%.
|
|
|
|
4 |
|
Includes proceeds received from a
settlement of litigation, through its investment in Master Large
Cap Core Portfolio, which impacted the Funds total return.
Not including these proceeds, the total return would have been
(5.10)%.
|
|
|
|
5 |
|
Includes the Funds share of
the Master Portfolios allocated expenses and/or net
investment income.
|
|
|
|
6 |
|
Excludes transactions in the Master
Portfolios.
|
|
|
|
7 |
|
Represents portfolio turnover for
the period October 1, 2008 to January 30, 2009.
|
|
|
|
8 |
|
Includes mortgage dollar roll
transactions. Excluding these transactions, the portfolio
turnover would have been 1,379%.
|
|
|
|
9 |
|
Includes mortgage dollar roll
transactions. Excluding these transactions, the portfolio
turnover would have been 1,248%.
|
|
|
|
10 |
|
Includes mortgage dollar roll
transactions. Excluding these transactions, the portfolio
turnover would have been 469%.
|
|
|
|
11 |
|
Represents portfolio turnover for
the period November 1, 2008 to September 30, 2009.
|
48
Financial
Highlights
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investor C
|
|
|
|
Year Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Per Share Operating Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of year
|
|
$
|
18.77
|
|
|
$
|
17.79
|
|
|
$
|
20.51
|
|
|
$
|
27.52
|
|
|
$
|
26.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment
income1
|
|
|
0.21
|
|
|
|
0.21
|
|
|
|
0.32
|
|
|
|
0.39
|
|
|
|
0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized gain (loss)
|
|
|
(0.08
|
)
|
|
|
1.12
|
|
|
|
(1.50
|
)
|
|
|
(4.95
|
)
|
|
|
2.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) from investment operations
|
|
|
0.13
|
|
|
|
1.33
|
|
|
|
(1.18
|
)
|
|
|
(4.56
|
)
|
|
|
3.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends and distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.26
|
)
|
|
|
(0.35
|
)
|
|
|
(0.43
|
)
|
|
|
(0.48
|
)
|
|
|
(0.49
|
)
|
Net realized gain
|
|
|
|
|
|
|
|
|
|
|
(1.11
|
)
|
|
|
(1.97
|
)
|
|
|
(1.34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total dividends and distributions
|
|
|
(0.26
|
)
|
|
|
(0.35
|
)
|
|
|
(1.54
|
)
|
|
|
(2.45
|
)
|
|
|
(1.83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year
|
|
$
|
18.64
|
|
|
$
|
18.77
|
|
|
$
|
17.79
|
|
|
$
|
20.51
|
|
|
$
|
27.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment
Return2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value
|
|
|
0.55
|
%
|
|
|
7.53
|
%3
|
|
|
(4.56
|
)%4
|
|
|
(17.90
|
)%
|
|
|
12.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net
Assets5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
2.18
|
%
|
|
|
2.20
|
%
|
|
|
1.97
|
%
|
|
|
1.67
|
%
|
|
|
1.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived
|
|
|
1.87
|
%
|
|
|
1.88
|
%
|
|
|
1.76
|
%
|
|
|
1.65
|
%
|
|
|
1.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
1.04
|
%
|
|
|
1.16
|
%
|
|
|
2.00
|
%
|
|
|
1.63
|
%
|
|
|
1.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of year (000)
|
|
$
|
56,608
|
|
|
$
|
61,017
|
|
|
$
|
60,461
|
|
|
$
|
72,694
|
|
|
$
|
100,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover of the
Fund6
|
|
|
|
|
|
|
|
|
|
|
94
|
%7
|
|
|
27
|
%
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover of Master Total Return Portfolio
|
|
|
1,771
|
%8
|
|
|
1,754
|
%9
|
|
|
708
|
%10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover of Master Large Cap Core Portfolio
|
|
|
129
|
%
|
|
|
173
|
%
|
|
|
168
|
%11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Based on average shares outstanding.
|
|
|
|
2 |
|
Where applicable, total investment
returns exclude the effects of any sales charges and include the
reinvestment of dividends and distributions.
|
|
|
|
3 |
|
Includes proceeds received from a
settlement of litigation, through its investment in Master Large
Cap Core Portfolio, which impacted the Funds total return.
Not including these proceeds, the total return would have been
7.12%.
|
|
|
|
4 |
|
Includes proceeds received from a
settlement of litigation, through its investment in Master Large
Cap Core Portfolio, which impacted the Funds total return.
Not including these proceeds, the total return would have been
(4.94)%.
|
|
|
|
5 |
|
Includes the Funds share of
the Master Portfolios allocated expenses and/or net
investment income.
|
|
|
|
6 |
|
Excludes transactions in the Master
Portfolios.
|
|
|
|
7 |
|
Represents portfolio turnover for
the period October 1, 2008 to January 30, 2009.
|
|
|
|
8 |
|
Includes mortgage dollar roll
transactions. Excluding these transactions, the portfolio
turnover would have been 1,379%.
|
|
|
|
9 |
|
Includes mortgage dollar roll
transactions. Excluding these transactions, the portfolio
turnover would have been 1,248%.
|
|
|
|
10 |
|
Includes mortgage dollar roll
transactions. Excluding these transactions, the portfolio
turnover would have been 469%.
|
|
|
|
11 |
|
Represents portfolio turnover for
the period November 1, 2008 to September 30, 2009.
|
49
Financial
Highlights
(concluded)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class R
|
|
|
|
Year Ended September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Per Share Operating Performance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of year
|
|
$
|
19.33
|
|
|
$
|
18.31
|
|
|
$
|
21.06
|
|
|
$
|
28.22
|
|
|
$
|
26.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment
income1
|
|
|
0.30
|
|
|
|
0.29
|
|
|
|
0.38
|
|
|
|
0.49
|
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized and unrealized gain (loss)
|
|
|
(0.09
|
)
|
|
|
1.14
|
|
|
|
(1.54
|
)
|
|
|
(5.08
|
)
|
|
|
2.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) from investment operations
|
|
|
0.21
|
|
|
|
1.43
|
|
|
|
(1.16
|
)
|
|
|
(4.59
|
)
|
|
|
3.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends and distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.32
|
)
|
|
|
(0.41
|
)
|
|
|
(0.48
|
)
|
|
|
(0.60
|
)
|
|
|
(0.65
|
)
|
Net realized gain
|
|
|
|
|
|
|
|
|
|
|
(1.11
|
)
|
|
|
(1.97
|
)
|
|
|
(1.34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total dividends and distributions
|
|
|
(0.32
|
)
|
|
|
(0.41
|
)
|
|
|
(1.59
|
)
|
|
|
(2.57
|
)
|
|
|
(1.99
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year
|
|
$
|
19.22
|
|
|
$
|
19.33
|
|
|
$
|
18.31
|
|
|
$
|
21.06
|
|
|
$
|
28.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment
Return2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value
|
|
|
0.96
|
%
|
|
|
7.87
|
%3
|
|
|
(4.25
|
)%4
|
|
|
(17.59
|
)%
|
|
|
13.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net
Assets5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1.77
|
%
|
|
|
1.84
|
%
|
|
|
1.64
|
%
|
|
|
1.31
|
%
|
|
|
1.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived
|
|
|
1.46
|
%
|
|
|
1.52
|
%
|
|
|
1.42
|
%
|
|
|
1.29
|
%
|
|
|
1.14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
1.44
|
%
|
|
|
1.51
|
%
|
|
|
2.29
|
%
|
|
|
1.98
|
%
|
|
|
1.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of year (000)
|
|
$
|
8,118
|
|
|
$
|
9,737
|
|
|
$
|
10,194
|
|
|
$
|
9,655
|
|
|
$
|
10,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover of the
Fund6
|
|
|
|
|
|
|
|
|
|
|
94
|
%7
|
|
|
27
|
%
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover of Master Total Return Portfolio
|
|
|
1,771
|
%8
|
|
|
1,754
|
%9
|
|
|
708
|
%10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover of Master Large Cap Core Portfolio
|
|
|
129
|
%
|
|
|
173
|
%
|
|
|
168
|
%11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Based on average shares outstanding.
|
|
|
|
2 |
|
Where applicable, total investment
returns include the reinvestment of dividends and distributions.
|
|
|
|
3 |
|
Includes proceeds received from a
settlement of litigation, through its investment in Master Large
Cap Core Portfolio, which impacted the Funds total return.
Not including these proceeds, the total return would have been
7.53%.
|
|
|
|
4 |
|
Includes proceeds received from a
settlement of litigation, through its investment in Master Large
Cap Core Portfolio, which impacted the Funds total return.
Not including these proceeds, the total return would have been
(4.62)%.
|
|
|
|
5 |
|
Includes the Funds share of
the Master Portfolios allocated expenses and/or net
investment income.
|
|
|
|
6 |
|
Excludes transactions in the Master
Portfolios.
|
|
|
|
7 |
|
Represents portfolio turnover for
the period October 1, 2008 to January 30, 2009.
|
|
|
|
8 |
|
Includes mortgage dollar roll
transactions. Excluding these transactions, the portfolio
turnover would have been 1,379%.
|
|
|
|
9 |
|
Includes mortgage dollar roll
transactions. Excluding these transactions, the portfolio
turnover would have been 1,248%.
|
|
|
|
10 |
|
Includes mortgage dollar roll
transactions. Excluding these transactions, the portfolio
turnover would have been 469%.
|
|
|
|
11 |
|
Represents portfolio turnover for
the period November 1, 2008 to September 30, 2009.
|
50
Electronic Access
to Annual Reports, Semi-Annual Reports and
Prospectuses
Electronic copies of most financial reports and prospectuses are
available on BlackRocks website. Shareholders can sign up
for e-mail
notifications of quarterly statements, annual and semi-annual
reports and prospectuses by enrolling in the Funds
electronic delivery program. To enroll:
Shareholders Who Hold Accounts with Investment Advisers,
Banks or Brokerages: Please contact your financial
professional. Please note that not all investment advisers,
banks or brokerages may offer this service.
Shareholders Who Hold Accounts Directly With BlackRock:
|
|
n
|
Access the BlackRock website at
http://www.blackrock.com/edelivery
|
|
n
|
Log into your account
|
Delivery of
Shareholder Documents
The Fund delivers only one copy of shareholder documents,
including prospectuses, shareholder reports and proxy
statements, to shareholders with multiple accounts at the same
address. This practice is known as householding and
is intended to eliminate duplicate mailings and reduce expenses.
Mailings of your shareholder documents may be householded
indefinitely unless you instruct us otherwise. If you do not
want the mailing of these documents to be combined with those
for other members of your household, please contact the Fund at
(800) 441-7762.
Anti-Money
Laundering Requirements
The Fund is subject to the USA PATRIOT Act (the Patriot
Act). The Patriot Act is intended to prevent the use of
the U.S. financial system in furtherance of money laundering,
terrorism or other illicit activities. Pursuant to requirements
under the Patriot Act, the Fund may request information from
shareholders to enable it to form a reasonable belief that it
knows the true identity of its shareholders. This information
will be used to verify the identity of investors or, in some
cases, the status of financial professionals; it will be used
only for compliance with the requirements of the Patriot Act.
The Fund reserves the right to reject purchase orders from
persons who have not submitted information sufficient to allow
the Fund to verify their identity. The Fund also reserves the
right to redeem any amounts in the Fund from persons whose
identity it is unable to verify on a timely basis. It is the
Funds policy to cooperate fully with appropriate
regulators in any investigations conducted with respect to
potential money laundering, terrorism or other illicit
activities.
BlackRock Privacy
Principles
BlackRock is committed to maintaining the privacy of its current
and former fund investors and individual clients (collectively,
Clients) and to safeguarding their nonpublic
personal information. The following information is provided to
help you understand what personal information BlackRock
collects, how we protect that information and why in certain
cases we share such information with select parties.
If you are located in a jurisdiction where specific laws, rules
or regulations require BlackRock to provide you with additional
or different privacy-related rights beyond what is set forth
below, then BlackRock will comply with those specific laws,
rules or regulations.
BlackRock obtains or verifies personal nonpublic information
from and about you from different sources, including the
following: (i) information we receive from you or, if
applicable, your Financial Intermediary, on applications, forms
or other documents; (ii) information about your
transactions with us, our affiliates, or others;
(iii) information we receive from a consumer reporting
agency; and (iv) from visits to our website.
BlackRock does not sell or disclose to nonaffiliated third
parties any nonpublic personal information about its Clients,
except as permitted by law, or as is necessary to respond to
regulatory requests or to service Client accounts. These
51
nonaffiliated third parties are required to protect the
confidentiality and security of this information and to use it
only for its intended purpose.
We may share information with our affiliates to service your
account or to provide you with information about other BlackRock
products or services that may be of interest to you. In
addition, BlackRock restricts access to nonpublic personal
information about its Clients to those BlackRock employees with
a legitimate business need for the information. BlackRock
maintains physical, electronic and procedural safeguards that
are designed to protect the nonpublic personal information of
its Clients, including procedures relating to the proper storage
and disposal of such information.
Statement of Additional Information
If you would like further information about the Fund, including
how it invests, please see the SAI.
For a discussion of the Funds policies and procedures
regarding the selective disclosure of its portfolio holdings,
please see the SAI. The Fund makes its top ten holdings
available on a monthly basis at www.blackrock.com generally
within 5 business days after the end of the month to which the
information applies.
52
This glossary contains an explanation of some of the common
terms used in this prospectus. For additional information about
the Fund, please see the SAI.
Acquired Fund Fees and Expenses
fees and expenses charged by other investment companies in which
the Fund invests a portion of its assets.
Annual Fund Operating Expenses
expenses that cover the costs of operating the Fund.
Barclays Capital U.S. Aggregate Bond
Index this unmanaged market-weighted index
is comprised of investment grade corporate bonds (rated BBB or
better), mortgages and U.S. Treasury and government agency
issues with at least one year to maturity.
Distribution Fees fees used to support
the Funds marketing and distribution efforts, such as
compensating financial professionals and other financial
intermediaries, advertising and promotion.
Management Fee a fee paid to BlackRock
for managing the Fund.
Other Expenses include accounting,
transfer agency, custody, professional fees and registration
fees.
Russell
1000®
Index an unmanaged broad-based index that
measures the performance of the 1,000 largest companies in the
Russell
3000®
Index, which represents approximately 92% of the total market
capitalization of the Russell
3000®
Index.
Service Fees fees used to compensate
securities dealers and other financial intermediaries for
certain shareholder servicing activities.
Shareholder Fees these fees include
sales charges that you may pay when you buy or sell shares of
the Fund.
53
Fund and
Service Providers
FUND
BlackRock Balanced Capital Fund, Inc.
100 Bellevue Parkway
Wilmington, Delaware 19809
Written Correspondence:
P.O. Box 9819
Providence, Rhode Island
02940-8019
Overnight Mail:
4400 Computer Drive
Westborough, Massachusetts 01588
(800) 441-7762
MANAGER
BlackRock Advisors, LLC
100 Bellevue Parkway
Wilmington, Delaware 19809
SUB-ADVISER
BlackRock Investment Management, LLC
1 University Square Drive
Princeton, New Jersey 08540-6455
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, Delaware 19809
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
200 Berkeley Street
Boston, MA 02116
ACCOUNTING SERVICES PROVIDER
State Street Bank and Trust Company
100 Summer Street
Boston, Massachusetts 02110
DISTRIBUTOR
BlackRock Investments, LLC
40 East 52nd Street
New York, New York 10022
CUSTODIAN
State Street Bank and Trust Company
100 Summer Street
Boston, Massachusetts 02110
COUNSEL
Willkie Farr & Gallagher LLP
787 Seventh Avenue
New York, New York
10019-6099
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This prospectus contains important information you should know before investing, including information about risks. Read it carefully and keep it for future reference. More information about the Fund is available at no charge upon request. This information includes:
Annual/Semi-Annual Reports These reports contain additional information about each of the Funds investments. The annual report describes the Funds performance, lists portfolio holdings, and discusses recent market conditions, economic trends and Fund investment strategies that significantly affected the Funds performance for the last fiscal year.
Statement of Additional Information A Statement of Additional Information, dated January 27, 2012, has been filed with the Securities and Exchange Commission (SEC). The SAI, which includes additional information about the Fund, may be obtained free of charge, along with the Funds annual and semi-annual reports, by calling (800) 441-7762. The SAI, as supplemented from time to time, is incorporated by reference into this prospectus.
BlackRock Investor Services Representatives are available to discuss account balance information, mutual fund prospectuses, literature, programs and services available. Hours: 8:00 a.m. to 6:00 p.m. (Eastern time), on any business day. Call: (800) 441-7762.
Purchases and Redemptions Call your financial professional or BlackRock Investor Services at (800) 441-7762.
World Wide Web General fund information and specific fund performance, including SAI and annual/semi-annual reports, can be accessed free of charge at www.blackrock.com/prospectus. Mutual fund prospectuses and literature can also be requested via this website.
Written Correspondence BlackRock Balanced Capital Fund, Inc., P.O. Box 9819 Providence, Rhode Island 02940-8019
|
|
Overnight Mail BlackRock Balanced Capital Fund, Inc., 4400 Computer Drive Westborough, Massachusetts 01588
Internal Wholesalers/Broker Dealer Support Available to support investment professionals 8:30 a.m. to 6:00 p.m. (Eastern time), on any business day. Call: (800) 882-0052
Portfolio Characteristics and Holdings A description of the Funds policies and procedures related to disclosure of portfolio characteristics and holdings is available in the SAI.
For information about portfolio holdings and characteristics, BlackRock fund shareholders and prospective investors may call (800) 882-0052.
Securities and Exchange Commission You may also view and copy public information about the Fund, including the SAI, by visiting the EDGAR database on the SEC website (http://www.sec.gov) or the SECs Public Reference Room in Washington, D.C. Information about the operation of the Public Reference Room can be obtained by calling the SEC directly at (202) 551-8090. Copies of this information can be obtained, for a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing to the Public Reference Section of the SEC, Washington, D.C. 20549-1520. Information about obtaining documents on the SECs Website without charge may be obtained by calling (800) SEC-0330.
You should rely only on the information contained in this prospectus. No one is authorized to provide you with information that is different from information contained in this prospectus.
The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.
INVESTMENT COMPANY ACT FILE # 811-2405 © BlackRock Advisors, LLC
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Code
# PRO-10044-0112
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STATEMENT
OF ADDITIONAL INFORMATION
BlackRock
Balanced Capital Fund, Inc.
100 Bellevue
Parkway, Wilmington, Delaware 19809 Phone No.
(800) 441-7762
This Statement of Additional Information of BlackRock Balanced
Capital Fund, Inc. (the Fund) is not a prospectus
and should be read in conjunction with the Prospectus of the
Fund, dated January 27, 2012, which has been filed with the
Securities and Exchange Commission (the Commission)
and can be obtained, without charge, by calling
(800) 441-7762
or by writing to the Fund at the above address. The Funds
Prospectus is incorporated by reference into this Statement of
Additional Information, and Part I of this Statement of
Additional Information and the portions of Part II of this
Statement of Additional Information that relate to the Fund have
been incorporated by reference into the Funds Prospectus.
The portions of Part II of this Statement of Additional
Information that do not relate to the Fund do not form a part of
the Funds Statement of Additional Information, have not
been incorporated by reference into the Funds Prospectus
and should not be relied upon by investors in the Fund. The
audited financial statements of the Fund, the Master Total
Return Portfolio of Master Bond LLC and the Master Large Cap
Core Portfolio of Master Large Cap Series LLC, in which the Fund
invests a portion of its assets, are incorporated into this
Statement of Additional Information by reference to the
Funds Annual Report to Shareholders for the fiscal year
ended September 30, 2011 (the Annual Report). You
may request a copy of the Annual Report at no charge by calling
(800) 441-7762
between 8:00 a.m. and 6:00 p.m. Eastern time on
any business day.
References to the Investment Company Act of 1940, as amended
(the Investment Company Act or the 1940
Act), or other applicable law, will include
interpretations or modifications by the Commission, Commission
staff or other authority with appropriate jurisdiction,
including court interpretations, and exemptive or other relief
or permission from the Commission, Commission staff or other
authority.
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Class
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|
Ticker Symbol
|
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Investor A Shares
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MDCPX
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Investor B Shares
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MBCPX
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Investor C Shares
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MCCPX
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Institutional Shares
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MACPX
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Class R Shares
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MRBPX
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BlackRock
Advisors, LLC Manager
BlackRock Investments, LLC Distributor
The date of
this Statement of Additional Information is January 27,
2012.
TABLE OF
CONTENTS
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Part I
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Investment Objectives and Policies
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I-1
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Investment Restrictions
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I-6
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Information on Directors and Officers
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I-11
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Management and Advisory Arrangements
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I-34
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Information on Sales Charges and Distribution Related Expenses
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I-42
|
Computation of Offering Price Per Share
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I-43
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Portfolio Transactions and Brokerage
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I-43
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Additional Information
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I-45
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Financial Statements
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I-46
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Part II
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Investment Risks and Considerations
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II-1
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Management and Other Service Arrangements
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II-61
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Selective Disclosure of Portfolio Holdings
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II-64
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Purchase of Shares
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II-73
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Redemption of Shares
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II-85
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Shareholder Services
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II-88
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Pricing of Shares
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II-92
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Portfolio Transactions and Brokerage
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II-95
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Dividends and Taxes
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II-99
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Performance Data
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II-105
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Proxy Voting Policies and Procedures
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II-107
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General Information
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II-107
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Appendix A Description of Bond Ratings
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A-1
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Appendix B Proxy Voting Policies
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B-1
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Part I:
Information About BlackRock Balanced Capital Fund,
Inc.
Part I of this Statement of Additional Information sets
forth information about BlackRock Balanced Capital Fund, Inc. It
includes information about the Funds, Master Bond
LLCs and Master Large Cap Series LLCs Boards of
Directors, the advisory services provided to and the management
fees paid by the Fund, performance data for the Fund, and
information about other fees paid by and services provided to
the Fund. This Part I should be read in conjunction with
the Funds Prospectus and those portions of Part II of
this Statement of Additional Information that pertain to the
Fund.
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I.
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Investment
Objectives and Policies
|
Set forth below are descriptions of some of the types of
investments and investment strategies that the Fund may use, and
the risks and considerations associated with those investments
and investment strategies. Please see the Part II of this
Statement of Additional Information for further information on
these investments and investment strategies. Information
contained in Part II about the risks and considerations
associated with investments
and/or
investment strategies applies only to the extent the Fund makes
each type of investment or uses each investment strategy.
Information that does not apply to the Fund does not form a part
of the Funds Statement of Additional Information and
should not be relied on by investors in the Fund.
Only information that is clearly identified as applicable to the
Fund is considered to form a part of the Funds Statement
of Additional Information.
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BlackRock Balanced
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Capital Fund, Inc.
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144A Securities
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x
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Asset-Backed Securities
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x
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Asset-Based Securities
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x
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Precious Metal-Related Securities
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x
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Bank Loans
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x
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Borrowing and Leverage
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x
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Cash Flows; Expenses
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Cash Management
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x
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Collateralized Debt Obligations
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Collateralized Loan Obligations
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Collateralized Bond Obligations
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Commercial Paper
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x
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Commodity-Linked Derivative Instruments and Hybrid Instruments
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Qualifying Hybrid Instruments
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Hybrid Instruments Without Principal Protection
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Limitations on Leverage
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Counterparty Risk
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Convertible Securities
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x
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Debt Securities
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x
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Depositary Receipts (ADRs, EDRs and GDRs)
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x
|
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I-1
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|
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BlackRock Balanced
|
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Capital Fund, Inc.
|
Derivatives
|
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x
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Hedging
|
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x
|
Indexed and Inverse Floating Rate
|
|
x
|
Swap Agreements
|
|
x
|
Interest Rate Swaps, Caps and Floors
|
|
x
|
Credit Default Swap Agreements and Similar Instruments
|
|
x
|
Credit Linked Securities
|
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x
|
Interest Rate Transactions and Swaptions
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|
x
|
Total Return Swap Agreements
|
|
x
|
Types of Options
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x
|
Options on Securities and Securities Indices
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x
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Call Options
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x
|
Put Options
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x
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Options on Government National Mortgage Association
(GNMA) Certificates
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x
|
Risks Associated with Options
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x
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Futures
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x
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Risks Associated with Futures
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x
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Foreign Exchange Transactions
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x
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Forward Foreign Exchange Transactions
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x
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Currency Futures
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x
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Currency Options
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x
|
Limitations on Currency Transactions
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x
|
Risk Factors in Hedging Foreign Currency Risks
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x
|
Risk Factors in Derivatives
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x
|
Credit Risk
|
|
x
|
Currency Risk
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|
x
|
Leverage Risk
|
|
x
|
Liquidity Risk
|
|
x
|
Correlation Risk
|
|
x
|
Index Risk
|
|
x
|
Additional Risk Factors of OTC Transactions; Limitations on the
Use of OTC Derivatives
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x
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|
Distressed Securities
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x
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|
Dollar Rolls
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|
x
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Equity Securities
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|
x
|
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Exchange Traded Notes
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|
x
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|
Foreign Investment Risks
|
|
x
|
Foreign Market Risk
|
|
x
|
Foreign Economy Risk
|
|
x
|
Currency Risk and Exchange Risk
|
|
x
|
Governmental Supervision and Regulation/Accounting Standards
|
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x
|
Certain Risks of Holding Fund Assets Outside the United
States
|
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x
|
Settlement Risk
|
|
x
|
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I-2
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|
|
|
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BlackRock Balanced
|
|
|
Capital Fund, Inc.
|
Funding Agreements
|
|
|
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Guarantees
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|
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|
Illiquid or Restricted Securities
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x
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|
Inflation-Indexed Bonds
|
|
x
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Information Concerning the Indices
|
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Standard & Poors 500
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Russell 2000
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EAFE Index
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|
Inflation Risk
|
|
x
|
|
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|
Initial Public Offering (IPO) Risk
|
|
x
|
|
|
|
Investment Grade Debt Obligations
|
|
x
|
|
|
|
Investment in Emerging Markets
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|
x
|
Brady Bonds
|
|
x
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|
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|
Investment in Other Investment Companies
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|
x
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|
|
|
Junk Bonds
|
|
x
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|
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|
Lease Obligations
|
|
|
|
|
|
Liquidity Management
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|
x
|
|
|
|
Master Limited Partnerships
|
|
x
|
|
|
|
Merger Transaction Risk
|
|
|
|
|
|
Mezzanine Investments
|
|
x
|
|
|
|
Money Market Obligations of Domestic Banks, Foreign Banks and
Foreign Branches of U.S. Banks
|
|
x
|
|
|
|
Money Market Securities
|
|
x
|
|
|
|
Mortgage-Related Securities
|
|
x
|
Mortgage-Backed Securities
|
|
x
|
Collateralized Mortgage Obligations (CMOs)
|
|
x
|
Adjustable Rate Mortgage Securities
|
|
x
|
CMO Residuals
|
|
x
|
Stripped Mortgage Backed Securities
|
|
x
|
Tiered Index Bonds
|
|
x
|
|
|
|
I-3
|
|
|
|
|
BlackRock Balanced
|
|
|
Capital Fund, Inc.
|
Municipal Investments
|
|
x
|
Risk Factors and Special Considerations Relating to Municipal
Bonds
|
|
x
|
Description of Municipal Bonds
|
|
x
|
General Obligation Bonds
|
|
x
|
Revenue Bonds
|
|
x
|
PABs
|
|
x
|
Moral Obligation Bonds
|
|
x
|
Municipal Notes
|
|
x
|
Municipal Commercial Paper
|
|
x
|
Municipal Lease Obligations
|
|
x
|
Tender Option Bonds
|
|
x
|
Yields
|
|
x
|
Variable Rate Demand Obligations (VRDOs) and
Participating VRDOs
|
|
x
|
Transactions in Financial Futures Contracts
|
|
x
|
Call Rights
|
|
x
|
Municipal Interest Rate Swap Transactions
|
|
x
|
Insured Municipal Bonds
|
|
x
|
|
|
|
Participation Notes
|
|
x
|
|
|
|
Pay-in-Kind
Bonds
|
|
x
|
|
|
|
Portfolio Turnover Rates
|
|
x
|
|
|
|
Preferred Stock
|
|
x
|
|
|
|
Real Estate Related Securities
|
|
x
|
|
|
|
Real Estate Investment Trusts (REITS)
|
|
x
|
|
|
|
Repurchase Agreements and Purchase and Sale Contracts
|
|
x
|
|
|
|
Reverse Repurchase Agreements
|
|
x
|
|
|
|
Rights Offerings and Warrants to Purchase
|
|
x
|
|
|
|
Securities Lending
|
|
x
|
|
|
|
Securities of Smaller or Emerging Growth Companies
|
|
x
|
|
|
|
Short Sales
|
|
x
|
|
|
|
Sovereign Debt
|
|
x
|
|
|
|
Standby Commitment Agreements
|
|
x
|
|
|
|
Stripped Securities
|
|
x
|
|
|
|
Structured Notes
|
|
x
|
|
|
|
Supranational Entities
|
|
x
|
|
|
|
Tax-Exempt Derivatives
|
|
|
|
|
|
Tax-Exempt Preferred Shares
|
|
|
|
|
|
Taxability Risk
|
|
|
|
|
|
Trust Preferred Securities
|
|
x
|
|
|
|
U.S. Government Obligations
|
|
x
|
|
|
|
I-4
|
|
|
|
|
BlackRock Balanced
|
|
|
Capital Fund, Inc.
|
Utility Industries
|
|
x
|
|
|
|
When Issued Securities, Delayed Delivery Securities and Forward
Commitments
|
|
x
|
|
|
|
Yields and Ratings
|
|
x
|
|
|
|
Zero Coupon Securities
|
|
x
|
|
|
|
The investment objective of the Fund is to achieve the highest
total investment return through a fully managed investment
policy using equity, debt (including money market) and
convertible securities. This investment objective is a
fundamental policy of the Fund and may not be changed without
the approval of the holders of a majority of the Funds
outstanding voting securities, as defined in the Investment
Company Act. To achieve its objective, Fund management shifts
its investment emphasis among equity, fixed-income (including
debt and money market securities) and convertible securities.
This flexible, total investment return approach is called a
fully managed investment strategy. It distinguishes
the Fund from other investment companies, which often seek
either capital growth or current income. There can be no
assurance that the Fund will achieve its objective. The Fund is
classified as a diversified open-end investment company under
the Investment Company Act.
The Fund intends to invest all of its fixed-income assets in the
Master Total Return Portfolio (the Total Return
Portfolio) of Master Bond LLC (Master Bond
LLC). The primary objective of the Total Return Portfolio
is to realize total return that exceeds that of the Barclays
Capital U.S. Aggregate Bond Index. The Fund intends to
invest all of its equity assets in the Master Large Cap Core
Portfolio (the Core Portfolio and together with the
Total Return Portfolio, the Master Portfolios) of
Master Large Cap Series LLC (Master Large Cap
LLC). The Core Portfolio utilizes a blended investment
strategy that emphasizes a mix of both growth and value and will
seek to outperform the Russell
1000®
Index.
The investment results of the fixed-income and equity portion of
the Funds portfolio will correspond directly to the
investment results of (i) the Total Return Portfolio
together with those of any fixed-income investments held
directly by the Fund and (ii) the Core Portfolio together
with those of any equity investments held directly by the Fund,
respectively. For simplicity, this Statement of Additional
Information, like the Prospectus, uses the term Fund
to include the underlying Total Return Portfolio and Core
Portfolio in which the Fund invests.
The Funds investment philosophy is based on the belief
that, as in the past, the structure of the U.S. economy and
the economies and securities markets of other countries will
undergo continuous change. Thus, the fully managed approach puts
maximum emphasis on investment flexibility.
The two principal features of Fund managements investment
approach are flexibility and concentration in
quality companies.
Flexibility. The Funds fully managed investment
approach makes use of equity, fixed-income (including debt and
money market securities) and convertible securities. Freedom to
move among these different types of securities as prevailing
trends change is the keystone of the Funds investment
policy.
Concentration in Quality Companies. The
earnings of quality companies generally tend to grow
consistently. Their internal strengths good
financial resources, a strong balance sheet, satisfactory rate
of return on capital, a good industry position and superior
management skills give the Fund confidence that
these companies consistently will perform at high levels. The
Fund considers quality companies to be those that conform most
closely to these characteristics. Most of the Funds equity
portfolio is in the common stocks of these quality companies.
BlackRock Advisors, LLC (BlackRock or the
Manager) and BlackRock Investment Management, LLC,
the Funds sub-adviser, expect that over longer periods a
larger portion of the Funds portfolio will consist of
equity securities. However, the flexible fully managed
investment approach enables the Fund to switch its emphasis to
fixed-income and convertible securities if, in the opinion of
the Manager, prevailing market or economic conditions warrant.
The Manager will determine the emphasis among equity and
fixed-income securities, including convertible securities, based
on its evaluation as to the types of securities presently
providing the opportunity for the highest total investment
return. The Fund presently has a non-fundamental investment
policy (which may be changed by the
I-5
Board of Directors) of investing at all times at least 25% of
net assets in senior fixed-income securities, such as debt
securities and preferred stock. The Fund intends at all times to
invest no less than 25% of net assets in equity securities. For
this purpose, net assets include any borrowings for investment
purposes.
At times, to reduce risk and to achieve the highest total
investment return, the Fund may invest in other securities,
including non-convertible long-term debt securities, including
deep discount corporate debt securities,
mortgage-backed securities issued or guaranteed by governmental
entities or private issuers, and debt securities issued or
guaranteed by governments, their agencies and instrumentalities.
The Fund will invest primarily in investment grade
fixed-income securities. However, the Fund may also invest up to
20% of its assets in securities that are rated below investment
grade by nationally recognized statistical rating organizations
such as Moodys Investors Service, Inc.
(Moodys), Standard & Poors
(S&P) and Fitch Ratings or that, in the
Managers judgment, possess similar credit characteristics.
Securities rated in the lower ratings categories are sometimes
referred to as high yield/high risk securities or
junk bonds.
The Fund may invest in mortgage-backed securities.
Mortgage-backed securities in which the Fund invests include
mortgage pass-through certificates and multiple-class
pass-through securities such as Real Estate Mortgage Investment
Conduit (REMIC) pass-through certificates,
Collateralized Mortgage Obligations (CMOs) and
stripped mortgage-backed securities, and other types of
mortgage-backed securities that may be available in the future.
The Fund may invest up to 30% of its net assets in the
securities of foreign issuers, of which 20% (as a percentage of
the Funds net assets) may be in emerging markets issuers.
Investments in U.S. dollar-denominated securities of
foreign issuers, excluding issuers from emerging markets, are
permitted beyond the 30% limit. This means that the Fund may
invest in such U.S. dollar-denominated securities of foreign
issuers without limit. (The Funds investments in American
Depositary Receipts also are not subject to the 30% foreign
issuer limitation.) The Fund may invest in issuers from any
country.
Temporary Investments. The Fund reserves the right, as a
temporary defensive measure, to hold, without limitation, assets
in temporary investments (Temporary Investments)
including cash, cash equivalents, money market securities, such
as U.S. Treasury and agency obligations, other
U.S. Government securities, short term debt obligations of
corporate issuers, certificates of deposit, bankers
acceptances, commercial paper (short term, unsecured, negotiable
promissory notes of a domestic or foreign issuer), or other high
quality fixed-income securities. Under certain adverse
investment conditions, the Fund may restrict the markets in
which its assets will be invested and may increase the
proportion of assets invested in Temporary Investments.
Investments made for defensive purposes will be maintained only
during periods in which the Manager determines that economic or
financial conditions are adverse for holding or being primarily
invested in equity securities. A portion of the Fund normally
would be held in Temporary Investments in anticipation of
investment in equity securities or to provide for possible
redemptions.
|
|
II.
|
Investment
Restrictions
|
The Fund has adopted a number of fundamental and non-fundamental
investment restrictions and policies relating to the investment
of its assets and its activities. The fundamental policies set
forth below may not be changed without the approval of the
holders of a majority of the Funds outstanding voting
securities (which for this purpose and under the Investment
Company Act means the lesser of (i) 67% of the Funds
shares present at a meeting at which more than 50% of the
outstanding shares of the Fund are represented or (ii) more
than 50% of the Funds outstanding shares). The Fund has
also adopted certain non-fundamental investment restrictions,
which may be changed by the Board of Directors without
shareholder approval. None of the following restrictions shall
prevent the Fund from investing all or a portion of its assets
in shares of another registered investment company with the same
investment objective.
Set forth below are the Funds fundamental and
non-fundamental investment restrictions. Unless otherwise
provided, all references below to the assets of the Fund are in
terms of current market value.
Under its fundamental investment restrictions, the Fund may not:
(1) Make any investment inconsistent with the Funds
classification as a diversified company under the Investment
Company Act.
I-6
(2) Invest more than 25% of its total assets, taken at
market value at the time of each investment, in the securities
of issuers in any particular industry (excluding the
U.S. Government and its agencies and instrumentalities).
(3) Make investments for the purpose of exercising control
or management.
(4) Purchase or sell real estate, except that, to the
extent permitted by applicable law, the Fund may invest in
securities directly or indirectly secured by real estate or
interests therein or issued by companies which invest in real
estate or interests therein.
(5) Make loans to other persons, except (i) that the
acquisition of bonds, debentures or other corporate debt
securities and investment in government obligations, commercial
paper, pass-through instruments, certificates of deposit,
bankers acceptances and repurchase agreements or any
similar instruments shall not be deemed to be the making of a
loan; (ii) that the Fund may lend its portfolio securities,
provided that the lending of portfolio securities may be made
only in accordance with applicable law and the guidelines set
forth in the Prospectus and this Statement of Additional
Information, as they may be amended from time to time; and
(iii) as may otherwise be permitted by an exemptive order
issued to the Fund by the Securities and Exchange Commission.
(6) Issue senior securities to the extent such issuance
would violate applicable law.
(7) Borrow money, except that (i) the Fund may borrow
in amounts up to
331/3%
of its total assets (including the amount borrowed),
(ii) the Fund may, to the extent permitted by law, borrow
up to an additional 5% of its total assets for temporary
purposes, (iii) the Fund may obtain such short-term credit
as may be necessary for the clearance of purchases and sales of
portfolio securities and (iv) the Fund may purchase
securities on margin to the extent permitted by applicable law.
The Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by the Funds
investment policies as set forth in the Prospectus and this
Statement of Additional Information, as they may be amended from
time to time, in connection with hedging transactions, short
sales, when-issued and forward commitment transactions and
similar investment strategies.
(8) Underwrite securities of other issuers, except insofar
as the Fund technically may be deemed an underwriter under the
Securities Act of 1933, as amended (the Securities
Act), in selling portfolio securities.
(9) Purchase or sell commodities or contracts on
commodities, except to the extent that the Fund may do so in
accordance with applicable law and the Funds Prospectus
and Statement of Additional Information, as they may be amended
from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Under its non-fundamental investment restrictions, the Fund may
not:
(a) Purchase securities of other investment companies,
except to the extent such purchases are permitted by applicable
law. As a matter of policy, however, the Fund will not purchase
shares of any registered open-end investment company or
registered unit investment trust, in reliance on
Section 12(d)(1)(F) or (G) (the fund of funds
provisions) of the Investment Company Act at any time the
Funds shares are owned by another investment company that
is part of the same group of investment companies as the Fund.
(b) Invest in securities that cannot be readily resold or
that cannot otherwise be marketed, redeemed or put to the issuer
or to a third party at approximately current value, if at the
time of acquisition more than 15% of its net assets would be
invested in such securities. This restriction shall not apply to
securities that mature within seven days or securities that the
Board of Directors of the Fund has otherwise determined to be
liquid pursuant to applicable law. Securities purchased in
accordance with Rule 144A under the Securities Act and
determined to be liquid by the Board of Directors are not
subject to the limitations set forth in this investment
restriction.
(c) Notwithstanding fundamental investment restriction
(7) above, borrow amounts in excess of 5% of its total
assets, taken at acquisition or market value, whichever is
lower. The purchase of securities while borrowings are
outstanding will have the effect of leveraging the Fund. Such
leveraging or borrowing increases the Funds exposure to
capital risk, and borrowed funds are subject to interest costs
that will reduce net income as a temporary measure for
extraordinary or emergency purposes.
(d) Maintain less than 25% of the value of its net assets
in fixed-income senior securities, including but not limited to
debt securities and preferred stock.
I-7
In addition, as a non-fundamental investment policy, which may
be changed by the Board of Directors without shareholder
approval, and to the extent required by the Commission or its
staff, the Fund will, for purposes of investment restriction
(2), treat securities issued or guaranteed by the government of
any one foreign country as the obligations of a single issuer.
Except with respect to restriction (7), if a percentage
restriction on the investment or use of assets set forth above
is adhered to at the time a transaction is effected, later
changes in percentages resulting from changing values will not
be considered a violation.
For purposes of investment restriction (2) above, the Fund
uses the classifications and sub-classifications of Morgan
Stanley Capital International as a guide to identify industries.
Master Bond LLC has adopted restrictions and policies relating
to the investment of its assets and its activities. Master Bond
LLCs fundamental policies may not be changed without the
approval of the holders of a majority of interests of Master
Bond LLC.
Under its fundamental investment restrictions, Master Bond LLC
may not:
(1) Make any investment inconsistent with the Funds
classification as a diversified company under the Investment
Company Act.
(2) Invest more than 25% of its total assets, taken at
market value, in the securities of issuers in any particular
industry (excluding the U.S. Government and its agencies
and instrumentalities).
(3) Make investments for the purpose of exercising control
or management.
(4) Purchase or sell real estate, except that, to the
extent permitted by applicable law, each Fund may invest in
securities directly or indirectly secured by real estate or
interests therein or issued by companies which invest in real
estate or interests therein.
(5) Make loans to other persons, except that the
acquisition of bonds, debentures or other corporate debt
securities and investment in government obligations, commercial
paper, pass-through instruments, certificates of deposit,
bankers acceptances, repurchase agreements or any similar
instruments shall not be deemed to be the making of a loan, and
except further that each Fund may lend its portfolio securities,
provided that the lending of portfolio securities may be made
only in accordance with applicable law and the guidelines set
forth in the Master Bond LLCs Prospectus and Statement of
Additional Information, as they may be amended from time to
time. (For purposes of this restriction, corporate debt
securities include corporate loans purchased in the secondary
market).
(6) Issue senior securities to the extent such issuance
would violate applicable law.
(7) Borrow money, except that (i) each Fund may borrow
from banks (as defined in the Investment Company Act) in amounts
up to
331/3%
of its total assets (including the amount borrowed),
(ii) each Fund may borrow up to an additional 5% of its
total assets for temporary purposes, (iii) each Fund may
obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities, and
(iv) each Fund may purchase securities on margin to the
extent permitted by applicable law. The Master Bond LLC may not
pledge its assets other than to secure such borrowings or, to
the extent permitted by the Master Bond LLCs investment
policies as set forth in its Prospectus and Statement of
Additional Information, as they may be amended from time to
time, in connection with hedging transactions, short sales,
when-issued and forward commitment transactions and similar
investment strategies.
(8) Underwrite securities of other issuers except insofar
as a Fund technically may be deemed an underwriter under the
Securities Act in selling portfolio securities.
(9) Purchase or sell commodities or contracts on
commodities, except to the extent that a series of the Master
Bond LLC may do so in accordance with applicable law and the
Master Bond LLCs Prospectus and Statement of Additional
Information, as they may be amended from time to time, and
without registering as a commodity pool operator under the
Commodity Exchange Act.
I-8
Under its non-fundamental investment restrictions, Master Bond
LLC may not:
(a) Change its policy of investing under normal
circumstances at least 80% of its assets in bonds without
providing shareholders with at least 60 days prior
written notice of such change.
(b) Purchase securities of other investment companies,
except to the extent such purchases are permitted by applicable
law. As a matter of policy, however, the Fund will not purchase
shares of any registered open-end investment company or
registered unit investment trust, in reliance on
Section 12(d)(1)(F) or (G) (the fund of funds
provisions) of the Investment Company Act at any time the
Funds shares are owned by another investment company that
is part of the same group of investment companies as the Fund.
(c) Make short sales of securities or maintain a short
position, except to the extent permitted by the Prospectus or
applicable law.
(d) Invest in securities that cannot be resold, or
otherwise marketed, redeemed or put to the issuer or a third
party, in the ordinary course of business within seven days at
approximately current value, if at the time of acquisition more
than 15% of its net assets would be invested in such securities.
This restriction shall not apply to securities that mature
within seven days or securities that the Board of Directors of
the Master Bond LLC has otherwise determined to be liquid
pursuant to applicable law. Securities purchased in accordance
with Rule 144A under the Securities Act (a
Rule 144A Security) and determined to be liquid
by the Master Bond LLCs Board of Directors are not subject
to the limitations set forth in this investment restriction.
(e) Notwithstanding fundamental investment restriction
(7) above, neither Fund will borrow amounts in excess of 5%
of the total assets of such Fund, taken at market value, and
then only from banks as a temporary measure for extraordinary or
emergency purposes such as the redemption of Fund shares. In
addition, the Fund will not purchase securities while borrowings
are outstanding.
Except with respect to restriction (7), if a percentage
restriction on the investment or use of assets set forth above
is adhered to at the time a transaction is effected, later
changes in percentages resulting from changing values will not
be considered a violation.
Master Large Cap LLC has adopted restrictions and policies
relating to the investment of its assets and its activities.
Master Large Cap LLCs fundamental policies may not be
changed without the approval of the holders of a majority of
interests of Master Large Cap LLC.
Under its fundamental investment restrictions, Master Large Cap
LLC may not:
(1) Make any investment inconsistent with the Funds
classification as a diversified company under the Investment
Company Act.
(2) Invest more than 25% of its assets, taken at market
value, in the securities of issuers in any particular industry
(excluding the U.S. Government and its agencies and
instrumentalities).
(3) Make investments for the purpose of exercising control
or management. Investments by a Fund in wholly owned investment
entities created under the laws of certain countries will not be
deemed the making of investments for the purpose of exercising
control or management.
(4) Purchase or sell real estate, except that, to the
extent permitted by applicable law, a Fund may invest in
securities directly or indirectly secured by real estate or
interests therein or issued by companies that invest in real
estate or interests therein.
(5) Make loans to other persons, except that the
acquisition of bonds, debentures or other corporate debt
securities and investment in governmental obligations,
commercial paper, pass-through instruments, certificates of
deposit, bankers acceptances, repurchase agreements or any
similar instruments shall not be deemed to be the making of a
loan, and except further that a Fund may lend its portfolio
securities, provided that the lending of portfolio securities
may be made only in accordance with applicable law and the
guidelines set forth in the Funds Prospectus and Statement
of Additional Information, as they may be amended from time to
time.
(6) Issue senior securities to the extent such issuance
would violate applicable law.
I-9
(7) Borrow money, except that (i) a Fund may borrow
from banks (as defined in the Investment Company Act) in amounts
up to
331/3%
of its total assets (including the amount borrowed), (ii) a
Fund may borrow up to an additional 5% of its total assets for
temporary purposes, (iii) a Fund may obtain such short term
credit as may be necessary for the clearance of purchases and
sales of portfolio securities and (iv) a Fund may purchase
securities on margin to the extent permitted by applicable law.
A Fund may not pledge its assets other than to secure such
borrowings or, to the extent permitted by each Funds
investment policies as set forth in the Funds Prospectus
and Statement of Additional Information, as they may be amended
from time to time, in connection with hedging transactions,
short sales, when issued and forward commitment transactions and
similar investment strategies.
(8) Underwrite securities of other issuers except insofar
as the Fund technically may be deemed an underwriter under the
Securities Act in selling portfolio securities.
(9) Purchase or sell commodities or contracts on
commodities, except to the extent that a Fund may do so in
accordance with applicable law and the Funds Prospectus
and Statement of Additional Information, as they may be amended
from time to time, and without registering as a commodity pool
operator under the Commodity Exchange Act.
Under its non-fundamental investment restrictions, Master Large
Cap LLC may not:
(a) Purchase securities of other investment companies,
except to the extent such purchases are permitted by applicable
law. As a matter of policy, however, a Fund will not purchase
shares of any registered open-end investment company or
registered unit investment trust, in reliance on
Section 12(d)(1)(F) or (G) (the fund of funds
provisions) of the Investment Company Act, at any time a
Funds shares are owned by another investment company that
is part of the same group of investment companies as the Fund.
(b) Make short sales of securities or maintain a short
position, except to the extent permitted by applicable law. The
Funds currently do not intend to engage in short sales, except
short sales against the box.
(c) Invest in securities that cannot be readily resold or
that cannot otherwise be marketed, redeemed or put to the issuer
or a third party, if at the time of acquisition more than 15% of
its net assets would be invested in such securities. This
restriction shall not apply to securities that mature within
seven days or securities that the Directors of the Master Large
Cap LLC have otherwise determined to be liquid pursuant to
applicable law. Securities purchased in accordance with
Rule 144A under the Securities Act (which are restricted
securities that can be resold to qualified institutional buyers,
but not to the general public) and determined to be liquid by
the Directors are not subject to the limitations set forth in
this investment restriction.
(d) Notwithstanding fundamental investment restriction
(7) above, borrow money or pledge its assets, except that a
Fund (a) may borrow from a bank as a temporary measure for
extraordinary or emergency purposes or to meet redemptions in
amounts not exceeding
331/3%
(taken at market value) of its total assets and pledge its
assets to secure such borrowing, (b) may obtain such short
term credit as may be necessary for the clearance of purchases
and sales of portfolio securities and (c) may purchase
securities on margin to the extent permitted by applicable law.
However, at the present time, applicable law prohibits the Funds
from purchasing securities on margin. The deposit or payment by
a Fund of initial or variation margin in connection with
financial futures contracts or options transactions is not
considered to be the purchase of a security on margin. The
purchase of securities while borrowings are outstanding will
have the effect of leveraging a Fund. Such leveraging or
borrowing increases a Funds exposure to capital risk and
borrowed funds are subject to interest costs which will reduce
net income. A Fund will not purchase securities while borrowing
exceeds 5% of its total assets.
(e) Change its policy of investing, under normal
circumstances, at least 80% of its assets in equity securities
of large cap companies, as defined in the Prospectus, unless the
Fund provides shareholders with at least 60 days
prior written notice of such change.
Except with respect to fundamental investment restriction (7),
if a percentage restriction on the investment or use of assets
set forth above is adhered to at the time a transaction is
effected, later changes in percentages resulting from changing
values will not be considered a violation.
I-10
For purposes of fundamental investment restriction (2)
above, Master Large Cap LLC use the classifications and
sub-classifications of Morgan Stanley Capital International as a
guide to identify industries.
In addition, as a non-fundamental policy that may be changed by
the Board of Directors and to the extent required by the
Commission or its staff, Master Large Cap LLC will, for purposes
of fundamental investment restriction (1), treat securities
issued or guaranteed by the government of any one foreign
country as the obligations of a single issuer.
III.
Information on Directors and Officers
Directors
of the Fund and Master Bond LLC
The Board of Directors of the Fund (the
Fund Board) consists of thirteen individuals
(each a Director), ten of whom are not interested
persons of the Fund as defined in the Investment Company
Act (the Independent Directors). The same
individuals serve as Directors of the Master Bond LLC (the
Master Bond LLC Board and together with the
Fund Board, the Board). The Directors are
responsible for the oversight of the operations of the Fund and
the Master Bond LLC and perform the various duties imposed on
the directors of investment companies under the Investment
Company Act. The registered investment companies advised by the
Manager or its affiliates (the BlackRock-advised
Funds) are organized into one complex of closed-end funds,
two complexes of open-end funds (the Equity-Liquidity Complex
and the Equity-Bond Complex) and one complex of exchange-traded
funds (each a BlackRock Fund Complex). The Fund
and the Master Bond LLC are included in the BlackRock
Fund Complex referred to as the Equity-Bond Complex. The
Directors also oversee as Board members the operations of the
other open-end registered investment companies included in the
Equity-Bond Complex. For simplicity, references in this section
to the Fund also includes reference to Master Bond LLC.
The Board of Directors has overall responsibility for the
oversight of the Fund. The Chairman of the Board is an
Independent Director, and the Chairman of each Board committee
(each, a Committee) is an Independent Director. The
Board has five standing Committees: an Audit Committee, a
Governance and Nominating Committee, a Compliance Committee, a
Performance Oversight Committee and an Executive Committee. The
Board also has one ad hoc committee, the Joint Product
Pricing Committee. The Chairman of the Boards role is to
preside at all meetings of the Board, and to act as a liaison
with service providers, officers, attorneys, and other Directors
generally between meetings. The Chairman of each Committee
performs a similar role with respect to the Committee. The
Chairman of the Board or a Committee may also perform such other
functions as may be delegated by the Board or the Committee from
time to time. The Independent Directors meet regularly outside
the presence of Fund management, in executive session or with
other service providers to the Fund. The Board has regular
meetings five times a year, and may hold special meetings if
required before its next regular meeting. Each Committee meets
regularly to conduct the oversight functions delegated to that
Committee by the Board and reports its findings to the Board.
The Board and each standing Committee conduct annual assessments
of their oversight function and structure. The Board has
determined that the Boards leadership structure is
appropriate because it allows the Board to exercise independent
judgment over management and to allocate areas of responsibility
among Committees and the full Board to enhance effective
oversight.
The Board has engaged the Manager to manage the Fund on a
day-to-day basis. The Board is responsible for overseeing the
Manager, other service providers, the operations of the Fund and
associated risk in accordance with the provisions of the
Investment Company Act, state law, other applicable laws, the
Funds charter, and the Funds investment objectives
and strategies. The Board reviews, on an ongoing basis, the
Funds performance, operations, and investment strategies
and techniques. The Board also conducts reviews of the Manager
and its role in running the operations of the Fund.
Day-to-day risk management with respect to the Fund is the
responsibility of the Manager or of sub-advisers or other
service providers (depending on the nature of the risk), subject
to the supervision of the Manager. The Fund is subject to a
number of risks, including investment, compliance, operational
and valuation risks, among others. While there are a number of
risk management functions performed by the Manager and the
sub-advisers or other service providers, as applicable, it is
not possible to eliminate all of the risks applicable to the
Fund. Risk oversight forms part of the Boards general
oversight of the Fund and is addressed as part of various Board
and Committee activities. The Board, directly or through a
Committee, also reviews reports from, among others, management,
the independent registered public accounting firm for the Fund,
sub-advisers, and internal auditors for the investment
I-11
adviser or its affiliates, as appropriate, regarding risks faced
by the Fund and managements or the service providers
risk functions. The Committee system facilitates the timely and
efficient consideration of matters by the Directors, and
facilitates effective oversight of compliance with legal and
regulatory requirements and of the Funds activities and
associated risks. The Board has appointed a Chief Compliance
Officer, who oversees the implementation and testing of the
Funds compliance program and reports to the Board
regarding compliance matters for the Fund and their service
providers. The Independent Directors have engaged independent
legal counsel to assist them in performing their oversight
responsibilities.
The members of the Audit Committee are Fred G. Weiss (Chair),
Robert M. Hernandez and the Honorable Stuart E. Eizenstat, all
of whom are Independent Directors. The principal
responsibilities of the Audit Committee are to approve the
selection, retention, termination and compensation of the
Funds independent registered public accounting firm (the
independent auditors) and to oversee the independent
auditors work. The Audit Committees responsibilities
include, without limitation, to (1) evaluate the
qualifications and independence of the independent auditors;
(2) approve all audit engagement terms and fees for the
Fund; (3) review the conduct and results of each audit and
discuss the Funds audited financial statements;
(4) review any issues raised by the independent auditor or
Fund management regarding the accounting of financial reporting
policies and practices of the Fund and the internal controls of
the Fund and certain service providers; (5) oversee the
performance of (a) the Funds internal audit function
provided by its investment adviser and (b) the independent
auditor; (6) oversee policies, procedures and controls
regarding valuation of the Funds investments;
(7) discuss with Fund management its policies regarding
risk assessment and risk management as such matters relate to
the Funds financial reporting and controls; and
(8) resolve any disagreements between Fund management and
the independent auditors regarding financial reporting. The
Board has adopted a written charter for the Audit Committee.
During the fiscal year ended September 30, 2011, the Audit
Committee met five times.
The members of the Governance and Nominating Committee (the
Governance Committee) are the Honorable Stuart E.
Eizenstat (Chair), Robert M. Hernandez and Fred G. Weiss, all of
whom are Independent Directors. The principal responsibilities
of the Governance Committee are to (1) identify individuals
qualified to serve as Independent Directors of the Fund and
recommend Independent Director nominees for election by
shareholders or appointment by the Board; (2) advise the
Board with respect to Board composition, procedures and
committees (other than the Audit Committee); (3) oversee
periodic self-assessments of the Board and committees of the
Board (other than the Audit Committee); (4) review and make
recommendations regarding Independent Director compensation; and
(5) monitor corporate governance matters and develop
appropriate recommendations to the Board. The Governance
Committee may consider nominations for the office of Director
made by Fund shareholders as it deems appropriate. Fund
shareholders who wish to recommend a nominee should send
nominations to the Secretary of the Fund that include
biographical information and set forth the qualifications of the
proposed nominee. The Board has adopted a written charter for
the Governance Committee. During the fiscal year ended
September 30, 2011, the Governance Committee met
four times.
The members of the Compliance Committee are James H. Bodurtha
(Chair), Bruce R. Bond and Roberta Cooper Ramo, all of whom are
Independent Directors. The Compliance Committees purpose
is to assist the Board in fulfilling its responsibility to
oversee regulatory and fiduciary compliance matters involving
the Fund, the fund-related activities of BlackRock and the
Funds third party service providers. The Compliance
Committees responsibilities include, without limitation,
to (1) oversee the compliance policies and procedures of
the Fund and its service providers; (2) review information
on and, where appropriate, recommend policies concerning the
Funds compliance with applicable law; and (3) review
reports from and make certain recommendations and determinations
regarding the Funds Chief Compliance Officer. The Board
has adopted a written charter for the Compliance Committee.
During the fiscal year ended September 30, 2011, the
Compliance Committee met nine times.
The members of the Performance Oversight Committee (the
Performance Committee) are David H. Walsh (Chair),
Donald W. Burton, Kenneth A. Froot and John F. OBrien, all
of whom are Independent Directors, and Paul L. Audet, who
is an interested Director. The Performance Committees
purpose is to assist the Board in fulfilling its responsibility
to oversee the Funds investment performance relative to
its
agreed-upon
performance objectives. The Performance Committees
responsibilities include, without limitation, to (1) review
the Funds investment objectives, policies and practices,
(2) recommend to the Board specific investment tools and
techniques employed by BlackRock, (3) recommend to the
Board appropriate investment performance objectives based on its
I-12
review of appropriate benchmarks and competitive universes,
(4) review the Funds investment performance relative
to
agreed-upon
performance objectives and (5) review information on
unusual or exceptional investment matters. The Board has adopted
a written charter for the Performance Committee. During the
fiscal year ended September 30, 2011, the Performance
Committee met four times.
The Boards of the Equity-Liquidity Complex, the Equity-Bond
Complex and the Closed-End BlackRock Fund Complex,
established the ad hoc Joint Product Pricing Committee (the
Product Pricing Committee) comprised of nine members
drawn from the Independent Board members serving on the Boards
of these BlackRock Fund Complexes. Messrs. John F.
OBrien, Robert M. Hernandez, Fred G. Weiss, Donald W.
Burton, and David H. Walsh are members of the Product Pricing
Committee representing the Equity-Bond Complex. Two Independent
board members representing the Closed-End BlackRock
Fund Complex and two Independent board members representing
the Equity-Liquidity Complex, serve on the Product Pricing
Committee. The Product Pricing Committee is chaired by
Mr. John F. OBrien. The purpose of the Product
Pricing Committee is to review the components and pricing
structure of the non-money market funds in the BlackRock
Fund Complexes. During the fiscal year ended
September 30, 2011, the Product Pricing Committee met
three times.
The members of the Executive Committee are James H. Bodurtha,
Honorable Stuart E. Eizenstat, Robert M. Hernandez, David H.
Walsh and Fred G. Weiss, all of whom are Independent Directors,
and Paul L. Audet, who serves as an interested Director. The
principal responsibilities of the Executive Committee are to
(1) act on routine matters between meetings of the Board;
(2) act on such matters as may require urgent action
between meetings of the Board; and (3) exercise such other
authority as may from time to time be delegated to the Executive
Committee by the Board. The Board has adopted a written charter
for the Executive Committee. The Executive Committee was
constituted December 9, 2008, and during the fiscal year
ended September 30, 2011, the Executive Committee did not
meet.
The Independent Directors have adopted a statement of policy
that describes the experience, qualifications, skills and
attributes that are necessary and desirable for potential
Independent Director candidates (the Statement of
Policy). The Board believes that each Independent Director
satisfied, at the time he or she was initially elected or
appointed a Director, and continues to satisfy, the standards
contemplated by the Statement of Policy. Furthermore, in
determining that a particular Director was and continues to be
qualified to serve as a Director, the Board has considered a
variety of criteria, none of which, in isolation, was
controlling. The Board believes that, collectively, the
Directors have balanced and diverse experience, skills,
attributes and qualifications, which allow the Board to operate
effectively in governing the Fund and protecting the interests
of shareholders. Among the attributes common to all Directors
are their ability to review critically, evaluate, question and
discuss information provided to them, to interact effectively
with the Funds investment adviser, sub-advisers, other
service providers, counsel and independent auditors, and to
exercise effective business judgment in the performance of their
duties as Directors. Each Directors ability to perform his
or her duties effectively is evidenced by his or her educational
background or professional training; business, consulting,
public service or academic positions; experience from service as
a board member of the Fund and the other funds in the BlackRock
Fund Complex (and any predecessor funds), other investment
funds, public companies, or non-profit entities or other
organizations; ongoing commitment and participation in Board and
committee meetings, as well as their leadership of standing and
ad hoc committees throughout the years; or other relevant life
experiences.
The table below discusses some of the experiences,
qualifications and skills of each of our Directors that support
the conclusion that each board member should serve (or continue
to serve) on the Boards.
I-13
|
|
|
Director
|
|
Experience, Qualifications and Skills
|
|
|
|
|
Independent Directors
|
|
|
|
|
|
James H. Bodurtha
|
|
James H. Bodurtha has served for more than 20 years on the
boards of registered investment companies, most recently as a
member of the Board of the Equity-Bond Complex and its
predecessor funds, including as Chairman of the Board of certain
of the legacy-Merrill Lynch Investment Managers, L.P.
(MLIM) funds. Prior thereto, Mr. Bodurtha was
counsel to and a member of the Board of a smaller bank-sponsored
mutual funds group. In addition, Mr. Bodurtha is a member of,
and previously served as Chairman of, the Independent Directors
Council and currently serves as an independent director on the
Board of Governors of the Investment Company Institute. He also
has more than 30 years of executive management and business
experience through his work as a consultant and as the chairman
of the board of a privately-held company. In addition, Mr.
Bodurtha has more than 20 years of legal experience as a
corporate attorney and partner in a law firm, where his practice
included counseling registered investment companies and their
boards.
|
|
|
|
Bruce R. Bond
|
|
Bruce R. Bond has served for approximately 13 years on the
board of registered investment companies, having served as a
member of the Board of the Equity-Bond Complex and its
predecessor funds, including the legacy-BlackRock funds and the
State Street Research Mutual Funds. He also has executive
management and business experience, having served as president
and chief executive officer of several communications networking
companies. Mr. Bond also has corporate governance experience
from his service as a director of a computer equipment company.
|
|
|
|
Donald W. Burton
|
|
Donald W. Burton has served for approximately 25 years on
the board of registered investment companies, having served as a
member of the Board of the Equity-Bond Complex and its
predecessor funds, including the legacy-MLIM and Raymond James
funds. He also has more than 30 years of investment
management business experience, having served as the managing
general partner of an investment partnership, and a member of
the Investment Advisory Council of the Florida State Board of
Administration. In addition, Mr. Burton has corporate governance
experience, having served as a board member of publicly-held
financial, health-care, and telecommunications companies.
|
|
|
|
The Honorable Stuart E. Eizenstat
|
|
The Honorable Stuart E. Eizenstat has served for approximately
9 years on the board of registered investment companies,
having served as a member of the Board of the Equity-Bond
Complex and its predecessor funds, including the
legacy-BlackRock funds. He served as U.S. Ambassador to the
European Union Under Secretary of Commerce for International
Trade, Under Secretary of State for Economic, Business &
Agricultural Affairs, and Deputy Secretary of the U.S. Treasury
during the Clinton Administration. He was Director of the White
House Domestic Policy Staff and Chief Domestic Policy Adviser to
President Carter. In addition, Mr. Eizenstat is a practicing
attorney and Head of the International Practice at a major
international law firm. Mr. Eizenstat has business and executive
management experience and corporate governance experience
through his service on the advisory boards and corporate boards
of publicly-held consumer, energy, environmental delivery,
metallurgical and telecommunications companies.
Mr. Eizenstat has been determined by the Audit Committee to
be an audit committee financial expect, as such term is defined
in the applicable SEC rules.
|
I-14
|
|
|
Director
|
|
Experience, Qualifications and Skills
|
|
Kenneth A. Froot
|
|
Kenneth A. Froot has served for approximately 15 years on
the boards of registered investment companies, having served as
a member of the Board of the Equity-Bond Complex and its
predecessor funds, including the legacy-MLIM funds. The
Equity-Bond Board benefits from Mr. Froots years of
academic experience, having served as a professor of finance at
Harvard University since 1992 and teaching courses on capital
markets, international finance, and risk management. Mr. Froot
has published numerous articles and books on a range of topics,
including, among others, the financing of risk, risk management,
the global financial system, currency analysis, foreign
investing, and investment style strategies. He has served as a
director of research for Harvard Business School for
approximately 5 years, and as a managing partner of an
investment partnership. In addition, Mr. Froot has served as a
consultant to the International Monetary Fund, the World Bank,
and the Board of Governors of the Federal Reserve, and served on
the staff of the US Presidents Council of Economic
Advisers and the Economic Advisory Board of the Export-Import
Bank of the United States.
|
|
|
|
Robert M. Hernandez
|
|
Robert M. Hernandez has served for approximately 16 years
on the board of registered investment companies, having served
as Chairman of the Board of the Equity-Bond Complex and as Vice
Chairman and Chairman of the Audit and Nominating/Governance
Committees of its predecessor funds, including certain
legacy-BlackRock funds. Mr. Hernandez has business and executive
experience through his service as group president, chief
financial officer, Chairman and vice chairman, among other
positions, of publicly-held energy, steel, and metal companies.
He has served as a director of other public companies in various
industries throughout his career. He also has broad corporate
governance experience, having served as a board member of
publicly-held energy, insurance, chemicals, metals and
electronics companies. Mr. Hernandez has been determined by the
Audit Committee to be an audit committee financial expert, as
such term is defined in the applicable SEC rules.
|
|
|
|
John F. OBrien
|
|
John F. OBrien has served for approximately 5 years
on the board of registered investment companies, having served
as a member of the Board of the Equity-Bond Complex and its
predecessor funds, including the legacy-MLIM funds. He also has
investment management experience, having served as the
president, director, and chairman of the board of an investment
management firm and a life insurance company. Mr. OBrien
also has broad corporate governance and audit committee
experience, having served as a board member and audit committee
member of publicly-held financial, medical, energy, chemical,
retail, life insurance, and auto parts manufacturing companies,
and as a director of a not-for-profit organization.
|
|
|
|
Roberta Cooper Ramo
|
|
Roberta Cooper Ramo has served for approximately 10 years
on the board of registered investment companies, having served
as a member of the Board of the Equity-Bond Complex and its
predecessor funds, including the legacy-MLIM funds. She is a
practicing attorney and shareholder in a law firm for more than
30 years. Ms. Ramo has oversight experience through her
service as chairman of the board of a retail company and as
president of the American Bar Association and the American Law
Institute and as President, for 2 years, and Member of the
Board of Regents, for 6 years, of the University of New Mexico.
She also has corporate governance experience, having served on
the Boards of United New Mexico Bank and the First National Bank
of New Mexico and on the Boards of non-profit organizations.
|
I-15
|
|
|
Director
|
|
Experience, Qualifications and Skills
|
|
David H. Walsh
|
|
David H. Walsh has served for approximately 7 years on the
board of registered investment companies, having served as a
member of the Equity-Bond Complex and its predecessor funds,
including the legacy-MLIM funds. Mr. Walsh has investment
management experience, having served as a consultant with Putnam
Investments (Putnam) from 1993 to 2003, and employed
in various capacities at Putnam from 1971 to 1992. He has
oversight experience, serving as the director of an academic
institute, and a board member of various not-for-profit
organizations.
|
|
|
|
Fred G. Weiss
|
|
Fred G. Weiss has served for approximately 12 years on the
board of registered investment companies, having served as a
member of the Equity-Bond Complex and its predecessor funds,
including as Chairman of the board of certain of the legacy-MLIM
funds. He also has more than 30 years of business and
executive management experience, having served in senior
executive positions of two public companies where he was
involved in both strategic planning and corporate development,
as Chairman of the Committee on Investing Employee Assets (CIBA)
and as a managing director of an investment consulting firm. Mr.
Weiss also has corporate governance experience, having served as
a board member of a publicly-held global technology company and
a pharmaceutical company, and as a director of a not-for-profit
foundation. Mr. Weiss has been determined by the Audit Committee
to be an audit committee financial expert, as such term is
defined in the applicable SEC rules.
|
|
|
|
Interested Directors
|
|
|
|
|
|
Paul L. Audet
|
|
Paul L. Audet has a wealth of experience in the investment
management industry, including more than 13 years with
BlackRock and over 20 years in finance and asset
management. His expertise in finance is demonstrated by his
positions as Chief Financial Officer of BlackRock and head of
BlackRocks Global Cash Management business. Mr. Audet
currently is a member of BlackRocks Global Operating and
Corporate Risk Management Committees, the BlackRock Alternative
Investors Executive Committee and the Investment Committee for
the Private Equity Fund of Funds. Prior to joining BlackRock,
Mr. Audet was the Senior Vice President of Finance at PNC
Bank Corp. and Chief Financial Officer of the investment
management and mutual fund processing businesses and head of
PNCs Mergers & Acquisitions unit.
|
|
|
|
Laurence D. Fink
|
|
Laurence D. Fink has served for approximately 10 years on
the board of registered investment companies, having served as a
member of the Equity-Bond Complex and its predecessor funds. He
serves as Chairman of the Board and Chief Executive Officer of
BlackRock, Inc. since its formation in 1998 and of BlackRock,
Inc.s predecessor entities since 1988 and Chairman of the
Executive and Management Committees. Mr. Fink served as a
managing director of The First Boston Corporation, Member of its
Management Committee, Co-head of its Taxable Fixed Income
Division and Head of its Mortgage and Real Estate Products
Group. He also is Chairman of the Board of several of
BlackRocks alternative investment vehicles, Director of
several of BlackRocks offshore funds, a Member of the
Board of Trustees of New York University, Chair of the Financial
Affairs Committee and a member of the Executive Committee, the
Ad Hoc Committee on Board Governance, and the Committee on
Trustees. Mr. Fink serves as Co-Chairman of the NYU Hospitals
Center Board of Trustees, Chairman of the Development/Trustee
Stewardship Committee and Chairman of the Finance Committee, and
a Trustee of The Boys Club of New York.
|
I-16
|
|
|
Director
|
|
Experience, Qualifications and Skills
|
|
Henry Gabbay
|
|
Mr. Gabbays many years of experience in finance provides
the Boards with a wealth of practical business knowledge and
leadership. In particular, Mr. Gabbays experience as
a Consultant for and Managing Director of BlackRock, Inc., Chief
Administration Officer of BlackRock Advisors, LLC and President
of BlackRock Funds provides the Funds with greater insight into
the analysis and evaluation of both its existing investment
portfolios and potential future investments as well as enhanced
oversight of their investment decisions and investment valuation
processes. In addition, Mr. Gabbays former positions as
Chief Administrative Officer of the BlackRock Advisors, LLC and
as Treasurer of certain closed-end funds in the BlackRock fund
complex provides the Boards with direct knowledge of the
operations of the Funds and their investment advisers,
respectively. Mr. Gabbays previous service on and
long-standing relationship with the Boards also provides him
with a specific understanding of the Funds, their operations,
and the business and regulatory issues facing the Funds.
|
Biographical
Information
Certain biographical and other information relating to the
Directors of the Fund and Master Bond LLC is set forth below,
including their address and year of birth, their principal
occupations for at least the last five years, the length of time
served, the total number of investment companies and portfolios
overseen in the BlackRock-advised Funds and any public
directorships.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
BlackRock-
|
|
|
|
|
|
|
|
|
|
|
Advised
|
|
|
|
|
|
|
|
|
|
|
Registered
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
Companies
|
|
|
|
|
|
|
|
|
|
|
(RICs)
|
|
Public Company
|
|
|
Position(s)
|
|
|
|
|
|
Consisting
|
|
or Investment
|
|
|
Held with
|
|
Length of
|
|
|
|
of Investment
|
|
Company
|
|
|
the Fund
|
|
Time
|
|
|
|
Portfolios
|
|
Directorships
|
Name, Address
|
|
and Master
|
|
Served as a
|
|
Principal Occupation(s)
|
|
(Portfolios)
|
|
held During Past
|
and Year of Birth
|
|
Bond LLC
|
|
Director1,2
|
|
During Past Five Years
|
|
Overseen
|
|
Five Years
|
|
Independent Directors
|
James H.
Bodurtha3
55 East 52nd Street
New York, NY 10055
1944
|
|
Director
|
|
2007 to
present
|
|
Director, The China Business Group, Inc. (consulting firm) since
1996 and Executive Vice President thereof from 1996 to 2003;
Chairman of the Board, Berkshire Holding Corporation since 1980.
|
|
29 RICs consisting of 82 Portfolios
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bruce R. Bond
55 East 52nd Street
New York, NY 10055
1946
|
|
Director
|
|
2007 to
present
|
|
Trustee and Member of the Governance Committee, State Street
Research Mutual Funds from 1997 to 2005; Board Member of
Governance, Audit and Finance Committee, Avaya Inc. (computer
equipment) from 2003 to 2007.
|
|
29 RICs consisting of 82 Portfolios
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Donald W. Burton
55 East 52nd Street
New York, NY 10055
1944
|
|
Director
|
|
Director
of the Fund from 2002
to present; Director of Master Bond LLC from 2007
to present
|
|
Managing General Partner, The Burton Partnership, LP (an
investment partnership) since 1979; Managing General Partner,
The South Atlantic Venture Funds since 1983; Director, Lifestyle
Family Fitness (fitness industry) since 2006; Director, Idology,
Inc. (technology solutions) since 2006; Member of the Investment
Advisory Council of the Florida State Board of Administration
from 2001 to 2007.
|
|
29 RICs consisting of 82 Portfolios
|
|
Knology, Inc. (telecommunications); Capital Southwest (financial)
|
|
|
|
|
|
|
|
|
|
|
|
I-17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
BlackRock-
|
|
|
|
|
|
|
|
|
|
|
Advised
|
|
|
|
|
|
|
|
|
|
|
Registered
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
Companies
|
|
|
|
|
|
|
|
|
|
|
(RICs)
|
|
Public Company
|
|
|
Position(s)
|
|
|
|
|
|
Consisting
|
|
or Investment
|
|
|
Held with
|
|
Length of
|
|
|
|
of Investment
|
|
Company
|
|
|
the Fund
|
|
Time
|
|
|
|
Portfolios
|
|
Directorships
|
Name, Address
|
|
and Master
|
|
Served as a
|
|
Principal Occupation(s)
|
|
(Portfolios)
|
|
held During Past
|
and Year of Birth
|
|
Bond LLC
|
|
Director1,2
|
|
During Past Five Years
|
|
Overseen
|
|
Five Years
|
|
Honorable Stuart E.
Eizenstat4
55 East 52nd Street
New York, NY 10055
1943
|
|
Director
|
|
2007
to present
|
|
Partner and Head of International Practice, Covington and
Burling LLP (law firm) since 2001; International Advisory Board
Member, The Coca Cola Company since 2002; Advisory Board Member,
Veracity Worldwide LLC (risk management) since 2007; Member of
the Board of Directors, Chicago Climate Exchange (environmental)
since 2006; Member of the International Advisory Board GML
(energy) since 2003; Advisory Board Member BT American
(telecommunications) from 2004 to 2010.
|
|
29 RICs consisting of 82 Portfolios
|
|
Alcatel-Lucent (telecommunications); Global Specialty
Metallurgical (metallurgical
industry); UPS Corporation (delivery service)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth A. Froot
55 East 52nd Street
New York, NY 10055
1957
|
|
Director
|
|
2007
to present
|
|
Professor, Harvard University since 1992.
|
|
29 RICs consisting of 82 Portfolios
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert M.
Hernandez5
55 East 52nd Street
New York, NY 10055
1944
|
|
Director
|
|
2007
to present
|
|
Director, Vice Chairman and Chief Financial Officer of USX
Corporation (energy and steel business) from 1991 to 2001.
|
|
29 RICs consisting of 82 Portfolios
|
|
ACE Limited (insurance company);
Eastman Chemical Company (chemicals); RTI International Metals,
Inc. (metals);
TYCO Electronics (electronics)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John F.
OBrien6
55 East 52nd Street
New York, NY 10055
1943
|
|
Director
|
|
Director
of the Fund from 2005
to present; Director of Master Bond LLC from 2007
to present
|
|
Chairman and Director, Woods Hole Oceanographic Institute since
2009 and Trustee thereof from 2003 to 2009; Director, Allmerica
Financial Corporation from 1995 to 2003; Director, ABIOMED from
1989 to 2006; Director, Ameresco, Inc. (energy solutions
company) from 2006 to 2007; Vice Chairman and Director, Boston
Lyric Opera from 2002 to 2007.
|
|
29 RICs consisting of 82 Portfolios
|
|
Cabot Corporation (chemicals);
LKQ Corporation
(auto parts manufacturing);
TJX Companies, Inc. (retailer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roberta Cooper Ramo
55 East 52nd Street
New York, NY 10055
1942
|
|
Director
|
|
2007
to present
|
|
Shareholder, Modrall, Sperling, Roehl, Harris & Sisk,
P.A. (law firm) since 1993; Chairman of the Board, Coopers
Inc. (retail) since 2000; Director, ECMC Group (service provider
to students, schools and lenders) since 2001; President, The
American Law Institute (non-profit) since 2008; President,
American Bar Association from 1995 to 1996.
|
|
29 RICs consisting of 82 Portfolios
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
I-18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
BlackRock-
|
|
|
|
|
|
|
|
|
|
|
Advised
|
|
|
|
|
|
|
|
|
|
|
Registered
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
Companies
|
|
|
|
|
|
|
|
|
|
|
(RICs)
|
|
Public Company
|
|
|
Position(s)
|
|
|
|
|
|
Consisting
|
|
or Investment
|
|
|
Held with
|
|
Length of
|
|
|
|
of Investment
|
|
Company
|
|
|
the Fund
|
|
Time
|
|
|
|
Portfolios
|
|
Directorships
|
Name, Address
|
|
and Master
|
|
Served as a
|
|
Principal Occupation(s)
|
|
(Portfolios)
|
|
held During Past
|
and Year of Birth
|
|
Bond LLC
|
|
Director1,2
|
|
During Past Five Years
|
|
Overseen
|
|
Five Years
|
|
David H.
Walsh7
55 East 52nd Street
New York, NY 10055
1941
|
|
Director
|
|
Director
of the Fund from 2003
to present; Director of Master Bond LLC from 2007
to present
|
|
Director, National Museum of Wildlife Art since 2007; Trustee,
University of Wyoming Foundation since 2008; Director,
Ruckleshaus Institute and Haub School of Natural Resources at
the University of Wyoming from 2006 to 2008; Director, The
American Museum of Fly Fishing since 1997; Director, The
National Audubon Society from 1998 to 2005.
|
|
29 RICs consisting of 82 Portfolios
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fred G.
Weiss8
55 East 52nd Street
New York, NY 10055
1941
|
|
Director
|
|
Director
of the Fund from 1998
to present; Director of Master Bond LLC from 2007
to present
|
|
Managing Director, FGW Associates (consulting and investment
company) since 1997; Director and Treasurer, Michael J. Fox
Foundation for Parkinsons Research since 2000; Director of
BTG International Plc (medical technology commercialization
company) from 2001 to 2007.
|
|
29 RICs consisting of 82 Portfolios
|
|
Watson
Pharmaceuticals
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
Interested
Directors9
|
Paul L. Audet
55 East 52nd Street
New York, NY 10055
1953
|
|
Director
|
|
2011
to present
|
|
Senior Managing Director, BlackRock, Inc., and Head of
BlackRocks Real Estate business from 2008 to 2011; Member
of BlackRocks Global Operating and Corporate Risk
Management Committees and of the BlackRock Alternative Investors
Executive Committee and Investment Committee for the Private
Equity Fund of Funds business since 2008; Head of
BlackRocks Global Cash Management business from 2005 to
2010; Acting Chief Financial Officer of BlackRock from 2007 to
2008; Chief Financial Officer of BlackRock from 1998 to 2005.
|
|
159 RICs consisting of 286 Portfolios
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
I-19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
BlackRock-
|
|
|
|
|
|
|
|
|
|
|
Advised
|
|
|
|
|
|
|
|
|
|
|
Registered
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
Companies
|
|
|
|
|
|
|
|
|
|
|
(RICs)
|
|
Public Company
|
|
|
Position(s)
|
|
|
|
|
|
Consisting
|
|
or Investment
|
|
|
Held with
|
|
Length of
|
|
|
|
of Investment
|
|
Company
|
|
|
the Fund
|
|
Time
|
|
|
|
Portfolios
|
|
Directorships
|
Name, Address
|
|
and Master
|
|
Served as a
|
|
Principal Occupation(s)
|
|
(Portfolios)
|
|
held During Past
|
and Year of Birth
|
|
Bond LLC
|
|
Director1,2
|
|
During Past Five Years
|
|
Overseen
|
|
Five Years
|
|
Laurence D. Fink
55 East 52nd Street
New York, NY 10055
1952
|
|
Director
|
|
2007
to present
|
|
Chairman and Chief Executive Officer of BlackRock, Inc. since
its formation in 1998 and of BlackRock, Inc.s predecessor
entities since 1988 and Chairman of the Executive and Management
Committees; Formerly, Managing Director, The First Boston
Corporation, Member of its Management Committee, Co-head of its
Taxable Fixed Income Division and Head of its Mortgage and Real
Estate Products Group; Chairman of the Board of several of
BlackRocks alternative investment vehicles; Director of
several of BlackRocks offshore funds; Member of the Board
of Trustees of New York University, Chair of the Financial
Affairs Committee and a member of the Executive Committee, the
Ad Hoc Committee on Board Governance, and the Committee on
Trustees;
Co-Chairman
of the NYU Hospitals Center Board of Trustees, Chairman of the
Development/Trustee Stewardship Committee and Chairman of the
Finance Committee; Trustee, The Boys Club of New York.
|
|
29 RICs consisting of 82 Portfolios
|
|
BlackRock, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Henry Gabbay
55 East 52nd Street
New York, NY 10055
1947
|
|
Director
|
|
2007
to present
|
|
Consultant, BlackRock, Inc. from 2007 to 2008; Managing
Director, BlackRock, Inc. from 1989 to 2007; Chief
Administrative Officer, BlackRock Advisors, LLC from 1998 to
2007; President of BlackRock Funds and BlackRock Bond Allocation
Target Shares from 2005 to 2007 and Treasurer of certain
closed-end funds in the BlackRock fund complex from 1989 to 2006.
|
|
159 RICs consisting of 286 Portfolios
|
|
None
|
|
|
|
1 |
|
Each Director holds office until
his or her successor is elected and qualifies or until his or
her earlier death, resignation, retirement or removal as
provided by the Funds by-laws or charter or statute, or
until December 31 of the year in which he or she turns 72.
|
2 |
|
Following the combination of
Merrill Lynch Investment Managers, L.P. (MLIM) and
BlackRock, Inc. in September 2006, the various legacy MLIM and
legacy BlackRock fund boards were realigned and consolidated
into three new fund boards in 2007. As a result, although the
chart shows certain Directors as joining the Funds board
in 2007, each Director first became a member of the board of
trustees/directors of other legacy MLIM or legacy BlackRock
Funds as follows: James H. Bodurtha, 1995; Bruce R. Bond, 2005;
Donald W. Burton, 2002; Honorable Stuart E. Eizenstat, 2001;
Kenneth A. Froot, 2005; Robert M. Hernandez, 1996; John F.
OBrien, 2005; Roberta Cooper Ramo, 1999; David H. Walsh,
2003; and Fred G. Weiss, 1998.
|
3 |
|
Chairman of the Compliance
Committee.
|
4 |
|
Chairman of the Governance
Committee.
|
5 |
|
Chairman of the Board of Directors.
|
6 |
|
Chairman of the Product Pricing
Committee.
|
7 |
|
Chairman of the Performance
Committee.
|
8 |
|
Vice-Chairman of the Board of
Directors and Chairman of the Audit Committee.
|
9 |
|
Messrs. Audet and Fink are
both interested persons, as defined in the
Investment Company Act, of the Fund based on their positions
with BlackRock, Inc. and its affiliates. Mr. Gabbay is an
interested person of the Fund due to his former
position of BlackRock, Inc. and to his ownership of BlackRock,
Inc. and The PNC Financial Services Group, Inc. (PNC) securities.
|
I-20
Directors
of Master Large Cap LLC
The Board of Directors of Master Large Cap LLC (the Master
Large Cap LLC Board) consists of thirteen individuals
(each, a Director), eleven of whom are not
interested persons of Master Large Cap LLC as
defined in the Investment Company Act (the Independent
Directors). The Directors are responsible for the
oversight of the operations of Master Large Cap LLC and perform
the various duties imposed on the directors of investment
companies by the Investment Company Act. The registered
investment companies advised by BlackRock or its affiliates (the
BlackRock-advised Funds) are organized into one
complex of closed-end funds (the Closed-End
Complex), two complexes of open-end funds, the
Equity-Liquidity Complex and the Equity-Bond Complex, and one
complex of exchange-traded funds (each complex, a
BlackRock Fund Complex). The Directors also
oversee as Board members the operations of the other open-end
registered investment companies included in the BlackRock
Fund Complex referred to as the Equity-Liquidity Complex.
The Independent Directors have retained independent legal
counsel to assist them in connection with their duties.
The Master Large Cap LLC Board has five standing committees: an
Audit Committee, a Governance and Nominating Committee, a
Compliance Committee, a Performance Oversight and Contract
Committee and an Executive Committee.
The members of the Audit Committee (the Master Large Cap
LLC Audit Committee) are Kenneth L. Urish (chair), Herbert
I. London and Frederick W. Winter, all of whom are Independent
Directors. The principal responsibilities of the Master Large
Cap LLC Audit Committee are to approve the selection, retention,
termination and compensation of Master Large Cap LLCs
independent registered public accounting firm (the Master
Large Cap LLC independent auditors) and to oversee the
Master Large Cap LLC independent auditors work. The Master
Large Cap LLC Audit Committees responsibilities include,
without limitation, to (1) evaluate the qualifications and
independence of the Master Large Cap LLC independent auditors;
(2) approve all audit engagement terms and fees for Master
Large Cap LLC; (3) review the conduct and results of each
independent audit of Master Large Cap LLCs financial
statements; (4) review with the Master Large Cap LLC
independent auditor any audit problems or difficulties
encountered during or related to the conduct of the audit;
(5) review the internal controls of Master Large Cap LLC
and its service providers with respect to accounting and
financial matters; (6) oversee the performance of Master
Large Cap LLCs internal audit function provided by its
investment adviser, administrator, pricing agent or other
service provider; and (7) resolve any disagreements between
Master Large Cap LLCs management and the independent
auditors regarding financial reporting. The Master Large Cap LLC
Board has adopted a written charter for the Audit Committee.
During the fiscal period ended September 30, 2011, the
Master Large Cap LLC Audit Committee met four times.
The members of the Governance and Nominating Committee (the
Master Large Cap LLC Governance Committee) are
Dr. Matina Horner (chair), Cynthia A. Montgomery and Robert
C. Robb, Jr., all of whom are Independent Directors. The
principal responsibilities of the Master Large Cap LLC
Governance Committee are to (1) identify individuals
qualified to serve as Independent Directors of Master Large Cap
LLC and recommend Independent Director nominees for election by
shareholders or appointment by the Master Large Cap LLC Board;
(2) advise the Master Large Cap LLC Board with respect to
Master Large Cap LLC Board composition, procedures and
committees (other than the Master Large Cap LLC Audit
Committee); (3) oversee periodic self-assessments of the
Master Large Cap LLC Board and committees of the Master Large
Cap LLC Board (other than the Master Large Cap LLC Audit
Committee); (4) review and make recommendations regarding
Independent Director compensation; and (5) monitor
corporate governance matters and develop appropriate
recommendations to the Master Large Cap LLC Board. The
Governance Committee may consider nominations for the office of
Director made by Master Large Cap LLCs shareholders as it
deems appropriate. Master Large Cap LLCs shareholders who
wish to recommend a nominee should send nominations to the
Secretary of Master Large Cap LLC that include biographical
information and set forth the qualifications of the proposed
nominee. The Master Large Cap LLC Board has adopted a written
charter for the Governance Committee. During the fiscal period
ended September 30, 2011, the Master Large Cap LLC
Governance Committee met four times.
The members of the Compliance Committee (the Master Large
Cap LLC Compliance Committee) are
Joseph P. Platt, Jr. (chair), Cynthia A. Montgomery
and Robert C. Robb, Jr., all of whom are Independent Directors.
The Master Large Cap LLC Compliance Committees purpose is
to assist the Master Large Cap LLC Board in fulfilling its
responsibility to oversee regulatory and fiduciary compliance
matters involving Master Large Cap
I-21
LLC, the
fund-related
activities of BlackRock and Master Large Cap LLCs third
party service providers. The Master Large Cap LLC Compliance
Committees responsibilities include, without limitation,
to (1) oversee the compliance policies and procedures of
Master Large Cap LLC and its service providers; (2) review
information on and, where appropriate, recommend policies
concerning Master Large Cap LLCs compliance with
applicable law; and (3) review reports from and make
certain recommendations regarding Master Large Cap LLCs
Chief Compliance Officer. The Master Large Cap LLC Board has
adopted a written charter for the Master Large Cap LLC
Compliance Committee. During the fiscal period ended
September 30, 2011, the Master Large Cap LLC Compliance
Committee met eight times.
The members of the Performance Oversight and Contract Committee
(the Master Large Cap LLC Performance Committee) are
David O. Beim (chair), Toby Rosenblatt (vice chair), Ronald W.
Forbes and Rodney D. Johnson, all of whom are Independent
Directors. The Master Large Cap LLC Performance Committees
purpose is to assist the Master Large Cap LLC Board in
fulfilling its responsibility to oversee Master Large Cap
LLCs investment performance relative to its
agreed-upon
performance objectives. The Master Large Cap LLCs
Performance Committees responsibilities include, without
limitation, to (1) review Master Large Cap LLCs
investment objectives, policies and practices,
(2) recommend to the Master Large Cap LLC Board specific
investment tools and techniques employed by BlackRock,
(3) recommend to the Master Large Cap LLC Board appropriate
investment performance objectives based on its review of
appropriate benchmarks and competitive universes,
(4) review Master Large Cap LLCs investment
performance relative to
agreed-upon
performance objectives and (5) review information on
unusual or exceptional investment matters. The Master Large Cap
LLC Board has adopted a written charter for the Master Large Cap
LLC Performance Committee. During the fiscal period ended
September 30, 2011, the Master Large Cap LLC Performance
Committee met four times.
The members of the Executive Committee (the Master Large
Cap LLC Executive Committee) are Ronald W. Forbes,
Rodney D. Johnson and Paul L. Audet. Messrs. Forbes and
Johnson are Independent Directors and Mr. Davis is an interested
Director. The principal responsibilities of the Master Large Cap
LLC Executive Committee are to (1) act on routine matters
between meetings of the Master Large Cap LLC Board; (2) act on
such matters as may require urgent action between meetings of
the Master Large Cap LLC Board; and (3) exercise such other
authority as may from time to time be delegated to the Master
Large Cap LLC Executive Committee by the Master Large Cap LLC
Board. The Master Large Cap LLC Board has adopted a written
charter for the Master Large Cap LLC Executive Committee. During
the fiscal period ended September 30, 2011, the Master
Large Cap LLC Executive Committee did not meet.
The Boards of the Equity-Liquidity, the Equity-Bond and the
Closed-End BlackRock Fund Complexes established the Joint
Product Pricing Committee (the Product Pricing
Committee) comprised of nine members drawn from the board
members serving on the boards of these BlackRock Fund Complexes.
Messrs. Forbes and Johnson, non-interested Master Large Cap
LLC Board members, are members of the Product Pricing Committee
representing the Equity-Liquidity Complex. Mr. Gabbay, an
interested Board member of these BlackRock Fund Complexes,
is also a member of the Product Pricing Committee. One
non-interested board member representing the Closed-End Complex
and five non-interested board members representing the
Equity-Bond Complex serve on the Product Pricing Committee,
including Jack OBrien, who serves as Chair of the Product
Pricing Committee. The purpose of the Product Pricing Committee
is to review the components and structure of the non-money
market funds in the BlackRock Fund Complexes. During the
fiscal period ended September 30, 2011, the Product Pricing
Committee met three times.
Each Directors ability to perform his or her duties
effectively is evidenced by his or her educational background or
professional training; business, consulting, public service or
academic positions; experience from service as a board member of
the Trust and the other funds in the BlackRock Fund Complex
(and any predecessor funds), other investment funds, public
companies, or non-profit entities or other organizations;
ongoing commitment and participation in Board and Committee
meetings, as well as his or her leadership of standing and ad
hoc committees throughout the years; or other relevant life
experiences.
I-22
The table below discusses some of the experiences,
qualifications and skills of each of the Directors that support
the conclusion that each Director should serve (or continue to
serve) on the Board.
|
|
|
Directors
|
|
Experience, Qualifications and Skills
|
|
|
|
|
Independent Directors
|
|
|
|
|
|
David O. Beim
|
|
David O. Beim has served for approximately 13 years on the
boards of registered investment companies, most recently as a
member of the boards of the funds in the Equity-Liquidity
Complex and its predecessor funds, including the legacy Merrill
Lynch Investment Managers, LP (MLIM) funds.
Mr. Beim has served as a professor of finance and economics
at the Columbia University Graduate School of Business since
1991 and has taught courses on corporate finance, international
banking and emerging financial markets. The Board benefits from
the perspective and background gained by his almost
20 years of academic experience. He has published numerous
articles and books on a range of topics, including, among
others, banking and finance. In addition, Mr. Beim spent
25 years in investment banking, including starting and
running the investment banking business at Bankers Trust Company.
|
|
|
|
Ronald W. Forbes
|
|
Ronald W. Forbes has served for more than 30 years on the
boards of registered investment companies, most recently as a
member of the boards of the funds in the Equity-Liquidity
Complex and its predecessor funds, including the legacy MLIM
funds. This length of service provides Mr. Forbes with
direct knowledge of the operation of the Fund and the business
and regulatory issues facing the Fund. He currently serves as
professor emeritus at the School of Business at the State
University of New York at Albany, and has served as a professor
of finance thereof since 1989. Mr. Forbes experience
as a professor of finance provides valuable background for his
service on the boards. Mr. Forbes has also served as a
member of the task force on municipal securities markets for
Twentieth Century Fund.
|
|
|
|
Dr. Matina S. Horner
|
|
Dr. Matina S. Horner has served for approximately 7 years
on the boards of registered investment companies, most recently
as a member of the boards of the funds in the Equity-Liquidity
Complex and its predecessor funds, including the legacy
BlackRock funds. The Board benefits from her service as
executive vice president of Teachers Insurance and Annuity
Association and College Retirement Equities Fund. This
experience provided Dr. Horner with management and corporate
governance experience. In addition, Dr. Horner served as a
professor in the Department of Psychology at Harvard University
and served as President of Radcliffe College for 17 years.
Dr. Horner also served on various public, private and non-profit
boards.
|
|
|
|
Rodney D. Johnson
|
|
Rodney D. Johnson has served for over 20 years on the
boards of registered investment companies, most recently as a
member of the boards of the funds in the Equity-Liquidity
Complex and its predecessor funds including the legacy BlackRock
funds. He has over 25 years of experience as a financial
advisor covering a range of engagements, which has broadened his
knowledge of and experience with the investment management
business. Prior to founding Fairmount Capital Advisors, Inc.,
Mr. Johnson served as Chief Investment Officer of Temple
University for two years. He served as Director of Finance and
Managing Director, in addition to a variety of other roles, for
the City of Philadelphia, and has extensive experience in
municipal finance. Mr. Johnson was also a tenured associate
professor of finance at Temple University and a research
economist with the Federal Reserve Bank of Philadelphia.
|
I-23
|
|
|
Directors
|
|
Experience, Qualifications and Skills
|
|
Herbert I. London
|
|
Herbert I. London has served for over 20 years on the
boards of registered investment companies, most recently as a
member of the boards of the funds in the Equity-Liquidity
Complex and its predecessor funds, including the legacy MLIM
funds. Dr. Londons experience as president of the Hudson
Institute, a world renowned think tank in Washington D.C., since
1997; and in various positions at New York University provide
both background and perspective on financial, economic and
global issues, which enhance his service on the Board. He has
authored several books and numerous articles, which have
appeared in major newspapers and journals throughout the United
States.
|
|
|
|
Cynthia A. Montgomery
|
|
Cynthia A. Montgomery has served for over 15 years on the
boards of registered investment companies, most recently as a
member of the boards of the funds in the Equity-Liquidity
Complex and its predecessor funds, including the legacy MLIM
funds. The Board benefits from Ms. Montgomerys more than
20 years of academic experience as a professor at Harvard
Business School where she taught courses on corporate strategy
and corporate governance. Ms. Montgomery also has business
management and corporate governance experience through her
service on the corporate boards of a variety of public
companies. She has also authored numerous articles and books on
these topics.
|
|
|
|
Joseph P. Platt
|
|
Joseph P. Platt has served for approximately 12 years on
the boards of registered investment companies, most recently as
a member of the boards of the funds in the Equity-Liquidity
Complex and its predecessor funds, including the legacy
BlackRock funds. Mr. Platt currently serves as general
partner at Thorn Partners, LP, a private investment company.
Prior to his joining Thorn Partners, L.P., he was an owner,
director and executive vice president with Johnson and Higgins,
an insurance broker and employee benefits consultant. He has
over 25 years experience in the areas of insurance,
compensation and benefits. Mr. Platt also serves on the
boards of private, public and non-profit companies.
|
|
|
|
Robert C. Robb, Jr.
|
|
Robert C. Robb, Jr. has served for approximately 12 years
on the boards of registered investment companies, most recently
as a member of the boards of the funds in the Equity-Liquidity
Complex and its predecessor funds, including the legacy
BlackRock funds. Mr. Robb has over 30 years of
experience in management consulting and has worked with many
companies and business associations located throughout the
United States. Mr. Robb brings to the Board a wealth of
practical business experience across a range of industries.
|
|
|
|
Toby Rosenblatt
|
|
Toby Rosenblatt has served for approximately 20 years on
the boards of registered investment companies, most recently as
a member of the boards of the funds in the Equity-Liquidity
Complex and its predecessor funds, including the legacy
BlackRock funds. He has served as president and general partner
of Founders Investments, Ltd., a private investment limited
partnership, since 1999, providing him with relevant experience
with the issues faced by investment management firms and their
clients. Mr. Rosenblatt has been active in the civic arena
and has served as a trustee of a number of community and
educational organizations for over 30 years.
|
|
|
|
Kenneth L. Urish
|
|
Kenneth L. Urish has served for approximately 12 years on
the boards of registered investment companies, most recently as
a member of the boards of the funds in the Equity-Liquidity
Complex and its predecessor funds, including the legacy
BlackRock funds. He has over 30 years of experience in
public accounting. Mr. Urish has served as a managing
member of an accounting and consulting firm. Mr. Urish has
been determined by the Audit Committee to be an audit
committee financial expert, as such term is defined in the
applicable SEC rules.
|
I-24
|
|
|
Directors
|
|
Experience, Qualifications and Skills
|
|
Frederick W. Winter
|
|
Frederick W. Winter has served for approximately 12 years
on the boards of registered investment companies, most recently
as a member of the boards of the funds in the Equity-Liquidity
Complex and its predecessor funds, including the legacy
BlackRock funds. The Board benefits from
Mr. Winters years of academic experience, having
served as a professor and dean emeritus of the Joseph M. Katz
Graduate School of Business at the University of Pittsburgh
since 2005, and dean thereof since 1997. He is widely regarded
as a specialist in marketing strategy, marketing management,
business-to-business marketing and services marketing. He has
also served as a consultant to more than 50 different
firms.
|
|
|
|
Directors
|
|
Experience, Qualifications and Skills
|
|
|
|
|
Interested Directors
|
|
|
|
|
|
Paul L. Audet
|
|
Paul L. Audet has a wealth of experience in the investment
management industry, including more than 13 years with
BlackRock and over 20 years in finance and asset
management. His expertise in finance is demonstrated by his
positions as Chief Financial Officer of BlackRock and head of
BlackRocks Global Cash Management business. Mr. Audet
currently is a member of BlackRocks Global Operating and
Corporate Risk Management Committees, the BlackRock Alternative
Investors Executive Committee and the Investment Committee for
the Private Equity Fund of Funds. Prior to joining BlackRock,
Mr. Audet was the Senior Vice President of Finance at PNC
Bank Corp. and Chief Financial Officer of the investment
management and mutual fund processing businesses and head of
PNCs Mergers & Acquisitions unit.
|
|
|
|
Henry Gabbay
|
|
Henry Gabbays many years of experience in finance
provides the Boards with a wealth of practical business
knowledge and leadership. In particular, Mr. Gabbays
experience as a Consultant for and Managing Director of
BlackRock, Inc., Chief Administration Officer of BlackRock
Advisors, LLC and President of BlackRock Funds provide the Fund
with greater insight into the analysis and evaluation of both
its existing investment portfolios and potential future
investments as well as enhanced oversight of its investment
decisions and investment valuation processes. In addition,
Mr. Gabbays former positions as Chief Administrative
Officer of BlackRock Advisors, LLC and as Treasurer of certain
closed-end funds in the BlackRock Fund Complex provide the Board
with direct knowledge of the operations of the Fund and its
investment adviser. Mr. Gabbays previous service on
and long-standing relationship with the Board also provide him
with a specific understanding of the Fund, its operations, and
the business and regulatory issues facing the Fund.
|
I-25
Biographical
Information
Certain biographical and other information relating to the
Directors of Master Large Cap LLC is set forth below, including
their address and year of birth, their principal occupations for
at least the last five years, the length of time served, the
total number of registered investment companies and investment
portfolios overseen in the BlackRock-advised Funds and any
public directorships.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
BlackRock-
|
|
|
|
|
|
|
|
|
|
|
Advised
|
|
|
|
|
|
|
|
|
|
|
Registered
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
Companies
|
|
|
|
|
|
|
|
|
|
|
(RICs)
|
|
Public Company
|
|
|
|
|
|
|
|
|
Consisting
|
|
or Investment
|
|
|
Position(s)
|
|
Length of
|
|
|
|
of Investment
|
|
Company
|
|
|
Held with
|
|
Time
|
|
|
|
Portfolios
|
|
Directorships
|
Name, Address
|
|
Master Large
|
|
Served as a
|
|
Principal Occupation(s)
|
|
(Portfolios)
|
|
held During Past
|
and Year of Birth
|
|
Cap LLC
|
|
Director2
|
|
During Past Five Years
|
|
Overseen
|
|
Five Years
|
|
Independent
Directors1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David O.
Beim3
55 East 52nd Street
New York, NY 10055
1940
|
|
Director
|
|
1999 to present
|
|
Professor of Professional Practice at the Columbia University
Graduate School of Business since 1991; Trustee, Phillips Exeter
Academy since 2002; Chairman, Wave Hill Inc. (public garden and
cultural center) from 1990 to 2006.
|
|
33 RICs consisting of
107 Portfolios
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ronald W.
Forbes4
55 East 52nd Street
New York, NY 10055
1940
|
|
Director
|
|
2007 to present
|
|
Professor Emeritus of Finance, School of Business, State
University of New York at Albany since 2000.
|
|
33 RICs consisting of
107 Portfolios
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Matina
Horner5
55 East 52nd Street
New York, NY 10055
1939
|
|
Director
|
|
2007 to present
|
|
Executive Vice President of Teachers Insurance and Annuity
Association and College Retirement Equities Fund from 1989 to
2003.
|
|
33 RICs consisting of
107 Portfolios
|
|
NSTAR (electric & gas utility)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rodney D.
Johnson4
55 East 52nd Street
New York, NY 10055
1941
|
|
Director
|
|
2007 to present
|
|
President, Fairmount Capital Advisors, Inc. since 1987; Member
of the Archdiocesan Investment Committee of the Archdiocese of
Philadelphia since 2004; Director, The Committee of Seventy
(civic) since 2006; Director, Fox Chase Cancer Center from 2004
to 2010.
|
|
33 RICs consisting of
107 Portfolios
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Herbert I. London
55 East 52nd Street
New York, NY 10055
1939
|
|
Director
|
|
1999 to present
|
|
Professor Emeritus, New York University since 2005; John M. Olin
Professor of Humanities, New York University from 1993 to 2005
and Professor thereof from 1980 to 2005; President, Hudson
Institute (policy research organization) since 1997 and Trustee
thereof since 1980; Chairman of the Board of Trustees for
Grantham University since 2006; Director, InnoCentive, Inc.
(strategic solutions company) since 2005; Director, Cerego, LLC
(software development and design) since 2005; Director,
Cybersettle (dispute resolution technology) since 2009.
|
|
33 RICs consisting of
107 Portfolios
|
|
AIMS Worldwide, Inc. (marketing)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cynthia A. Montgomery
55 East 52nd Street
New York, NY 10055
1952
|
|
Director
|
|
2007 to present
|
|
Professor, Harvard Business School since 1989; Director, McLean
Hospital since 2005; Director, Harvard Business School
Publishing from 2005 to 2010.
|
|
33 RICs consisting of
107 Portfolios
|
|
Newell Rubbermaid, Inc. (manufacturing)
|
|
|
|
|
|
|
|
|
|
|
|
I-26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
BlackRock-
|
|
|
|
|
|
|
|
|
|
|
Advised
|
|
|
|
|
|
|
|
|
|
|
Registered
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
Companies
|
|
|
|
|
|
|
|
|
|
|
(RICs)
|
|
Public Company
|
|
|
|
|
|
|
|
|
Consisting
|
|
or Investment
|
|
|
Position(s)
|
|
Length of
|
|
|
|
of Investment
|
|
Company
|
|
|
Held with
|
|
Time
|
|
|
|
Portfolios
|
|
Directorships
|
Name, Address
|
|
Master Large
|
|
Served as a
|
|
Principal Occupation(s)
|
|
(Portfolios)
|
|
held During Past
|
and Year of Birth
|
|
Cap LLC
|
|
Director2
|
|
During Past Five Years
|
|
Overseen
|
|
Five Years
|
|
Joseph P. Platt,
Jr.6
55 East 52nd Street
New York, NY 10055
1947
|
|
Director
|
|
2007 to present
|
|
Director, The West Penn Allegheny Health System (a
not-for-profit health system) since 2008; Director, Jones and
Brown (Canadian insurance broker) since 1998; General Partner,
Thorn Partners, LP (private investment) since 1998; Director,
WQED Multi-Media (public broadcasting not-for-profit) since
2001; Partner, Amarna Corporation LLC (private investment
company) from 2002 to 2008.
|
|
33 RICs consisting of
107 Portfolios
|
|
Greenlight Capital Re, Ltd. (reinsurance) company)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert C. Robb, Jr.
55 East 52nd Street
New York, NY 10055
1945
|
|
Director
|
|
2007 to present
|
|
Partner, Lewis, Eckert, Robb and Company (management and
financial consulting firm) since 1981.
|
|
33 RICs consisting of
107 Portfolios
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Toby
Rosenblatt7
55 East 52nd Street
New York, NY 10055
1938
|
|
Director
|
|
2007 to present
|
|
President, Founders Investments Ltd. (private investments) since
1999; Director, College Access Foundation of California
(philanthropic foundation) since 2009; Director, Forward
Management, LLC since 2007; Director, The James Irvine
Foundation (philanthropic foundation) from 1998 to 2008.
|
|
33 RICs consisting of
107 Portfolios
|
|
A.P. Pharma, Inc. (specialty pharmaceuticals)
(1983-2011)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kenneth L.
Urish8
55 East 52nd Street
New York, NY 10055
1951
|
|
Director
|
|
2007 to present
|
|
Managing Partner, Urish Popeck & Co., LLC (certified
public accountants and consultants) since 1976; Chairman Elect
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 2001;
Trustee, The Holy Family Foundation from 2001 to 2009; President
and Trustee, Pittsburgh Catholic Publishing Associates from 2003
to 2008; Director, Inter-Tel from 2006 to 2007.
|
|
33 RICs consisting of
107 Portfolios
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frederick W. Winter
55 East 52nd Street
New York, NY 10055
1945
|
|
Director
|
|
2007 to present
|
|
Professor and Dean Emeritus of the Joseph M. Katz School of
Business, University of Pittsburgh since 2005 and Dean thereof
from 1997 to 2005; Director, Alkon Corporation (pneumatics)
since 1992; Director, Tippman Sports (recreation) since 2005;
Director, Indotronix International (IT services) from 2004 to
2008.
|
|
33 RICs consisting of
107 Portfolios
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
I-27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
BlackRock-
|
|
|
|
|
|
|
|
|
|
|
Advised
|
|
|
|
|
|
|
|
|
|
|
Registered
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
Companies
|
|
|
|
|
|
|
|
|
|
|
(RICs)
|
|
Public Company
|
|
|
|
|
|
|
|
|
Consisting
|
|
or Investment
|
|
|
Position(s)
|
|
Length of
|
|
|
|
of Investment
|
|
Company
|
|
|
Held with
|
|
Time
|
|
|
|
Portfolios
|
|
Directorships
|
Name, Address
|
|
Master Large
|
|
Served as a
|
|
Principal Occupation(s)
|
|
(Portfolios)
|
|
held During Past
|
and Year of Birth
|
|
Cap LLC
|
|
Director2
|
|
During Past Five Years
|
|
Overseen
|
|
Five Years
|
|
Interested
Directors1,9
|
Paul L. Audet
55 East 52nd Street
New York, NY 10055
1953
|
|
Director
|
|
2011 to present
|
|
Senior Managing Director, BlackRock, Inc., and Head of
BlackRocks Real Estate business from 2008 to 2011; Member
of BlackRocks Global Operating and Corporate Risk
Management Committees and of the BlackRock Alternative Investors
Executive Committee and Investment Committee for the Private
Equity Fund of Funds business since 2008; Head of
BlackRocks Global Cash Management business from 2005 to
2010; Acting Chief Financial Officer of BlackRock from 2007 to
2008; Chief Financial Officer of BlackRock from 1998 to 2005.
|
|
159 RICs consisting of
286 Portfolios
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Henry Gabbay
55 East 52nd Street
New York, NY 10055
1947
|
|
Director
|
|
2007 to present
|
|
Consultant, BlackRock Inc. from 2007 to 2008; Managing Director,
BlackRock, Inc. from 1989 to 2007; Chief Administrative Officer,
BlackRock Advisors, LLC from 1998 to 2007; President of
BlackRock Funds and BlackRock Bond Allocation Target Shares from
2005 to 2007; and Treasurer of certain closed-end funds in the
BlackRock fund complex from 1989 to 2006.
|
|
159 RICs consisting of
286 portfolios
|
|
None
|
|
|
|
1 |
|
Directors serve until their
resignation, removal or death, or until December 31 of the year
in which they turn 72. The Master Large Cap LLC Board has
approved one-year extensions in the terms of Directors who turn
72 prior to December 31, 2013.
|
2 |
|
Following the combination of
Merrill Lynch Investment Managers, L.P. (MLIM) and
BlackRock, Inc. in September 2006, the various legacy MLIM and
legacy BlackRock fund boards were realigned and consolidated
into three new fund boards in 2007. As a result, although the
chart shows certain Directors as joining the Master Large Cap
LLCs Board in 2007, each Independent Director first became
a member of the board of directors of other legacy MLIM or
legacy BlackRock Funds as follows: David O. Beim, 1998; Ronald
W. Forbes, 1977; Dr. Matina Horner, 2004; Rodney D.
Johnson, 1995; Herbert I. London, 1987; Cynthia A. Montgomery,
1994; Joseph P. Platt, Jr., 1999; Robert C. Robb, Jr.,
1999; Toby Rosenblatt, 2005; Kenneth L. Urish, 1999 and
Frederick W. Winter, 1999.
|
3 |
|
Chairman of the Master Large Cap
LLC Performance Committee.
|
4 |
|
Co-Chairman of the Master Large Cap
LLC Board of Directors.
|
5 |
|
Chairman of the Master Large Cap
LLC Governance Committee.
|
6 |
|
Chairman of the Master Large Cap
LLC Compliance Committee.
|
7 |
|
Vice-Chairman of the Master Large
Cap LLC Performance Committee.
|
8 |
|
Chairman of the Master Large Cap
LLC Audit Committee.
|
9 |
|
Mr. Audet is an
interested person, as defined in the Investment
Company Act, of Master Large Cap LLC based on his position with
BlackRock, Inc. and its affiliates. Mr. Gabbay is an
interested person of Master Large Cap LLC based on
his former positions with BlackRock, Inc. and its affiliates as
well as his ownership of BlackRock, Inc. and PNC securities.
|
I-28
Officers
of the Fund, Master Bond LLC and Master Large Cap LLC
Certain biographical and other information relating to the
officers of the Fund, Master Bond LLC and Master Large Cap LLC
is set forth below, including their address and year of birth,
their principal occupations for at least the last five years,
the length of time served, the total number of registered
investment companies and investment portfolios overseen in the
BlackRock-advised funds and any public directorships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
BlackRock-
|
|
|
|
|
|
|
|
|
|
|
Advised
|
|
|
|
|
|
|
|
|
|
|
Registered
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
|
|
Position(s)
|
|
|
|
|
|
Companies
|
|
Public
|
|
|
Held with the
|
|
|
|
|
|
(RICs)
|
|
Company
|
|
|
Fund,
|
|
|
|
|
|
Consisting
|
|
or Investment
|
|
|
Master Bond
|
|
|
|
|
|
of Investment
|
|
Company
|
|
|
LLC and
|
|
Length of
|
|
|
|
Portfolios
|
|
Directorships
|
Name, Address
|
|
Master Large
|
|
Time Served
|
|
Principal Occupation(s)
|
|
(Portfolios)
|
|
held During
|
and Year of Birth
|
|
Cap LLC
|
|
as an
Officer1
|
|
During Past Five Years
|
|
Overseen
|
|
Past Five Years
|
|
Fund Officers
|
|
|
|
|
|
|
|
|
|
|
John M. Perlowski
55 East 52nd Street
New York, NY 10055
1964
|
|
President and Chief Executive Officer
|
|
2010 to present
|
|
Managing Director of BlackRock, Inc. since 2009; Global Head of
BlackRock Fund Administration since 2009; Managing Director and
Chief Operating Officer of the Global Product Group at Goldman
Sachs Asset Management, L.P. from 2003 to 2009; Treasurer of
Goldman Sachs Mutual Funds from 2003 to 2009 and Senior Vice
President thereof from 2007 to 2009; Director of Goldman Sachs
Offshore Funds from 2002 to 2009; Director of Family Resource
Network (charitable foundation).
|
|
62 RICs consisting of 189 Portfolios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brendan Kyne 55 East 52nd Street
New York, NY 10055
1977
|
|
Vice President
|
|
2009 to present
|
|
Managing Director of BlackRock, Inc. since 2010; Director of
BlackRock, Inc. from 2008 to 2009; Head of Product Development
and Management for BlackRocks U.S. Retail Group since
2009 and
Co-head
thereof from 2007 to 2009; Vice President of BlackRock, Inc.
from 2005 to 2008.
|
|
159 RICs consisting of 286 Portfolios
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Neal Andrews
55 East 52nd Street
New York, NY 10055
1966
|
|
Chief Financial Officer
|
|
2007 to present
|
|
Managing Director of BlackRock, Inc. since 2006; Senior Vice
President and Line of Business Head of Fund Accounting and
Administration at PNC Global Investment Servicing (U.S.) Inc.,
from 1992 to 2006.
|
|
159 RICs consisting of 286 Portfolios
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jay Fife
55 East 52nd Street
New York, NY 10055
1970
|
|
Treasurer
|
|
2007 to present
|
|
Managing Director of BlackRock, Inc. since 2007; Director of
BlackRock, Inc. in 2006; Assistant Treasurer of the MLIM and
Fund Asset Management, L.P. advised funds from 2005 to 2006;
Director of MLIM Fund Services Group from 2001 to 2006.
|
|
159 RICs consisting of 286 Portfolios
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian Kindelan
55 East 52nd Street
New York, NY 10055
1959
|
|
Chief Compliance Officer and Anti-Money Laundering Officer
|
|
2007 to present
|
|
Chief Compliance Officer of the BlackRock-advised Funds since
2007; Managing Director and Senior Counsel of BlackRock, Inc.
since 2005.
|
|
159 RICs consisting of 286 Portfolios
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
I-29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
BlackRock-
|
|
|
|
|
|
|
|
|
|
|
Advised
|
|
|
|
|
|
|
|
|
|
|
Registered
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
|
|
Position(s)
|
|
|
|
|
|
Companies
|
|
Public
|
|
|
Held with the
|
|
|
|
|
|
(RICs)
|
|
Company
|
|
|
Fund,
|
|
|
|
|
|
Consisting
|
|
or Investment
|
|
|
Master Bond
|
|
|
|
|
|
of Investment
|
|
Company
|
|
|
LLC and
|
|
Length of
|
|
|
|
Portfolios
|
|
Directorships
|
Name, Address
|
|
Master Large
|
|
Time Served
|
|
Principal Occupation(s)
|
|
(Portfolios)
|
|
held During
|
and Year of Birth
|
|
Cap LLC
|
|
as an
Officer1
|
|
During Past Five Years
|
|
Overseen
|
|
Past Five Years
|
|
Ira P. Shapiro
55 East 52nd Street
New York, NY 10055
1963
|
|
Secretary
|
|
2010 to present
|
|
Managing Director of BlackRock, Inc. since 2009; Managing
Director and Associate General Counsel of Barclays Global
Investors from 2008 to 2009 and Principal thereof from 2004 to
2008.
|
|
163 RICs consisting of 516 Portfolios
|
|
None
|
|
|
|
1 |
|
Officers of the Fund, Master Bond
LLC and Master Large Cap LLC serve at the pleasure of the Board
of Directors of the Fund, Master Bond LLC and Master Large Cap
LLC, respectively.
|
Share
Ownership by Directors of the Fund and Master Bond LLC
Information relating to each Directors share ownership in
the Fund and Master Bond LLC and in all BlackRock-advised Funds
that are overseen by the respective Directors (Supervised
Funds) as of December 31, 2010 is set forth in the
chart below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Dollar Range of Equity
|
|
|
Securities in
|
|
|
|
|
|
|
Supervised
|
Name of
Director1
|
|
The Fund
|
|
Master Bond
LLC2
|
|
Funds
|
|
Interested Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul L. Audet
|
|
|
None
|
|
|
|
N/A
|
|
|
|
Over $100,000
|
|
Laurence D. Fink
|
|
|
None
|
|
|
|
N/A
|
|
|
|
$50,001-$100,0003
|
|
Henry Gabbay
|
|
|
None
|
|
|
|
N/A
|
|
|
|
Over $100,000
|
|
Independent Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
James H. Bodurtha
|
|
|
None
|
|
|
|
N/A
|
|
|
|
Over $100,000
|
|
Bruce R. Bond
|
|
|
None
|
|
|
|
N/A
|
|
|
|
Over $100,000
|
|
Donald W. Burton
|
|
|
None
|
|
|
|
N/A
|
|
|
|
None
|
|
Honorable Stuart E. Eizenstat
|
|
|
None
|
|
|
|
N/A
|
|
|
|
Over $100,000
|
|
Kenneth A. Froot
|
|
|
None
|
|
|
|
N/A
|
|
|
|
Over $100,000
|
|
Robert M. Hernandez
|
|
|
None
|
|
|
|
N/A
|
|
|
|
Over $100,000
|
|
John F. OBrien
|
|
|
None
|
|
|
|
N/A
|
|
|
|
Over $100,000
|
|
Roberta Cooper Ramo
|
|
|
None
|
|
|
|
N/A
|
|
|
|
Over $100,000
|
|
David H. Walsh
|
|
|
None
|
|
|
|
N/A
|
|
|
|
Over $100,000
|
|
Fred G. Weiss
|
|
|
None
|
|
|
|
N/A
|
|
|
|
Over $100,000
|
|
|
|
|
1 |
|
Directors of the Fund and Master
Bond LLC are eligible to purchase Institutional Shares of the
Fund. The Directors anticipate purchasing additional shares of
the Supervised Funds in the near future.
|
2 |
|
Master Bond LLC does not offer
interests for sale to the public.
|
3 |
|
As of December 31, 2011, Mr. Fink
had invested, in the aggregate, over $100,000 in
BlackRock-advised funds, including funds not overseen by him as
a Director or Trustee.
|
As of December 31, 2011, the Directors and officers of the
Fund and Master Bond LLC then in office as a group owned an
aggregate of less than 1% of the outstanding shares of the Fund.
As of December 31, 2011, none of the Independent Directors
of the Fund or Master Bond LLC then in office or their immediate
family members owned beneficially or of record any securities of
affiliates of the Manager, the Distributor, or any person
directly or indirectly controlling, controlled by, or under
common control with the Manager or the Distributor.
I-30
Share
Ownership by Directors of Master Large Cap LLC
Information relating to each Directors share ownership in
Master Large Cap LLC and in all Supervised Funds as of
December 31, 2011 is set forth in the chart below:
|
|
|
|
|
|
|
|
|
|
|
Aggregate Dollar Range of Equity Securities in
|
|
|
|
|
Supervised
|
Name of Director
|
|
Master Large Cap
LLC1
|
|
Funds
|
|
Interested Directors:
|
|
|
|
|
|
|
|
|
Paul L. Audet
|
|
|
N/A
|
|
|
|
Over $100,000
|
|
Henry Gabbay
|
|
|
N/A
|
|
|
|
Over $100,000
|
|
Independent Directors:
|
|
|
|
|
|
|
|
|
David O. Beim
|
|
|
N/A
|
|
|
|
Over $100,000
|
|
Ronald W. Forbes
|
|
|
N/A
|
|
|
|
Over $100,000
|
|
Dr. Matina Horner
|
|
|
N/A
|
|
|
|
Over $100,000
|
|
Rodney D. Johnson
|
|
|
N/A
|
|
|
|
Over $100,000
|
|
Herbert I. London
|
|
|
N/A
|
|
|
|
$50,001 - $100,000
|
|
Cynthia A. Montgomery
|
|
|
N/A
|
|
|
|
Over $100,000
|
|
Joseph P. Platt, Jr.
|
|
|
N/A
|
|
|
|
Over $100,000
|
|
Robert C. Robb, Jr.
|
|
|
N/A
|
|
|
|
Over $100,000
|
|
Toby Rosenblatt
|
|
|
N/A
|
|
|
|
Over $100,000
|
|
Kenneth L. Urish
|
|
|
N/A
|
|
|
|
Over $100,000
|
|
|
|
|
1 |
|
The Master Large Cap LLC does not
offer interests for sale to the public.
|
As of December 31, 2011, the Directors and officers of the
Master Large Cap LLC as a group owned an aggregate of less than
1% of the outstanding shares of Master Large Cap LLC. As of
December 31, 2011, none of the Independent Directors of
Master Large Cap LLC or their immediate family members owned
beneficially or of record any securities of affiliates of the
Manager, the Distributor, or any person directly or indirectly
controlling, controlled by, or under common control with the
Manager or the Distributor.
Compensation
of Directors of the Fund and Master Bond LLC
Effective October 1, 2011, each Independent Director is
paid an annual retainer of $175,000 per year for his or her
services to as a Board member of the BlackRock-advised Funds,
including the Fund, and a $25,000 Board meeting fee to be paid
for each Board meeting up to five Board meetings held in a
calendar year (compensation for meetings in excess of this
number to be determined on a
case-by-case
basis), together with
out-of-pocket
expenses in accordance with a Board policy on travel and other
business expenses relating to attendance at meetings. In
addition, the Chairman and Vice-Chairman of the Board are paid
as compensation an additional annual retainer of $115,000 and
$35,000, respectively, per year. The Chairmen of the Audit
Committee, Compliance Committee, Governance Committee and
Performance Committee are paid as compensation an additional
annual retainer of $35,000, respectively. The Chairman of the
Product Pricing Committee, Mr. OBrien, is paid an
annual retainer of $25,000, which is allocated among all of the
non-money market funds in the BlackRock Fund Complexes.
Mr. Gabbay is an interested Director of the Fund and Master
Bond LLC and serves as an interested Board member of the other
BlackRock-advised Funds which comprise the Equity-Liquidity, the
Equity-Bond and the Closed-End BlackRock Fund Complexes.
Mr. Gabbay receives as compensation for his services as a
Board member of each of the three BlackRock Fund Complexes,
(i) an annual retainer of $506,250 allocated to the funds
in these three BlackRock Fund Complexes, including the Fund
and Master Bond LLC (ii) with respect to each of the two
open-end BlackRock Fund Complexes, a Board meeting fee of
$3,750 (with respect to meetings of the Equity-Liquidity
Complex) and $18,750 (with respect to meetings of the
Equity-Bond Complex) to be paid for attendance at each Board
meeting up to five Board meetings held in a calendar year by
each such Complex (compensation for meetings in excess of this
number to be determined on a
case-by-case
basis). Mr. Gabbay will also be reimbursed for
out-of-pocket
expenses in accordance with a Board policy on travel and other
business expenses relating to attendance at meetings.
Mr. Gabbays compensation for serving on the boards of
funds in these BlackRock Fund Complexes (including the Fund
and Master Bond LLC) is equal to 75% of each retainer and,
as applicable, of each meeting fee (without regard to additional
fees paid to Board and Committee chairs) received by the
independent board members serving on such boards. The Board of
the Fund, Master Bond LLC or of any other
I-31
fund in a BlackRock Fund Complex may modify the Board
members compensation from time to time depending on market
conditions and Mr. Gabbays compensation would be
impacted by those modifications.
Prior to October 1, 2011, each Director who was an
Independent Director was paid as compensation an annual retainer
of $150,000 per year for his or her services as a Board member
of the BlackRock-advised Funds, including the Fund, and a
$25,000 Board meeting fee for each Board meeting up to five
Board meetings held in a calendar year (compensation for
meetings in excess of this number to be determined on a
case-by-case
basis), together with
out-of-pocket
expenses in accordance with a Board policy on travel and other
business expenses relating to attendance at meetings. In
addition, the Chairman and Vice-Chairman of the Board were paid
as compensation an additional annual retainer of $80,000 and
$25,000, respectively, per year. The Chairmen of the Audit
Committee, Compliance Committee, Governance Committee and
Performance Committee were paid as compensation an additional
annual retainer of $25,000, respectively. The Chairman of the
Product Pricing Committee, Mr. OBrien, was paid an
annual retainer of $25,000, which is allocated among all of the
non-money market funds in the BlackRock Fund Complexes.
Mr. Gabbays compensation for serving on the boards of
funds in these BlackRock Fund Complexes (including the
Fund) was equal to 75% of each retainer and, as applicable, of
each meeting fee (without regard to additional fees paid to
Board and Committee chairs) received by the independent board
members serving on such boards.
The following table sets forth the compensation earned by each
of the Directors from the Fund and the Master Bond LLC for the
fiscal year ending September 30, 2011 and the aggregate
compensation paid to them by all BlackRock-advised Funds for the
calendar year ended December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
|
Compensation
|
|
|
|
|
|
|
from the Fund,
|
|
|
Aggregate
|
|
|
|
Master Bond
|
|
|
Compensation
|
|
Estimated Annual
|
|
LLC and Other
|
|
|
from the Fund and
|
|
Benefits Upon
|
|
BlackRock-
|
Name1
|
|
Master Bond LLC
|
|
Retirement
|
|
Advised Funds
|
|
Interested
Directors: 2
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul L.
Audet3
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
Richard S.
Davis4
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
Laurence D. Fink
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
Henry Gabbay
|
|
$
|
2,072
|
|
|
|
None
|
|
|
$
|
625,000
|
|
Independent Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
James H.
Bodurtha5
|
|
$
|
3,110
|
|
|
|
None
|
|
|
$
|
308,750
|
|
Bruce R. Bond
|
|
$
|
2,873
|
|
|
|
None
|
|
|
$
|
281,250
|
|
Donald W. Burton
|
|
$
|
2,989
|
|
|
|
None
|
|
|
$
|
281,250
|
|
Honorable Stuart E.
Eizenstat6
|
|
$
|
3,110
|
|
|
|
None
|
|
|
$
|
308,750
|
|
Kenneth A. Froot
|
|
$
|
2,873
|
|
|
|
None
|
|
|
$
|
281,250
|
|
Robert M.
Hernandez7
|
|
$
|
3,750
|
|
|
|
None
|
|
|
$
|
370,000
|
|
John F.
OBrien8
|
|
$
|
3,066
|
|
|
|
None
|
|
|
$
|
287,500
|
|
Roberta Cooper Ramo
|
|
$
|
2,873
|
|
|
|
None
|
|
|
$
|
281,250
|
|
David H.
Walsh9
|
|
$
|
3,227
|
|
|
|
None
|
|
|
$
|
308,750
|
|
Fred G.
Weiss10
|
|
$
|
3,464
|
|
|
|
None
|
|
|
$
|
336,250
|
|
Richard R.
West11
|
|
$
|
665
|
|
|
|
None
|
|
|
|
None
|
|
|
|
|
1 |
|
For the number of BlackRock-advised
Funds from which each Director receives compensation see the
Biographical Information Chart beginning on page I-17.
|
2 |
|
Mr. Gabbay began receiving
compensation from the Fund and Master Bond LLC for his services
as Director effective January 1, 2009. Mr. Audet,
Mr. Davis and Mr. Fink receive no compensation from
the Fund or Master Bond LLC for their services as Director.
|
3 |
|
Mr. Audet was appointed to
serve as a Director of the Fund effective September 13,
2011.
|
4 |
|
Mr. Davis resigned as a
Director of the Fund effective September 13, 2011.
|
5 |
|
Chairman of the Compliance
Committee.
|
6 |
|
Chairman of the Governance
Committee.
|
7 |
|
Chairman of the Board of Directors.
|
8 |
|
Chairman of the Product Pricing
Committee.
|
9 |
|
Chairman of the Performance
Committee.
|
10 |
|
Vice Chairman of the Board of
Directors and Chairman of the Audit Committee.
|
11 |
|
Mr. West retired as a Director of
the Fund and as a director or trustee of all other
BlackRock-advised Funds effective December 31, 2010.
|
Compensation
of Directors of Master Large Cap LLC
Each Director who is a Independent Director is paid as
compensation an annual retainer of $250,000 per year for his or
her services as a board member to the BlackRock-advised Funds in
the Equity-Liquidity Complex, including
I-32
Master Large Cap LLC, and a $5,000 board meeting fee to be paid
for each in-person board meeting attended (a $2,500 board
meeting fee for telephonic attendance at regular board
meetings), for up to five board meetings held in a calendar year
(compensation for meetings in excess of this number to be
determined on a
case-by-case
basis), together with out-of-pocket expenses in accordance with
a board policy on travel and other business expenses relating to
attendance at meetings. The Co-Chairs of the Master Large Cap
LLC Board of Directors are each paid an additional annual
retainer of $45,000. The Chairs of the Master Large Cap LLC
Audit Committee, Master Large Cap LLC Compliance Committee,
Master Large Cap LLC Governance Committee and Master Large Cap
LLC Performance Committee and the Vice-Chair of the Master Large
Cap LLC Performance Committee are each paid an additional annual
retainer of $25,000. The Chair of the Product Pricing Committee,
who oversees funds in the Equity-Bond Complex, is paid an annual
retainer of $25,000, that is allocated among all of the
non-money
market funds in the Equity-Liquidity, the Equity-Bond and the
Closed-End BlackRock Fund Complexes.
Mr. Gabbay is an interested Director of Master Large Cap
LLC and serves as an interested Board member of the other
BlackRock-advised Funds which comprise the Equity-Liquidity, the
Equity-Bond and the Closed-End BlackRock Fund Complexes.
Mr. Gabbay receives as compensation for his services as a
board member of each of these three BlackRock
Fund Complexes, (i) an annual retainer of $506,250,
paid quarterly in arrears, allocated to the BlackRock-advised
Funds in these BlackRock Fund Complexes, including Master
Large Cap LLC, and (ii) with respect to each of the two
open-end BlackRock Fund Complexes, a board meeting fee of
$3,750 (with respect to meetings of the Equity-Liquidity
Complex) and $18,750 (with respect to meetings of the
Equity-Bond Complex) to be paid for attendance at each board
meeting up to five board meetings held in a calendar year by
each such Complex (compensation for meetings in excess of this
number to be determined on a case by case basis).
Mr. Gabbay will also be reimbursed for
out-of-pocket
expenses in accordance with a board policy on travel and other
business expenses relating to attendance at meetings.
Mr. Gabbays compensation for serving on the boards of
funds in these three BlackRock Fund Complexes (including
Master Large Cap LLC) is equal to 75% of each retainer and,
as applicable, of each meeting fee (without regard to additional
fees paid to Board and Committee chairs) received by the
non-interested board members serving on such boards. The board
of Master Large Cap LLC or of any other BlackRock-advised Fund
may modify the board members compensation from time to
time depending on market conditions and Mr. Gabbays
compensation would be impacted by those modifications.
Each of the Independent Directors and Mr. Gabbay agreed to
a 10% reduction in their compensation for the period May 1,
2009 through December 31, 2009.
The following table sets forth the compensation earned by the
Directors of Master Large Cap LLC from the Core Portfolio for
the fiscal period ended September 30, 2011, and the
aggregate compensation paid to them by all RICs and Portfolios
for the calendar year ended December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
|
Compensation from
|
|
|
Aggregate
|
|
Estimated
|
|
Master Large
|
|
|
Compensation
|
|
Annual
|
|
Cap LLC and
|
|
|
from the
|
|
Benefits Upon
|
|
Other BlackRock-
|
Name
|
|
Core Portfolio
|
|
Retirement
|
|
Advised
Funds1
|
|
Independent Directors:
|
|
|
|
|
|
|
|
|
|
|
|
|
David O.
Beim2
|
|
$
|
6,329
|
|
|
|
None
|
|
|
$
|
300,000
|
|
Ronald W.
Forbes3
|
|
$
|
10,065
|
|
|
|
None
|
|
|
$
|
320,000
|
|
Dr. Matina
Horner4
|
|
$
|
6,329
|
|
|
|
None
|
|
|
$
|
300,000
|
|
Rodney D.
Johnson3
|
|
$
|
10,065
|
|
|
|
None
|
|
|
$
|
320,000
|
|
Herbert I. London
|
|
$
|
5,777
|
|
|
|
None
|
|
|
$
|
275,000
|
|
Cynthia A. Montgomery
|
|
$
|
5,777
|
|
|
|
None
|
|
|
$
|
275,000
|
|
Joseph P. Platt,
Jr.5
|
|
$
|
6,329
|
|
|
|
None
|
|
|
$
|
310,000
|
|
Robert C. Robb, Jr.
|
|
$
|
5,777
|
|
|
|
None
|
|
|
$
|
275,000
|
|
Toby
Rosenblatt6
|
|
$
|
6,329
|
|
|
|
None
|
|
|
$
|
300,000
|
|
Kenneth L.
Urish7
|
|
$
|
6,329
|
|
|
|
None
|
|
|
$
|
310,000
|
|
Frederick W. Winter
|
|
$
|
5,777
|
|
|
|
None
|
|
|
$
|
275,000
|
|
Interested Director:
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul L.
Audet8
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard S.
Davis9
|
|
|
None
|
|
|
|
None
|
|
|
|
None
|
|
Henry
Gabbay10
|
|
$
|
4,092
|
|
|
|
None
|
|
|
$
|
625,000
|
|
|
|
|
1 |
|
For the number of RICs and
Portfolios from which each Independent Director receives
compensation, see the Biographical Information chart beginning
on page I-26.
|
2 |
|
Chairman of the Master Large Cap
LLC Performance Oversight Committee.
|
I-33
|
|
|
3 |
|
Co-Chairman of the Master Large Cap
LLC Board of Directors.
|
4 |
|
Chair of the Master Large Cap LLC
Governance Committee.
|
5 |
|
Chairman of the Master Large Cap
LLC Compliance Committee.
|
6 |
|
Vice-Chairman of the Master Large
Cap LLC Performance Oversight Committee.
|
7 |
|
Chairman of the Master Large Cap
LLC Audit Committee.
|
8 |
|
Mr. Audet was appointed to
serve as a Director of the Master Large Cap LLC effective
September 22, 2011. Mr. Audet receives no compensation
for his service as a Director.
|
9 |
|
Mr. Davis resigned as a
Director of the Master Large Cap LLC effective
September 22, 2011.
|
10 |
|
Mr. Gabbay began receiving
compensation for his service as a Director effective
January 1, 2009.
|
|
|
IV.
|
Management
and Advisory Arrangements
|
The Fund, Master Bond LLC and Master Large Cap LLC each have
entered into management agreements with the Manager (each a
Management Agreement). Pursuant to the Management
Agreement between the Manager and the Fund, the Manager receives
for its services to the Fund monthly compensation at the annual
rates of 0.50% of that portion of the average daily net assets
not exceeding $250 million; 0.45% of that portion of the
average daily net assets exceeding $250 million but not
exceeding $300 million; 0.425% of that portion of the
average daily net assets exceeding $300 million but not
exceeding $400 million; and 0.40% of that portion of the
average daily net assets exceeding $400 million. The Fund
also pays management fees to the Manager to the extent it
invests its fixed-income assets and equity assets in the
respective Master Portfolios. The Manager has contractually
agreed to waive the management fee charged to the Fund by the
amount of management fees the Fund pays to the Manager
indirectly through its investment in the Master Portfolios.
Pursuant to the Management Agreement between the Manager and
Master Bond LLC, the Manager manages the day-to-day activities
of the Total Return Portfolio. Under the Management Agreement,
the manager receives as compensation for its services to the
Total Return Portfolio, at the end of each month a management
fee with respect to the Total Return Portfolio. Master Bond LLC
pays the management fee at annual rates that decrease as the
total net assets of the Total Return Portfolio increase above
certain levels. The fee rates are applied to the average daily
net assets of the Total Return Portfolio, with the reduced rates
applicable to portions of the assets of the Total Return
Portfolio to the extent that the aggregate average daily net
assets of the Total Return Portfolio exceeds certain levels. The
fee with respect to the Total Return Portfolio shall be 0.20% of
the average daily net assets not exceeding $250 million;
0.15% of the average daily net assets in excess of
$250 million but not exceeding $500 million; 0.10% of
the average daily net assets in excess of $500 million but
not exceeding $750 million and 0.05% of the average daily
net assets in excess of $750 million.
Pursuant to the Management Agreement between the Manager and
Master Large Cap LLC, the Manager manages the day-to-day
activities of Master Large Cap LLC. Under the Management
Agreement, the manager receives as compensation for its services
to the Core Portfolio, at the end of each month a management fee
with respect to the Core Portfolio. Master Large Cap LLC pays
the management fee at annual rates that decrease as the total
net assets of the Core Portfolio increase above certain levels.
The fee rates are applied to the average daily net assets of the
Core Portfolio, with the reduced rates applicable to portions of
the assets of the Core Portfolio to the extent that the
aggregate average daily net assets of the Core Portfolio exceeds
certain levels. The fee with respect to the Core Portfolio shall
be 0.50% of the Core Portfolios average daily net assets
not exceeding $1 billion, 0.45% of the Core
Portfolios average daily net assets in excess of
$1 billion but not exceeding $5 billion, and 0.40% of
the Core Portfolios average daily net assets in excess of
$5 billion.
Set forth below are the management fees paid by the Fund, the
Total Return Portfolio and the Core Portfolio to the Manager for
the periods indicated:
|
|
|
|
|
|
|
|
|
Fund:
|
|
|
|
|
Fiscal Year Ended
|
|
Paid to the
|
|
Waived by the
|
September 30,
|
|
Manager
|
|
Manager1
|
|
2011
|
|
$
|
4,920,817
|
|
|
$
|
3,611,351
|
|
2010
|
|
$
|
5,094,146
|
|
|
$
|
3,790,533
|
|
2009
|
|
$
|
5,137,285
|
|
|
$
|
2,584,665
|
|
|
|
|
1 |
|
In addition to the contractual
agreement described above between the Fund and the Manager, the
Manager may waive a portion of the Funds management fee in
connection with the Funds investment in an affiliated
money market fund.
|
I-34
|
|
|
|
|
|
|
|
|
Total Return Portfolio:
|
|
|
|
|
Fiscal Year Ended
|
|
Paid to the
|
|
Waived by the
|
September 30,
|
|
Manager
|
|
Manager1
|
|
2011
|
|
$
|
2,653,158
|
|
|
$
|
45,704
|
|
2010
|
|
$
|
2,238,333
|
|
|
$
|
13,143
|
|
2009
|
|
$
|
1,955,736
|
|
|
$
|
9,393
|
|
|
|
|
1 |
|
The Manager may waive a portion of
the Total Return Portfolios management fee in connection
with the Total Return Portfolios investment in an
affiliated money market fund.
|
|
|
|
|
|
|
|
|
|
Core Portfolio:
|
|
Paid to the
|
|
Waived by the
|
Fiscal Year/Period Ended
|
|
Manager
|
|
Manager1
|
|
September 30, 2011
|
|
$
|
15,147,528
|
|
|
$
|
389
|
|
September 30, 2010
|
|
$
|
17,455,621
|
|
|
$
|
599
|
|
September 30,
20092
|
|
$
|
13,518,511
|
|
|
$
|
1,748
|
|
|
|
|
1 |
|
The Manager may waive a portion of
the Core Portfolios management fee in connection with the
Core Portfolios investment in an affiliated money market
fund.
|
2 |
|
For the period November 1,
2008 to September 30, 2009.
|
Pursuant to the Management Agreement, the Manager may from time
to time, in its sole discretion to the extent permitted by
applicable law, appoint one or more sub-advisers, including,
without limitation, affiliates of the Manager, to perform
management services with respect to the Fund. In addition, the
Manager may delegate certain of its management functions under
the Management Agreements to one or more of its affiliates to
the extent permitted by applicable law. The Manager may
terminate any or all sub-advisers or such delegation
arrangements in its sole discretion at any time to the extent
permitted by applicable law.
The Manager has entered into a sub-advisory agreement (the
Sub-Advisory Agreement) with BlackRock Investment
Management, LLC (BIM or the Sub-Adviser)
with respect to the Fund, pursuant to which the Sub-Adviser
receives for the services it provides a monthly fee at an annual
rate equal to a percentage of the management fee paid to the
Manager under the Management Agreement between the Manager and
the Fund. The Sub-Adviser is responsible for the day-to-day
management of the Funds portfolio. Set forth below are the
sub-advisory fees paid by the Manager to the Sub-Adviser for the
periods indicated:
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
Paid to the Sub-Adviser
|
|
2011
|
|
$
|
975,352
|
|
2010
|
|
$
|
965,015
|
|
2009
|
|
$
|
1,884,095
|
|
The Manager has entered into a sub-advisory agreement with
BlackRock Financial Management, Inc. (BFM) with
respect to Master Bond LLC, pursuant to which BFM receives for
the services it provides a monthly fee at an annual rate equal
to a percentage of the management fee paid to the Manager under
the Management Agreement between the Manager and Master Bond
LLC. The Sub-Adviser is responsible for the day-to-day
management of the Total Return Portfolios portfolio. Set
forth below are the sub-advisory fees paid by the Manager to BFM
for the periods indicated:
|
|
|
|
|
Fiscal Year Ended September 30,
|
|
Paid to the Sub-Adviser
|
|
2011
|
|
$
|
1,537,134
|
|
2010
|
|
$
|
1,209,535.70
|
|
2009
|
|
$
|
1,148,738
|
|
The Manager has entered into a sub-advisory agreement with BIM
with respect to Master Large Cap LLC, pursuant to which BIM
receives for the services it provides a monthly fee at an annual
rate equal to a percentage of the management fee paid to the
Manager under the Management Agreement between the Manager and
Master
I-35
Large Cap LLC. The Sub-Adviser is responsible for the day-to-day
management of the Core Portfolios portfolio. Set forth
below are the sub-advisory fees paid by the Manager to the
Sub-Adviser for the periods indicated:
|
|
|
|
|
Fiscal Year/Period
|
|
Paid to the Sub-Adviser
|
|
September 30, 2011
|
|
$
|
11,825,701
|
|
September 30, 2010
|
|
$
|
12,923,095.31
|
|
September 30,
20091
|
|
$
|
9,991,633
|
|
October 31, 2008
|
|
$
|
16,395,399
|
|
|
|
|
1 |
|
For the period November 1,
2008 to September 30, 2009.
|
Information
Regarding the Portfolio Managers
Philip Green is responsible for the asset allocation of the
equity and fixed-income portions of the Funds portfolio.
Robert Doll, Jr., CFA, CPA, Daniel Hanson, CFA and Peter
Stournaras, CFA, are jointly and primarily responsible for the
day-to-day management of the equity portion of the Funds
portfolio. The Total Return Portfolio is managed by a team of
investment professionals comprised of Rick Rieder, Bob Miller,
Matthew Marra and Eric Pellicciaro.
Other
Funds and Accounts Managed
The following table sets forth information about funds and
accounts other than the Fund, the Core Portfolio or the Total
Return Portfolio, as applicable, for which the portfolio
managers are primarily responsible for the day-to-day portfolio
management as of the Funds fiscal year ended
September 30, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Other Accounts Managed
|
|
Number of Other Accounts and Assets for
|
|
|
and Assets by Account Type
|
|
Which Advisory Fee is Performance-Based
|
|
|
|
|
|
|
|
Other Registered
|
|
Other Pooled
|
|
|
|
Other Registered
|
|
Other Pooled
|
|
|
Name of
|
|
Investment
|
|
Investment
|
|
Other
|
|
Investment
|
|
Investment
|
|
Other
|
Portfolio Manager
|
|
Companies
|
|
Vehicles
|
|
Accounts
|
|
Companies
|
|
Vehicles
|
|
Accounts
|
Balanced Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
Philip Green
|
|
17
|
|
25
|
|
11
|
|
0
|
|
0
|
|
3
|
|
|
$2.27 Billion
|
|
$3.43 Billion
|
|
$6.07 Billion
|
|
$0
|
|
$0
|
|
$1.31 Billion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
Bob Doll
|
|
30
|
|
9
|
|
9
|
|
0
|
|
1
|
|
0
|
|
|
$12.82 Billion
|
|
$2.03 Billion
|
|
$1.39 Billion
|
|
$0
|
|
$115.5 Million
|
|
$0
|
Daniel Hanson
|
|
30
|
|
9
|
|
9
|
|
0
|
|
1
|
|
0
|
|
|
$12.82 Billion
|
|
$2.03 Billion
|
|
$1.39 Billion
|
|
$0
|
|
$115.5 Million
|
|
$0
|
Peter Stournaras
|
|
30
|
|
9
|
|
9
|
|
0
|
|
1
|
|
0
|
|
|
$12.82 Billion
|
|
$2.03 Billion
|
|
$1.39 Billion
|
|
$0
|
|
$115.5 Million
|
|
$0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return
|
|
|
|
|
|
|
|
|
|
|
|
|
Rick Rieder
|
|
11
|
|
5
|
|
2
|
|
0
|
|
3
|
|
1
|
|
|
$15.78 Billion
|
|
$1.68 Billion
|
|
$146.5 Million
|
|
$0
|
|
$99.52 Million
|
|
$100.2 Million
|
Bob Miller
|
|
10
|
|
1
|
|
0
|
|
0
|
|
0
|
|
0
|
|
|
$9.78 Billion
|
|
$366 Million
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
Matthew Marra
|
|
26
|
|
2
|
|
0
|
|
0
|
|
0
|
|
0
|
|
|
$21.38 Billion
|
|
$483.3 Million
|
|
$0
|
|
$0
|
|
$0
|
|
$0
|
Eric Pellicciaro
|
|
16
|
|
3
|
|
1
|
|
0
|
|
1
|
|
0
|
|
|
$18.96 Billion
|
|
$793.4 Million
|
|
$549.98 Million
|
|
$0
|
|
$200.5 Million
|
|
$0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio
Manager Compensation Overview: The Fund
BlackRocks financial arrangements with its portfolio
managers, its competitive compensation and its career path
emphasis at all levels reflect the value senior management
places on key resources. Compensation may include a variety of
components and may vary from year to year based on a number of
factors. The principal components of compensation include a base
salary, a performance-based discretionary bonus, participation
in various benefits programs and one or more of the incentive
compensation programs established by BlackRock.
Base compensation. Generally, portfolio managers receive
base compensation based on their position with the firm.
I-36
Discretionary
Incentive Compensation.
Discretionary incentive compensation is a function of several
components: the performance of BlackRock, Inc., the performance
of the portfolio managers group within BlackRock, the
investment performance, including risk-adjusted returns, of the
firms assets under management or supervision by that
portfolio manager, and the individuals performance and
contribution to the overall performance of these portfolios and
BlackRock. Among other things, BlackRocks Chief Investment
Officers make a subjective determination with respect to each
portfolio managers compensation based on the performance
of the Funds and other accounts managed by each portfolio
manager. Performance of multi-asset class funds is generally
measured on a pre-tax basis over various time periods including
1-, 3- and 5- year periods, as applicable. Mr. Greens
performance is not measured against a specific benchmark.
Distribution
of Discretionary Incentive Compensation
Discretionary incentive compensation is distributed to portfolio
managers in a combination of cash and BlackRock, Inc. restricted
stock units which vest ratably over a number of years. For some
portfolio managers, discretionary incentive compensation is also
distributed in deferred cash awards that notionally track the
returns of select BlackRock investment products they manage and
that vest ratably over a number of years. The BlackRock, Inc.
restricted stock units, upon vesting, will be settled in
BlackRock, Inc. common stock. Typically, the cash bonus, when
combined with base salary, represents more than 60% of total
compensation for the portfolio managers. Paying a portion of
annual bonuses in stock puts compensation earned by a portfolio
manager for a given year at risk based on
BlackRocks ability to sustain and improve its performance
over future periods. Providing a portion of annual bonuses in
deferred cash awards that notionally track the BlackRock
investment products they manage provides direct alignment with
investment product results.
Long-Term Incentive Plan Awards From time to
time long-term incentive equity awards are granted to certain
key employees to aid in retention, align their interests with
long-term shareholder interests and motivate performance. Equity
awards are generally granted in the form of BlackRock, Inc.
restricted stock units that, once vested, settle in BlackRock,
Inc. common stock. Mr. Green has received long-term
incentive awards.
Deferred Compensation Program A portion of
the compensation paid to eligible BlackRock employees may be
voluntarily deferred into an account that tracks the performance
of certain of the firms investment products. Each
participant in the deferred compensation program is permitted to
allocate his deferred amounts among various BlackRock investment
options. Mr. Green has in the deferred compensation program.
Other compensation benefits. In addition to base
compensation and discretionary incentive compensation, portfolio
managers may be eligible to receive or participate in one or
more of the following:
Incentive Savings Plans BlackRock, Inc. has
created a variety of incentive savings plans in which BlackRock
employees are eligible to participate, including a 401(k) plan,
the BlackRock Retirement Savings Plan (RSP), and the BlackRock
Employee Stock Purchase Plan (ESPP). The employer contribution
components of the RSP include a company match equal to 50% of
the first 8% of eligible pay contributed to the plan capped at
$5,000 per year, and a company retirement contribution equal to
3-5% of eligible compensation. The RSP offers a range of
investment options, including registered investment companies
and collective investment funds managed by the firm. BlackRock
contributions follow the investment direction set by
participants for their own contributions or, absent participant
investment direction, are invested into an index target date
fund that corresponds to, or is closest to, the year in which
the participant attains age 65. The ESPP allows for
investment in BlackRock common stock at a 5% discount on the
fair market value of the stock on the purchase date. Annual
participation in the ESPP is limited to the purchase of
1,000 shares or a dollar value of $25,000. Each portfolio
manager is eligible to participate in these plans.
Portfolio
Manager Compensation Overview: Core Portfolio
BlackRocks financial arrangements with its portfolio
managers, its competitive compensation and its career path
emphasis at all levels reflect the value senior management
places on key resources. Compensation may include a variety of
components and may vary from year to year based on a number of
factors. The principal components of
I-37
compensation include a base salary, a performance-based
discretionary bonus, participation in various benefits programs
and one or more of the incentive compensation programs
established by BlackRock.
Base compensation. Generally, portfolio managers receive
base compensation based on their position with the firm.
Discretionary
Incentive Compensation
Generally, discretionary incentive compensation for Active
Equity portfolio managers is based on a formulaic compensation
program. BlackRocks formulaic portfolio manager
compensation program is based on team revenue and pre-tax
investment performance relative to appropriate competitors or
benchmarks over 1-, 3- and
5-year
performance periods, as applicable. In most cases, these
benchmarks are the same as the benchmark or benchmarks against
which the performance of the Funds or other accounts managed by
the portfolio managers are measured. BlackRocks Chief
Investment Officers determine the benchmarks or rankings against
which the performance of funds and other accounts managed by
each portfolio management team is compared and the period of
time over which performance is evaluated. With respect to these
portfolio managers, such benchmarks for the Fund and other
accounts include the following:
|
|
|
|
Portfolio Manager
|
|
|
Applicable Benchmarks
|
|
|
|
|
Bob Doll
Dan Hanson Peter Stournaras
|
|
|
Lipper Multi-Cap Core, Multi-Cap Growth and Multi-Cap Value Fund
Classifications
|
|
|
|
|
A smaller element of portfolio manager discretionary
compensation may include consideration of: financial results,
expense control, profit margins, strategic planning and
implementation, quality of client service, market share,
corporate reputation, capital allocation, compliance and risk
control, leadership, technology and innovation. These factors
are considered collectively by BlackRock management and the
relevant Chief Investment Officers.
Distribution
of Discretionary Incentive Compensation
Discretionary incentive compensation is distributed to portfolio
managers in a combination of cash and BlackRock, Inc. restricted
stock units which vest ratably over a number of years. For some
portfolio managers, discretionary incentive compensation is also
distributed in deferred cash awards that notionally track the
returns of select BlackRock investment products they manage and
that vest ratably over a number of years. The BlackRock, Inc.
restricted stock units, upon vesting, will be settled in
BlackRock, Inc. common stock. Typically, the cash bonus, when
combined with base salary, represents more than 60% of total
compensation for the portfolio managers. Paying a portion of
annual bonuses in stock puts compensation earned by a portfolio
manager for a given year at risk based on
BlackRocks ability to sustain and improve its performance
over future periods. Providing a portion of annual bonuses in
deferred cash awards that notionally track the BlackRock
investment products they manage provides direct alignment with
investment product results.
Long-Term Incentive Plan Awards From time to
time long-term incentive equity awards are granted to certain
key employees to aid in retention, align their interests with
long-term shareholder interests and motivate performance. Equity
awards are generally granted in the form of BlackRock, Inc.
restricted stock units that, once vested, settle in BlackRock,
Inc. common stock. Messrs. Doll and Hanson have each
received long-term incentive awards.
Deferred Compensation Program A portion of
the compensation paid to eligible BlackRock employees may be
voluntarily deferred into an account that tracks the performance
of certain of the firms investment products. Each
participant in the deferred compensation program is permitted to
allocate his deferred amounts among various BlackRock investment
options. Messrs. Doll, Hanson and Stournaras have each
participated in the deferred compensation program.
Other compensation benefits. In addition to base
compensation and discretionary incentive compensation, portfolio
managers may be eligible to receive or participate in one or
more of the following:
Incentive Savings Plans BlackRock, Inc. has
created a variety of incentive savings plans in which BlackRock
employees are eligible to participate, including a 401(k) plan,
the BlackRock Retirement Savings
I-38
Plan (RSP), and the BlackRock Employee Stock Purchase Plan
(ESPP). The employer contribution components of the RSP include
a company match equal to 50% of the first 8% of eligible pay
contributed to the plan capped at $5,000 per year, and a company
retirement contribution equal to 3-5% of eligible compensation.
The RSP offers a range of investment options, including
registered investment companies and collective investment funds
managed by the firm. BlackRock contributions follow the
investment direction set by participants for their own
contributions or, absent participant investment direction, are
invested into an index target date fund that corresponds to, or
is closest to, the year in which the participant attains
age 65. The ESPP allows for investment in BlackRock common
stock at a 5% discount on the fair market value of the stock on
the purchase date. Annual participation in the ESPP is limited
to the purchase of 1,000 shares or a dollar value of
$25,000.
Portfolio
Manager Compensation Overview: Total Return Portfolio
BlackRocks financial arrangements with its portfolio
managers, its competitive compensation and its career path
emphasis at all levels reflect the value senior management
places on key resources. Compensation may include a variety of
components and may vary from year to year based on a number of
factors. The principal components of compensation include a base
salary, a performance-based discretionary bonus, participation
in various benefits programs and one or more of the incentive
compensation programs established by BlackRock.
Base compensation. Generally, portfolio managers receive
base compensation based on their position with the firm.
Discretionary
Incentive Compensation.
Discretionary incentive compensation is a function of several
components: the performance of BlackRock, Inc., the performance
of the portfolio managers group within BlackRock, the
investment performance, including risk-adjusted returns, of the
firms assets under management or supervision by that
portfolio manager relative to predetermined benchmarks, and the
individuals performance and contribution to the overall
performance of these portfolios and BlackRock. In most cases,
these benchmarks are the same as the benchmark or benchmarks
against which the performance of the Fund or other accounts
managed by the portfolio managers are measured. Among other
things, BlackRocks Chief Investment Officers make a
subjective determination with respect to each portfolio
managers compensation based on the performance of the
Funds and other accounts managed by each portfolio manager
relative to the various benchmarks. Performance of fixed income
funds is measured on a pre-tax and/or after-tax basis over
various time periods including 1-, 3- and 5- year periods, as
applicable. With respect to these portfolio managers, such
benchmarks for the Fund and other accounts include the following:
|
|
|
|
Portfolio Manager
|
|
|
Applicable Benchmarks
|
|
|
|
|
Matthew Marra
|
|
|
A combination of market-based indices (e.g., Barclays Capital
U.S. Aggregate
|
Bob Miller
|
|
|
Bond Index), certain customized indices and certain fund
industry peer groups.
|
Eric Pellicciaro
|
|
|
|
Rick Rieder
|
|
|
|
|
|
|
|
Distribution
of Discretionary Incentive Compensation
Discretionary incentive compensation is distributed to portfolio
managers in a combination of cash and BlackRock, Inc. restricted
stock units which vest ratably over a number of years. For some
portfolio managers, discretionary incentive compensation is also
distributed in deferred cash awards that notionally track the
returns of select BlackRock investment products they manage and
that vest ratably over a number of years. The BlackRock, Inc.
restricted stock units, upon vesting, will be settled in
BlackRock, Inc. common stock. Typically, the cash bonus, when
combined with base salary, represents more than 60% of total
compensation for the portfolio managers. Paying a portion of
annual bonuses in stock puts compensation earned by a portfolio
manager for a given year at risk based on
BlackRocks ability to sustain and improve its performance
over future periods. Providing a portion of annual bonuses in
deferred cash awards that notionally track the BlackRock
investment products they manage provides direct alignment with
investment product results.
Long-Term Incentive Plan Awards From time to
time long-term incentive equity awards are granted to certain
key employees to aid in retention, align their interests with
long-term shareholder interests and motivate performance. Equity
awards are generally granted in the form of BlackRock, Inc.
restricted stock units that, once
I-39
vested, settle in BlackRock, Inc. common stock.
Messrs. Marra, Pellicciaro and Rieder have each received
long-term incentive awards.
Deferred Compensation Program A portion of
the compensation paid to eligible BlackRock employees may be
voluntarily deferred into an account that tracks the performance
of certain of the firms investment products. Each
participant in the deferred compensation program is permitted to
allocate his deferred amounts among various BlackRock investment
options. Messrs. Marra, Miller, Pellicciaro and Rieder have
each participated in the deferred compensation program.
Other compensation benefits. In addition to base
compensation and discretionary incentive compensation, portfolio
managers may be eligible to receive or participate in one or
more of the following:
Incentive Savings Plans BlackRock, Inc. has
created a variety of incentive savings plans in which BlackRock
employees are eligible to participate, including a 401(k) plan,
the BlackRock Retirement Savings Plan (RSP), and the BlackRock
Employee Stock Purchase Plan (ESPP). The employer contribution
components of the RSP include a company match equal to 50% of
the first 8% of eligible pay contributed to the plan capped at
$5,000 per year, and a company retirement contribution equal to
3-5% of eligible compensation. The RSP offers a range of
investment options, including registered investment companies
and collective investment funds managed by the firm. BlackRock
contributions follow the investment direction set by
participants for their own contributions or, absent participant
investment direction, are invested into an index target date
fund that corresponds to, or is closest to, the year in which
the participant attains age 65. The ESPP allows for
investment in BlackRock common stock at a 5% discount on the
fair market value of the stock on the purchase date. Annual
participation in the ESPP is limited to the purchase of
1,000 shares or a dollar value of $25,000. Each portfolio
manager is eligible to participate in these plans.
Portfolio
Manager Beneficial Holdings
The following table sets forth the dollar range of equity
securities of the Fund beneficially owned by each portfolio
manager as of the fiscal year ended September 30, 2011.
|
|
|
Portfolio Manager
|
|
Dollar Range
|
|
Bob Doll
|
|
None
|
Daniel Hanson
|
|
None
|
Philip Green
|
|
None
|
Matthew Marra
|
|
None
|
Peter Stournaras
|
|
None
|
Bob Miller
|
|
None
|
Rick Rieder
|
|
None
|
Eric Pellicciaro
|
|
None
|
Potential
Material Conflicts of Interest
BlackRock has built a professional working environment,
firm-wide compliance culture and compliance procedures and
systems designed to protect against potential incentives that
may favor one account over another. BlackRock has adopted
policies and procedures that address the allocation of
investment opportunities, execution of portfolio transactions,
personal trading by employees and other potential conflicts of
interest that are designed to ensure that all client accounts
are treated equitably over time. Nevertheless, BlackRock
furnishes investment management and advisory services to
numerous clients in addition to the Fund, and BlackRock may,
consistent with applicable law, make investment recommendations
to other clients or accounts (including accounts which are hedge
funds or have performance or higher fees paid to BlackRock, or
in which portfolio managers have a personal interest in the
receipt of such fees), which may be the same as or different
from those made to the Fund. In addition, BlackRock, its
affiliates and significant shareholders and any officer,
director, shareholder or employee may or may not have an
interest in the securities whose purchase and sale BlackRock
recommends to the Fund. BlackRock, or any of its affiliates or
significant shareholders, or any officer, director, shareholder,
employee or any member of their families may take different
actions than those recommended to the Fund by BlackRock with
respect to the same securities. Moreover, BlackRock may refrain
from rendering any advice or services concerning securities of
companies of which any of BlackRocks (or its
affiliates or significant shareholders) officers,
directors or employees are directors or officers, or companies
as to which BlackRock or any of its affiliates or significant
I-40
shareholders or the officers, directors and employees of any of
them has any substantial economic interest or possesses material
non-public information. Certain portfolio managers also may
manage accounts whose investment strategies may at times be
opposed to the strategy utilized for a fund. It should also be
noted that Messrs. Doll, Hanson, Pellicciaro, Rieder and
Stournaras may be managing hedge fund
and/or long
only accounts, or may be part of a team managing hedge fund
and/or long
only accounts, subject to incentive fees. Messrs. Doll
Hanson, Pellicciaro, Rieder and Stournaras may therefore be
entitled to receive a portion of any incentive fees earned on
such accounts.
As a fiduciary, BlackRock owes a duty of loyalty to its clients
and must treat each client fairly. When BlackRock purchases or
sells securities for more than one account, the trades must be
allocated in a manner consistent with its fiduciary duties.
BlackRock attempts to allocate investments in a fair and
equitable manner among client accounts, with no account
receiving preferential treatment. To this end, BlackRock has
adopted policies that are intended to ensure reasonable
efficiency in client transactions and provide BlackRock with
sufficient flexibility to allocate investments in a manner that
is consistent with the particular investment discipline and
client base, as appropriate.
Custodian
State Street Bank and Trust Company, 100 Summer Street, Boston,
Massachusetts 02110, serves as the Funds custodian.
Transfer
Agency Services
PNC Global Investment Servicing (U.S.) Inc. (PNC
GIS), an affiliate of the Manager, served as transfer
agent and dividend disbursing agent. Effective July 1,
2010, PNC GIS was sold to The Bank of New York Mellon
Corporation and is no longer considered an affiliate of the
Manager. At the close of the sale, PNC GIS changed its name to
BNY Mellon Investment Servicing (US) Inc.
The following table sets forth the fees paid by the Fund to PNC
GIS and to the Manager for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Paid to
|
|
Paid to
|
Fiscal Year Ended September 30,
|
|
PNC GIS
|
|
Manager1
|
|
2011
|
|
|
N/A
|
|
|
$
|
22,476
|
|
2010
|
|
$
|
159,211
|
2
|
|
$
|
22,852
|
|
2009
|
|
$
|
229,196
|
|
|
$
|
37,093
|
|
|
|
|
1 |
|
Pursuant to a Shareholders
Administrative Services Agreement, the Manager provides certain
shareholder liaison services in connection with the Funds
investor service center. The Fund reimburses the Manager for its
costs in maintaining the service center, which costs include,
among other things, employee salaries, leasehold expenses, and
other
out-of-pocket
expenses which are a component of the transfer agency fees in
the Funds annual report.
|
2 |
|
For the period October 1, 2009
to June 30, 2010 (date on which PNC GIS ceased being an
affiliate).
|
Accounting
Services
For the fiscal years ended September 30, 2011, 2010 and
2009, the Fund did not accrue or pay fees for accounting
services to State Street Bank and Trust Company
(State Street) or the Manager. The following tables
set forth the amounts paid for accounting services by the Total
Return Portfolio to State Street and the Manager and by the Core
Portfolio to State Street and the Manager during the periods
indicated:
Total
Return Portfolio:
|
|
|
|
|
|
|
|
|
|
|
Paid to
|
|
Paid to the
|
Fiscal Year Ended September 30,
|
|
State
Street1
|
|
Manager
|
|
2011
|
|
$
|
610,407
|
|
|
$
|
63,209
|
|
2010
|
|
$
|
572,467
|
|
|
$
|
86,993
|
|
2009
|
|
$
|
576,092
|
|
|
$
|
61,316
|
|
|
|
|
1 |
|
For providing services to the Total
Return Portfolio and each feeder fund which invests its assets
in the Total Return Portfolio.
|
I-41
Core
Portfolio:
|
|
|
|
|
|
|
|
|
|
|
Paid to
|
|
Paid to the
|
Fiscal Year/Period Ended
|
|
State
Street1
|
|
Manager
|
|
September 30, 2011
|
|
$
|
547,342
|
|
|
$
|
40,545
|
|
September 30, 2010
|
|
$
|
559,577
|
|
|
$
|
73,376
|
|
September 30,
20092
|
|
$
|
466,231
|
|
|
$
|
56,620
|
|
|
|
|
1 |
|
For providing services to the Core
Portfolio and each feeder fund which invests its assets in the
Core Portfolio.
|
2 |
|
For the period November 1,
2008 to September 30, 2009.
|
Credit Agreement. The Fund, along with certain other
funds managed by the Manager and its affiliates, is a party to a
$500 million credit agreement with a group of lenders,
which is renewed annually (the Credit Agreement).
The Fund may borrow under the Credit Agreement to meet
shareholder redemptions and for other lawful purposes. The Fund
may not borrow under the Credit Agreement for leverage. The Fund
may borrow up to the maximum amount allowable under the
Funds current Prospectus and Statement of Additional
Information, subject to various other legal, regulatory or
contractual limits. Borrowing results in interest expense and
other fees and expenses for the Fund which may impact net Fund
expenses borne by remaining shareholders of the Fund. The costs
of borrowing may reduce the Funds return. The Fund is
charged its pro rata share of upfront fees and commitment fees
on the aggregate commitment amount based on its net assets. If
the Fund borrows pursuant to the Credit Agreement, the Fund is
charged interest at a variable rate.
|
|
V.
|
Information
on Sales Charges and Distribution Related Expenses
|
Set forth below is information on sales charges (including
contingent deferred sales charges (CDSCs)) received
by the Fund, including the amounts paid to BlackRock
Investments, LLC (the Distributor), an affiliate of
the Manager, for each of the Funds last three fiscal
years. Institutional Shares are not subject to a sales charge.
Investor
A Sales Charge Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investor A Shares
|
|
|
|
|
|
|
|
|
CDSCs Received
|
|
|
Gross Sales
|
|
Sales Charges
|
|
Sales Charges
|
|
on Redemption
|
|
|
Charges
|
|
Retained by
|
|
Paid to
|
|
of Load-Waived
|
Fiscal Year Ended September 30,
|
|
Collected
|
|
the Distributor
|
|
Affiliates
|
|
Shares
|
|
2011
|
|
$
|
74,772
|
|
|
$
|
6,186
|
|
|
$
|
6,186
|
|
|
$
|
25
|
|
2010
|
|
$
|
94,432
|
|
|
$
|
7,034
|
|
|
$
|
7,111
|
|
|
$
|
110
|
|
2009
|
|
$
|
59,918
|
|
|
$
|
4,523
|
|
|
$
|
15,059
|
|
|
$
|
694
|
|
Investor
B and Investor C Sales Charge Information
|
|
|
|
|
|
|
|
|
|
|
Investor B
Shares1
|
|
|
CDSCs
|
|
CDSCs
|
Fiscal Year
|
|
Received by
|
|
Paid to
|
Ended September 30,
|
|
the Distributor
|
|
Affiliates
|
|
2011
|
|
$
|
11,602
|
|
|
$
|
11,602
|
|
2010
|
|
$
|
27,743
|
|
|
$
|
27,743
|
|
2009
|
|
$
|
53,871
|
|
|
$
|
53,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investor C Shares
|
|
|
CDSCs
|
|
CDSCs
|
Fiscal Year
|
|
Received by
|
|
Paid to
|
Ended September 30,
|
|
the Distributor
|
|
Affiliates
|
|
2011
|
|
$
|
3,749
|
|
|
$
|
3,749
|
|
2010
|
|
$
|
2,441
|
|
|
$
|
2,441
|
|
2009
|
|
$
|
11,060
|
|
|
$
|
11,060
|
|
|
|
|
1 |
|
Additional Investor B CDSCs payable
to a distributor may have been waived or converted to a
contingent obligation in connection with a shareholders
participation in certain fee-based programs.
|
The table below provides information for the fiscal year ended
September 30, 2011 about the
12b-1 fees
the Fund paid to the Funds Distributor under the
Funds
12b-1 plans.
A significant amount of the fees collected by the Distributor
I-42
were paid to a significant shareholder for providing shareholder
servicing activities for Investor A Shares and for providing
shareholder servicing and distribution related activities and
services for Investor B, Investor C and Class R Shares.
|
|
|
|
|
|
|
Paid to
|
Class Name
|
|
the Distributor
|
|
Investor A Shares
|
|
$
|
1,240,101
|
|
Investor B Shares
|
|
$
|
126,052
|
|
Investor C Shares
|
|
$
|
635,725
|
|
Class R Shares
|
|
$
|
49,204
|
|
|
|
VI.
|
Computation
of Offering Price Per Share
|
An illustration of the computation of the public offering price
of the Investor A Shares of the Fund based on the value of
the Funds Investor A Shares net assets and
number of the Investor A Shares outstanding on
September 30, 2011 is set forth below.
|
|
|
|
|
|
|
Investor A
|
|
|
Shares
|
|
Net Assets
|
|
$
|
426,819,353
|
|
|
|
|
|
|
Number of Shares Outstanding
|
|
|
21,231,373
|
|
|
|
|
|
|
Net Asset Value Per Share (net assets divided by number of
shares outstanding)
|
|
$
|
20.10
|
|
Sales Charge (for Investor A shares:
|
|
|
|
|
5.25% of offering price;
|
|
|
|
|
5.54% of net asset value per
share)1
|
|
|
1.11
|
|
|
|
|
|
|
Offering Price
|
|
$
|
21.21
|
|
|
|
|
|
|
|
|
|
1 |
|
Rounded to the nearest
one-hundredth percent; assumes maximum sales charge is
applicable.
|
The offering price for the Funds other share classes is
equal to the share classs net asset value computed as set
forth above for Investor A Shares. Though not subject to a sales
charge, certain share classes may be subject to a CDSC on
redemption. For more information on the purchasing and valuation
of shares, please see Purchase of Shares and
Pricing of Shares in Part II of this Statement
of Additional Information.
VII.
Portfolio Transactions and Brokerage
See Portfolio Transactions and Brokerage in
Part II of this Statement of Additional Information for
more information.
Information about the brokerage commissions paid by the Fund,
Total Return Portfolio and Core Portfolio, including commissions
paid to Affiliates, for each of their last three fiscal years is
set forth in the following tables:
Fund:
|
|
|
|
|
|
|
|
|
|
|
Aggregate Brokerage
|
|
Commissions Paid
|
Fiscal Year Ended September 30,
|
|
Commissions Paid
|
|
to Affiliates
|
|
2011
|
|
$
|
0
|
|
|
$
|
0
|
|
2010
|
|
$
|
0
|
|
|
$
|
0
|
|
2009
|
|
$
|
527,475
|
|
|
$
|
81,901
|
|
Total
Return Portfolio:
|
|
|
|
|
|
|
|
|
|
|
Aggregate Brokerage
|
|
Commissions Paid
|
Fiscal Year Ended September 30,
|
|
Commissions Paid
|
|
to Affiliates
|
|
2011
|
|
$
|
1,015,382
|
|
|
$
|
0
|
|
2010
|
|
$
|
1,824,471
|
|
|
$
|
0
|
|
2009
|
|
$
|
540,468
|
|
|
$
|
0
|
|
I-43
Core
Portfolio:
|
|
|
|
|
|
|
|
|
|
|
Aggregate Brokerage
|
|
Commissions Paid
|
Fiscal Year/Period Ended
|
|
Commissions Paid
|
|
to Affiliates
|
|
September 30, 2011
|
|
$
|
1,168,763
|
|
|
$
|
0
|
|
September 30, 2010
|
|
$
|
4,889,468
|
|
|
$
|
0
|
|
September 30,
20091
|
|
$
|
4,068,986
|
|
|
$
|
0
|
|
|
|
|
1 |
|
For the period November 1,
2008 to September 30, 2009.
|
The following table shows the dollar amount of brokerage
commissions paid to brokers by the Fund for providing research
services and the approximate amount of the transactions involved
for the fiscal year ended September 30, 2011. The provision
of research services was not necessarily a factor in the
placement of all brokerage business with such brokers.
|
|
|
|
|
Amount of Commissions
|
|
|
Paid to Brokers For
|
|
Amount of Brokerage
|
Providing Research Services
|
|
Transactions Involved
|
|
$0
|
|
$
|
0
|
|
The Fund held no securities of its regular brokers or dealers
(as defined in
Rule 10b-1
under the Investment Company Act) as of September 30, 2011.
The value of the Total Return Portfolios aggregate
holdings of the securities of its regular brokers or dealers (as
defined in
Rule 10b-1
under the Investment Company Act) if any portion of such
holdings were purchased during the fiscal year ended
September 30, 2011 are as follows:
Total
Return Portfolio:
|
|
|
|
|
|
|
|
|
|
|
Debt (D)/
|
|
Aggregate
|
Regular Broker-Dealer
|
|
Equity (E)
|
|
Holdings (000s)
|
|
Citigroup Global Markets Inc.
|
|
|
D
|
|
|
$
|
60,558
|
|
J.P. Morgan Securities Inc.
|
|
|
D
|
|
|
$
|
45,355
|
|
Morgan Stanley & Co. Incorporated
|
|
|
D
|
|
|
$
|
30,291
|
|
Credit Suisse Securities (USA) LLC
|
|
|
D
|
|
|
$
|
10,529
|
|
Barclays Capital Inc.
|
|
|
D
|
|
|
$
|
7,680
|
|
Deutsche Bank Securities Inc.
|
|
|
D
|
|
|
$
|
3,606
|
|
BNP Paribas Securities Corp.
|
|
|
D
|
|
|
$
|
2,303
|
|
The Core Portfolio held no securities of its regular brokers or
dealers (as defined in
Rule 10b-1
under the Investment Company Act) as of September 30, 2011.
The following tables sets forth information regarding securities
lending fees paid by the Fund, Total Return Portfolio and Core
Portfolio to the lending agent for the periods shown:
Fund:
|
|
|
|
|
|
|
Amount
|
Fiscal Year Ended September 30,
|
|
Paid
|
|
2011
|
|
$
|
0
|
|
2010
|
|
$
|
0
|
|
2009
|
|
$
|
0
|
|
Total
Return Portfolio:
|
|
|
|
|
|
|
Amount
|
Fiscal Year Ended September 30,
|
|
Paid
|
|
2011
|
|
$
|
0
|
|
2010
|
|
$
|
0
|
|
2009
|
|
$
|
0
|
|
I-44
Core
Portfolio:
|
|
|
|
|
|
|
Amount
|
Fiscal Year/Period Ended
|
|
Paid
|
|
September 30, 2011
|
|
$
|
33,956
|
|
September 30, 2010
|
|
$
|
72,814
|
|
September 30,
20091
|
|
$
|
293,110
|
|
|
|
|
1 |
|
For the period November 1,
2008 to September 30, 2009.
|
Portfolio Turnover. The Total Return Portfolio
experienced a significant variation in the portfolio turnover
rate over the two most recently completed fiscal years ended
September 30, 2011 and September 30, 2010. The
portfolio turnover rate increased from 1,754% during the fiscal
year ended September 30, 2010 to 1,771% during the fiscal
year ended September 30, 2011. The portfolio turnover rate
includes TBA transactions and mortgage dollar roll transactions
during the fiscal years. Excluding these transactions, the
portfolio turnover rate would have been 1,248% and 1,379% for
September 30, 2010 and 2011, respectively. Excluding TBA
transactions, significant variation was primarily due to active
trading in response to frequent cash flows and market volatility.
|
|
VIII.
|
Additional
Information
|
The Fund, a diversified, open-end investment company, was
organized as a Maryland corporation on July 29, 1987 and is
the successor to a fund that was organized in Delaware under the
name Lionel D. Edie Capital Fund, Inc. in September 1973, and
changed its name to Merrill Lynch Capital Fund, Inc. in June
1976. On approximately July 1, 2000, the Fund changed its
name to Merrill Lynch Balanced Capital Fund, Inc. On
October 1, 2003, the Fund changed its fiscal year end from
March 31 to September 30. Effective September 29,
2006, the Fund changed its name from Merrill Lynch Balanced
Capital Fund, Inc. to BlackRock Balanced Capital Fund, Inc. The
authorized capital stock of the Fund consists of
1,800,000,000 shares of Common Stock, par value $0.10 per
share, divided into five classes, designated Investor A,
Investor B, Investor C, Institutional and Class R Common
Stock. Institutional consists of 400,000,000 shares,
Investor B and Class R each consist of
500,000,000 shares, Investor A and Investor C each consist
of 200,000,000 shares. Shares of Investor A, Investor B,
Investor C, Institutional and Class R Common Stock
represent interests in the same assets of the Fund and have
identical voting, dividend, liquidation and other rights and the
same terms and conditions except that the Investor A, Investor
B, Investor C and Class R Shares bear certain expenses
related to the shareholder servicing
and/or
distribution of such shares and have exclusive voting rights
with respect to matters relating to such shareholder servicing
and/or
distribution expenditures (except that Investor B shareholders
may vote upon any material changes to expenses charged under the
Investor A Distribution Plan). The Board of Directors of the
Fund may classify and reclassify the shares of the Fund into
additional classes of Common Stock at a future date. Prior to
April 14, 2003, Class A shares were designated
Class D and Class I shares were designated
Class A. Effective September 29, 2006, Class A
shares were redesignated Investor A Shares, Class B shares
were redesignated Investor B Shares, Class C shares were
redesignated Investor C Shares and Class I shares were
redesignated Institutional Shares.
I-45
Principal
Shareholders
To the knowledge of the Fund, the following entities owned
beneficially or of record 5% or more of the Funds shares
as of January 3, 2012.
|
|
|
|
|
|
|
|
|
Name
|
|
Address
|
|
%
|
|
Class
|
|
|
|
|
|
|
|
|
|
|
*Merrill Lynch Pierce Fenner & Smith Incorporated
|
|
4800 Deer Lake Drive East Jacksonville, FL 32246-6484
|
|
|
84.57
|
%
|
|
Investor A Shares
|
|
|
|
|
|
|
|
|
|
*Merrill Lynch Pierce Fenner & Smith Incorporated
|
|
4800 Deer Lake Drive East Jacksonville, FL 32246-6484
|
|
|
86.55
|
%
|
|
Investor B Shares
|
|
|
|
|
|
|
|
|
|
*Merrill Lynch Pierce Fenner & Smith Incorporated
|
|
4800 Deer Lake Drive East Jacksonville, FL 32246-6484
|
|
|
75.31
|
%
|
|
Investor C Shares
|
|
|
|
|
|
|
|
|
|
*Merrill Lynch Pierce Fenner & Smith Incorporated
|
|
4800 Deer Lake Drive East Jacksonville, FL 32246-6484
|
|
|
83.24
|
%
|
|
Institutional Shares
|
|
|
|
|
|
|
|
|
|
*Merrill Lynch Pierce Fenner & Smith Incorporated
|
|
4800 Deer Lake Drive East Jacksonville, FL 32246-6484
|
|
|
63.35
|
%
|
|
Class R Shares
|
|
|
|
|
|
|
|
|
|
*State Street Bank TTEE Cust (FBO) ADP Access
|
|
1 Lincoln Street
Boston, MA 02111
|
|
|
16.17
|
%
|
|
Class R Shares
|
|
|
|
|
|
|
|
|
|
*Hartford Life Insurance Company
|
|
PO Box 2999
Hartford, CT
06140-2999
|
|
|
6.52
|
%
|
|
Class R Shares
|
|
|
|
*
|
|
Record holder that does not
beneficially hold the shares.
|
The audited financial statements of the Fund, the Total Return
Portfolio of Master Bond LLC and the Core Portfolio of Master
Large Cap LLC, including the reports of the independent
registered public accounting firm, are incorporated in the
Funds Statement of Additional Information by reference to
the Funds 2010 Annual Report. You may request a copy of
the Annual Report at no charge by calling
(800) 441-7762
between 8:00 a.m. and 6:00 p.m. Eastern time on
any business day.
I-46
Part II
Throughout this Statement of Additional Information (SAI), each BlackRock-advised fund may
be referred to as a Fund or collectively with others as the Funds. Certain Funds may also be
referred to as Municipal Funds if they invest certain of their assets in municipal investments
described below.
Each Fund is organized either as a Maryland corporation, a Massachusetts business trust or a
Delaware statutory trust. In each jurisdiction, nomenclature varies. For ease and clarity of
presentation, shares of common stock and shares of beneficial interest are referred to herein as
shares or Common Stock, holders of shares of Common Stock are referred to as shareholders,
the trustees or directors of each Fund are referred to as Directors, BlackRock Advisors, LLC or
its affiliates is the investment adviser or manager of each Fund and is referred to herein as the
Manager or BlackRock, and the investment advisory agreement or management agreement applicable
to each Fund is referred to as the Management Agreement. Each Funds Articles of Incorporation or
Declaration of Trust, together with all amendments thereto, is referred to as its charter. The
Investment Company Act of 1940, as amended, is referred to herein as the Investment Company Act.
The Securities Act of 1933, as amended, is referred to herein as the Securities Act. The
Securities and Exchange Commission is referred to herein as the Commission or the SEC.
Certain Funds are feeder funds (each, a Feeder Fund) that invest all or a portion of their
assets in a corresponding master portfolio (each, a Master Portfolio) of a master limited
liability company (each, a Master LLC), a mutual fund that has the same objective and strategies
as the Feeder Fund. All investments are generally made at the level of the Master Portfolio. This
structure is sometimes called a master/feeder structure. A Feeder Funds investment results will
correspond directly to the investment results of the underlying Master Portfolio in which it
invests. For simplicity, this SAI uses the term Fund to include both a Feeder Fund and its Master
Portfolio.
In addition to containing information about the Funds, Part II of this SAI contains general
information about all funds in the BlackRock-advised fund complex. Certain information contained
herein may not be relevant to a particular Fund.
Investment Risks and Considerations
Set forth below are descriptions of some of the types of investments and investment strategies that
one or more of the Funds may use, and the risks and considerations associated with those
investments and investment strategies. Please see each Funds Prospectus and the Investment
Objectives and Policies section of Part I of this SAI for further information on each Funds
investment policies and risks. Information contained in this section about the risks and
considerations associated with a Funds investments and/or investment strategies applies only to
those Funds specifically identified in Part I of the SAI as making each type of investment or using
each investment strategy (each, a Covered Fund). Information that does not apply to a Covered
Fund does not form a part of that Covered Funds Statement of Additional Information and should not
be relied on by investors in that Covered Fund. Only information that is clearly identified as
applicable to a Covered Fund is considered to form a part of that Covered Funds Statement of
Additional Information.
144A Securities. A Fund may purchase securities that can be offered and sold only to qualified
institutional buyers under Rule 144A under the Securities Act. The Directors have determined to
treat as liquid Rule 144A securities that are either freely tradable in their primary markets
offshore or have been determined to be liquid in accordance with the policies and procedures
adopted by the Funds Directors. The Directors have adopted guidelines and delegated to the Manager
the daily function of determining and monitoring liquidity of 144A securities. The Directors,
however, will retain sufficient oversight and will ultimately be responsible for the
determinations. Since it is not possible to predict with assurance exactly how the market for
securities sold and offered under Rule 144A will continue to develop, the Directors will carefully
monitor a Funds investments in these securities. This investment practice could have the effect of
increasing the level of illiquidity in a Fund to the extent that qualified institutional buyers
become for a time uninterested in purchasing these securities.
Asset-Backed Securities. Asset-backed securities are securities backed by home equity loans,
installment sale contracts, credit card receivables or other assets. Asset-backed securities are
pass-through securities, meaning that principal and interest payments net of expenses made
by the borrower on the underlying assets (such as credit
II-1
card receivables) are passed through to a Fund. The value of asset-backed securities, like that of
traditional fixed income securities, typically increases when interest rates fall and decreases
when interest rates rise. However, asset-backed securities differ from traditional fixed income
securities because of their potential for prepayment. The price paid by a Fund for its asset-backed
securities, the yield the Fund expects to receive from such securities and the average life of the
securities are based on a number of factors, including the anticipated rate of prepayment of the
underlying assets. In a period of declining interest rates, borrowers may prepay the underlying
assets more quickly than anticipated, thereby reducing the yield to maturity and the average life
of the asset-backed securities. Moreover, when a Fund reinvests the proceeds of a prepayment in
these circumstances, it will likely receive a rate of interest that is lower than the rate on the
security that was prepaid. To the extent that a Fund purchases asset-backed securities at a
premium, prepayments may result in a loss to the extent of the premium paid. If a Fund buys such
securities at a discount, both scheduled payments and unscheduled prepayments will increase current
and total returns and unscheduled prepayments will also accelerate the recognition of income which,
when distributed to shareholders, will be taxable as ordinary income. In a period of rising
interest rates, prepayments of the underlying assets may occur at a slower than expected rate,
creating maturity extension risk. This particular risk may effectively change a security that was
considered short- or intermediate-term at the time of purchase into a longer term security. Since
the value of longer-term securities generally fluctuates more widely in response to changes in
interest rates than does the value of shorter-term securities, maturity extension risk could
increase the volatility of the Fund. When interest rates decline, the value of an asset-backed
security with prepayment features may not increase as much as that of other fixed-income
securities, and, as noted above, changes in market rates of interest may accelerate or retard
prepayments and thus affect maturities.
Asset-Based Securities. Certain Funds may invest in debt, preferred or convertible securities, the
principal amount, redemption terms or conversion terms of which are related to the market price of
some natural resource asset such as gold bullion. These securities are referred to as asset-based
securities. A Fund will purchase only asset-based securities that are rated, or are issued by
issuers that have outstanding debt obligations rated, investment grade (for example, AAA, AA, A or
BBB by Standard & Poors (S&P) or Fitch Ratings (Fitch), or Baa by Moodys Investors Service,
Inc. (Moodys) or commercial paper rated A-1 by S&P or Prime-1 by Moodys) or by issuers that the
Manager has determined to be of similar creditworthiness. Obligations ranked in the fourth highest
rating category, while considered investment grade, may have certain speculative characteristics
and may be more likely to be downgraded than securities rated in the three highest rating
categories. If an asset-based security is backed by a bank letter of credit or other similar
facility, the Manager may take such backing into account in determining the creditworthiness of the
issuer. While the market prices for an asset-based security and the related natural resource asset
generally are expected to move in the same direction, there may not be perfect correlation in the
two price movements. Asset-based securities may not be secured by a security interest in or claim
on the underlying natural resource asset. The asset-based securities in which a Fund may invest may
bear interest or pay preferred dividends at below market (or even relatively nominal) rates.
Certain asset-based securities may be payable at maturity in cash at the stated principal amount
or, at the option of the holder, directly in a stated amount of the asset to which it is related.
In such instance, because no Fund presently intends to invest directly in natural resource assets,
a Fund would sell the asset-based security in the secondary market, to the extent one exists, prior
to maturity if the value of the stated amount of the asset exceeds the stated principal amount and
thereby realize the appreciation in the underlying asset.
Precious Metal-Related Securities. A Fund may invest in the securities of companies that explore
for, extract, process or deal in precious metals (e.g., gold, silver and platinum), and in
asset-based securities indexed to the value of such metals. Such securities may be purchased when
they are believed to be attractively priced in relation to the value of a companys precious
metal-related assets or when the values of precious metals are expected to benefit from
inflationary pressure or other economic, political or financial uncertainty or instability. Based
on historical experience, during periods of economic or financial instability the securities of
companies involved in precious metals may be subject to extreme price fluctuations, reflecting the
high volatility of precious metal prices during such periods. In addition, the instability of
precious metal prices may result in volatile earnings of precious metal-related companies, which
may, in turn, adversely affect the financial condition of such companies. The major producers of
gold include the Republic of South Africa, Russia, Canada, the United States, Brazil and Australia.
Sales of gold by Russia are largely unpredictable and often relate to political and economic
considerations rather than to market forces. Economic, financial, social and political factors
within South Africa may significantly affect South African gold production.
II-2
Bank Loans. Certain Funds may invest in bank loans. Bank loans are generally non-investment grade
floating rate instruments. Usually, they are freely callable at the issuers option. Certain Funds
may invest in fixed and floating rate loans (Loans) arranged through private negotiations between
a corporate borrower or a foreign sovereign entity and one or more financial institutions
(Lenders). A Fund may invest in such Loans in the form of participations in Loans
(Participations) and assignments of all or a portion of Loans from third parties (Assignments).
A Fund considers these investments to be investments in debt securities for purposes of its
investment policies. Participations typically will result in the Fund having a contractual
relationship only with the Lender, not with the borrower. The Fund will have the right to receive
payments of principal, interest and any fees to which it is entitled only from the Lender selling
the Participation and only upon receipt by the Lender of the payments from the borrower. In
connection with purchasing Participations, the Fund generally will have no right to enforce
compliance by the borrower with the terms of the loan agreement relating to the Loans, nor any
rights of set-off against the borrower, and the Fund may not benefit directly from any collateral
supporting the Loan in which it has purchased the Participation. As a result, the Fund will assume
the credit risk of both the borrower and the Lender that is selling the Participation. In the event
of the insolvency of the Lender selling the Participation, the Fund may be treated as a general
creditor of the Lender and may not benefit from any set-off between the Lender and the borrower.
The Fund will acquire Participations only if the Lender interpositioned between the Fund and the
borrower is determined by the Funds manager to be creditworthy. When the Fund purchases
Assignments from Lenders, the Fund will acquire direct rights against the borrower on the Loan, and
will not have exposure to a counterpartys credit risk. The Funds may enter into Participations and
Assignments on a forward commitment or when-issued basis, whereby a Fund would agree to purchase
a Participation or Assignment at set terms in the future. For more information on forward
commitments and when-issued securities, see When-Issued Purchases and Forward Commitments below.
A Fund may have difficulty disposing of Assignments and Participations. In certain cases, the
market for such instruments is not highly liquid, and therefore the Fund anticipates that in such
cases such instruments could be sold only to a limited number of institutional investors. The lack
of a highly liquid secondary market may have an adverse impact on the value of such instruments and
on the Funds ability to dispose of particular Assignments or Participations in response to a
specific economic event, such as deterioration in the creditworthiness of the borrower. Assignments
and Participations will not be considered illiquid so long as it is determined by the Funds
manager that an adequate trading market exists for these securities. To the extent that liquid
Assignments and Participations that a Fund holds become illiquid, due to the lack of sufficient
buyers or market or other conditions, the percentage of the Funds assets invested in illiquid
assets would increase.
Leading financial institutions often act as agent for a broader group of lenders, generally
referred to as a syndicate. The syndicates agent arranges the loans, holds collateral and accepts
payments of principal and interest. If the agent develops financial problems, a Fund may not
recover its investment or recovery may be delayed.
The Loans in which the Fund may invest are subject to the risk of loss of principal and income.
Although borrowers frequently provide collateral to secure repayment of these obligations they do
not always do so. If they do provide collateral, the value of the collateral may not completely
cover the borrowers obligations at the time of a default. If a borrower files for protection from
its creditors under the U.S. bankruptcy laws, these laws may limit a Funds rights to its
collateral. In addition, the value of collateral may erode during a bankruptcy case. In the event
of a bankruptcy, the holder of a Loan may not recover its principal, may experience a long delay in
recovering its investment and may not receive interest during the delay.
Borrowing and Leverage. Each Fund may borrow as a temporary measure for extraordinary or emergency
purposes, including to meet redemptions or to settle securities transactions. Certain Funds will
not purchase securities at any time when borrowings exceed 5% of their total assets, except (a) to
honor prior commitments or (b) to exercise subscription rights when outstanding borrowings have
been obtained exclusively for settlements of other securities transactions. Certain Funds may also
borrow in order to make investments. The purchase of securities while borrowings are outstanding
will have the effect of leveraging the Fund. Such leveraging increases the Funds exposure to
capital risk, and borrowed funds are subject to interest costs that will reduce net income. The use
of leverage by a Fund creates an opportunity for greater total return, but, at the same time,
creates special risks. For example, leveraging may exaggerate changes in the net asset value of
Fund shares and in the yield on the Funds portfolio. Although the principal of such borrowings
will be fixed, the Funds assets may change in value during the time the borrowings are
outstanding. Borrowings will create interest expenses for the Fund that can exceed the income from
the assets purchased with the borrowings. To the extent the income or capital appreciation derived
II-3
from securities purchased with borrowed funds exceeds the interest the Fund will have to pay on the
borrowings, the
Funds return will be greater than if leverage had not been used. Conversely, if the income or
capital appreciation from the securities purchased with such borrowed funds is not sufficient to
cover the cost of borrowing, the return to the Fund will be less than if leverage had not been used
and, therefore, the amount available for distribution to shareholders as dividends will be reduced.
In the latter case, the Manager in its best judgment nevertheless may determine to maintain the
Funds leveraged position if it expects that the benefits to the Funds shareholders of maintaining
the leveraged position will outweigh the current reduced return.
Certain types of borrowings by a Fund may result in the Fund being subject to covenants in credit
agreements relating to asset coverage, portfolio composition requirements and other matters. It is
not anticipated that observance of such covenants would impede the Manager from managing a Funds
portfolio in accordance with the Funds investment objectives and policies. However, a breach of
any such covenants not cured within the specified cure period may result in acceleration of
outstanding indebtedness and require the Fund to dispose of portfolio investments at a time when it
may be disadvantageous to do so.
Each Fund may at times borrow from affiliates of the Manager, provided that the terms of such
borrowings are no less favorable than those available from comparable sources of funds in the
marketplace.
Cash Flows; Expenses. The ability of each Fund to satisfy its investment objective depends to some
extent on the Managers ability to manage cash flow (primarily from purchases and redemptions and
distributions from the Funds investments). The Manager will make investment changes to a Funds
portfolio to accommodate cash flow while continuing to seek to replicate the total return of the
Funds target index. Investors should also be aware that the investment performance of each index
is a hypothetical number which does not take into account brokerage commissions and other
transaction costs, custody and other costs of investing, and any incremental operating costs (e.g.,
transfer agency and accounting costs) that will be borne by the Funds. Finally, since each Fund
seeks to replicate the total return of its target index, the Manager generally will not attempt to
judge the merits of any particular security as an investment.
Cash Management. Generally, the Manager will employ futures and options on futures to provide
liquidity necessary to meet anticipated redemptions or for day-to-day operating purposes. However,
if considered appropriate in the opinion of the Manager, a portion of a Funds assets may be
invested in certain types of instruments with remaining maturities of 397 days or less for
liquidity purposes. Such instruments would consist of: (i) obligations of the U.S. Government, its
agencies, instrumentalities, authorities or political subdivisions (U.S. Government Securities);
(ii) other fixed-income securities rated Aa or higher by Moodys or AA or higher by S&P or, if
unrated, of comparable quality in the opinion of the Manager; (iii) commercial paper; (iv) bank
obligations, including negotiable certificates of deposit, time deposits and bankers acceptances;
and (v) repurchase agreements. At the time the Fund invests in commercial paper, bank obligations
or repurchase agreements, the issuer or the issuers parent must have outstanding debt rated Aa or
higher by Moodys or AA or higher by S&P or outstanding commercial paper, bank obligations or other
short-term obligations rated Prime-1 by Moodys or A-1 by S&P; or, if no such ratings are
available, the instrument must be of comparable quality in the opinion of the Manager.
Collateralized Debt Obligations. Certain Funds may invest in collateralized debt obligations
(CDOs), which include collateralized bond obligations (CBOs), collateralized loan obligations
(CLOs) and other similarly structured securities. CDOs are types of asset-backed securities. A
CBO is ordinarily issued by a trust or other special purpose entity (SPE) and is typically backed
by a diversified pool of fixed income securities (which may include high risk, below investment
grade securities) held by such issuer. A CLO is ordinarily issued by a trust or other SPE and is
typically collateralized by a pool of loans, which may include, among others, domestic and non-U.S.
senior secured loans, senior unsecured loans, and subordinate corporate loans, including loans that
may be rated below investment grade or equivalent unrated loans, held by such issuer. Although
certain CDOs may benefit from credit enhancement in the form of a senior-subordinate structure,
over-collateralization or bond insurance, such enhancement may not always be present, and may fail
to protect a Fund against the risk of loss on default of the collateral. Certain CDO issuers may
use derivatives contracts to create synthetic exposure to assets rather than holding such assets
directly, which entails the risks of derivative instruments described elsewhere in this SAI. CDOs
may charge management fees and administrative expenses, which are in addition to those of a Fund.
For both CBOs and CLOs, the cash flows from the SPE are split into two or more portions, called
tranches, varying in risk and yield. The riskiest portion is the equity tranche, which bears the
first loss from defaults from the bonds
II-4
or loans in the SPE and serves to protect the other, more
senior tranches from default (though such protection is not
complete). Since it is partially protected from defaults, a senior tranche from a CBO or CLO
typically has higher ratings and lower yields than its underlying securities, and may be rated
investment grade. Despite the protection from the equity tranche, CBO or CLO tranches can
experience substantial losses due to actual defaults, downgrades of the underlying collateral by
rating agencies, forced liquidation of the collateral pool due to a failure of coverage tests,
increased sensitivity to defaults due to collateral default and disappearance of protecting
tranches, market anticipation of defaults as well as investor aversion to CBO or CLO securities as
a class. Interest on certain tranches of a CDO may be paid in kind or deferred and capitalized
(paid in the form of obligations of the same type rather than cash), which involves continued
exposure to default risk with respect to such payments.
The risks of an investment in a CDO depend largely on the type of collateral securities and the
class of the CDO in which a Fund invests. Normally, CBOs, CLOs and other CDOs are privately offered
and sold, and thus are not registered under the securities laws. As a result, investments in CDOs
may be characterized by a Fund as illiquid securities. However, an active dealer market may exist
for CDOs, allowing a CDO to qualify for Rule 144A transactions. In addition to the normal risks
associated with fixed income securities and asset-backed securities generally discussed elsewhere
in this SAI, CDOs carry additional risks including, but not limited to: (i) the possibility that
distributions from collateral securities will not be adequate to make interest or other payments;
(ii) the risk that the collateral may default or decline in value or be downgraded, if rated by a
nationally recognized statistical rating organization (NRSRO); (iii) a Fund may invest in
tranches of CDOs that are subordinate to other tranches; (iv) the structure and complexity of the
transaction and the legal documents could lead to disputes among investors regarding the
characterization of proceeds; (v) the investment return achieved by the Fund could be significantly
different than those predicted by financial models; (vi) the lack of a readily available secondary
market for CDOs; (vii) risk of forced fire sale liquidation due to technical defaults such as
coverage test failures; and (viii) the CDOs manager may perform poorly.
Commercial Paper. Certain Funds may purchase commercial paper. Commercial paper purchasable by each
Fund includes Section 4(2) paper, a term that includes debt obligations issued in reliance on the
private placement exemption from registration afforded by Section 4(2) of the Securities Act.
Section 4(2) paper is restricted as to disposition under the Federal securities laws, and is
frequently sold (and resold) to institutional investors such as the Fund through or with the
assistance of investment dealers who make a market in the Section 4(2) paper, thereby providing
liquidity. Certain transactions in Section 4(2) paper may qualify for the registration exemption
provided in Rule 144A under the Securities Act. Most Funds can purchase commercial paper rated (at
the time of purchase) A-1 by S&P or Prime-1 by Moodys or when deemed advisable by a Funds
Manager or sub-adviser, high quality issues rated A-2, Prime-2 or F-2 by S&P, Moodys or
Fitch, respectively.
Commodity-Linked Derivative Instruments and Hybrid Instruments. Certain Funds seek to gain exposure
to the commodities markets primarily through investments in hybrid instruments. Hybrid instruments
are either equity or debt derivative securities with one or more commodity-dependent components
that have payment features similar to a commodity futures contract, a commodity option contract, or
a combination of both. Therefore, these instruments are commodity-linked. They are considered
hybrid instruments because they have both commodity-like and security-like characteristics.
Hybrid instruments are derivative instruments because at least part of their value is derived from
the value of an underlying commodity, futures contract, index or other readily measurable economic
variable.
The prices of commodity-linked derivative instruments may move in different directions than
investments in traditional equity and debt securities when the value of those traditional
securities is declining due to adverse economic conditions. As an example, during periods of rising
inflation, debt securities have historically tended to decline in value due to the general increase
in prevailing interest rates. Conversely, during those same periods of rising inflation, the prices
of certain commodities, such as oil and metals, have historically tended to increase. Of course,
there cannot be any guarantee that these investments will perform in that manner in the future, and
at certain times the price movements of commodity-linked instruments have been parallel to those of
debt and equity securities. Commodities have historically tended to increase and decrease in value
during different parts of the business cycle than financial assets. Nevertheless, at various times,
commodities prices may move in tandem with the prices of financial assets and thus may not provide
overall portfolio diversification benefits. Under favorable economic conditions, the Funds
investments may be expected to under-perform an investment in traditional securities. Over the long
term, the returns on the Funds investments are expected to exhibit low or negative correlation
with stocks and bonds.
II-5
Qualifying Hybrid Instruments. Certain Funds may invest in hybrid instruments that qualify for
exclusion from regulation under the Commodity Exchange Act and the regulations adopted thereunder.
A hybrid instrument that qualifies for this exclusion from regulation must be predominantly a
security. A hybrid instrument is considered to be predominantly a security if (a) the issuer of
the hybrid instrument receives payment in full of the purchase price of the hybrid instrument,
substantially contemporaneously with delivery of the hybrid instrument; (b) the purchaser or holder
of the hybrid instrument is not required to make any payment to the issuer in addition to the
purchase price paid under subparagraph (a), whether as margin, settlement payment, or otherwise,
during the life of the hybrid instrument or at maturity; (c) the issuer of the hybrid instrument is
not subject by the terms of the instrument to mark-to-market margining requirements; and (d) the
hybrid instrument is not marketed as a contract of sale of a commodity for future delivery (or
option on such a contract) subject to applicable provisions of the Commodity Exchange Act. Hybrid
instruments may be principal protected, partially protected, or offer no principal protection. A
principal protected hybrid instrument means that the issuer will pay, at a minimum, the par value
of the note at maturity. Therefore, if the commodity value to which the hybrid instrument is linked
declines over the life of the note, the Fund will receive at maturity the face or stated value of
the note. With a principal protected hybrid instrument, the Fund will receive at maturity the
greater of the par value of the note or the increase in its value based on the underlying commodity
or index. This protection is, in effect, an option whose value is subject to the volatility and
price level of the underlying commodity. The Managers decision whether to use principal protection
depends in part on the cost of the protection. In addition, the protection feature depends upon the
ability of the issuer to meet its obligation to buy back the security, and, therefore, depends on
the creditworthiness of the issuer. With full principal protection, the Fund will receive at
maturity of the hybrid instrument either the stated par value of the hybrid instrument, or
potentially, an amount greater than the stated par value if the underlying commodity, index,
futures contract or economic variable to which the hybrid instrument is linked has increased in
value. Partially protected hybrid instruments may suffer some loss of principal if the underlying
commodity, index, futures contract or economic variable to which the hybrid instrument is linked
declines in value during the term of the hybrid instrument. However, partially protected hybrid
instruments have a specified limit as to the amount of principal that they may lose.
Hybrid Instruments Without Principal Protection. Certain Funds may invest in hybrid instruments
that offer no principal protection. At maturity, there is a risk that the underlying commodity
price, futures contract, index or other economic variable may have declined sufficiently in value
such that some or all of the face value of the hybrid instrument might not be returned. The
Manager, at its discretion, may invest in a partially protected principal structured note or a note
without principal protection. In deciding to purchase a note without principal protection, the
Manager may consider, among other things, the expected performance of the underlying commodity
futures contract, index or other economic variable over the term of the note, the cost of the note,
and any other economic factors that the Manager believes are relevant.
Limitations on Leverage. Some of the hybrid instruments in which a Fund may invest may involve
leverage. To avoid being subject to undue leverage risk, a Fund will seek to limit the amount of
economic leverage it has under any one hybrid instrument that it buys and the leverage of the
Funds overall portfolio. A Fund will not invest in a hybrid instrument if, at the time of
purchase: (i) that instruments leverage ratio exceeds 300% of the price increase in the
underlying commodity, futures contract, index or other economic variable or (ii) the Funds
portfolio leverage ratio exceeds 150%, measured at the time of purchase. Leverage ratio is the
expected increase in the value of a hybrid instrument, assuming a one percent price increase in the
underlying commodity, futures contract, index or other economic factor. In other words, for a
hybrid instrument with a leverage factor of 150%, a 1% gain in the underlying economic variable
would be expected to result in a 1.5% gain in value for the hybrid instrument. Conversely, a hybrid
instrument with a leverage factor of 150% would suffer a 1.5% loss if the underlying economic
variable lost 1% of its value. Portfolio leverage ratio is defined as the average (mean) leverage
ratio of all instruments in a Funds portfolio, weighted by the market values of such instruments
or, in the case of futures contracts, their notional values. To the extent that the policy on a
Funds use of leverage stated above conflicts with the Investment Company Act or the rules and
regulations thereunder, the Fund will comply with the applicable provisions of the Investment
Company Act. A Fund may at times or from time to time decide not to use leverage in its investments
or use less leverage than may otherwise be allowable.
Counterparty Risk. A significant risk of hybrid instruments is counterparty risk. Unlike
exchange-traded futures and options, which are standard contracts, hybrid instruments are
customized securities, tailor-made by a specific issuer. With a listed futures or options contract,
an investors counterparty is the exchange clearinghouse. Exchange
II-6
clearinghouses are capitalized by the exchange members and typically have high investment grade
ratings (e.g., ratings of AAA or AA by S&P). Therefore, the risk is small that an exchange
clearinghouse might be unable to meet its obligations at maturity. However, with a hybrid
instrument, a Fund will take on the counterparty credit risk of the issuer. That is, at maturity of
the hybrid instrument, there is a risk that the issuer may be unable to perform its obligations
under the structured note.
Convertible Securities. A convertible security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of common stock or other
equity security of the same or a different issuer within a particular period of time at a specified
price or formula. A convertible security entitles the holder to receive interest paid or accrued
on debt or the dividend paid on preferred stock until the convertible security matures or is
redeemed, converted or exchanged. Before conversion, convertible securities have characteristics
similar to nonconvertible income securities in that they ordinarily provide a stable stream of
income with generally higher yields than those of common stocks of the same or similar issuers, but
lower yields than comparable nonconvertible securities. The value of a convertible security is
influenced by changes in interest rates, with investment value declining as interest rates increase
and increasing as interest rates decline. The credit standing of the issuer and other factors also
may have an effect on the convertible securitys investment value. Convertible securities rank
senior to common stock in a corporations capital structure but are usually subordinated to
comparable nonconvertible securities. Convertible securities may be subject to redemption at the
option of the issuer at a price established in the convertible securitys governing instrument.
The characteristics of convertible securities make them potentially attractive investments for an
investment company seeking a high total return from capital appreciation and investment income.
These characteristics include the potential for capital appreciation as the value of the underlying
common stock increases, the relatively high yield received from dividend or interest payments as
compared to common stock dividends and decreased risks of decline in value relative to the
underlying common stock due to their fixed income nature. As a result of the conversion feature,
however, the interest rate or dividend preference on a convertible security is generally less than
would be the case if the securities were issued in nonconvertible form.
In analyzing convertible securities, the Manager will consider both the yield on the convertible
security relative to its credit quality and the potential capital appreciation that is offered by
the underlying common stock, among other things.
Convertible securities are issued and traded in a number of securities markets. Even in cases where
a substantial portion of the convertible securities held by a Fund are denominated in U.S. dollars,
the underlying equity securities may be quoted in the currency of the country where the issuer is
domiciled. As a result, fluctuations in the exchange rate between the currency in which the debt
security is denominated and the currency in which the share price is quoted will affect the value
of the convertible security. With respect to convertible securities denominated in a currency
different from that of the underlying equity securities, the conversion price may be based on a
fixed exchange rate established at the time the security is issued, which may increase the effects
of currency risk. As described below, a Fund is authorized to enter into foreign currency hedging
transactions in which it may seek to reduce the effect of exchange rate fluctuations.
Apart from currency considerations, the value of convertible securities is influenced by both the
yield on nonconvertible securities of comparable issuers and by the value of the underlying common
stock. The value of a convertible security viewed without regard to its conversion feature (i.e.,
strictly on the basis of its yield) is sometimes referred to as its investment value. To the
extent interest rates change, the investment value of the convertible security typically will
fluctuate. At the same time, however, the value of the convertible security will be influenced by
its conversion value, which is the market value of the underlying common stock that would be
obtained if the convertible security were converted. Conversion value fluctuates directly with the
price of the underlying common stock. If the conversion value of a convertible security is
substantially below its investment value, the price of the convertible security is governed
principally by its investment value. To the extent the conversion value of a convertible security
increases to a point that approximates or exceeds its investment value, the price of the
convertible security will be influenced principally by its conversion value. A convertible security
will sell at a premium over the conversion value to the extent investors place value on the right
to acquire the underlying common stock while holding a fixed income security. The yield and
conversion premium of convertible securities issued in Japan and the Euromarket are frequently
determined at levels that cause the conversion value to affect their market value more than the
securities investment value.
II-7
Holders of convertible securities generally have a claim on the assets of the issuer prior to the
common stockholders but may be subordinated to other debt securities of the same issuer. A
convertible security may be subject to redemption at the option of the issuer at a price
established in a charter provision, indenture or other governing instrument pursuant to which the
convertible security was issued. If a convertible security held by a Fund is called for redemption,
the Fund will be required to redeem the security, convert it into the underlying common stock or
sell it to a third party. Certain convertible debt securities may provide a put option to the
holder, which entitles the holder to cause the security to be redeemed by the issuer at a premium
over the stated principal amount of the debt security under certain circumstances.
A Fund may also invest in synthetic convertible securities. Synthetic convertible securities may
include either Cash-Settled Convertibles or Manufactured Convertibles. Cash-Settled Convertibles
are instruments that are created by the issuer and have the economic characteristics of traditional
convertible securities but may not actually permit conversion into the underlying equity securities
in all circumstances. As an example, a private company may issue a Cash-Settled Convertible that is
convertible into common stock only if the company successfully completes a public offering of its
common stock prior to maturity and otherwise pays a cash amount to reflect any equity appreciation.
Manufactured Convertibles are created by the Manager or another party by combining separate
securities that possess one of the two principal characteristics of a convertible security, i.e.,
fixed income (fixed income component) or a right to acquire equity securities (convertibility
component). The fixed income component is achieved by investing in nonconvertible fixed income
securities, such as nonconvertible bonds, preferred stocks and money market instruments. The
convertibility component is achieved by investing in call options, warrants, or other securities
with equity conversion features (equity features) granting the holder the right to purchase a
specified quantity of the underlying stocks within a specified period of time at a specified price
or, in the case of a stock index option, the right to receive a cash payment based on the value of
the underlying stock index.
A Manufactured Convertible differs from traditional convertible securities in several respects.
Unlike a traditional convertible security, which is a single security that has a unitary market
value, a Manufactured Convertible is comprised of two or more separate securities, each with its
own market value. Therefore, the total market value of such a Manufactured Convertible is the sum
of the values of its fixed income component and its convertibility component.
More flexibility is possible in the creation of a Manufactured Convertible than in the purchase of
a traditional convertible security. Because many corporations have not issued convertible
securities, the Manager may combine a fixed income instrument and an equity feature with respect to
the stock of the issuer of the fixed income instrument to create a synthetic convertible security
otherwise unavailable in the market. The Manager may also combine a fixed income instrument of an
issuer with an equity feature with respect to the stock of a different issuer when the Manager
believes such a Manufactured Convertible would better promote a Funds objective than alternative
investments. For example, the Manager may combine an equity feature with respect to an issuers
stock with a fixed income security of a different issuer in the same industry to diversify the
Funds credit exposure, or with a U.S. Treasury instrument to create a Manufactured Convertible
with a higher credit profile than a traditional convertible security issued by that issuer. A
Manufactured Convertible also is a more flexible investment in that its two components may be
purchased separately and, upon purchasing the separate securities, combined to create a
Manufactured Convertible. For example, the Fund may purchase a warrant for eventual inclusion in a
Manufactured Convertible while postponing the purchase of a suitable bond to pair with the warrant
pending development of more favorable market conditions.
The value of a Manufactured Convertible may respond to certain market fluctuations differently from
a traditional convertible security with similar characteristics. For example, in the event a Fund
created a Manufactured Convertible by combining a short-term U.S. Treasury instrument and a call
option on a stock, the Manufactured Convertible would be expected to outperform a traditional
convertible of similar maturity that is convertible into that stock during periods when Treasury
instruments outperform corporate fixed income securities and underperform during periods when
corporate fixed income securities outperform Treasury instruments.
Debt Securities. Debt securities, such as bonds, involve credit risk. This is the risk that the
issuer will not make timely payments of principal and interest. The degree of credit risk depends
on the issuers financial condition and on the terms of the debt securities. Changes in an issuers
credit rating or the markets perception of an issuers creditworthiness may also affect the value
of a Funds investment in that issuer. Credit risk is reduced to the extent a Fund limits its debt
investments to U.S. Government securities.
II-8
All debt securities, however, are subject to interest rate risk. This is the risk that the value of
the security may fall when interest rates rise. If interest rates move sharply in a manner not
anticipated by Fund management, a Funds investments in debt securities could be adversely affected
and the Fund could lose money. In general, the market price of debt securities with longer
maturities will go up or down more in response to changes in interest rates than will the market
price of shorter-term debt securities.
During periods of rising interest rates, the average life of certain fixed income securities is
extended because of slower than expected principal payments. This may lock in a below-market
interest rate and extend the duration of these fixed-income securities, especially mortgage-related
securities, making them more sensitive to changes in interest rates. As a result, in a period of
rising interest rates, these securities may exhibit additional volatility and lose value. This is
known as extension risk.
The value of fixed income securities in the Funds can be expected to vary inversely with changes in
prevailing interest rates. Fixed income securities with longer maturities, which tend to produce
higher yields, are subject to potentially greater capital appreciation and depreciation than
securities with shorter maturities. The Funds are not restricted to any maximum or minimum time to
maturity in purchasing individual portfolio securities, and the average maturity of a Funds assets
will vary.
Depositary Receipts (ADRs, EDRs and GDRs). Certain Funds may invest in the securities of foreign
issuers in the form of Depositary Receipts or other securities convertible into securities of
foreign issuers. Depositary Receipts may not necessarily be denominated in the same currency as
the underlying securities into which they may be converted. The Fund may invest in both sponsored
and unsponsored American Depositary Receipts (ADRs), European Depositary Receipts (EDRs),
Global Depositary Receipts (GDRs) and other similar global instruments. ADRs typically are
issued by an American bank or trust company and evidence ownership of underlying securities issued
by a foreign corporation. EDRs, which are sometimes referred to as Continental Depositary Receipts,
are receipts issued in Europe, typically by foreign banks and trust companies, that evidence
ownership of either foreign or domestic underlying securities. GDRs are depositary receipts
structured like global debt issues to facilitate trading on an international basis. Unsponsored
ADR, EDR and GDR programs are organized independently and without the cooperation of the issuer of
the underlying securities. As a result, available information concerning the issuer may not be as
current as for sponsored ADRs, EDRs and GDRs, and the prices of unsponsored ADRs, EDRs and GDRs may
be more volatile than if such instruments were sponsored by the issuer. Depositary Receipts are
generally subject to the same risks as the foreign securities that they evidence or into which they
may be converted. Investments in ADRs, EDRs and GDRs present additional investment considerations
as described under Foreign Investment Risks.
Derivatives
Each Fund may use instruments referred to as derivative securities. Derivatives are financial
instruments the value of which is derived from another security, a commodity (such as gold or oil),
a currency or an index (a measure of value or rates, such as the S&P 500 Index or the prime lending
rate). Derivatives allow a Fund to increase or decrease the level of risk to which the Fund is
exposed more quickly and efficiently than transactions in other types of instruments. Each Fund may
use derivatives for hedging purposes. Certain Funds may also use derivatives for speculative
purposes to seek to enhance returns. The use of a derivative is speculative if the Fund is
primarily seeking to achieve gains, rather than offset the risk of other positions. When a Fund
invests in a derivative for speculative purposes, the Fund will be fully exposed to the risks of
loss of that derivative, which may sometimes be greater than the derivatives cost. No Fund may use
any derivative to gain exposure to an asset or class of assets that it would be prohibited by its
investment restrictions from purchasing directly.
Hedging. Hedging is a strategy in which a derivative is used to offset the risks associated with
other Fund holdings. Losses on the other investment may be substantially reduced by gains on a
derivative that reacts in an opposite manner to market movements. While hedging can reduce losses,
it can also reduce or eliminate gains or cause losses if the market moves in a manner different
from that anticipated by the Fund or if the cost of the derivative outweighs the benefit of the
hedge. Hedging also involves correlation risk, i.e. the risk that changes in the value of the
derivative will not match those of the holdings being hedged as expected by a Fund, in which case
any losses on the holdings being hedged may not be reduced or may be increased. The inability to
close options and futures positions also could have an adverse impact on a Funds ability to hedge
effectively its portfolio. There is also a risk of loss by the Fund of margin deposits or
collateral in the event of bankruptcy of a broker with whom the Fund has an open position in an
option, a futures contract or a related option. There can be no assurance that a Funds hedging
II-9
strategies will be effective. No Fund is required to engage in hedging transactions and each Fund
may choose not to
do so.
A Fund may use derivative instruments and trading strategies, including the following:
Indexed and Inverse Floating Rate Securities. A Fund may invest in securities that provide a
potential return based on a particular index of value or interest rates. For example, a Fund may
invest in securities that pay interest based on an index of interest rates. The principal amount
payable upon maturity of certain securities also may be based on the value of the index. To the
extent a Fund invests in these types of securities, the Funds return on such securities will be
subject to risk with respect to the value of the particular index: that is, if the value of the
index falls, the value of the indexed securities owned by the Fund will fall. Interest and
principal payable on certain securities may also be based on relative changes among particular
indices. A Fund may also invest in so-called inverse floating obligations or residual interest
bonds on which the interest rates vary inversely with a floating rate (which may be reset
periodically by a dutch auction, a remarketing agent, or by reference to a short-term tax-exempt
interest rate index). A Fund may purchase synthetically-created inverse floating rate bonds
evidenced by custodial or trust receipts. Generally, income on inverse floating rate bonds will
decrease when interest rates increase, and will increase when interest rates decrease. Such
securities have the effect of providing a degree of investment leverage, since they may increase or
decrease in value in response to changes, as an illustration, in market interest rates at a rate
that is a multiple of the rate at which fixed-rate securities increase or decrease in response to
such changes. As a result, the market values of such securities will generally be more volatile
than the market values of fixed-rate securities. To seek to limit the volatility of these
securities, a Fund may purchase inverse floating obligations that have shorter-term maturities or
that contain limitations on the extent to which the interest rate may vary. Certain investments in
such obligations may be illiquid. The Manager believes that indexed and inverse floating
obligations represent flexible portfolio management instruments for a Fund that allow the Fund to
seek potential investment rewards, hedge other portfolio positions or vary the degree of investment
leverage relatively efficiently under different market conditions. A Fund may invest in indexed and
inverse securities for hedging purposes or to seek to increase returns. When used for hedging
purposes, indexed and inverse securities involve correlation risk. Furthermore, where such a
security includes a contingent liability, in the event of an adverse movement in the underlying
index or interest rate, a Fund may be required to pay substantial additional margin to maintain the
position.
The Funds may invest up to 10% of their total assets in leveraged inverse floating rate debt
instruments (inverse floaters). Tender option bonds (including residual interests thereon) are
excluded from this 10% limitation.
Swap Agreements. A Fund may enter into swap agreements, including interest rate and index swap
agreements, for hedging purposes or to seek to obtain a particular desired return at a lower cost
to the Fund than if the Fund had invested directly in an instrument that yielded the desired
return. Swap agreements are two party contracts entered into primarily by institutional investors
for periods ranging from a few weeks to more than one year. In a standard swap transaction, two
parties agree to exchange the returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments. The gross returns to be exchanged or swapped
between the parties are calculated with respect to a notional amount, i.e., the dollar amount
invested at a particular interest rate, in a particular foreign currency, or in a basket of
securities representing a particular index. The notional amount of the swap agreement is only a
fictive basis on which to calculate the obligations that the parties to a swap agreement have
agreed to exchange. A Funds obligations (or rights) under a swap agreement will generally be equal
only to the net amount to be paid or received under the agreement based on the relative values of
the positions held by each party to the agreement (the net amount). A Funds obligations under a
swap agreement will be accrued daily (offset against any amounts owing to the Fund) and any accrued
but unpaid net amounts owed to a swap counterparty will be covered by marking as segregated liquid,
unencumbered assets, marked to market daily, to avoid any potential leveraging of the Funds
portfolio.
Whether a Funds use of swap agreements will be successful in furthering its investment objective
will depend on the Managers ability to correctly predict whether certain types of investments are
likely to produce greater returns than other investments. Because they are two party contracts and
because they may have terms of greater than seven days, some swap agreements may be considered to
be illiquid. Moreover, a Fund bears the risk of loss of the amount expected to be received under a
swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. A Fund
will seek to lessen this risk to some extent by entering into a transaction only if the
counterparty meets the current credit requirement for OTC option counterparties. Swap agreements
also bear the risk
II-10
that a Fund will not be able to meet its payment obligations to the
counterparty. As noted, however, a Fund will
deposit in a segregated account liquid assets permitted to be so segregated by the Commission in an
amount equal to or greater than the market value of the Funds liabilities under the swap agreement
or the amount it would cost the Fund initially to make an equivalent direct investment plus or
minus any amount the Fund is obligated to pay or is to receive under the swap agreement.
Restrictions imposed by the tax rules applicable to regulated investment companies, may limit the
Funds ability to use swap agreements. The swap market is largely unregulated. It is possible that
developments in the swap market, including potential government regulation, could adversely affect
each Funds ability to terminate existing swap agreements or to realize amounts to be received
under such agreements.
See Credit Default Swap Agreements, Interest Rate Swaps, Caps and Floors and Municipal
Interest Rate Swap Agreements below for further information on particular types of swap agreements
that may be used by certain Funds.
Interest Rate Swaps, Caps and Floors. In order to hedge the value of a Funds portfolio against
interest rate fluctuations or to enhance a Funds income, a Fund may enter into various
transactions, such as interest rate swaps and the purchase or sale of interest rate caps and
floors. Interest rate swaps are OTC contracts in which each party agrees to make a periodic
interest payment based on an index or the value of an asset in return for a periodic payment from
the other party based on a different index or asset. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index falls below a predetermined interest
rate, to receive payments of interest on a notional principal amount from the party selling such
interest rate floor. The purchase of an interest rate cap entitles the purchaser, to the extent
that a specified index rises above a predetermined interest rate, to receive payments of interest
on a notional principal amount from the party selling such interest rate cap.
A Fund expects to enter into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio or to protect against any increase in the price
of securities the Fund anticipates purchasing at a later date. A Fund generally will use these
transactions primarily as a hedge and not as a speculative investment. However, a Fund may also
invest in interest rate swaps to enhance income or to increase the Funds yield during periods of
steep interest rate yield curves (i.e., wide differences between short term and long term interest
rates). In an interest rate swap, a Fund may exchange with another party their respective
commitments to pay or receive interest, e.g., an exchange of fixed rate payments for floating rate
payments. For example, if a Fund holds a mortgage- backed security with an interest rate that is
reset only once each year, it may swap the right to receive interest at this fixed rate for the
right to receive interest at a rate that is reset every week. This would enable a Fund to offset a
decline in the value of the mortgage backed security due to rising interest rates but would also
limit its ability to benefit from falling interest rates. Conversely, if a Fund holds a
mortgage-backed security with an interest rate that is reset every week and it would like to lock
in what it believes to be a high interest rate for one year, it may swap the right to receive
interest at this variable weekly rate for the right to receive interest at a rate that is fixed for
one year. Such a swap would protect the Fund from a reduction in yield due to falling interest
rates and may permit the Fund to enhance its income through the positive differential between one
week and one year interest rates, but would preclude it from taking full advantage of rising
interest rates.
A Fund usually will enter into interest rate swap transactions on a net basis (i.e., the two
payment streams are netted against one another with the Fund receiving or paying, as the case may
be, only the net amount of the two payment streams). Inasmuch as these transactions are entered
into for good faith hedging purposes, the Manager believes that such obligations do not constitute
senior securities and, accordingly, will not treat them as being subject to its borrowing
restrictions. The net amount of the excess, if any, of a Funds obligations over its entitlements
with respect to each interest rate swap will be accrued on a daily basis, and an amount of liquid
assets that have an aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Fund.
If the interest rate swap transaction is entered into on other than a net basis, the full amount of
a Funds obligations will be accrued on a daily basis, and the full amount of the Funds
obligations will be maintained in a segregated account.
Typically the parties with which a Fund will enter into interest rate transactions will be
broker-dealers and other financial institutions. A Fund will enter into interest rate swap, cap or
floor transactions only with counterparties that are rated investment grade quality by at least one
nationally recognized statistical rating organization at the time of entering into such transaction
or whose creditworthiness is believed by the Manager to be equivalent to such rating.
II-11
If there is a
default by the counterparty to such a transaction, a Fund will have contractual remedies pursuant
to the
agreements related to the transaction. The swap market has grown substantially in recent years with
a large number of banks and investment banking firms acting both as principals and as agents using
standardized swap documentation. As a result, the swap market has become relatively liquid in
comparison with other similar instruments traded in the interbank market. Caps and floors, however,
are less liquid than swaps. Certain Federal income tax requirements may limit a Funds ability to
engage in certain interest rate transactions. Gains from transactions in interest rate swaps
distributed to shareholders will be taxable as ordinary income or, in certain circumstances, as
long term capital gains to shareholders.
Credit Default Swap Agreements and Similar Instruments. Certain Funds may enter into credit default
swap agreements and similar agreements, and may also buy credit-linked securities. The credit
default swap agreement or similar instrument may have as reference obligations one or more
securities that are not currently held by a Fund. The protection buyer in a credit default
contract may be obligated to pay the protection seller an up-front payment or a periodic stream
of payments over the term of the contract, provided generally that no credit event on a reference
obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the par
value (full notional value) of the swap in exchange for an equal face amount of deliverable
obligations of the reference entity described in the swap, or the seller may be required to deliver
the related net cash amount, if the swap is cash settled. A Fund may be either the buyer or seller
in the transaction. If a Fund is a buyer and no credit event occurs, the Fund recovers nothing if
the swap is held through its termination date. However, if a credit event occurs, the Fund may
elect to receive the full notional value of the swap in exchange for an equal face amount of
deliverable obligations of the reference entity that may have little or no value. As a seller, a
Fund generally receives an up-front payment or a fixed rate of income throughout the term of the
swap, which typically is between six months and three years, provided that there is no credit
event. If a credit event occurs, generally the seller must pay the buyer the full notional value of
the swap in exchange for an equal face amount of deliverable obligations of the reference entity
that may have little or no value.
Credit default swaps and similar instruments involve greater risks than if a Fund had invested in
the reference obligation directly, since, in addition to general market risks, they are subject to
illiquidity risk, counterparty risk and credit risk. A Fund will enter into credit default swap
agreements and similar instruments only with counterparties who are rated investment grade quality
by at least one nationally recognized statistical rating organization at the time of entering into
such transaction or whose creditworthiness is believed by the Manager to be equivalent to such
rating. A buyer also will lose its investment and recover nothing should no credit event occur and
the swap is held to its termination date. If a credit event were to occur, the value of any
deliverable obligation received by the seller, coupled with the up-front or periodic payments
previously received, may be less than the full notional value it pays to the buyer, resulting in a
loss of value to the Fund. When a Fund acts as a seller of a credit default swap or a similar
instrument, it is exposed to many of the same risks of leverage since, if a credit event occurs,
the seller may be required to pay the buyer the full notional value of the contract net of any
amounts owed by the buyer related to its delivery of deliverable obligations.
Credit Linked Securities. Among the income producing securities in which a Fund may invest are
credit linked securities, which are issued by a limited purpose trust or other vehicle that, in
turn, invests in a derivative instrument or basket of derivative instruments, such as credit
default swaps, interest rate swaps and other securities, in order to provide exposure to certain
fixed income markets. For instance, a Fund may invest in credit linked securities as a cash
management tool in order to gain exposure to a certain market and/or to remain fully invested when
more traditional income producing securities are not available.
Like an investment in a bond, investments in these credit linked securities represent the right to
receive periodic income payments (in the form of distributions) and payment of principal at the end
of the term of the security. However, these payments are conditioned on the issuers receipt of
payments from, and the issuers potential obligations to, the counterparties to the derivative
instruments and other securities in which the issuer invests. For instance, the issuer may sell one
or more credit default swaps, under which the issuer would receive a stream of payments over the
term of the swap agreements provided that no event of default has occurred with respect to the
referenced debt obligation upon which the swap is based. If a default occurs, the stream of
payments may stop and the issuer would be obligated to pay the counterparty the par (or other
agreed upon value) of the referenced debt obligation. This, in turn, would reduce the amount of
income and principal that a Fund would receive. A Funds investments in these instruments are
indirectly subject to the risks associated with derivative instruments, including,
II-12
among others,
credit risk, default or similar event risk, counterparty risk, interest rate risk, leverage risk
and
management risk. It is also expected that the securities will be exempt from registration under the
Securities Act. Accordingly, there may be no established trading market for the securities and they
may constitute illiquid investments.
Interest Rate Transactions and Swaptions. A Fund, to the extent permitted under applicable law, may
enter into interest rate swaps, may purchase or sell interest rate caps and floors and may enter
into options on swap agreements (swaptions) on either an asset-based or liability-based basis,
depending on whether a Fund is hedging its assets or its liabilities. A Fund may enter into these
transactions primarily to preserve a return or spread on a particular investment or portion of
their holdings, as a duration management technique or to protect against an increase in the price
of securities a Fund anticipates purchasing at a later date. They may also be used for speculation
to increase returns.
Swap agreements are two-party contracts entered into primarily by institutional investors for
periods ranging from a few weeks to more than one year. In a standard swap transaction, two
parties agree to exchange the returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments, which may be adjusted for an interest factor.
The gross returns to be exchanged or swapped between the parties are generally calculated with
respect to a notional amount, i.e., the return on or increase in value of a particular dollar
amount invested at a particular interest rate or in a basket of securities representing a
particular index. Forms of swap agreements include interest rate caps, under which, in return for a
premium, one party agrees to make payments to the other to the extent that interest rates exceed a
specified rate, or cap; and interest rate floors, under which, in return for a premium, one party
agrees to make payments to the other to the extent that interest rates fall below a specified rate,
or floor. Caps and floors are less liquid than swaps.
A Fund will usually enter into interest rate swaps on a net basis, i.e., the two payment streams
are netted out, with the Fund receiving or paying, as the case may be, only the net amount of the
two payments.
A swaption is a contract that gives a counterparty the right (but not the obligation) to enter into
a new swap agreement or to shorten, extend, cancel or otherwise modify an existing swap agreement,
at some designated future time on specified terms. A Fund may write (sell) and purchase put and
call swaptions.
Depending on the terms of the particular option agreement, a Fund will generally incur a greater
degree of risk when it writes a swaption than it will incur when it purchases a swaption. When a
Fund purchases a swaption, it risks losing only the amount of the premium it has paid should it
decide to let the option expire unexercised. However, when a Fund writes a swaption, upon exercise
of the option the Fund will become obligated according to the terms of the underlying agreement.
A Fund will accrue the net amount of the excess, if any, of its obligations over its entitlements
with respect to each interest rate or currency swap or swaption on a daily basis and its Manager or
sub-adviser will designate liquid assets on its books and records in an amount having an aggregate
net asset value at least equal to the accrued excess to the extent required by Commission
guidelines. If the other party to an interest rate swap defaults, a Funds risk of loss consists of
the net amount of interest payments that the Fund is contractually entitled to receive.
Total Return Swap Agreements. Total return swap agreements are contracts in which one party agrees
to make periodic payments to another party based on the change in market value of the assets
underlying the contract, which may include a specified security, basket of securities or securities
indices during the specified period, in return for periodic payments based on a fixed or variable
interest rate or the total return from other underlying assets. Total return swap agreements may be
used to obtain exposure to a security or market without owning or taking physical custody of such
security or investing directly in such market. Total return swap agreements may effectively add
leverage to the Funds portfolio because, in addition to its total net assets, the Fund would be
subject to investment exposure on the notional amount of the swap.
Total return swap agreements are subject to the risk that a counterparty will default on its
payment obligations to the Fund thereunder. Swap agreements also bear the risk that the Fund will
not be able to meet its obligation to the counterparty. Generally, the Fund will enter into total
return swaps on a net basis (i.e., the two payment streams are netted against one another with the
Fund receiving or paying, as the case may be, only the net amount of the two payments). The net
amount of the excess, if any, of the Funds obligations over its entitlements with respect to each
II-13
total return swap will be accrued on a daily basis, and an amount of liquid assets having an
aggregate net asset value
at least equal to the accrued excess will be segregated by the Fund. If the total return swap
transaction is entered into on other than a net basis, the full amount of the Funds obligations
will be accrued on a daily basis, and the full amount of the Funds obligations will be segregated
by the Fund in an amount equal to or greater than the market value of the liabilities under the
total return swap agreement or the amount it would have cost the Fund initially to make an
equivalent direct investment, plus or minus any amount the Fund is obligated to pay or is to
receive under the total return swap agreement.
Types of Options
Options on Securities and Securities Indices. A Fund may engage in transactions in options on
individual securities, baskets of securities or securities indices, or particular measurements of
value or rates (an index), such as an index of the price of treasury securities or an index
representative of short-term interest rates. Such investments may be made on exchanges and in the
over-the-counter (OTC) markets. In general, exchange-traded options have standardized exercise
prices and expiration dates and require the parties to post margin against their obligations, and
the performance of the parties obligations in connection with such options is guaranteed by the
exchange or a related clearing corporation. OTC options have more flexible terms negotiated between
the buyer and the seller, but generally do not require the parties to post margin and are subject
to greater credit risk. OTC options also involve greater liquidity risk. See Additional Risk
Factors of OTC Transactions; Limitations on the Use of OTC Derivatives below.
Call Options. A Fund may purchase call options on any of the types of securities or instruments in
which it may invest. A purchased call option gives a Fund the right to buy, and obligates the
seller to sell, the underlying security at the exercise price at any time during the option period.
A Fund also may purchase and sell call options on indices. Index options are similar to options on
securities except that, rather than taking or making delivery of securities underlying the option
at a specified price upon exercise, an index option gives the holder the right to receive cash upon
exercise of the option if the level of the index upon which the option is based is greater than the
exercise price of the option.
A call option is also covered if a Fund holds a call on the same security or index as the call
written where the exercise price of the call held is (i) equal to or less than the exercise price
of the call written, or (ii) greater than the exercise price of the call written provided the
difference is maintained by the Fund in liquid assets designated on the advisers or sub-advisers
books and records to the extent required by Commission guidelines.
A Fund also is authorized to write (i.e., sell) covered call options on the securities or
instruments in which it may invest and to enter into closing purchase transactions with respect to
certain of such options. A covered call option is an option in which a Fund, in return for a
premium, gives another party a right to buy specified securities owned by the Fund at a specified
future date and price set at the time of the contract. The principal reason for writing call
options is the attempt to realize, through the receipt of premiums, a greater return than would be
realized on the securities alone. By writing covered call options, a Fund gives up the opportunity,
while the option is in effect, to profit from any price increase in the underlying security above
the option exercise price. In addition, a Funds ability to sell the underlying security will be
limited while the option is in effect unless the Fund enters into a closing purchase transaction. A
closing purchase transaction cancels out a Funds position as the writer of an option by means of
an offsetting purchase of an identical option prior to the expiration of the option it has written.
Covered call options also serve as a partial hedge to the extent of the premium received against
the price of the underlying security declining.
A Fund also is authorized to write (i.e., sell) uncovered call options on securities or instruments
in which it may invest but that are not currently held by the Fund. The principal reason for
writing uncovered call options is to realize income without committing capital to the ownership of
the underlying securities or instruments. When writing uncovered call options, a Fund must deposit
and maintain sufficient margin with the broker dealer through which it made the uncovered call
option as collateral to ensure that the securities can be purchased for delivery if and when the
option is exercised. In addition, in connection with each such transaction a Fund will segregate
unencumbered liquid securities or cash with a value at least equal to the Funds exposure (the
difference between the unpaid amounts owed by the Fund on such transaction minus any collateral
deposited with the broker dealer), on a marked-to-market basis (as calculated pursuant to
requirements of the Commission). Such segregation will ensure that the Fund has assets available to
satisfy its obligations with respect to the transaction and will avoid any potential
II-14
leveraging of
the Funds portfolio. Such segregation will not limit the Funds exposure to loss. During periods
of
declining securities prices or when prices are stable, writing uncovered calls can be a profitable
strategy to increase a Funds income with minimal capital risk. Uncovered calls are riskier than
covered calls because there is no underlying security held by a Fund that can act as a partial
hedge. Uncovered calls have speculative characteristics and the potential for loss is unlimited.
When an uncovered call is exercised, a Fund must purchase the underlying security to meet its call
obligation. There is also a risk, especially with less liquid preferred and debt securities, that
the securities may not be available for purchase. If the purchase price exceeds the exercise price,
a Fund will lose the difference.
Put Options. A Fund is authorized to purchase put options to seek to hedge against a decline in the
value of its securities or to enhance its return. By buying a put option, a Fund acquires a right
to sell the underlying securities or instruments at the exercise price, thus limiting the Funds
risk of loss through a decline in the market value of the securities or instruments until the put
option expires. The amount of any appreciation in the value of the underlying securities or
instruments will be partially offset by the amount of the premium paid for the put option and any
related transaction costs. Prior to its expiration, a put option may be sold in a closing sale
transaction and profit or loss from the sale will depend on whether the amount received is more or
less than the premium paid for the put option plus the related transaction costs. A closing sale
transaction cancels out a Funds position as the purchaser of an option by means of an offsetting
sale of an identical option prior to the expiration of the option it has purchased. A Fund also may
purchase uncovered put options.
Each Fund also has authority to write (i.e., sell) put options on the types of securities or
instruments that may be held by the Fund, provided that such put options are covered, meaning that
such options are secured by segregated, liquid assets. A Fund will receive a premium for writing a
put option, which increases the Funds return.
Each Fund is also authorized to write (i.e., sell) uncovered put options on securities or
instruments in which it may invest but with respect to which the Fund does not currently have a
corresponding short position or has not deposited as collateral cash equal to the exercise value of
the put option with the broker dealer through which it made the uncovered put option. The principal
reason for writing uncovered put options is to receive premium income and to acquire such
securities or instruments at a net cost below the current market value. A Fund has the obligation
to buy the securities or instruments at an agreed upon price if the price of the securities or
instruments decreases below the exercise price. If the price of the securities or instruments
increases during the option period, the option will expire worthless and a Fund will retain the
premium and will not have to purchase the securities or instruments at the exercise price. In
connection with such a transaction, a Fund will segregate unencumbered liquid assets with a value
at least equal to the Funds exposure, on a marked-to-market basis (as calculated pursuant to
requirements of the Commission). Such segregation will ensure that a Fund has assets available to
satisfy its obligations with respect to the transaction and will avoid any potential leveraging of
the Funds portfolio. Such segregation will not limit the Funds exposure to loss.
Options on Government National Mortgage Association (GNMA) Certificates. The following
information relates to the unique characteristics of options on GNMA Certificates. Since the
remaining principal balance of GNMA Certificates declines each month as a result of mortgage
payments, a Fund, as a writer of a GNMA call holding GNMA Certificates as cover to satisfy its
delivery obligation in the event of exercise, may find that the GNMA Certificates it holds no
longer have a sufficient remaining principal balance for this purpose. Should this occur, a Fund
will purchase additional GNMA Certificates from the same pool (if obtainable) or other GNMA
Certificates in the cash market in order to maintain its cover.
A GNMA Certificate held by a Fund to cover an option position in any but the nearest expiration
month may cease to represent cover for the option in the event of a decline in the GNMA coupon rate
at which new pools are originated under the FHA/VA loan ceiling in effect at any given time. If
this should occur, a Fund will no longer be covered, and the Fund will either enter into a closing
purchase transaction or replace such Certificate with a certificate that represents cover. When a
Fund closes its position or replaces such Certificate, it may realize an unanticipated loss and
incur transaction costs.
Risks Associated with Options. There are several risks associated with transactions in options on
securities and indexes. For example, there are significant differences between the securities and
options markets that could result in an imperfect correlation between these markets, causing a
given transaction not to achieve its objectives. In addition, a liquid secondary market for
particular options, whether traded over-the-counter or on a national securities
II-15
exchange
(Exchange) may be absent for reasons which include the following: there may be insufficient
trading
interest in certain options; restrictions may be imposed by an Exchange on opening transactions or
closing transactions or both; trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options or underlying securities; unusual or unforeseen
circumstances may interrupt normal operations on an Exchange; the facilities of an Exchange or the
Options Clearing Corporation may not at all times be adequate to handle current trading volume; or
one or more Exchanges could, for economic or other reasons, decide or be compelled at some future
date to discontinue the trading of options (or a particular class or series of options), in which
event the secondary market on that Exchange (or in that class or series of options) would cease to
exist, although outstanding options that had been issued by the Options Clearing Corporation as a
result of trades on that Exchange would continue to be exercisable in accordance with their terms.
Futures
A Fund may engage in transactions in futures and options on futures. Futures are standardized,
exchange-traded contracts that obligate a purchaser to take delivery, and a seller to make
delivery, of a specific amount of an asset at a specified future date at a specified price. No
price is paid upon entering into a futures contract. Rather, upon purchasing or selling a futures
contract a Fund is required to deposit collateral (margin) equal to a percentage (generally less
than 10%) of the contract value. Each day thereafter until the futures position is closed, the Fund
will pay additional margin representing any loss experienced as a result of the futures position
the prior day or be entitled to a payment representing any profit experienced as a result of the
futures position the prior day. Futures involve substantial leverage risk.
The sale of a futures contract limits a Funds risk of loss from a decline in the market value of
portfolio holdings correlated with the futures contract prior to the futures contracts expiration
date. In the event the market value of the portfolio holdings correlated with the futures contract
increases rather than decreases, however, a Fund will realize a loss on the futures position and a
lower return on the portfolio holdings than would have been realized without the purchase of the
futures contract.
The purchase of a futures contract may protect a Fund from having to pay more for securities as a
consequence of increases in the market value for such securities during a period when the Fund was
attempting to identify specific securities in which to invest in a market the Fund believes to be
attractive. In the event that such securities decline in value or a Fund determines not to complete
an anticipatory hedge transaction relating to a futures contract, however, the Fund may realize a
loss relating to the futures position.
A Fund is also authorized to purchase or sell call and put options on futures contracts including
financial futures and stock indices. Generally, these strategies would be used under the same
market and market sector conditions (i.e., conditions relating to specific types of investments) in
which the Fund entered into futures transactions. A Fund may purchase put options or write call
options on futures contracts and stock indices in lieu of selling the underlying futures contract
in anticipation of a decrease in the market value of its securities. Similarly, a Fund can purchase
call options, or write put options on futures contracts and stock indices, as a substitute for the
purchase of such futures to hedge against the increased cost resulting from an increase in the
market value of securities which the Fund intends to purchase.
To maintain greater flexibility, a Fund may invest in instruments which have characteristics
similar to futures contracts. These instruments may take a variety of forms, such as debt
securities with interest or principal payments determined by reference to the value of a security,
an index of securities or a commodity at a future point in time. The risks of such investments
could reflect the risks of investing in futures and securities, including volatility and
illiquidity.
Risks Associated with Futures. The primary risks associated with the use of futures contracts and
options are (a) the imperfect correlation between the change in market value of the instruments
held by a Fund and the price of the futures contract or option; (b) possible lack of a liquid
secondary market for a futures contract and the resulting inability to close a futures contract
when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited;
(d) the Managers or sub-advisers inability to predict correctly the direction of securities
prices, interest rates, currency exchange rates and other economic factors; and (e) the possibility
that the counterparty will default in the performance of its obligations.
II-16
Each Fund has filed a notice of eligibility for exclusion from the definition of the term
commodity pool operator in accordance with Rule 4.5 of the U.S. Commodity Exchange Act, as
amended (the Commodity Exchange Act) and, therefore, the Funds are not subject to registration or
regulation as commodity pool operators, under the Commodity Exchange Act.
Foreign Exchange Transactions. A Fund may engage in spot and forward foreign exchange transactions
and currency swaps, purchase and sell options on currencies and purchase and sell currency futures
and related options thereon (collectively, Currency Instruments) for purposes of hedging against
the decline in the value of currencies in which its portfolio holdings are denominated against the
U.S. dollar or, with respect to certain Funds, to seek to enhance returns. Such transactions could
be effected with respect to hedges on foreign dollar denominated securities owned by a Fund, sold
by a Fund but not yet delivered, or committed or anticipated to be purchased by a Fund. As an
illustration, a Fund may use such techniques to hedge the stated value in U.S. dollars of an
investment in a yen-denominated security. In such circumstances, for example, the Fund may purchase
a foreign currency put option enabling it to sell a specified amount of yen for dollars at a
specified price by a future date. To the extent the hedge is successful, a loss in the value of the
yen relative to the dollar will tend to be offset by an increase in the value of the put option. To
offset, in whole or in part, the cost of acquiring such a put option, the Fund may also sell a call
option which, if exercised, requires it to sell a specified amount of yen for dollars at a
specified price by a future date (a technique called a straddle). By selling such a call option
in this illustration, the Fund gives up the opportunity to profit without limit from increases in
the relative value of the yen to the dollar. Straddles of the type that may be used by a Fund are
considered to constitute hedging transactions. No Fund will attempt to hedge all of its foreign
portfolio positions.
Forward Foreign Exchange Transactions. Forward foreign exchange transactions are OTC contracts to
purchase or sell a specified amount of a specified currency or multinational currency unit at a
price and future date set at the time of the contract. Spot foreign exchange transactions are
similar but require current, rather than future, settlement. A Fund will enter into foreign
exchange transactions for purposes of hedging either a specific transaction or a portfolio
position, or, with respect to certain Funds, to seek to enhance returns. A Fund may enter into a
foreign exchange transaction for purposes of hedging a specific transaction by, for example,
purchasing a currency needed to settle a security transaction or selling a currency in which the
Fund has received or anticipates receiving a dividend or distribution. A Fund may enter into a
foreign exchange transaction for purposes of hedging a portfolio position by selling forward a
currency in which a portfolio position of the Fund is denominated or by purchasing a currency in
which the Fund anticipates acquiring a portfolio position in the near future. Forward foreign
exchange transactions involve substantial currency risk, and also involve credit and liquidity
risk. A Fund may also hedge a currency by entering into a transaction in a Currency Instrument
denominated in a currency other than the currency being hedged (a cross-hedge). A Fund will only
enter into a cross-hedge if the Manager believes that (i) there is a demonstrably high correlation
between the currency in which the cross-hedge is denominated and the currency being hedged, and
(ii) executing a cross-hedge through the currency in which the cross-hedge is denominated will be
significantly more cost-effective or provide substantially greater liquidity than executing a
similar hedging transaction by means of the currency being hedged.
A Fund may also engage in proxy hedging transactions to reduce the effect of currency fluctuations
on the value of existing or anticipated holdings of portfolio securities. Proxy hedging is often
used when the currency to which the Fund is exposed is difficult to hedge or to hedge against the
dollar. Proxy hedging entails entering into a forward contract to sell a currency whose changes in
value are generally considered to be linked to a currency or currencies in which some or all of the
Funds securities are, or are expected to be, denominated, and to buy U.S. dollars. Proxy hedging
involves some of the same risks and considerations as other transactions with similar instruments.
Currency transactions can result in losses to the Fund if the currency being hedged fluctuates in
value to a degree or in a direction that is not anticipated. In addition, there is the risk that
the perceived linkage between various currencies may not be present or may not be present during
the particular time that a Fund is engaging in proxy hedging. A Fund may also cross-hedge
currencies by entering into forward contracts to sell one or more currencies that are expected to
decline in value relative to other currencies to which the Fund has or in which the Fund expects to
have portfolio exposure. For example, a Fund may hold both Canadian government bonds and Japanese
government bonds, and the adviser or sub-adviser may believe that Canadian dollars will deteriorate
against Japanese yen. The Fund would sell Canadian dollars to reduce its exposure to that currency
and buy Japanese yen. This strategy would be a hedge against a decline in the value of Canadian
dollars, although it would expose the Fund to declines in the value of the Japanese yen relative to
the U.S. dollar.
II-17
Some of the forward non-U.S. currency contracts entered into by the Funds are classified as
non-deliverable forwards (NDF). NDFs are cash-settled, short-term forward contracts that may be
thinly traded or are denominated in non-convertible foreign currency, where the profit or loss at
the time at the settlement date is calculated by taking the difference between the agreed upon
exchange rate and the spot rate at the time of settlement, for an agreed upon notional amount of
funds. All NDFs have a fixing date and a settlement date. The fixing date is the date at which
the difference between the prevailing market exchange rate and the agreed upon exchange rate is
calculated. The settlement date is the date by which the payment of the difference is due to the
party receiving payment. NDFs are commonly quoted for time periods of one month up to two years,
and are normally quoted and settled in U.S. dollars. They are often used to gain exposure to
and/or hedge exposure to foreign currencies that are not internationally traded.
Currency Futures. A Fund may also seek to enhance returns or hedge against the decline in the value
of a currency through use of currency futures or options thereon. Currency futures are similar to
forward foreign exchange transactions except that futures are standardized, exchange-traded
contracts while forward foreign exchange transactions are traded in the OTC market. Currency
futures involve substantial currency risk, and also involve leverage risk.
Currency Options. A Fund may also seek to enhance returns or hedge against the decline in the value
of a currency through the use of currency options. Currency options are similar to options on
securities. For example, in consideration for an option premium the writer of a currency option is
obligated to sell (in the case of a call option) or purchase (in the case of a put option) a
specified amount of a specified currency on or before the expiration date for a specified amount of
another currency. A Fund may engage in transactions in options on currencies either on exchanges or
OTC markets. See Types of Options above and Additional Risk Factors of OTC Transactions;
Limitations on the Use of OTC Derivatives below. Currency options involve substantial currency
risk, and may also involve credit, leverage or liquidity risk.
Currency Swaps. In order to protect against currency fluctuations, a Fund may enter into currency
swaps. A Fund may also hedge portfolio positions through currency swaps, which are transactions in
which one currency is simultaneously bought for a second currency on a spot basis and sold for the
second currency on a forward basis. Currency swaps involve the exchange of the rights of a Fund
and another party to make or receive payments in specified currencies. Currency swaps usually
involve the delivery of the entire principal value of one designated currency in exchange for the
other designated currency. Because currency swaps usually involve the delivery of the entire
principal value of one designated currency in exchange for the other designated currency, the
entire principal value of a currency swap is subject to the risk that the other party to the swap
will default on its contractual delivery obligations.
Limitations on Currency Transactions. A Fund will not hedge a currency in excess of the aggregate
market value of the securities that it owns (including receivables for unsettled securities sales),
or has committed to purchase or anticipates purchasing, which are denominated in such currency.
Open positions in forward foreign exchange transactions used for non-hedging purposes will be
covered by the segregation of liquid assets and are marked to market daily. A Funds exposure to
futures or options on currencies will be covered as described below under Risk Factors in
Derivatives.
Risk Factors in Hedging Foreign Currency. Hedging transactions involving Currency Instruments
involve substantial risks, including correlation risk. While a Funds use of Currency Instruments
to effect hedging strategies is intended to reduce the volatility of the net asset value of the
Funds shares, the net asset value of the Funds shares will fluctuate. Moreover, although Currency
Instruments will be used with the intention of hedging against adverse currency movements,
transactions in Currency Instruments involve the risk that anticipated currency movements will not
be accurately predicted and that the Funds hedging strategies will be ineffective. To the extent
that a Fund hedges against anticipated currency movements that do not occur, the Fund may realize
losses and decrease its total return as the result of its hedging transactions. Furthermore, a Fund
will only engage in hedging activities from time to time and may not be engaging in hedging
activities when movements in currency exchange rates occur.
In connection with its trading in forward foreign currency contracts, a Fund will contract with a
foreign or domestic bank, or foreign or domestic securities dealer, to make or take future delivery
of a specified amount of a particular currency. There are no limitations on daily price moves in
such forward contracts, and banks and dealers are not required to continue to make markets in such
contracts. There have been periods during which certain banks or
II-18
dealers have refused to quote prices for such forward contracts or have quoted prices with an
unusually wide spread between the price at which the bank or dealer is prepared to buy and that at
which it is prepared to sell. Governmental imposition of credit controls might limit any such
forward contract trading. With respect to its trading of forward contracts, if any, a Fund will be
subject to the risk of bank or dealer failure and the inability of, or refusal by, a bank or dealer
to perform with respect to such contracts. Any such default would deprive the Fund of any profit
potential or force the Fund to cover its commitments for resale, if any, at the then market price
and could result in a loss to the Fund.
It may not be possible for a Fund to hedge against currency exchange rate movements, even if
correctly anticipated, in the event that (i) the currency exchange rate movement is so generally
anticipated that the Fund is not able to enter into a hedging transaction at an effective price, or
(ii) the currency exchange rate movement relates to a market with respect to which Currency
Instruments are not available and it is not possible to engage in effective foreign currency
hedging. The cost to a Fund of engaging in foreign currency transactions varies with such factors
as the currencies involved, the length of the contract period and the market conditions then
prevailing. Since transactions in foreign currency exchange usually are conducted on a principal
basis, no fees or commissions are involved.
Risk Factors in Derivatives
Derivatives are volatile and involve significant risks, including:
Credit Risk the risk that the counterparty in a derivative transaction will be unable to honor
its financial obligation to a Fund, or the risk that the reference entity in a credit default swap
or similar derivative will not be able to honor its financial obligations.
Currency Risk the risk that changes in the exchange rate between two currencies will adversely
affect the value (in U.S. dollar terms) of an investment.
Leverage Risk the risk associated with certain types of investments or trading strategies (such
as, for example, borrowing money to increase the amount of investments) that relatively small
market movements may result in large changes in the value of an investment. Certain investments or
trading strategies that involve leverage can result in losses that greatly exceed the amount
originally invested.
Liquidity Risk the risk that certain securities may be difficult or impossible to sell at the
time that the seller would like or at the price that the seller believes the security is currently
worth.
Correlation Risk the risk that changes in the value of a derivative will not match the changes
in the value of the portfolio holdings that are being hedged or of the particular market or
security to which the Fund seeks exposure.
Index Risk If the derivative is linked to the performance of an index, it will be subject to the
risks associated with changes in that index. If the index changes, a Fund could receive lower
interest payments or experience a reduction in the value of the derivative to below what that Fund
paid. Certain indexed securities, including inverse securities (which move in an opposite direction
to the index), may create leverage, to the extent that they increase or decrease in value at a rate
that is a multiple of the changes in the applicable index.
A Fund intends to enter into transactions involving derivatives only if there appears to be a
liquid secondary market for such instruments or, in the case of illiquid instruments traded in OTC
transactions, such instruments satisfy the
criteria set forth below under Additional Risk Factors of OTC Transactions; Limitations on the Use
of OTC Derivatives. However, there can be no assurance that, at any specific time, either a liquid
secondary market will exist for a derivative or the Fund will otherwise be able to sell such
instrument at an acceptable price. It may, therefore, not be possible to close a position in a
derivative without incurring substantial losses, if at all.
Certain transactions in derivatives (such as futures transactions or sales of put options) involve
substantial leverage risk and may expose a Fund to potential losses that exceed the amount
originally invested by the Fund. When a Fund engages in such a transaction, the Fund will deposit
in a segregated account liquid assets with a value at least equal to the Funds exposure, on a
mark-to-market basis, to the transaction (as calculated pursuant to requirements of the
Commission). Such segregation will ensure that a Fund has assets available to satisfy its
obligations with respect to
II-19
the transaction, but will not limit the Funds exposure to loss.
Additional Risk Factors of OTC Transactions; Limitations on the Use of OTC Derivatives
Certain derivatives traded in OTC markets, including indexed securities, swaps and OTC options,
involve substantial liquidity risk. The absence of liquidity may make it difficult or impossible
for a Fund to sell such instruments promptly at an acceptable price. The absence of liquidity may
also make it more difficult for a Fund to ascertain a market value for such instruments. A Fund
will, therefore, acquire illiquid OTC instruments (i) if the agreement pursuant to which the
instrument is purchased contains a formula price at which the instrument may be terminated or sold,
or (ii) for which the Manager anticipates the Fund can receive on each business day at least two
independent bids or offers, unless a quotation from only one dealer is available, in which case
that dealers quotation may be used.
Because derivatives traded in OTC markets are not guaranteed by an exchange or clearing corporation
and generally do not require payment of margin, to the extent that a Fund has unrealized gains in
such instruments or has deposited collateral with its counterparty the Fund is at risk that its
counterparty will become bankrupt or otherwise fail to honor its obligations. A Fund will attempt
to minimize these risks by engaging in transactions in derivatives traded in OTC markets only with
financial institutions that have substantial capital or that have provided the Fund with a
third-party guaranty or other credit enhancement.
Distressed Securities. A Fund may invest in securities, including loans purchased in the secondary
market, that are the subject of bankruptcy proceedings or otherwise in default or in risk of being
in default as to the repayment of principal and/or interest at the time of acquisition by the Fund
or that are rated in the lower rating categories by one or more nationally recognized statistical
rating organizations (for example, Ca or lower by Moodys and CC or lower by S&P or Fitch) or, if
unrated, are in the judgment of the Manager of equivalent quality (Distressed Securities).
Investment in Distressed Securities is speculative and involves significant risks.
A Fund will generally make such investments only when the Manager believes it is reasonably likely
that the issuer of the Distressed Securities will make an exchange offer or will be the subject of
a plan of reorganization pursuant to which the Fund will receive new securities in return for the
Distressed Securities. However, there can be no assurance that such an exchange offer will be made
or that such a plan of reorganization will be adopted. In addition, a significant period of time
may pass between the time at which a Fund makes its investment in Distressed Securities and the
time that any such exchange offer or plan of reorganization is completed. During this period, it
is unlikely that a Fund will receive any interest payments on the Distressed Securities, the Fund
will be subject to significant uncertainty as to whether or not the exchange offer or plan of
reorganization will be completed and the Fund may be required to bear certain extraordinary
expenses to protect and recover its investment. Therefore, to the extent the Fund seeks capital
appreciation through investment in distressed securities, the Funds ability to achieve current
income for its shareholders may be diminished. The Fund also will be subject to significant
uncertainty as to when and in what manner and for what value the obligations evidenced by the
distressed securities will eventually be satisfied (e.g., through a liquidation of the obligors
assets, an exchange offer or plan of reorganization involving the distressed securities or a
payment of some amount in satisfaction of the obligation). Even if an exchange offer is made or
plan of reorganization is adopted with respect to Distressed Securities held by a Fund, there can
be no assurance that the securities or other assets received by a Fund in connection with such
exchange offer or plan of reorganization will not have a lower value or income potential than may
have been anticipated when the investment was made or no value. Moreover, any securities received
by a Fund upon completion of an exchange offer or plan of reorganization may be restricted as to
resale. Similarly, if a Fund participates in negotiations with respect to any exchange offer or
plan of reorganization with respect to an issuer of Distressed Securities, the Fund may be
restricted from disposing of such securities. To the extent that a Fund becomes involved in such
proceedings, the Fund may have a more active participation in the affairs of the issuer than that
assumed generally by an investor. The Fund, however, will not make investments for the purpose of
exercising day-to-day management of any issuers affairs.
Dollar Rolls. A dollar roll transaction involves a sale by the Fund of a mortgage-backed or other
security concurrently with an agreement by the Fund to repurchase a similar security at a later
date at an agreed-upon price. The securities that are repurchased will bear the same interest rate
and a similar maturity as those sold, but pools of mortgages collateralizing those securities may
have different prepayment histories than those sold. During the period between the sale and
repurchase, a Fund will not be entitled to receive interest and principal payments on the
securities sold. Proceeds of the sale will be invested in additional instruments for the Fund, and
the income from
II-20
these investments will generate income for the Fund. If such income does not exceed the income,
capital appreciation and gain or loss that would have been realized on the securities sold as part
of the dollar roll, the use of this technique will diminish the investment performance of a Fund
compared with what the performance would have been without the use of dollar rolls. At the time a
Fund enters into a dollar roll transaction, the Manager or sub-adviser will designate assets on its
books and records in an amount equal to the amount of the Funds commitments and will subsequently
monitor the account to ensure that its value is maintained.
Dollar rolls involve the risk that the market value of the securities subject to a Funds forward
purchase commitment may decline below, or the market value of the securities subject to a Funds
forward sale commitment may increase above, the exercise price of the forward commitment. In the
event the buyer of the securities files for bankruptcy or becomes insolvent, a Funds use of the
proceeds of the current sale portion of the transaction may be restricted pending a determination
by the other party, or its trustee or receiver, whether to enforce the Funds obligation to
purchase the similar securities in the forward transaction. Dollar rolls are speculative techniques
that can be deemed to involve leverage. At the time a Fund sells securities and agrees to
repurchase securities at a future date, the Fund will segregate liquid assets with a value equal to
the repurchase price. A Fund may engage in dollar roll transactions to enhance return. Each dollar
roll transaction is accounted for as a sale or purchase of a portfolio security and a subsequent
purchase or sale of a substantially similar security in the forward market. Successful use of
mortgage dollar rolls may depend upon the Managers ability to correctly predict interest rates and
prepayments. There is no assurance that dollar rolls can be successfully employed.
Equity Securities. Equity securities include common stock and preferred stock (including
convertible preferred stock); bonds, notes and debentures convertible into common or preferred
stock; stock purchase warrants and rights; equity interests in trusts; general and limited
partnerships and limited liability companies; and depositary receipts. Stock markets are volatile.
The price of equity securities will fluctuate and can decline and reduce the value of a portfolio
investing in equities. The price of equity securities fluctuates based on changes in a companys
financial condition and overall market and economic conditions. The value of equity securities
purchased by the Fund could decline if the financial condition of the companies the Fund invests in
decline or if overall market and economic conditions deteriorate. They may also decline due to
factors that affect a particular industry or industries, such as labor shortages or increase in
production costs and competitive conditions within an industry. In addition, they may decline due
to general market conditions that are not specifically related to a company or industry, such as
real or perceived adverse economic conditions, changes in the general outlook for corporate
earnings, changes in interest or currency rates or generally adverse investor sentiment.
From time to time certain of the Funds may invest in shares of companies through initial public
offerings (IPOs). IPOs have the potential to produce, and have in fact produced, substantial
gains for certain Funds. There is no assurance that any Fund will have continued access to
profitable IPOs and therefore investors should not rely on these past gains as an indication of
future performance. The investment performance of a Fund during periods when it is unable to
invest significantly or at all in IPOs may be lower than during periods when it is able to do so.
In addition, as a Fund increases in size, the impact of IPOs on its performance will generally
decrease. Securities issued in IPOs are subject to many of the same risks as investing in
companies with smaller market capitalizations. Securities issued in IPOs have no trading history,
and information about the companies may be available for very limited periods. In addition, the
prices of securities sold in IPOs may be highly volatile or may decline shortly after the initial
public offering.
The Funds may invest in companies that have relatively small market capitalizations. These
organizations will normally have more limited product lines, markets and financial resources and
will be dependent upon a more limited management group than larger capitalized companies. In
addition, it is more difficult to get information on smaller companies, which tend to be less well
known, have shorter operating histories, do not have significant ownership by large investors and
are followed by relatively few securities analysts. The securities of smaller capitalized companies
are often traded in the over-the-counter markets and may have fewer market makers and wider price
spreads. This may result in greater price movements and less ability to sell a Funds investment
than if the Fund held the securities of larger, more established companies.
Exchange Traded Notes (ETNs). Certain Funds may invest in ETNs. ETNs are generally notes
representing debt of the issuer, usually a financial institution. ETNs combine both aspects of
bonds and ETFs. An ETNs returns are based on the performance of one or more underlying assets,
reference rates or indexes, minus fees and expenses. Similar to ETFs, ETNs are listed on an
exchange and traded in the secondary market. However, unlike an ETF, an ETN can be held until the
ETNs maturity, at which time the issuer will pay a return linked to the performance of the
II-21
specific asset, index or rate (reference instrument) to which the ETN is linked minus certain
fees. Unlike regular bonds, ETNs do not make periodic interest payments, and principal is not
protected.
The value of an ETN may be influenced by, among other things, time to maturity, level of supply and
demand for the ETN, volatility and lack of liquidity in underlying markets, changes in the
applicable interest rates, the performance of the reference instrument, changes in the issuers
credit rating and economic, legal, political or geographic events that affect the reference
instrument. An ETN that is tied to a reference instrument may not replicate the performance of the
reference instrument. ETNs also incur certain expenses not incurred by their applicable reference
instrument. Some ETNs that use leverage can, at times, be relatively illiquid and, thus, they may
be difficult to purchase or sell at a fair price. Levered ETNs are subject to the same risk as
other instruments that use leverage in any form. While leverage allows for greater potential
return, the potential for loss is also greater. Finally, additional losses may be incurred if the
investment loses value because, in addition to the money lost on the investment, the loan still
needs to be repaid.
Because the return on the ETN is dependent on the issuers ability or willingness to meet its
obligations, the value of the ETN may change due to a change in the issuers credit rating, despite
no change in the underlying reference instrument. The market value of ETN shares may differ from
the value of the reference instrument. This difference in price may be due to the fact that the
supply and demand in the market for ETN shares at any point in time is not always identical to the
supply and demand in the market for the assets underlying the reference instrument that the ETN
seeks to track.
There may be restrictions on the Funds right to redeem its investment in an ETN, which are
generally meant to be held until maturity. The Funds decision to sell its ETN holdings may be
limited by the availability of a secondary market. An investor in an ETN could lose some or all of
the amount invested.
Foreign Investment Risks. Certain Funds may invest in foreign securities, including securities
from issuers located in emerging market countries. These securities may be denominated in U.S.
dollars or in a foreign currency. Investing in foreign securities involves risks not typically
associated with investing in securities of companies organized and operated in the United States
that can increase the chances that a Fund will lose money.
Securities issued by certain companies organized outside the United States may not be deemed to be
foreign securities (but rather deemed to be U.S. securities) if (i) the companys principal
operations are conducted from the U.S., (ii) the companys equity securities trade principally on a
U.S. stock exchange, (iii) the company does a substantial amount of business in the U.S. or (iv)
the issuer of securities is included in the Funds primary U.S. benchmark index.
In addition to equity securities, foreign investments of the Funds may include: (a) debt
obligations issued or guaranteed by foreign sovereign governments or their agencies, authorities,
instrumentalities or political subdivisions, including a foreign state, province or municipality;
(b) debt obligations of supranational organizations; (c) debt obligations of foreign banks and bank
holding companies; (d) debt obligations of domestic banks and corporations issued in foreign
currencies; (e) debt obligations denominated in the Euro; and (f) foreign corporate debt securities
and commercial paper. Such securities may include loan participations and assignments, convertible
securities and zero-coupon securities.
Dividends or interest on, or proceeds from the sale of, foreign securities may be subject to
foreign withholding taxes.
Foreign Market Risk. Funds that may invest in foreign securities offer the potential for more
diversification than a Fund that invests only in the United States because securities traded on
foreign markets have often (though not always) performed differently from securities traded in the
United States. However, such investments often involve risks not present in U.S. investments that
can increase the chances that a Fund will lose money. In particular, a Fund is subject to the risk
that, because there are generally fewer investors on foreign exchanges and a smaller number of
shares traded each day, it may be difficult for the Fund to buy and sell securities on those
exchanges. In addition, prices of foreign securities may fluctuate more than prices of securities
traded in the United States. Investments in foreign markets may also be adversely affected by
governmental actions such as the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign investing in their
capital markets or in certain industries. Any of these actions could severely affect security
prices, impair a Funds ability to purchase or sell foreign securities or transfer the Funds
assets or income back into the United
II-22
States, or otherwise adversely affect a Funds operations. Other potential foreign market risks
include exchange controls, difficulties in pricing securities, defaults on foreign government
securities, difficulties in enforcing favorable legal judgments in foreign courts, and political
and social conditions, such as diplomatic relations, confiscatory taxation, expropriation,
limitation on the removal of funds or assets, or imposition of (or change in) exchange control
regulations. Legal remedies available to investors in certain foreign countries may be less
extensive than those available to investors in the United States or other foreign countries. In
addition, changes in government administrations or economic or monetary policies in the U.S. or
abroad could result in appreciation or depreciation of portfolio securities and could favorably or
adversely affect a Funds operations.
Foreign Economy Risk. The economies of certain foreign markets often do not compare favorably with
that of the United States with respect to such issues as growth of gross national product,
reinvestment of capital, resources, and balance of payments position. Certain such economies may
rely heavily on particular industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country or countries,
changes in international trading patterns, trade barriers, and other protectionist or retaliatory
measures.
Currency Risk and Exchange Risk. Because foreign securities generally are denominated and pay
dividends or interest in foreign currencies, the value of a Fund that invests in foreign securities
as measured in U.S. dollars will be affected favorably or unfavorably by changes in exchange rates.
Generally, when the U.S. dollar rises in value against a foreign currency, a security denominated
in that currency loses value because the currency is worth fewer U.S. dollars. Conversely, when
the U.S. dollar decreases in value against a foreign currency, a security denominated in that
currency gains value because the currency is worth more U.S. dollars. This risk, generally known
as currency risk, means that a stronger U.S. dollar will reduce returns for U.S. investors while
a weak U.S. dollar will increase those returns.
Governmental Supervision and Regulation/Accounting Standards. Many foreign governments supervise
and regulate stock exchanges, brokers and the sale of securities less than does the United States.
Some countries may not have laws to protect investors comparable to the U.S. securities laws. For
example, some foreign countries may have no laws or rules against insider trading. Insider trading
occurs when a person buys or sells a companys securities based on nonpublic information about that
company. Accounting standards in other countries are not necessarily the same as in the United
States. If the accounting standards in another country do not require as much detail as U.S.
accounting standards, it may be harder for Fund management to completely and accurately determine a
companys financial condition. In addition, the U.S. Government has from time to time in the past
imposed restrictions, through penalties and otherwise, on foreign investments by U.S. investors
such as the Fund. If such restrictions should be reinstituted, it might become necessary for the
Fund to invest all or substantially all of its assets in U.S. securities. Also, brokerage
commissions and other costs of buying or selling securities often are higher in foreign countries
than they are in the United States. This reduces the amount the Fund can earn on its investments.
Certain Risks of Holding Fund Assets Outside the United States. A Fund generally holds its foreign
securities and cash in foreign banks and securities depositories. Some foreign banks and securities
depositories may be recently organized or new to the foreign custody business. In addition, there
may be limited or no regulatory oversight over their operations. Also, the laws of certain
countries may put limits on a Funds ability to recover its assets if a foreign bank or depository
or issuer of a security or any of their agents goes bankrupt. In addition, it is often more
expensive for a Fund to buy, sell and hold securities in certain foreign markets than in the United
States. The increased expense of investing in foreign markets reduces the amount a Fund can earn on
its investments and typically results in a higher operating expense ratio for the Fund as compared
to investment companies that invest only in the United States.
Publicly Available Information. In general, less information is publicly available with respect to
foreign issuers than is available with respect to U.S. companies. Most foreign companies are also
not subject to the uniform accounting and financial reporting requirements applicable to issuers in
the United States. While the volume of transactions effected on foreign stock exchanges has
increased in recent years, it remains appreciably below that of the New York Stock Exchange.
Accordingly, a Funds foreign investments may be less liquid and their prices may be more volatile
than comparable investments in securities in U.S. companies. In addition, there is generally less
government supervision and regulation of securities exchanges, brokers and issuers in foreign
countries than in the United States.
II-23
Settlement Risk. Settlement and clearance procedures in certain foreign markets differ
significantly from those in the United States. Foreign settlement procedures and trade regulations
also may involve certain risks (such as delays in payment for or delivery of securities) not
typically generated by the settlement of U.S. investments. Communications between the United States
and emerging market countries may be unreliable, increasing the risk of delayed settlements or
losses of security certificates in markets that still rely on physical settlement. Settlements in
certain foreign countries at times have not kept pace with the number of securities transactions;
these problems may make it difficult for a Fund to carry out transactions. If a Fund cannot settle
or is delayed in settling a purchase of securities, it may miss attractive investment opportunities
and certain of its assets may be uninvested with no return earned thereon for some period. If a
Fund cannot settle or is delayed in settling a sale of securities, it may lose money if the value
of the security then declines or, if it has contracted to sell the security to another party, the
Fund could be liable to that party for any losses incurred.
Funding Agreements. Certain Funds may invest in Guaranteed Investment Contracts (GICs) and
similar funding agreements. In connection with these investments, a Fund makes cash contributions
to a deposit fund of an insurance companys general account. The insurance company then credits to
the Fund on a monthly basis guaranteed interest, which is based on an index (such as LIBOR). The
funding agreements provide that this guaranteed interest will not be less than a certain minimum
rate. The purchase price paid for a funding agreement becomes part of the general assets of the
insurance company, and the contract is paid from the general assets of the insurance company.
Generally, funding agreements are not assignable or transferable without the permission of the
issuing insurance companies, and an active secondary market in some funding agreements does not
currently exist.
Guarantees. A Fund may purchase securities which contain guarantees issued by an entity separate
from the issuer of the security. Generally, the guarantor of a security (often an affiliate of the
issuer) will fulfill an issuers payment obligations under a security if the issuer is unable to do
so.
Illiquid or Restricted Securities. Each Fund may invest up to 15% of its net assets in securities
that lack an established secondary trading market or otherwise are considered illiquid. Liquidity
of a security relates to the ability to dispose easily of the security and the price to be obtained
upon disposition of the security, which may be less than would be obtained for a comparable more
liquid security. Illiquid securities may trade at a discount from comparable, more liquid
investments. Investment of a Funds assets in illiquid securities may restrict the ability of the
Fund to dispose of its investments in a timely fashion and for a fair price as well as its ability
to take advantage of market opportunities. The risks associated with illiquidity will be
particularly acute where a Funds operations require cash, such as when the Fund redeems shares or
pays dividends, and could result in the Fund borrowing to meet short term cash requirements or
incurring capital losses on the sale of illiquid investments.
A Fund may invest in securities that are not registered under the Securities Act (restricted
securities). Restricted securities may be sold in private placement transactions between issuers
and their purchasers and may be neither listed on an exchange nor traded in other established
markets. In many cases, privately placed securities may not be freely transferable under the laws
of the applicable jurisdiction or due to contractual restrictions on resale. As a result of the
absence of a public trading market, privately placed securities may be less liquid and more
difficult to value than publicly traded securities. To the extent that privately placed securities
may be resold in privately negotiated transactions, the prices realized from the sales, due to
illiquidity, could be less than those originally paid by the Fund or less than their fair market
value. In addition, issuers whose securities are not publicly traded may not be subject to the
disclosure and other investor protection requirements that may be applicable if their securities
were publicly traded. If any privately placed securities held by a Fund are required to be
registered under the securities laws of one or more jurisdictions before being resold, the Fund may
be required to bear the expenses of registration. Certain of the Funds investments in private
placements may consist of direct investments and may include investments in smaller, less seasoned
issuers, which may involve greater risks. These issuers may have limited product lines, markets or
financial resources, or they may be dependent on a limited management group. In making investments
in such securities, a Fund may obtain access to material nonpublic information, which may restrict
the Funds ability to conduct portfolio transactions in such securities.
Some of these securities are new and complex, and trade only among institutions; the markets for
these securities are still developing, and may not function as efficiently as established markets.
Owning a large percentage of restricted or illiquid securities could hamper the Funds ability to
raise cash to meet redemptions. Also, because there may not be an established market price for
these securities, the Fund may have to estimate their value, which means that their valuation (and,
to a much smaller extent, the valuation of the Fund) may have a subjective element. Transactions
in
II-24
restricted or illiquid securities may entail registration expense and other transaction costs that
are higher than those for transactions in unrestricted or liquid securities. Where registration is
required for restricted or illiquid securities a considerable time period may elapse between the
time the Fund decides to sell the security and the time it is actually permitted to sell the
security under an effective registration statement. If during such period, adverse market
conditions were to develop, the Fund might obtain less favorable pricing terms that when it decided
to sell the security.
Inflation-Indexed Bonds. Certain Funds may invest in inflation-indexed bonds, which are fixed
income securities or other instruments whose principal value is periodically adjusted according to
the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a
structure that accrues inflation into the principal value of the bond. Most other issuers pay out
the Consumer Price Index (CPI) accruals as part of a semi-annual coupon.
Inflation-indexed securities issued by the U.S. Treasury have maturities of five, ten or thirty
years, although it is possible that securities with other maturities will be issued in the future.
The U.S. Treasury securities pay interest on a semi-annual basis, equal to a fixed percentage of
the inflation-adjusted principal amount. For example, if a Fund purchased an inflation-indexed bond
with a par value of $1,000 and a 3% real rate of return coupon (payable 1.5% semi-annually), and
inflation over the first six months was 1%, the mid-year par value of the bond would be $1,010 and
the first semi-annual interest payment would be $15.15 ($1,010 times 1.5%). If inflation during the
second half of the year resulted in the whole years inflation equaling 3%, the end-of-year par
value of the bond would be $1,030 and the second semi-annual interest payment would be $15.45
($1,030 times 1.5%).
If the periodic adjustment rate measuring inflation falls, the principal value of inflation-indexed
bonds will be adjusted downward, and, consequently, the interest payable on these securities
(calculated with respect to a smaller principal amount) will be reduced. Repayment of the original
bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury
inflation-indexed bonds, even during a period of deflation. However, the current market value of
the bonds is not guaranteed, and will fluctuate. Certain Funds may also invest in other inflation
related bonds which may or may not provide a similar guarantee. If a guarantee of principal is not
provided, the adjusted principal value of the bond repaid at maturity may be less than the original
principal. In addition, if the Fund purchases inflation-indexed bonds offered by foreign issuers,
the rate of inflation measured by the foreign inflation index may not be correlated to the rate of
inflation in the United States.
The value of inflation-indexed bonds is expected to change in response to changes in real interest
rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates
and the rate of inflation. Therefore, if inflation were to rise at a faster rate than nominal
interest rates, real interest rates might decline, leading to an increase in value of
inflation-indexed bonds. In contrast, if nominal interest rates increased at a faster rate than
inflation, real interest rates might rise, leading to a decrease in value of inflation-indexed
bonds. There can be no assurance, however, that the value of inflation-indexed bonds will be
directly correlated to changes in interest rates.
While these securities are expected to be protected from long-term inflationary trends, short-term
increases in inflation may lead to a decline in value. If interest rates rise due to reasons other
than inflation (for example, due to changes in currency exchange rates), investors in these
securities may not be protected to the extent that the increase is not reflected in the bonds
inflation measure.
In general, the measure used to determine the periodic adjustment of U.S. inflation-indexed bonds
is the Consumer Price Index for Urban Consumers (CPI-U), which is calculated monthly by the U.S.
Bureau of Labor Statistics. The CPI-U is a measurement of changes in the cost of living, made up of
components such as housing, food, transportation and energy. Inflation-indexed bonds issued by a
foreign government are generally adjusted to reflect a comparable inflation index, calculated by
that government. There can be no assurance that the CPI-U or any foreign inflation index will
accurately measure the real rate of inflation in the prices of goods and services. Moreover, there
can be no assurance that the rate of inflation in a foreign country will be correlated to the rate
of inflation in the United States.
Any increase in the principal amount of an inflation-indexed bond will be considered taxable
ordinary income, even though investors do not receive their principal until maturity.
II-25
Inflation Risk. Like all mutual funds, the Funds are subject to inflation risk. Inflation risk is
the risk that the present value of assets or income from investments will be less in the future as
inflation decreases the value of money. As inflation increases, the present value of a Funds
assets can decline as can the value of a Funds distributions.
Information Concerning the Indices. Standard & Poors® 500 Index (S&P 500).
Standard & Poors®, S&P®, S&P
500®, Standard & Poors 500, and 500 are trademarks of The McGraw-Hill
Companies, Inc. and have been licensed for use by the Index Funds and the Quantitative Master
Series LLC (QMS LLC ). The S&P 500 Index Fund and the Master S&P 500 Index Series of QMS LLC are
not sponsored, endorsed, sold or promoted by S&P, a division of The McGraw Hill Companies, Inc. S&P
makes no representation regarding the advisability of investing in the Fund or the Series. S&P
makes no representation or warranty, express or implied, to the owners of shares of the Fund or the
Series or any member of the public regarding the advisability of investing in securities generally
or in the Fund or the Series particularly or the ability of the S&P 500 to track general stock
market performance. S&Ps only relationship to the Fund and the Series is the licensing of certain
trademarks and trade names of S&P and of the S&P 500 which is determined, composed and calculated
by S&P without regard to the Fund and the Series. S&P has no obligation to take the needs of the
Fund and the Series or the owners of shares of the Fund and the Series into consideration in
determining, composing or calculating the S&P 500. S&P is not responsible for and has not
participated in the determination of the prices and amount of the Fund and the Series or the timing
of the issuance or sale of shares of the Fund and the Series or in the determination or calculation
of the equation by which the Fund and the Series is to be converted into cash. S&P has no
obligation or liability in connection with the administration, marketing or trading of the Fund and
the Series.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500 Index or any data
included therein, and S&P shall have no liability for any errors, omissions, or interruptions
therein. S&P makes no warranty, express or implied, as to results to be obtained by the Fund, the
Series, owners of shares of the Fund and the Series, or any other person or entity from the use of
the S&P 500 Index or any data included therein. S&P makes no express or implied warranties and
expressly disclaims all warranties of merchantability or fitness for a particular purpose or use
with respect to the S&P 500 Index or any data included therein. Without limiting any of the
foregoing, in no event shall S&P have any liability for any special, punitive, indirect, or
consequential damages (including lost profits), even if notified of the possibility of such
damages.
Russell® 2000 Index (Russell 2000). The Small Cap Index Fund and the Master
Small Cap Index Series of QMS LLC are not promoted, sponsored or endorsed by, nor in any way
affiliated with Frank Russell Company. Frank Russell Company is not responsible for and has not
reviewed the Small Cap Index Fund or the Master Small Cap Index Series nor any associated
literature or publications and Frank Russell Company makes no representation or warranty, express
or implied, as to their accuracy, or completeness, or otherwise.
Frank Russell Company reserves the right, at any time and without notice, to alter, amend,
terminate or in any way change the Russell 2000. Frank Russell Company has no obligation to take
the needs of any particular fund or its participants or any other product or person into
consideration in determining, composing or calculating the Index.
Frank Russell Companys publication of the Russell 2000 in no way suggests or implies an opinion by
Frank Russell Company as to the attractiveness or appropriateness of investment in any or all
securities upon which the Russell 2000 is based. Frank Russell Company makes no representation,
warranty, or guarantee as to the accuracy, completeness, reliability, or otherwise of the Russell
2000 or any data included in the Russell 2000. Frank Russell Company makes no representation or
warranty regarding the use, or the results of use, of the Russell 2000 or any data included
therein, or any security (or combination thereof) comprising the Russell 2000. Frank Russell
Company makes no other express or implied warranty, and expressly disclaims any warranty, of any
kind, including, without means of limitation, any warranty of merchantability or fitness for a
particular purpose with respect to the Russell 2000 or any data or any security (or combination
thereof) included therein.
MSCI Europe, Australasia and Far East (Capitalization Weighted) Index (EAFE Index). The EAFE
Index is the exclusive property of MSCI, Inc. (MSCI). The EAFE Index is a service mark of Morgan
Stanley Group Inc. and has been licensed for use by the Manager and its affiliates.
The International Index Fund and the Master International Index Series are not sponsored, endorsed,
sold or promoted by MSCI. MSCI makes no representation or warranty, express or implied, to the
owners of shares of the International Index Fund and the International Index Series or any member
of the public regarding the advisability of investing in securities generally or in the
International Index Fund and the Master International Index Series particularly or the ability of
the EAFE Index to track general stock market performance. MSCI is the licensor of
II-26
certain trademarks, service marks and trade names of MSCI and of the EAFE Index. MSCI has no
obligation to take the needs of the International Index Fund and the Master International Index
Series or the owners of shares of the International Index Fund and the Master International Index
Series into consideration in determining, composing or calculating the EAFE Index. MSCI is not
responsible for and has not participated in the determination of the timing of, prices at, or
quantities of shares of the International Index Fund and the Master International Index Series to
be issued or in the determination or calculation of the equation by which the shares of the
International Index Fund and the Master International Index Series are redeemable for cash. MSCI
has no obligation or liability to owners of shares of the International Index Fund and the Master
International Index Series in connection with the administration, marketing or trading of the
International Index Fund and the Master International Index Series.
Although MSCI shall obtain information for inclusion in or for use in the calculation of the EAFE
Index from sources which MSCI considers reliable, MSCI does not guarantee the accuracy and/or the
completeness of the EAFE Index or any data included therein. MSCI makes no warranty, express or
implied, as to results to be obtained by licensee, licensees customers and counterparties, owners
of shares of the International Index Fund and the Master International Index Series, or any other
person or entity from the use of the EAFE Index or any data included therein in connection with the
rights licensed hereunder or for any other use. MSCI makes no express or implied warranties, and
hereby expressly disclaims all warranties of merchantability or fitness for a particular purpose
with respect to the EAFE Index or any data included therein. Without limiting any of the foregoing,
in no event shall MSCI have any liability for any direct, indirect, special, punitive,
consequential or any other damages (including lost profits) even if notified of the possibility of
such damages.
Investment Grade Debt Obligations. Certain Funds may invest in investment grade securities, which
are securities rated in the four highest rating categories of an NRSRO or deemed to be of
equivalent quality by a Funds Manager. Certain Funds may invest in debt securities rated Aaa by
Moodys or AAA by S&P. It should be noted that debt obligations rated in the lowest of the top four
ratings (i.e., Baa by Moodys or BBB by S&P) are considered to have some speculative
characteristics and are more sensitive to economic change than higher rated securities. If an
investment grade security of a Fund is subsequently downgraded below investment grade, the Funds
Manager will consider such an event in determining whether the Fund should continue to hold the
security. Subject to its investment strategies, there is no limit on the amount of such downgraded
securities a Fund may hold, although under normal market conditions the manager do not expect to
hold these securities to a material extent.
See Appendix A to this Statement of Additional Information for a description of applicable
securities ratings.
Investment in Emerging Markets. Certain Funds may invest in the securities of issuers domiciled in
various countries with emerging capital markets. Specifically, a country with an emerging capital
market is any country that the World Bank, the International Finance Corporation, the United
Nations or its authorities has determined to have a low or middle income economy. Countries with
emerging markets can be found in regions such as Asia, Latin America, Eastern Europe and Africa.
Investments in the securities of issuers domiciled in countries with emerging capital markets
involve certain additional risks that do not generally apply to investments in securities of
issuers in more developed capital markets, such as (i) low or non-existent trading volume,
resulting in a lack of liquidity and increased volatility in prices for such securities, as
compared to securities of comparable issuers in more developed capital markets; (ii) uncertain
national policies and social, political and economic instability, increasing the potential for
expropriation of assets, confiscatory taxation, high rates of inflation or unfavorable diplomatic
developments; (iii) possible fluctuations in exchange rates, differing legal systems and the
existence or possible imposition of exchange controls, custodial restrictions or other foreign or
U.S. governmental laws or restrictions applicable to such investments; (iv) national policies that
may limit a Funds investment opportunities such as restrictions on investment in issuers or
industries deemed sensitive to national interests; and (v) the lack or relatively early development
of legal structures governing private and foreign investments and private property. In addition to
withholding taxes on investment income, some countries with emerging markets may impose
differential capital gains taxes on foreign investors.
Political and economic structures in emerging market countries may be undergoing significant
evolution and rapid development, and these countries may lack the social, political and economic
stability characteristic of more developed countries. In such a dynamic environment, there can be
no assurance that any or all of these capital markets will continue to present viable investment
opportunities for a Fund. In the past, governments of such nations have expropriated substantial
amounts of private property, and most claims of the property owners have
II-27
never been fully settled.
There is no assurance that such expropriations will not reoccur. In such an event, it is
possible that a Fund could lose the entire value of its investments in the affected market. As a
result the risks described above, including the risks of nationalization or expropriation of
assets, may be heightened. In addition, unanticipated political or social developments may affect
the value of investments in these countries and the availability to a Fund of additional
investments. The small size and inexperience of the securities markets in certain of these
countries and the limited volume of trading in securities in these countries may make investments
in the countries illiquid and more volatile than investments in Japan or most Western European
countries.
Also, there may be less publicly available information about issuers in emerging markets than would
be available about issuers in more developed capital markets, and such issuers may not be subject
to accounting, auditing and financial reporting standards and requirements comparable to those to
which U.S. companies are subject. In certain countries with emerging capital markets, reporting
standards vary widely. As a result, traditional investment measurements used in the United States,
such as price/earnings ratios, may not be applicable. Emerging market securities may be
substantially less liquid and more volatile than those of mature markets, and company shares may be
held by a limited number of persons. This may adversely affect the timing and pricing of the Funds
acquisition or disposal of securities.
Practices in relation to settlement of securities transactions in emerging markets involve higher
risks than those in developed markets, in part because a Fund will need to use brokers and
counterparties that are less well capitalized, and custody and registration of assets in some
countries may be unreliable. The possibility of fraud, negligence, undue influence being exerted by
the issuer or refusal to recognize ownership exists in some emerging markets, and, along with other
factors, could result in ownership registration being completely lost. A Fund would absorb any loss
resulting from such registration problems and may have no successful claim for compensation.
Investment in non-dollar denominated securities including securities from issuers located in
emerging market countries may be on either a currency hedged or unhedged basis, and the Funds may
hold from time to time various foreign currencies pending investment or conversion into U.S.
dollars. Some of these instruments may have the characteristics of futures contracts. In
addition, certain Funds may engage in foreign currency exchange transactions to seek to protect
against changes in the level of future exchange rates which would adversely affect the Funds
performance. These investments and transactions involving foreign securities, currencies, options
(including options that relate to foreign currencies), futures, hedging and cross-hedging are
described below and under Interest Rate Transactions and Currency Swaps, Foreign Currency
Transactions and Options and Futures Contracts.
II-28
Risks of Investing in Asia-Pacific Countries. In addition to the risks of foreign investing and the
risks of investing in developing markets, the developing market Asia-Pacific countries in which a
Fund may invest are subject to certain additional or specific risks. Certain Funds may make
substantial investments in Asia-Pacific countries. In many of these markets, there is a high
concentration of market capitalization and trading volume in a small number of issuers representing
a limited number of industries, as well as a high concentration of investors and financial
intermediaries. Many of these markets also may be affected by developments with respect to more
established markets in the region such as in Japan and Hong Kong. Brokers in developing market
Asia-Pacific countries typically are fewer in number and less well capitalized than brokers in the
United States. These factors, combined with the U.S. regulatory requirements for open-end
investment companies and the restrictions on foreign investment discussed below, result in
potentially fewer investment opportunities for a Fund and may have an adverse impact on the
investment performance of the Fund.
Many of the developing market Asia-Pacific countries may be subject to a greater degree of
economic, political and social instability than is the case in the United States and Western
European countries. Such instability may result from, among other things: (i) authoritarian
governments or military involvement in political and economic decision-making, including changes in
government through extra-constitutional means; (ii) popular unrest associated with demands for
improved political, economic and social conditions; (iii) internal insurgencies; (iv) hostile
relations with neighbouring countries; and (v) ethnic, religious and racial disaffection. In
addition, the governments of many of such countries, such as Indonesia, have a substantial role in
regulating and supervising the economy. Another risk common to most such countries is that the
economy is heavily export oriented and, accordingly, is dependent upon international trade. The
existence of overburdened infrastructure and obsolete financial systems also presents risks in
certain countries, as do environmental problems. Certain economies also depend to a significant
degree upon exports of primary commodities and, therefore, are vulnerable to changes in commodity
prices that, in turn, may be affected by a variety of factors.
The legal systems in certain developing market Asia-Pacific countries also may have an adverse
impact on the Fund. For example, while the potential liability of a shareholder in a U.S.
corporation with respect to acts of the corporation is generally limited to the amount of the
shareholders investment, the notion of limited liability is less clear in certain emerging market
Asia-Pacific countries. Similarly, the rights of investors in developing market Asia-Pacific
companies may be more limited than those of shareholders of U.S. corporations. It may be difficult
or impossible to obtain and/or enforce a judgment in a developing market Asia-Pacific country.
Governments of many developing market Asia-Pacific countries have exercised and continue to
exercise substantial influence over many aspects of the private sector. In certain cases, the
government owns or controls many companies, including the largest in the country. Accordingly,
government actions in the future could have a significant effect on economic conditions in
developing market Asia-Pacific countries, which could affect private sector companies and a Fund
itself, as well as the value of securities in the Funds portfolio. In addition, economic
statistics of developing market Asia-Pacific countries may be less reliable than economic
statistics of more developed nations.
In addition to the relative lack of publicly available information about developing market
Asia-Pacific issuers and the possibility that such issuers may not be subject to the same
accounting, auditing and financial reporting standards as U.S. companies, inflation accounting
rules in some developing market Asia-Pacific countries require companies that keep accounting
records in the local currency, for both tax and accounting purposes, to restate certain assets and
liabilities on the companys balance sheet in order to express items in terms of currency of
constant purchasing power. Inflation accounting may indirectly generate losses or profits for
certain developing market Asia-Pacific companies.
II-29
Satisfactory custodial services for investment securities may not be available in some developing
Asia-Pacific countries, which may result in the Fund incurring additional costs and delays in
providing transportation and custody services for such securities outside such countries.
Certain developing Asia-Pacific countries, such as the Philippines, India and Turkey, are
especially large debtors to commercial banks and foreign governments.
On March 11, 2011, a powerful earthquake and resulting tsunami struck northeastern Japan causing
major damage along the coast, including damage to nuclear power plants in the region. This
disaster, and the resulting damage, could have a severe and negative impact on a Funds investment
portfolio and, in the longer term, could impair the ability of issuers in which the Fund invests to
conduct their businesses in the manner normally conducted.
Fund management may determine that, notwithstanding otherwise favorable investment criteria, it may
not be practicable or appropriate to invest in a particular developing Asia-Pacific country. A Fund
may invest in countries in which foreign investors, including management of the Fund, have had no
or limited prior experience.
Restrictions on Foreign Investments in Asia-Pacific Countries. Some developing Asia-Pacific
countries prohibit or impose substantial restrictions on investments in their capital markets,
particularly their equity markets, by foreign entities such as a Fund. As illustrations, certain
countries may require governmental approval prior to investments by foreign persons or limit the
amount of investment by foreign persons in a particular company or limit the investment by foreign
persons to only a specific class of securities of a company which may have less advantageous terms
(including price and shareholder rights) than securities of the company available for purchase by
nationals. There can be no assurance that a Fund will be able to obtain required governmental
approvals in a timely manner. In addition, changes to restrictions on foreign ownership of
securities subsequent to a Funds purchase of such securities may have an adverse effect on the
value of such shares. Certain countries may restrict investment opportunities in issuers or
industries deemed important to national interests.
The manner in which foreign investors may invest in companies in certain developing Asia-Pacific
countries, as well as limitations on such investments, also may have an adverse impact on the
operations of a Fund. For example, a Fund may be required in certain of such countries to invest
initially through a local broker or other entity and then have the shares purchased re-registered
in the name of the Fund. Re-registration may in some instances not be able to occur on a timely
basis, resulting in a delay during which a Fund may be denied certain of its rights as an investor,
including rights as to dividends or to be made aware of certain corporate actions. There also may
be instances where a Fund places a purchase order but is subsequently informed, at the time of
re-registration, that the permissible allocation of the investment to foreign investors has been
filled, depriving the Fund of the ability to make its desired investment at that time.
Substantial limitations may exist in certain countries with respect to a Funds ability to
repatriate investment income, capital or the proceeds of sales of securities by foreign investors.
A Fund could be adversely affected by delays in, or a refusal to grant, any required governmental
approval for repatriation of capital, as well as by the application to the Fund of any restrictions
on investments. It is possible that certain countries may impose currency controls or other
restrictions relating to their currencies or to securities of issuers in those countries. To the
extent that such restrictions have the effect of making certain investments illiquid, securities
may not be available for sale to meet redemptions. Depending on a variety of financial factors, the
percentage of a Funds portfolio subject to currency controls may increase. In the event other
countries impose similar controls, the portion of the Funds assets that may be used to meet
redemptions may be further decreased. Even where there is no outright restriction on repatriation
of capital, the mechanics of repatriation may affect certain aspects of the operations of a Fund
(for example, if funds may be withdrawn only in certain currencies and/or only at an exchange rate
established by the government).
In certain countries, banks or other financial institutions may be among the leading companies or
have actively traded securities available for investment. The Investment Company Act restricts a
Funds investments in any equity securities of an issuer that, in its most recent fiscal year,
derived more than 15% of its revenues from securities related activities, as defined by the rules
thereunder. These provisions may restrict a Funds investments in certain foreign banks and other
financial institutions.
II-30
Political and economic structures in emerging market countries may be undergoing significant
evolution and rapid development, and these countries may lack the social, political and economic
stability characteristic of more developed countries. Some of these countries may have in the past
failed to recognize private property rights and have at times nationalized or expropriated the
assets of private companies. As a result the risks described above, including the risks of
nationalization or expropriation of assets, may be heightened. In addition, unanticipated
political or social developments may affect the value of investments in these countries and the
availability to a Fund of additional investments in emerging market countries. The small size and
inexperience of the securities markets in certain of these countries and the limited volume of
trading in securities in these countries may make investments in the countries illiquid and more
volatile than investments in Japan or most Western European countries. There may be little
financial or accounting information available with respect to issuers located in certain emerging
market countries, and it may be difficult to assess the value or prospects of an investment in such
issuers.
The expense ratios of the Funds investing significantly in foreign securities can be expected to be
higher than those of Funds investing primarily in domestic securities. The costs attributable to
investing abroad are usually higher for several reasons, such as the higher cost of custody of
foreign securities, higher commissions paid on comparable transactions on foreign markets and
additional costs arising from delays in settlements of transactions involving foreign securities.
Risks of Investments in Russia. A Fund may invest a portion of its assets in securities issued by
companies located in Russia. Because of the recent formation of the Russian securities markets as
well as the underdeveloped state of Russias banking system, settlement, clearing and registration
of securities transactions are subject to significant risks. Ownership of shares is defined
according to entries in the companys share register and normally evidenced by extracts from the
register. These extracts are not negotiable instruments and are not effective evidence of
securities ownership. The registrars are not necessarily subject to effective state supervision nor
are they licensed with any governmental entity. Also, there is no central registration system for
shareholders and it is possible for a Fund to lose its registration through fraud, negligence or
mere oversight. While a Fund will endeavor to ensure that its interest continues to be
appropriately recorded either itself or through a custodian or other agent inspecting the share
register and by obtaining extracts of share registers through regular confirmations, these extracts
have no legal enforceability and it is possible that subsequent illegal amendment or other
fraudulent act may deprive the Fund of its ownership rights or improperly dilute its interest. In
addition, while applicable Russian regulations impose liability on registrars for losses resulting
from their errors, it may be difficult for a Fund to enforce any rights it may have against the
registrar or issuer of the securities in the event of loss of share registration. While a Fund
intends to invest directly in Russian companies that use an independent registrar, there can be no
assurance that such investments will not result in a loss to the Fund.
Brady Bonds. A Funds emerging market debt securities may include emerging market governmental debt
obligations commonly referred to as Brady Bonds. Brady Bonds are securities created through the
exchange of existing commercial bank loans to sovereign entities for new obligations in connection
with debt restructurings under a debt restructuring plan introduced by former U.S. Secretary of the
Treasury, Nicholas F. Brady (the Brady Plan). Brady Plan debt restructurings have been
implemented in a number of countries, including: Argentina, Bolivia, Brazil, Bulgaria, Costa Rica,
the Dominican Republic, Ecuador, Jordan, Mexico, Niger, Nigeria, Panama, Peru, the Philippines,
Poland, Uruguay and Venezuela.
Brady Bonds may be collateralized or uncollateralized, are issued in various currencies (primarily
the U.S. dollar) and are actively traded in the over-the-counter secondary market. Brady Bonds are
not considered to be U.S. Government securities. U.S. dollar-denominated, collateralized Brady
Bonds, which may be fixed rate par bonds or floating rate discount bonds, are generally
collateralized in full as to principal by U.S. Treasury zero-coupon bonds having the same maturity
as the Brady Bonds. Interest payments on these Brady Bonds generally are collateralized on a
one-year or longer rolling-forward basis by cash or securities in an amount that, in the case of
fixed rate bonds, is equal to at least one year of interest payments or, in the case of floating
rate bonds, initially is equal to at least one years interest payments based on the applicable
interest rate at that time and is adjusted at regular intervals thereafter. Certain Brady Bonds are
entitled to value recovery payments in certain circumstances, which in effect constitute
supplemental interest payments but generally are not collateralized. For example, some Mexican and
Venezuelan Brady Bonds include attached value recovery options, which increase interest payments if
oil revenues rise. Brady Bonds are often viewed as having three or four valuation components: (i)
the collateralized repayment of principal at final maturity; (ii) the collateralized interest
payments; (iii) the uncollateralized interest payments; and (iv) any uncollateralized repayment of
principal at maturity (the uncollateralized amounts constitute the residual risk).
Brady Bonds involve various risk factors described above associated with investing in foreign
securities, including the history of defaults with respect to commercial bank loans by public and
private entities of countries issuing Brady Bonds. In light of the residual risk of Brady Bonds
and, among other factors, the history of defaults, investments in Brady Bonds are considered
speculative. There can be no assurance that Brady Bonds in which the Funds may invest will not be
subject to restructuring arrangements or to requests for new credit, which may cause the Funds to
suffer a loss of interest or principal on any of its holdings.
Investment in Other Investment Companies. Each Fund may, subject to applicable law, invest in other
investment companies (including investment companies managed by BlackRock and its affiliates),
including money market funds and exchange traded funds (ETFs), which are typically open-end funds
or unit investment trusts listed on a stock exchange. In accordance with the Investment Company
Act, a Fund may invest up to 10% of its total assets in securities of other investment companies
(measured at the time of such investment). In addition, under the Investment Company Act a Fund may
not acquire securities of an investment company if such acquisition would cause the Fund to own
more than 3% of the total outstanding voting stock of such investment company and a Fund may not
invest in another investment company if such investment would cause more than 5% of the value of
the Funds total assets to be invested in securities of such investment company. (These limits do
not restrict a Feeder Fund from investing all of its assets in shares of its Master Portfolio.) In
addition to the restrictions on investing in other investment companies discussed above, a Fund may
not invest in a registered closed-end investment company if such investment would cause the Fund
and other BlackRock-advised investment companies to own more than 10% of the total outstanding
voting stock of such closed-end investment company. Pursuant to the Investment Company Act (or
alternatively, pursuant to exemptive orders received from the Commission) these percentage
limitations do not apply to investments in affiliated money market funds, and under certain
circumstances, do not apply to investments in affiliated investment companies, including ETFs. In
addition, many third-party ETFs have obtained exemptive relief from the Commission to permit
unaffiliated funds (such as the Funds) to invest in their shares beyond the statutory limits,
subject to certain conditions and pursuant to contractual arrangements between the ETFs and the
investing funds. A Fund may rely on these exemptive orders in investing in ETFs. Further, under
certain circumstances a Fund may be able to rely on certain provisions of the Investment Company
Act to invest in
II-31
shares of unaffiliated investment companies beyond the statutory limits noted
above, but subject to certain other statutory restrictions.
As with other investments, investments in other investment companies are subject to market and
selection risk.
Shares of investment companies, such as closed-end fund investment companies, that trade on an
exchange may at times be acquired at market prices representing premiums to their net asset values.
In addition, investment companies held by a Fund that trade on an exchange could trade at a
discount from net asset value, and such discount could increase while the Fund holds the shares. If
the market price of shares of an exchange-traded investment company decreases below the price that
the Fund paid for the shares and the Fund were to sell its shares of such investment company at a
time when the market price is lower than the price at which it purchased the shares, the Fund would
experience a loss.
In addition, if a Fund acquires shares in investment companies, including affiliated investment
companies, shareholders would bear both their proportionate share of expenses in the Fund and,
indirectly, the expenses of such investment companies. Such expenses, both at the Fund level and
acquired investment company level, would include management and advisory fees, unless such fees
have been waived by BlackRock. Please see the relevant Funds prospectus to determine whether any
such management and advisory fees have been waived by BlackRock. Investments by a Fund in wholly
owned investment entities created under the laws of certain countries will not be deemed an
investment in other investment companies.
To the extent shares of a Fund are held by an affiliated fund, the ability of the Fund itself to
purchase other affiliated investment companies may be limited. In addition, a fund-of-funds (e.g.,
an investment company that seeks to meet its investment objective by investing significantly in
other investment companies) may be limited in its ability to purchase affiliated underlying funds
if such affiliated underlying funds themselves own shares of affiliated funds.
A number of publicly traded closed-end investment companies have been organized to facilitate
indirect foreign investment in developing countries, and certain of such countries, such as
Thailand, South Korea, Chile and Brazil, have specifically authorized such funds. There also are
investment opportunities in certain of such countries in pooled vehicles that resemble open-end
investment companies. The restrictions on investments in securities of investment companies set
forth above may limit opportunities for a Fund to invest indirectly in certain developing
countries.
Junk Bonds. Non-investment grade or high yield fixed income or convertible securities commonly
known to investors as junk bonds are debt securities that are rated below investment grade by the
major rating agencies or are unrated securities that Fund management believes are of comparable
quality. While generally providing greater income and opportunity for gain, non-investment grade
debt securities may be subject to greater risks than securities which have higher credit ratings,
including a high risk of default, and their yields will fluctuate over time. High yield securities
will generally be in the lower rating categories of recognized rating agencies (rated Ba or lower
by Moodys or BB or lower by S&P) or will be non-rated. The credit rating of a high yield
security does not necessarily address its market value risk, and ratings may from time to time
change, positively or negatively, to reflect developments regarding the issuers financial
condition. High yield securities are considered to be speculative with respect to the capacity of
the issuer to timely repay principal and pay interest or dividends in accordance with the terms of
the obligation and may have more credit risk than higher rated securities.
The major risks in junk bond investments include the following:
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Junk bonds may be issued by less creditworthy companies. These securities are
vulnerable to adverse changes in the issuers industry and to general economic conditions.
Issuers of junk bonds may be unable to meet their interest or principal payment obligations
because of an economic downturn, specific issuer developments or the unavailability of
additional financing. |
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The issuers of junk bonds may have a larger amount of outstanding debt
relative to their assets than issuers of investment grade bonds. If the issuer experiences
financial stress, it may be unable to meet its debt obligations. The issuers ability to
pay its debt obligations also may be lessened by specific issuer developments, or the
unavailability of additional financing. Issuers of high yield securities are often in the
growth stage of their development and/or involved in a reorganization or takeover. |
II-32
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Junk bonds are frequently ranked junior to claims by other creditors. If the
issuer cannot meet its obligations, the senior obligations are generally paid off before
the junior obligations, which will potentially limit a Funds ability to fully recover
principal or to receive interest payments when senior securities are in default. Thus,
investors in high yield securities have a lower degree of protection with respect to
principal and interest payments then do investors in higher rated securities. |
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Junk bonds frequently have redemption features that permit an issuer to
repurchase the security from a Fund before it matures. If an issuer redeems the junk bonds,
a Fund may have to invest the proceeds in bonds with lower yields and may lose income. |
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Prices of junk bonds are subject to extreme price fluctuations. Negative
economic developments may have a greater impact on the prices of junk bonds than on those
of other higher rated fixed income securities. |
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The secondary markets for high yield securities are not as liquid as the
secondary markets for higher rated securities. The secondary markets for high yield
securities are concentrated in relatively few market makers and participants in the markets
are mostly institutional investors, including insurance companies, banks, other financial
institutions and mutual funds. In addition, the trading volume for high yield securities
is generally lower than that for higher rated securities and the secondary markets could
contract under adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. Under certain economic and/or market
conditions, a Fund may have difficulty disposing of certain high yield securities due to
the limited number of investors in that sector of the market. An illiquid secondary market
may adversely affect the market price of the high yield security, which may result in
increased difficulty selling the particular issue and obtaining accurate market quotations
on the issue when valuing a Funds assets. Market quotations on high yield securities are
available only from a limited number of dealers, and such quotations may not be the actual
prices available for a purchase or sale. When the secondary market for high yield
securities becomes more illiquid, or in the absence of readily available market quotations
for such securities, the relative lack of reliable objective data makes it more difficult
to value a Funds securities, and judgment plays a more important role in determining such
valuations. |
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A Fund may incur expenses to the extent necessary to seek recovery upon
default or to negotiate new terms with a defaulting issuer. |
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The junk bond markets may react strongly to adverse news about an issuer or
the economy, or to the perception or expectation of adverse news, whether or not it is
based on fundamental analysis. Additionally, prices for high yield securities may be
affected by legislative and regulatory developments. These developments could adversely
affect a Funds net asset value and investment practices, the secondary market for high
yield securities, the financial condition of issuers of these securities and the value and
liquidity of outstanding high yield securities, especially in a thinly traded market. For
example, federal legislation requiring the divestiture by federally insured savings and
loan associations of their investments in high yield bonds and limiting the deductibility
of interest by certain corporate issuers of high yield bonds adversely affected the market
in the past. |
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The rating assigned by a rating agency evaluates the issuing agencys
assessment of the safety of a non-investment grade securitys principal and interest
payments, but does not address market value risk. Because such ratings of the ratings
agencies may not always reflect current conditions and events, in addition to using
recognized rating agencies and other sources, the sub-adviser performs its own analysis of
the issuers whose non-investment grade securities a Fund holds. Because of this, the
Funds performance may depend more on the sub-advisers own credit analysis than in the
case of mutual funds investing in higher-rated securities. |
In selecting non-investment grade securities, the adviser or sub-adviser considers factors such as
those relating to the creditworthiness of issuers, the ratings and performance of the securities,
the protections afforded the securities and the diversity of the Fund. The sub-adviser
continuously monitors the issuers of non-investment grade securities held by the Fund for their
ability to make required principal and interest payments, as well as in an effort to control the
liquidity of the Fund so that it can meet redemption requests. If a securitys rating is reduced
below the minimum credit rating that is permitted for a Fund, the Funds sub-adviser will consider
whether the Fund should continue to hold the security.
II-33
In the event that a Fund investing in high yield securities experiences an unexpected level of net
redemptions, the Fund could be forced to sell its holdings without regard to the investment merits,
thereby decreasing the assets upon which the Funds rate of return is based.
The costs attributable to investing in the junk bond markets are usually higher for several
reasons, such as higher investment research costs and higher commission costs.
Lease Obligations. A Fund may hold participation certificates in a lease, an installment purchase
contract, or a conditional sales contract (lease obligations).
The Manager will monitor the credit standing of each borrower and each entity providing credit
support and/or a put option relating to lease obligations. In determining whether a lease
obligation is liquid, the Manager will consider, among other factors, the following: (i) whether
the lease can be cancelled; (ii) the degree of assurance that assets represented by the lease could
be sold; (iii) the strength of the lessees general credit (e.g., its debt, administrative,
economic and financial characteristics); (iv) in the case of a municipal lease, the likelihood that
the municipality would discontinue appropriating funding for the leased property because the
property is no longer deemed essential to the operations of the municipality (e.g., the potential
for an event of nonappropriation); (v) legal recourse in the event of failure to appropriate;
(vi) whether the security is backed by a credit enhancement such as insurance; and (vii) any
limitations which are imposed on the lease obligors ability to utilize substitute property or
services other than those covered by the lease obligation.
Life Settlement Investments. A Fund may invest in life settlements, which are sales to third
parties, such as the Fund, of existing life insurance contracts for more than their cash surrender
value but less than the net benefits to be paid under the policies. When a Fund acquires such a
contract, it pays the policy premiums in return for the expected receipt of the net benefit as the
beneficiary under the policy. Investments in these contracts involve certain risks, including
liquidity risk, credit risk of the insurance company, and inaccurate estimations of life expectancy
of the insured individuals (viators). These policies are considered illiquid in that they are
bought and sold in a secondary market through life settlement agents. As such, a Funds investments
in life settlement contracts are subject to the Funds investment restriction relating to illiquid
securities. Also, in the event of a bankruptcy of the insurance carrier for a policy, the Fund may
receive reduced or no benefits under the contract. A Fund seeks to minimize credit risk by
investing in policies issued by a diverse range of highly-rated insurance carriers. Furthermore, a
Fund may encounter losses on its investments if there is an inaccurate estimation of the life
expectancies of viators. A Fund intends to reduce this life expectancy risk by investing only in
contracts where the life expectancy was reviewed by an experienced actuary, as well as by
diversifying its investments across viators of varying ages and medical profiles. In addition, it
is unclear whether the income from life settlements is qualifying income for purposes of the
Internal Revenue Service 90% gross income test a Fund must satisfy each year to qualify as a
regulated investment company (RIC). A Fund intends to monitor its investments to ensure that the
Fund remains qualified as a RIC.
Liquidity Management. As a temporary defensive measure, if its Manager determines that market
conditions warrant, certain Funds may invest without limitation in high quality money market
instruments. Certain Funds may also invest in high quality money market instruments pending
investment or to meet anticipated redemption requests. High quality money market instruments
include U.S. government obligations, U.S. government agency obligations, dollar denominated
obligations of foreign issuers, bank obligations, including U.S. subsidiaries and branches of
foreign banks, corporate obligations, commercial paper, repurchase agreements and obligations of
supranational organizations. Generally, such obligations will mature within one year from the date
of settlement, but may mature within two years from the date of settlement.
Master Limited Partnerships. Certain Funds may invest in publicly traded master limited
partnerships (MLPs) which are limited partnerships or limited liability companies taxable as
partnerships. MLPs may derive income and gains from the exploration, development, mining or
production, processing, refining, transportation (including pipelines transporting gas, oil, or
products thereof), or the marketing of any mineral or natural resources. MLPs generally have two
classes of owners, the general partner and limited partners. When investing in an MLP, a Fund
intends to purchase publicly traded common units issued to limited partners of the MLP. The general
partner is typically owned by a major energy company, an investment fund, the direct management of
the MLP or is an entity owned by one or more of such parties. The general partner may be structured
as a private or publicly traded corporation or other entity. The general partner typically controls
the operations and management of the MLP through an up to 2% equity interest in the MLP plus, in
many cases, ownership of common units and subordinated
II-34
units. Limited partners own the remainder of
the partnership, through ownership of common units, and have a limited role in the partnerships
operations and management.
MLPs are typically structured such that common units and general partner interests have first
priority to receive quarterly cash distributions up to an established minimum amount (minimum
quarterly distributions or MQD). Common and general partner interests also accrue arrearages in
distributions to the extent the MQD is not paid. Once common and general partner interests have
been paid, subordinated units receive distributions of up to the
MQD; however, subordinated units do not accrue arrearages. Distributable cash in excess of the MQD
paid to both common and subordinated units is distributed to both common and subordinated units
generally on a pro rata basis. The general partner is also eligible to receive incentive
distributions if the general partner operates the business in a manner which results in
distributions paid per common unit surpassing specified target levels. As the general partner
increases cash distributions to the limited partners, the general partner receives an increasingly
higher percentage of the incremental cash distributions. A common arrangement provides that the
general partner can reach a tier where it receives 50% of every incremental dollar paid to common
and subordinated unit holders. These incentive distributions encourage the general partner to
streamline costs, increase capital expenditures and acquire assets in order to increase the
partnerships cash flow and raise the quarterly cash distribution in order to reach higher tiers.
Such results benefit all security holders of the MLP.
MLP common units represent a limited partnership interest in the MLP. Common units are listed and
traded on U.S. securities exchanges, with their value fluctuating predominantly based on prevailing
market conditions and the success of the MLP. Certain Funds intend to purchase common units in
market transactions. Unlike owners of common stock of a corporation, owners of common units have
limited voting rights and have no ability annually to elect directors. In the event of liquidation,
common units have preference over subordinated units, but not over debt or preferred units, to the
remaining assets of the MLP.
Merger Transaction Risk. In replicating its target index, a Fund may buy stock of the target
company in an announced merger transaction prior to the consummation of such transaction. In that
circumstance, a Fund would expect to receive an amount (whether in cash, stock of the acquiring
company or a combination of both) in excess of the purchase price paid by the Fund for the target
companys stock. However, a Fund is subject to the risk that the merger transaction may be
canceled, delayed or restructured, in which case a Funds holding of the target companys stock may
not result in any profit for the Fund and may lose significant value.
Mezzanine Investments. Certain Funds, consistent with their restrictions on investing in securities
of a specific credit quality, may invest in certain high yield securities known as mezzanine
investments, which are subordinated debt securities which are generally issued in private
placements in connection with an equity security (e.g., with attached warrants). Such mezzanine
investments may be issued with or without registration rights. Similar to other high yield
securities, maturities of mezzanine investments are typically seven to ten years, but the expected
average life is significantly shorter at three to five years. Mezzanine investments are usually
unsecured and subordinate to other obligations of the issuer.
Money Market Obligations of Domestic Banks, Foreign Banks and Foreign Branches of U.S. Banks.
Certain Funds may purchase bank obligations, such as certificates of deposit, notes, bankers
acceptances and time deposits, including instruments issued or supported by the credit of U.S. or
foreign banks or savings institutions having total assets at the time of purchase in excess of $1
billion. These obligations may be general obligations of the parent bank or may be limited to the
issuing branch or subsidiary by the terms of a specific obligation or by government regulation. The
assets of a bank or savings institution will be deemed to include the assets of its domestic and
foreign branches for purposes of a Funds investment policies. Investments in short-term bank
obligations may include obligations of foreign banks and domestic branches of foreign banks, and
also foreign branches of domestic banks.
To the extent consistent with their investment objectives, a Fund may invest in debt
obligations of domestic or foreign corporations and banks, and may acquire commercial obligations
issued by Canadian corporations and Canadian counterparts of U.S. corporations, as well as
Europaper, which is U.S. dollar-denominated commercial paper of a foreign issuer.
Money Market Securities. Certain Funds may invest in a broad range of short-term, high quality,
U.S. dollar-denominated instruments, such as government, bank, commercial and other obligations
that are available in the money markets. In particular, the Funds may invest in:
II-35
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U.S. dollar-denominated obligations issued or supported by the credit
of U.S. or foreign banks or savings institutions with total assets in
excess of $1 billion (including obligations of foreign branches of
such banks); |
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high quality commercial paper and other obligations issued or
guaranteed by U.S. and foreign corporations and other issuers rated
(at the time of purchase) A-2 or higher by S&P, Prime-2 or higher by
Moodys or F-2 or higher by Fitch, as well as high quality corporate
bonds rated (at the time of purchase) A or higher by those rating
agencies; |
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unrated notes, paper and other instruments that are of comparable
quality to the instruments described in (b) above as determined by the
Funds Manager; |
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asset-backed securities (including interests in pools of assets such
as mortgages, installment purchase obligations and credit card
receivables); |
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securities issued or guaranteed as to principal and interest by the
U.S. Government or by its agencies or authorities and related
custodial receipts; |
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dollar-denominated securities issued or guaranteed by foreign
governments or their political subdivisions, agencies or authorities; |
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(g) |
|
funding agreements issued by highly-rated U.S. insurance companies; |
|
|
(h) |
|
securities issued or guaranteed by state or local governmental bodies; |
|
|
(i) |
|
repurchase agreements relating to the above instruments; |
|
|
(j) |
|
municipal bonds and notes whose principal and interest payments are
guaranteed by the U.S. Government or one of its agencies or
authorities or which otherwise depend on the credit of the United
States; |
|
|
(k) |
|
fixed and variable rate notes and similar debt instruments rated
MIG-2, VMIG-2 or Prime-2 or higher by Moodys, SP-2 or A-2 or higher
by S&P, or F-2 or higher by Fitch; |
|
|
(l) |
|
tax-exempt commercial paper and similar debt instruments rated Prime-2
or higher by Moodys, A-2 or higher by S&P, or F-2 or higher by Fitch; |
|
|
(m) |
|
municipal bonds rated A or higher by Moodys, S&P or Fitch; |
|
|
(n) |
|
unrated notes, paper or other instruments that are of comparable
quality to the instruments described above, as determined by the
Funds Manager under guidelines established by the Board; and |
|
|
(o) |
|
municipal bonds and notes which are guaranteed as to principal and
interest by the U.S. Government or an agency or instrumentality
thereof or which otherwise depend directly or indirectly on the credit
of the United States. |
Mortgage-Related Securities
Mortgage-Backed Securities. Mortgage-backed securities represent interests in pools of mortgages in
which payments of both principal and interest on the securities are generally made monthly, in
effect passing through monthly payments made by borrowers on the residential or commercial
mortgage loans that underlie the securities (net of any fees paid to the issuer or guarantor of the
securities). Mortgage-backed securities differ from other forms of debt securities, which normally
provide for periodic payment of interest in fixed amounts with principal payments at maturity or
specified call dates.
Mortgage-backed securities are subject to the general risks associated with investing in real
estate securities; that is, they may lose value if the value of the underlying real estate to which
a pool of mortgages relates declines. In addition, investments in mortgage-backed securities
involve certain specific risks. These risks include the failure of a party to meet its commitments
under the related operative documents, adverse interest rate changes and the effects of prepayments
on mortgage cash flows. Mortgage-backed securities are pass-through securities, meaning that
principal and interest payments made by the borrower on the underlying mortgages are passed through
to a Fund.
II-36
The value of mortgage-backed securities, like that of traditional fixed income
securities, typically increases when interest rates fall and decreases when interest rates rise.
However, mortgage-backed securities differ from traditional fixed income securities because of
their potential for prepayment without penalty. The price paid by a Fund for its mortgage-backed
securities, the yield the Fund expects to receive from such securities and the weighted average
life of the securities are based on a number of factors, including the anticipated rate of
prepayment of the underlying mortgages. In a period of declining interest rates, borrowers may
prepay the underlying mortgages more quickly
than anticipated, thereby reducing the yield to maturity and the average life of the
mortgage-backed securities. Moreover, when a Fund reinvests the proceeds of a prepayment in these
circumstances, it will likely receive a rate of interest that is lower than the rate on the
security that was prepaid.
To the extent that a Fund purchases mortgage-backed securities at a premium, mortgage foreclosures
and principal prepayments may result in a loss to the extent of the premium paid. If a Fund buys
such securities at a discount, both scheduled payments of principal and unscheduled prepayments
will increase current and total returns and will accelerate the recognition of income, which, when
distributed to shareholders, will be taxable as ordinary income. In a period of rising interest
rates, prepayments of the underlying mortgages may occur at a slower than expected rate, creating
maturity extension risk. This particular risk may effectively change a security that was considered
short or intermediate-term at the time of purchase into a long-term security. Since the value of
long-term securities generally fluctuates more widely in response to changes in interest rates than
that of shorter-term securities, maturity extension risk could increase the inherent volatility of
the Fund. Under certain interest rate and prepayment scenarios, a Fund may fail to recoup fully its
investment in mortgage-backed securities notwithstanding any direct or indirect governmental or
agency guarantee.
There are currently three types of mortgage pass-through securities: (1) those issued by the U.S.
government or one of its agencies or instrumentalities, such as the Government National Mortgage
Association (Ginnie Mae), the Federal National Mortgage Association (Fannie Mae) and the
Federal Home Loan Mortgage Corporation (Freddie Mac); (2) those issued by private issuers that
represent an interest in or are collateralized by pass-through securities issued or guaranteed by
the U.S. government or one of its agencies or instrumentalities; and (3) those issued by private
issuers that represent an interest in or are collateralized by whole mortgage loans or pass-through
securities without a government guarantee but that usually have some form of private credit
enhancement.
Ginnie Mae is a wholly owned U.S. government corporation within the Department of Housing and Urban
Development. Ginnie Mae is authorized to guarantee, with the full faith and credit of the U.S.
government, the timely payment of principal and interest on securities issued by the institutions
approved by Ginnie Mae (such as savings and loan institutions, commercial banks and mortgage
banks), and backed by pools of Federal Housing Administration (FHA)-insured or Veterans
Administration (VA)-guaranteed mortgages. Pass-through certificates guaranteed by Ginnie Mae
(such certificates are also known as Ginnie Maes) are guaranteed as to the timely payment of
principal and interest by Ginnie Mae, whose guarantee is backed by the full faith and credit of the
United States. Ginnie Mae certificates also are supported by the authority of Ginnie Mae to borrow
funds from the U.S. Treasury Department to make payments under its guarantee. Mortgage-related
securities issued by Fannie Mae include Fannie Mae guaranteed Mortgage Pass-Through Certificates
(also known as Fannie Maes), which are guaranteed as to timely payment of principal and interest
by Fannie Mae. They are not backed by or entitled to the full faith and credit of the United
States, but are supported by the right of Fannie Mae to borrow from the U.S. Treasury Department.
Fannie Mae was established as a federal agency in 1938 and in 1968 was chartered by Congress as a
private shareholder-owned company. Mortgage-related securities issued by the Freddie Mac include
Freddie Mac Mortgage Participation Certificates (also known as Freddie Macs or PCs). Freddie
Mac is a stockholder-owned corporation chartered by Congress in 1970. Freddie Macs are not
guaranteed by the United States or by any Federal Home Loan Banks and do not constitute a debt or
obligation of the United States or of any Federal Home Loan Bank. Freddie Macs entitle the holder
to timely payment of interest, which is guaranteed by Freddie Mac. Freddie Mac guarantees either
ultimate collection or timely payment of all principal payments on the underlying mortgage loans.
While Freddie Mac generally does not guarantee timely payment of principal, Freddie Mac may remit
the amount due on account of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after it becomes payable. On
September 6, 2008, Director James Lockhart of the Federal Housing Finance Agency (FHFA) appointed
FHFA as conservator of both Fannie Mae and Freddie Mac. In addition the U.S. Treasury Department
agreed to provide Fannie Mae and Freddie Mac up to $100 billion of capital each on an as needed
basis to insure that they continue to provide liquidity to the housing and mortgage markets.
II-37
Private mortgage pass-through securities are structured similarly to Ginnie Mae, Fannie Mae, and
Freddie Mac mortgage pass-through securities and are issued by originators of and investors in
mortgage loans, including depository institutions, mortgage banks, investment banks and special
purpose subsidiaries of the foregoing.
Pools created by private mortgage pass-through issuers generally offer a higher rate of interest
than government and government-related pools because there are no direct or indirect government or
agency guarantees of payments in the private pools. However, timely payment of interest and
principal of these pools may be supported by various
forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and
letters of credit. The insurance and guarantees are issued by governmental entities, private
insurers and the mortgage poolers. The insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a mortgage-related security meets a
Funds investment quality standards. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee arrangements.
Private mortgage pass-through securities may be bought without insurance or guarantees if, through
an examination of the loan experience and practices of the originator/servicers and poolers, the
Manager determines that the securities meet a Funds quality standards. Any mortgage-related
securities that are issued by private issuers have some exposure to subprime loans as well as to
the mortgage and credit markets generally.
In addition, mortgage-related securities that are issued by private issuers are not subject to the
underwriting requirements for the underlying mortgages that are applicable to those
mortgage-related securities that have a government or government-sponsored entity guarantee. As a
result, the mortgage loans underlying private mortgage-related securities may, and frequently do,
have less favorable collateral, credit risk or other underwriting characteristics than government
or government-sponsored mortgage-related securities and have wider variances in a number of terms
including interest rate, term, size, purpose and borrower characteristics. Privately issued pools
more frequently include second mortgages, high loan-to-value mortgages and manufactured housing
loans. The coupon rates and maturities of the underlying mortgage loans in a private-label
mortgage-related securities pool may vary to a greater extent than those included in a government
guaranteed pool, and the pool may include subprime mortgage loans. Subprime loans refer to loans
made to borrowers with weakened credit histories or with a lower capacity to make timely payments
on their loans. For these reasons, the loans underlying these securities have had in many cases
higher default rates than those loans that meet government underwriting requirements.
The risk of non-payment is greater for mortgage-related securities that are backed by mortgage
pools that contain subprime loans, but a level of risk exists for all loans. Market factors
adversely affecting mortgage loan repayments may include a general economic turndown, high
unemployment, a general slowdown in the real estate market, a drop in the market prices of real
estate, or an increase in interest rates resulting in higher mortgage payments by holders of
adjustable rate mortgages.
Privately issued mortgage-related securities are not traded on an exchange and there may be a
limited market for the securities, especially when there is a perceived weakness in the mortgage
and real estate market sectors. Without an active trading market, mortgage-related securities held
in a funds portfolio may be particularly difficult to value because of the complexities involved
in assessing the value of the underlying mortgage loans.
A Fund from time to time may purchase in the secondary market (i) certain mortgage pass-through
securities packaged and master serviced by PNC Mortgage Securities Corp. (PNC Mortgage) or
Midland Loan Services, Inc. (Midland), or (ii) mortgage-related securities containing loans or
mortgages originated by PNC Bank, National Association (PNC Bank) or its affiliates. It is
possible that under some circumstances, PNC Mortgage, Midland or other affiliates could have
interests that are in conflict with the holders of these mortgage-backed securities, and such
holders could have rights against PNC Mortgage, Midland or their affiliates. For example, if PNC
Mortgage, Midland or their affiliates engaged in negligence or willful misconduct in carrying out
its duties as a master servicer, then any holder of the mortgage-backed security could seek
recourse against PNC Mortgage, Midland or their affiliates, as applicable. Also, as a master
servicer, PNC Mortgage, Midland or their affiliates may make certain representations and warranties
regarding the quality of the mortgages and properties underlying a mortgage-backed security. If one
or more of those representations or warranties is false, then the holders of the mortgage-backed
securities could trigger an obligation of PNC Mortgage, Midland or their affiliates, as applicable,
to repurchase the mortgages from the issuing trust. Finally, PNC Mortgage, Midland or their
affiliates may own securities that are subordinate to the senior mortgage-backed securities owned
by a Fund.
II-38
Collateralized Mortgage Obligations (CMOs). CMOs are debt obligations collateralized by
residential or commercial mortgage loans or residential or commercial mortgage pass-through
securities. Interest and prepaid principal are generally paid monthly. CMOs may be collateralized
by whole mortgage loans or private mortgage pass-through securities but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by Ginnie Mae, Freddie
Mac, or Fannie Mae. The issuer of a series of CMOs may elect to be treated as a Real Estate
Mortgage Investment Conduit (REMIC). All future references to CMOs also include REMICs.
CMOs are structured into multiple classes, often referred to as a tranche, each issued at a
specific adjustable or fixed interest rate, and bearing a different stated maturity date and each
must be fully retired no later than its final distribution date. Actual maturity and average life
will depend upon the prepayment experience of the collateral, which is ordinarily unrelated to the
stated maturity date. CMOs often provide for a modified form of call protection through a de facto
breakdown of the underlying pool of mortgages according to how quickly the loans are repaid.
Monthly payment of principal received from the pool of underlying mortgages, including prepayments,
is first returned to investors holding the shortest maturity class. Investors holding the longer
maturity classes usually receive principal only after the first class has been retired. An investor
may be partially protected against a sooner than desired return of principal because of the
sequential payments.
Certain issuers of CMOs are not considered investment companies pursuant to a rule adopted by the
Commission, and a Fund may invest in the securities of such issuers without the limitations imposed
by the Investment Company Act on investments by a Fund in other investment companies. In addition,
in reliance on an earlier Commission interpretation, a Funds investments in certain other
qualifying CMOs, which cannot or do not rely on the rule, are also not subject to the limitation of
the Investment Company Act on acquiring interests in other investment companies. In order to be
able to rely on the Commissions interpretation, these CMOs must be unmanaged, fixed asset issuers,
that: (1) invest primarily in mortgage-backed securities; (2) do not issue redeemable securities;
(3) operate under general exemptive orders exempting them from all provisions of the Investment
Company Act; and (4) are not registered or regulated under the Investment Company Act as investment
companies. To the extent that a Fund selects CMOs that cannot rely on the rule or do not meet the
above requirements, the Fund may not invest more than 10% of its assets in all such entities and
may not acquire more than 3% of the voting securities of any single such entity.
A Fund may also invest in, among other things, parallel pay CMOs, sequential pay CMOs, and floating
rate CMOs. Parallel pay CMOs are structured to provide payments of principal on each payment date
to more than one class, concurrently on a proportionate or disproportionate basis. These
simultaneous payments are taken into account in calculating the final distribution date of each
class. Sequential pay CMOs generally pay principal to only one class at a time while paying
interest to several classes. A wide variety of REMIC Certificates may be issued in the parallel
pay or sequential pay structures. These securities include accrual certificates (also known as
Z-Bonds), which only accrue interest at a specified rate until all other certificates having an
earlier final distribution date have been retired and are converted thereafter to an
interest-paying security. Floating rate CMOs are securities whose coupon rate fluctuates according
to some formula related to an existing market index or rate. Typical indices would include the
eleventh district cost-of-funds index (COFI), LIBOR, one-year Treasury yields, and ten-year
Treasury yields.
Classes of CMOs also include planned amortization classes (PACs) and targeted amortization
classes (TACs). PAC bonds generally require payments of a specified amount of principal on each
payment date. The scheduled principal payments for PAC Certificates generally have the highest
priority on each payment date after interest due has been paid to all classes entitled to receive
interest currently. Shortfalls, if any, are added to the amount payable on the next payment date.
The PAC Certificate payment schedule is taken into account in calculating the final distribution
date of each class of PAC. In order to create PAC tranches, one or more tranches generally must be
created that absorb most of the volatility in the underlying mortgage assets. These tranches (often
called supports or companion tranches) tend to have market prices and yields that are more
volatile than the PAC classes.
TACs are similar to PACs in that they require that specified amounts of principal be applied on
each payment date to one or more classes of REMIC Certificates. A PACs payment schedule, however,
remains in effect as long as prepayment rates on the underlying mortgages do not exceed certain
ranges. In contrast, a TAC provides investors with protection, to a certain level, against either
faster than expected or slower than expected prepayment rates, but not both. TACs thus provide more
cash flow stability than a regular sequential paying class, but less than a PAC. TACs also tend to
have market prices and yields that are more volatile than PACs.
II-39
Adjustable Rate Mortgage Securities. Adjustable rate mortgage securities (ARMs) are pass-through
securities collateralized by mortgages with adjustable rather than fixed rates. ARMs eligible for
inclusion in a mortgage pool generally provide for a fixed initial mortgage interest rate for a set
number of scheduled monthly payments. After that schedule of payments has been completed, the
interest rates are subject to periodic adjustment based on changes to a designated benchmark index.
ARMs contain maximum and minimum rates beyond which the mortgage interest rate may not vary over
the lifetime of the security. In addition, certain ARMs provide for additional limitations on the
maximum amount by which the mortgage interest rate may adjust for any single adjustment period. In
the event that market rates of interest rise more rapidly to levels above that of the ARMs maximum
rate, the ARMs coupon may represent a below market rate of interest. In these circumstances, the
market value of the ARM security will likely have fallen.
Certain ARMs contain limitations on changes in the required monthly payment. In the event that a
monthly payment is not sufficient to pay the interest accruing on an ARM, any such excess interest
is added to the principal balance of the mortgage loan, which is repaid through future monthly
payments. If the monthly payment for such an instrument exceeds the sum of the interest accrued at
the applicable mortgage interest rate and the principal payment required at such point to amortize
the outstanding principal balance over the remaining term of the loan, the excess is then used to
reduce the outstanding principal balance of the ARM.
CMO Residuals. CMO residuals are derivative mortgage securities issued by agencies or
instrumentalities of the U.S. government or by private originators of, or investors in, mortgage
loans, including savings and loan associations, homebuilders, mortgage banks, commercial banks,
investment banks, and special purpose entities of the foregoing. The cash flow generated by the
mortgage assets underlying a series of CMOs is applied first to make required payments of principal
and interest on the CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash flow remaining
after making the foregoing payments. Each payment of such excess cash flow to a holder of the
related CMO residual represents income and/or a return of capital. The amount of residual cash flow
resulting from a CMO will depend on, among other things, the characteristics of the mortgage
assets, the coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In part, the yield to
maturity on the CMO residuals is extremely sensitive to prepayments on the related underlying
mortgage assets, in the same manner as an interest-only (IO) class of stripped mortgage-related
securities. In addition, if a series of a CMO includes a class that bears interest at an adjustable
rate, the yield to maturity on the related CMO residual will also be extremely sensitive to changes
in the level of the index upon which interest rate adjustments are based. In certain circumstances,
a Fund may fail to recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors through one or more
investment banking firms acting as brokers or dealers. CMO residuals may not have the liquidity of
other more established securities trading in other markets. Transactions in CMO residuals are
generally completed only after careful review of the characteristics of the securities in question.
In addition, CMO residuals may or, pursuant to an exemption therefrom, may not have been registered
under the Securities Act. Residual interests generally are junior to, and may be significantly
more volatile than, regular CMO and REMIC interests.
Stripped Mortgage-Backed Securities. A Fund may invest in stripped mortgage-backed securities
(SMBSs) issued by agencies or instrumentalities of the United States. SMBSs are derivative
multi-class mortgage-backed securities. SMBS arrangements commonly involve two classes of
securities that receive different proportions of the interest and principal distributions on a pool
of mortgage assets. A common variety of SMBS is where one class (the principal only or PO class)
receives some of the interest and most of the principal from the underlying assets, while the other
class (the interest only or IO class) receives most of the interest and the remainder of the
principal. In the most extreme case, the IO class receives all of the interest, while the PO class
receives all of the principal. While a Fund may purchase securities of a PO class, a Fund is more
likely to purchase the securities of an IO class. The yield to maturity of an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the related underlying
assets, and a rapid rate of principal payments in excess of that considered in pricing the
securities will have a material adverse effect on an IO securitys yield to maturity. If the
underlying mortgage assets experience greater than anticipated payments of principal, a Fund may
fail to recoup fully its initial investment in IOs. In addition, there are certain types of IOs
that represent the interest portion of a particular class as opposed to the interest portion of the
entire pool. The sensitivity of this type of IO to interest rate fluctuations may be increased
because of the characteristics of the principal portion to which they relate. As a result of the
above factors, a Fund generally will purchase IOs only as a component of so called synthetic
securities. This means that purchases of
II-40
IOs will be matched with certain purchases of other
securities, such as POs, inverse floating rate CMOs or fixed rate securities; as interest rates
fall, presenting a greater risk of unanticipated prepayments of principal, the negative effect on a
Fund because of its holdings of IOs should be diminished somewhat because of the increased yield on
the inverse floating rate CMOs or the increased appreciation on the POs or fixed rate securities.
Tiered Index Bonds. Tiered index bonds are relatively new forms of mortgage-related securities. The
interest rate on a tiered index bond is tied to a specified index or market rate. So long as this
index or market rate is below a predetermined strike rate, the interest rate on the tiered index
bond remains fixed. If, however, the specified index or market rate rises above the strike rate,
the interest rate of the tiered index bond will decrease. Thus, under these circumstances, the
interest rate on a tiered index bond, like an inverse floater, will move in the opposite direction
of prevailing interest rates, with the result that the price of the tiered index bond may be
considerably more volatile than that of a fixed-rate bond.
Municipal Investments
The Municipal Funds may invest in obligations issued by or on behalf of states, territories and
possessions of the United States and the District of Columbia and their political subdivisions,
agencies and instrumentalities, the payments from which, in the opinion of bond counsel to the
issuer, are excludable from gross income for Federal income tax purposes (Municipal Bonds).
Certain of the Municipal Funds may also invest in Municipal Bonds that pay interest excludable from
gross income for purposes of state and local income taxes of the designated state and/or allow the
value of a Funds shares to be exempt from state and local taxes of the designated state (State
Municipal Bonds). The Municipal Funds may also invest in securities not issued by or on behalf of
a state or territory or by an agency or instrumentality thereof, if the Manager believes such
securities to pay interest excludable from gross income for purposes of Federal income tax and
state and local income taxes of the designated state and/or state and local personal property taxes
of the designated state (Non-Municipal Tax-Exempt Securities). Non-Municipal Tax-Exempt
Securities could include trust certificates or other instruments evidencing interest in one or more
long term municipal securities. Non-Municipal Tax-Exempt Securities also may include securities
issued by other investment companies that invest in municipal bonds, to the extent such investments
are permitted by applicable law. Non-Municipal Tax-Exempt Securities that pay interest excludable
from gross income for Federal income tax purposes will be considered Municipal Bonds for purposes
of a Municipal Funds investment objective and policies. Non-Municipal Tax-Exempt Securities that
pay interest excludable from gross income for purposes of Federal income tax and state and local
income taxes of a designated state and/or allow the value of a Funds shares to be exempt from
state and local personal property taxes of that state will be considered State Municipal Bonds
for purposes of the investment objective and policies of each of California Municipal Bond Fund,
New Jersey Municipal Bond Fund, New York Municipal Bond Fund and Pennsylvania Municipal Bond Fund.
Risk Factors and Special Considerations Relating to Municipal Bonds. The risks and special
considerations involved in investment in Municipal Bonds vary with the types of instruments being
acquired. Investments in Non-Municipal Tax-Exempt Securities may present similar risks, depending
on the particular product. Certain instruments in which a Fund may invest may be characterized as
derivatives.
The value of Municipal Bonds generally may be affected by uncertainties in the municipal markets as
a result of legislation or litigation, including legislation or litigation that changes the
taxation of Municipal Bonds or the rights of Municipal Bond holders in the event of a bankruptcy.
Municipal bankruptcies are rare and certain provisions of the U.S. Bankruptcy Code governing such
bankruptcies are unclear. Further, the application of state law to Municipal Bond issuers could
produce varying results among the states or among Municipal Bond issuers within a state. These
uncertainties could have a significant impact on the prices of the Municipal Bonds in which a Fund
invests.
Description of Municipal Bonds
Municipal Bonds include debt obligations issued to obtain funds for various public purposes,
including the construction of a wide range of public facilities, refunding of outstanding
obligations and obtaining funds for general operating expenses and loans to other public
institutions and facilities. In addition, certain types of bonds are issued by or on behalf of
public authorities to finance various privately owned or operated facilities, including certain
facilities for the local furnishing of electric energy or gas, sewage facilities, solid waste
disposal facilities and other specialized facilities. Such obligations are included within the term
Municipal Bonds if the interest paid thereon is
II-41
excluded from gross income for Federal income tax
purposes and any applicable state and local taxes. Other types of private activity bonds, the
proceeds of which are used for the construction, equipment or improvement of privately operated
industrial or commercial facilities, may constitute Municipal Bonds, although the current Federal
tax laws place substantial limitations on the size of such issues. The interest on Municipal Bonds
may bear a fixed rate or be payable at a variable or floating rate. The two principal
classifications of Municipal Bonds are general obligation
and revenue or special obligation bonds, which latter category includes private activity bonds
(PABs) (or industrial development bonds under pre-1986 law).
General Obligation Bonds. General obligation bonds are secured by the issuers pledge of its full
faith, credit and taxing power for the payment of principal and interest. The taxing power of any
governmental entity may be limited, however, by provisions of its state constitution or laws, and
an entitys creditworthiness will depend on many factors, including potential erosion of its tax
base due to population declines, natural disasters, declines in the states industrial base or
inability to attract new industries, economic limits on the ability to tax without eroding the tax
base, state legislative proposals or voter initiatives to limit ad valorem real property taxes and
the extent to which the entity relies on Federal or state aid, access to capital markets or other
factors beyond the states or entitys control. Accordingly, the capacity of the issuer of a
general obligation bond as to the timely payment of interest and the repayment of principal when
due is affected by the issuers maintenance of its tax base.
Revenue Bonds. Revenue bonds are payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise tax or other
specific revenue source such as payments from the user of the facility being financed; accordingly,
the timely payment of interest and the repayment of principal in accordance with the terms of the
revenue or special obligation bond is a function of the economic viability of such facility or such
revenue source.
Revenue bonds issued by state or local agencies to finance the development of low-income,
multi-family housing involve special risks in addition to those associated with municipal bonds
generally, including that the underlying properties may not generate sufficient income to pay
expenses and interest costs. Such bonds are generally non-recourse against the property owner, may
be junior to the rights of others with an interest in the properties, may pay interest that changes
based in part on the financial performance of the property, may be prepayable without penalty and
may be used to finance the construction of housing developments which, until completed and rented,
do not generate income to pay interest. Increases in interest rates payable on senior obligations
may make it more difficult for issuers to meet payment obligations on subordinated bonds.
PABs. PABs are, in most cases, tax-exempt securities issued by states, municipalities or public
authorities to provide funds, usually through a loan or lease arrangement, to a private entity for
the purpose of financing construction or improvement of a facility to be used by the entity. Such
bonds are secured primarily by revenues derived from loan repayments or lease payments due from the
entity, which may or may not be guaranteed by a parent company or otherwise secured. PABs generally
are not secured by a pledge of the taxing power of the issuer of such bonds. Therefore, an investor
should understand that repayment of such bonds generally depends on the revenues of a private
entity and be aware of the risks that such an investment may entail. The continued ability of an
entity to generate sufficient revenues for the payment of principal and interest on such bonds will
be affected by many factors including the size of the entity, its capital structure, demand for its
products or services, competition, general economic conditions, government regulation and the
entitys dependence on revenues for the operation of the particular facility being financed.
Moral Obligation Bonds. Moral obligation bonds are normally issued by special purpose public
authorities. If an issuer of moral obligation bonds is unable to meet its obligations, the
repayment of such bonds becomes a moral commitment but not a legal obligation of the state or
municipality that created the special purpose public authority that issued the bonds.
Municipal Notes. Municipal notes are shorter term municipal debt obligations. They may provide
interim financing in anticipation of tax collection, bond sales or revenue receipts. If there is a
shortfall in the anticipated proceeds, repayment on the note may be delayed or the note may not be
fully repaid, and a Fund may lose money.
Municipal Commercial Paper. Municipal commercial paper is generally unsecured and issued to meet
short-term financing needs. The lack of security presents some risk of loss to a Fund since, in the
event of an issuers bankruptcy, unsecured creditors are repaid only after the secured creditors
out of the assets, if any, that remain.
II-42
Municipal Lease Obligations. Also included within the general category of Municipal Bonds are
certificates of participation (COPs) issued by government authorities or entities to finance the
acquisition or construction of equipment, land and/or facilities. The COPs represent participations
in a lease, an installment purchase contract or a conditional sales contract (hereinafter
collectively called lease obligations) relating to such equipment, land or
facilities. Municipal leases, like other municipal debt obligations, are subject to the risk of
non-payment. Although lease obligations do not constitute general obligations of the issuer for
which the issuers unlimited taxing power is pledged, a lease obligation is frequently backed by
the issuers covenant to budget for, appropriate and make the payments due under the lease
obligation. However, certain lease obligations contain non-appropriation clauses, which provide
that the issuer has no obligation to make lease or installment purchase payments in future years
unless money is appropriated for such purpose on a yearly basis. Although non-appropriation lease
obligations are secured by the leased property, disposition of the property in the event of
foreclosure might prove difficult. These securities represent a type of financing that has not yet
developed the depth of marketability associated with more conventional securities. Certain
investments in lease obligations may be illiquid. A Fund may not invest in illiquid lease
obligations if such investments, together with all other illiquid investments, would exceed 15% of
the Funds net assets. A Fund may, however, invest without regard to such limitation in lease
obligations that the Manager, pursuant to guidelines that have been adopted by the Directors and
subject to the supervision of the Directors, determines to be liquid. The Manager will deem lease
obligations to be liquid if they are publicly offered and have received an investment grade rating
of Baa or better by Moodys, or BBB or better by S&P or Fitch Ratings (Fitch). Unrated lease
obligations, or those rated below investment grade, will be considered liquid if the obligations
come to the market through an underwritten public offering and at least two dealers are willing to
give competitive bids. In reference to the latter, the Manager must, among other things, also
review the creditworthiness of the entity obligated to make payment under the lease obligation and
make certain specified determinations based on such factors as the existence of a rating or credit
enhancement such as insurance the frequency of trades or quotes for the obligation and the
willingness of dealers to make a market in the obligation.
The ability of issuers of municipal leases to make timely lease payments may be adversely impacted
in general economic downturns and as relative governmental cost burdens are allocated and
reallocated among federal, state and local governmental units. Such non-payment would result in a
reduction of income to a Fund, and could result in a reduction in the value of the municipal lease
experiencing non-payment and a potential decrease in the net asset value of a Fund. Issuers of
municipal securities might seek protection under the bankruptcy laws. In the event of bankruptcy
of such an issuer, a Fund could experience delays and limitations with respect to the collection of
principal and interest on such municipal leases and a Fund may not, in all circumstances, be able
to collect all principal and interest to which it is entitled. To enforce its rights in the event
of a default in lease payments, the Fund might take possession of and manage the assets securing
the issuers obligations on such securities, which may increase a Funds operating expenses and
adversely affect the net asset value of a Fund. When the lease contains a non-appropriation
clause, however, the failure to pay would not be a default and a Fund would not have the right to
take possession of the assets. Any income derived from a Funds ownership or operation of such
assets may not be tax-exempt. In addition, a Funds intention to qualify as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the Code), may limit the
extent to which a Fund may exercise its rights by taking possession of such assets, because as a
regulated investment company a Fund is subject to certain limitations on its investments and on the
nature of its income.
Tender Option Bonds. Certain Funds may, invest in residual interest municipal tender option bonds,
which are derivative interests in Municipal Bonds. The residual interest municipal tender option
bonds in which the Funds will invest pay interest or income that, in the opinion of counsel to the
issuer, is exempt from regular Federal income tax. BlackRock will not conduct its own analysis of
the tax status of the interest or income paid by residual interest municipal tender option bonds
held by the Funds, but will rely on the opinion of counsel to the issuer. Although volatile, these
residual interests typically offer the potential for yields exceeding the yields available on fixed
rate Municipal Bonds with comparable credit quality, coupon, call provisions and maturity. The
Funds may invest in residual interests for the purpose of using economic leverage.
Residual interest municipal tender option bonds represent beneficial interests in a special purpose
trust formed by a third party sponsor for the purpose of holding Municipal Bonds purchased from a
Fund or from another third party. The special purpose trust typically sells two classes of
beneficial interests: short-term floating rate interests (sometimes known as put bonds or
puttable securities), which are sold to third party investors, and residual interests, which a
Fund would purchase. The short-term floating rate interests have first priority on the cash flow
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from the Municipal Bonds. A Fund is paid the residual cash flow from the special purpose trust. If
the Fund is the initial seller of the Municipal Bonds to the special purpose trust, it receives the
proceeds from the sale of the floating rate interests in the special purpose trust, less certain
transaction costs. These proceeds generally would be used by the Fund to purchase additional
Municipal Bonds or other permitted investments. If a Fund ever purchases all or a
portion of the short-term floating rate securities sold by the special purpose trust, it may
surrender those short-term floating rate securities together with a proportionate amount of
residual interests to the trustee of the special purpose trust in exchange for a proportionate
amount of the Municipal Bonds owned by the special purpose trust. In addition, all voting rights
and decisions to be made with respect to any other rights relating to the Municipal Bonds held in
the special purpose trust are passed through to the Fund, as the holder of the residual interests.
A Fund may invest in highly leveraged residual interest municipal tender option bonds. A residual
interest municipal tender option bond generally is considered highly leveraged if the principal
amount of the short-term floating rate interests issued by the related tender option bond trust
exceeds 50% of the principal amount of the Municipal Bonds owned by the tender option bond trust.
The sponsor of a highly leveraged tender option bond trust generally will retain a liquidity
provider that stands ready to purchase the short-term floating rate interests at their original
purchase price upon the occurrence of certain events, such as on a certain date prior to the
scheduled expiration date of the transaction, upon a certain percentage of the floating rate
interests failing to be remarketed in a timely fashion, upon the bonds owned by the tender option
bond trust being downgraded (but not below investment grade or upon the occurrence of a bankruptcy
event with respect to the issuer of the Municipal Bonds) or upon the occurrence of certain
regulatory or tax events. However, the liquidity provider is not required to purchase the floating
rate interests upon the occurrence of certain other events, including upon the downgrading of the
Municipal Bonds owned by the tender option bond trust below investment grade or certain events that
indicate the issuer of the bonds may be entering bankruptcy. The general effect of these provisions
is to pass to the holders of the floating rate interests the most severe credit risks associated
with the Municipal Bonds owned by the tender option bond trust and to leave with the liquidity
provider the interest rate risk and certain other risks associated with the Municipal Bonds.
If the liquidity provider acquires the floating rate interests upon the occurrence of an event
described above, the liquidity provider generally will be entitled to an in-kind distribution of
the Municipal Bonds owned by the tender option bond trust or to cause the tender option bond trust
to sell the bonds and distribute the proceeds to the liquidity provider. The liquidity provider
generally will enter into an agreement with a Fund that will require the Fund to make a payment to
the liquidity provider in an amount equal to any loss suffered by the liquidity provider in
connection with the foregoing transactions. The net economic effect of this agreement and these
transactions is as if the Fund had entered into a special type of reverse repurchase agreement with
the sponsor of the tender option bond trust, pursuant to which the Fund is required to repurchase
the Municipal Bonds it sells to the sponsor only upon the occurrence of certain events (such as a
failed remarketing of the floating rate interestsmost likely due to an adverse change in interest
rates) but not others (such as a default of the Municipal Bonds). In order to cover any potential
obligation of the Fund to the liquidity provider pursuant to this agreement, the Fund may designate
on its books and records liquid instruments having a value not less than the amount, if any, by
which the original purchase price of the floating rate interests issued by the related tender
option bond trust exceeds the market value of the Municipal Bonds owned by the tender option bond
trust.
A Fund may also invest in the short-term floating rate interest tender option bonds. The
remarketing agent for the special purpose trust sets a floating or variable rate on typically a
weekly basis. These securities grant the Funds the right to require the issuer or a specified
third party acting as agent for the issuer (e.g., a tender agent) to purchase the bonds, usually at
par, at a certain time or times prior to maturity or upon the occurrence of specified events or
conditions. The put option or tender option right is typically available to the investor on a
periodic (e.g., daily, weekly or monthly) basis. Typically, the put option is exercisable on dates
on which the floating or variable rate changes.
Investments in residual interest and floating rate interest tender option bonds may be considered
derivatives and are subject to the risk thereof, including counterparty risk, interest rate risk
and volatility.
Yields. Yields on Municipal Bonds are dependent on a variety of factors, including the general
condition of the money market and of the municipal bond market, the size of a particular offering,
the financial condition of the issuer, the maturity of the obligation and the rating of the issue.
The ability of a Fund to achieve its investment
II-44
objective is also dependent on the continuing
ability of the issuers of the securities in which the Fund invests to meet their obligations for
the payment of interest and principal when due. There are variations in the risks involved in
holding Municipal Bonds, both within a particular classification and between classifications,
depending on numerous factors. Furthermore, the rights of owners of Municipal Bonds and the
obligations of the issuer of such
Municipal Bonds may be subject to applicable bankruptcy, insolvency and similar laws and court
decisions affecting the rights of creditors generally and to general equitable principles, which
may limit the enforcement of certain remedies.
Variable Rate Demand Obligations (VRDOs) and Participating VRDOs. VRDOs are tax-exempt
obligations that contain a floating or variable interest rate adjustment formula and a right of
demand on the part of the holder thereof to receive payment of the unpaid principal balance plus
accrued interest upon a short notice period not to exceed seven days. Participating VRDOs provide a
Fund with a specified undivided interest (up to 100%) of the underlying obligation and the right to
demand payment of the unpaid principal balance plus accrued interest on the Participating VRDOs
from the financial institution that issued the participation interest upon a specified number of
days notice, not to exceed seven days. In addition, the Participating VRDO is backed by an
irrevocable letter of credit or guaranty of the financial institution. A Fund would have an
undivided interest in the underlying obligation and thus participate on the same basis as the
financial institution in such obligation except that the financial institution typically retains
fees out of the interest paid on the obligation for servicing the obligation, providing the letter
of credit and issuing the repurchase commitment.
There is the possibility that because of default or insolvency the demand feature of VRDOs and
Participating VRDOs may not be honored. The interest rates are adjustable at intervals (ranging
from daily to up to one year) to some prevailing market rate for similar investments, such
adjustment formula being calculated to maintain the market rate of the VRDOs at approximately the
par value of the VRDOs on the adjustment date. The adjustments typically are based upon the Public
Securities Association Index or some other appropriate interest rate adjustment index. The Funds
have been advised by counsel that they should be entitled to treat the income received on
Participating VRDOs as interest from tax-exempt obligations. It is not contemplated that any Fund
will invest more than a limited amount of its total assets in Participating VRDOs.
Because of the interest rate adjustment formula on VRDOs (including Participating VRDOs), VRDOs are
not comparable to fixed rate securities. During periods of declining interest rates, a Funds yield
on a VRDO will decrease and its shareholders will forego the opportunity for capital appreciation.
During periods of rising interest rates, however, a Funds yield on a VRDO will increase and the
Funds shareholders will have a reduced risk of capital depreciation.
VRDOs that contain a right of demand to receive payment of the unpaid principal balance plus
accrued interest on a notice period exceeding seven days may be deemed to be illiquid securities. A
VRDO with a demand notice period exceeding seven days will therefore be subject to a Funds
restriction on illiquid investments unless, in the judgment of the Directors such VRDO is liquid.
The Directors may adopt guidelines and delegate to the Manager the daily function of determining
and monitoring liquidity of such VRDOs. The Directors, however, will retain sufficient oversight
and will be ultimately responsible for such determinations.
The VRDOs and Participating VRDOs in which a Fund may invest will be in the following rating
categories at the time of purchase: MIG-1/ VMIG-1 through MIG-3/VMIG-3 for notes and VRDOs and
Prime-1 through Prime-3 for commercial paper (as determined by Moodys), SP-1 through SP-2 for
notes and A-1 through A-3 for VRDOs and commercial paper (as determined by S&P), or F-1 through F-3
for notes, VRDOs and commercial paper (as determined by Fitch).
Transactions in Financial Futures Contracts. The Municipal Funds and certain other funds deal in
financial futures contracts based on a long-term municipal bond index developed by the Chicago
Board of Trade (CBT) and The Bond Buyer (the Municipal Bond Index). The Municipal Bond Index is
comprised of 40 tax-exempt municipal revenue and general obligation bonds. Each bond included in
the Municipal Bond Index must be rated A or higher by Moodys or S&P and must have a remaining
maturity of 19 years or more. Twice a month new issues satisfying the eligibility requirements are
added to, and an equal number of old issues are deleted from, the Municipal Bond
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Index. The value
of the Municipal Bond Index is computed daily according to a formula based on the price of each
bond in the Municipal Bond Index, as evaluated by six dealer-to-dealer brokers.
The Municipal Bond Index futures contract is traded only on the CBT. Like other contract markets,
the CBT assures performance under futures contracts through a clearing corporation, a nonprofit
organization managed by the exchange membership that is also responsible for handling daily
accounting of deposits or withdrawals of margin.
The particular municipal bonds comprising the index underlying the Municipal Bond Index financial
futures contract may vary from the bonds held by a Municipal Fund. As a result, a Municipal Funds
ability to hedge effectively all or a portion of the value of its Municipal Bonds through the use
of such financial futures contracts will depend in part on the degree to which price movements in
the index underlying the financial futures contract correlate with the price movements of the
Municipal Bonds held by the Fund. The correlation may be affected by disparities in the average
maturity, ratings, geographical mix or structure of a Municipal Funds investments as compared to
those comprising the Municipal Bond Index and general economic or political factors. In addition,
the correlation between movements in the value of the Municipal Bond Index may be subject to change
over time as additions to and deletions from the Municipal Bond Index alter its structure. The
correlation between futures contracts on U.S. Government securities and the Municipal Bonds held by
a Municipal Fund may be adversely affected by similar factors and the risk of imperfect correlation
between movements in the prices of such futures contracts and the prices of Municipal Bonds held by
a Municipal Fund may be greater. Municipal Bond Index futures contracts were approved for trading
in 1986. Trading in such futures contracts may tend to be less liquid than trading in other futures
contracts. The trading of futures contracts also is subject to certain market risks, such as
inadequate trading activity, which could at times make it difficult or impossible to liquidate
existing positions.
Call Rights. A Fund may purchase a Municipal Bond issuers right to call all or a portion of such
Municipal Bond for mandatory tender for purchase (a Call Right). A holder of a Call Right may
exercise such right to require a mandatory tender for the purchase of related Municipal Bonds,
subject to certain conditions. A Call Right that is not exercised prior to maturity of the related
Municipal Bond will expire without value. The economic effect of holding both the Call Right and
the related Municipal Bond is identical to holding a Municipal Bond as a non-callable security.
Certain investments in such obligations may be illiquid. A Fund may not invest in such illiquid
obligations if such investments, together with other illiquid investments, would exceed 15% of a
Funds net assets.
Municipal Interest Rate Swap Transactions. In order to hedge the value of a Fund against interest
rate fluctuations or to enhance a Funds income, a Fund may enter into interest rate swap
transactions such as Municipal Market Data AAA Cash Curve swaps (MMD Swaps) or Bond Market
Association Municipal Swap Index swaps (BMA Swaps). To the extent that a Fund enters into these
transactions, the Fund expects to do so primarily to preserve a return or spread on a particular
investment or portion of its portfolio or to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date. A Fund intends to use these
transactions primarily as a hedge rather than as a speculative investment. However, a Fund also may
invest in MMD Swaps and BMA Swaps to enhance income or gain or to increase the Funds yield, for
example, during periods of steep interest rate yield curves (i.e., wide differences between short
term and long term interest rates).
A Fund may purchase and sell BMA Swaps in the BMA swap market. In a BMA Swap, a Fund exchanges with
another party their respective commitments to pay or receive interest (e.g., an exchange of fixed
rate payments for floating rate payments linked to the Bond Market Association Municipal Swap
Index). Because the underlying index is a tax-exempt index, BMA Swaps may reduce cross-market risks
incurred by a Fund and increase a Funds ability to hedge effectively. BMA Swaps are typically
quoted for the entire yield curve, beginning with a seven day floating rate index out to 30 years.
The duration of a BMA Swap is approximately equal to the duration of a fixed-rate Municipal Bond
with the same attributes as the swap (e.g., coupon, maturity, call feature).
A Fund may also purchase and sell MMD Swaps, also known as MMD rate locks. An MMD Swap permits a
Fund to lock in a specified municipal interest rate for a portion of its portfolio to preserve a
return on a particular investment or a portion of its portfolio as a duration management technique
or to protect against any increase in the price of securities to be purchased at a later date. By
using an MMD Swap, a Fund can create a synthetic long or short position, allowing the Fund to
select the most attractive part of the yield curve. An MMD Swap is a contract between a Fund and an
MMD Swap provider pursuant to which the parties agree to make payments to each other on a notional
amount, contingent upon whether the Municipal Market Data AAA General Obligation Scale is above or
II-46
below a specified level on the expiration date of the contract. For example, if a Fund buys an MMD
Swap and the Municipal Market Data AAA General Obligation Scale is below the specified level on the
expiration date, the counterparty to the contract will make a payment to the Fund equal to the
specified level minus the actual level,
multiplied by the notional amount of the contract. If the Municipal Market Data AAA General
Obligation Scale is above the specified level on the expiration date, a Fund will make a payment to
the counterparty equal to the actual level minus the specified level, multiplied by the notional
amount of the contract.
In connection with investments in BMA and MMD Swaps, there is a risk that municipal yields will
move in the opposite direction than anticipated by a Fund, which would cause the Fund to make
payments to its counterparty in the transaction that could adversely affect the Funds performance.
A Fund has no obligation to enter into BMA or MMD Swaps and may not do so. The net amount of the
excess, if any, of a Funds obligations over its entitlements with respect to each interest rate
swap will be accrued on a daily basis and an amount of liquid assets that have an aggregate net
asset value at least equal to the accrued excess will be maintained in a segregated account by the
Fund.
Insured Municipal Bonds. Bonds purchased by a Fund may be covered by insurance that guarantees
that interest payments on the bond will be made on time and the principal will be repaid when the
bond matures. Either the issuer of the bond or the Fund purchases the insurance. Insurance is
expected to protect the Fund against losses caused by a bond issuers failure to make interest or
principal payments. However, insurance does not protect the Fund or its shareholders against
losses caused by declines in a bonds market value. Also, the Fund cannot be certain that any
insurance company does not make these payments. In addition, if the Fund purchases the insurance,
it may pay the premiums, which will reduce the Funds yield. The Fund seeks to use only insurance
companies with claims paying ability, financial strength, or equivalent ratings of at least
investment grade. However, if insurance from insurers with these ratings is not available, the
Fund may use insurance companies with lower ratings or stop purchasing insurance or insured bonds.
If a bonds insurer fails to fulfill its obligations or loses its credit rating, the value of the
bond could drop.
Build America Bonds. If a Fund holds Build America Bonds, the Fund may be eligible to receive a
Federal income tax credit; however, the issuer of a Build America Bond may instead elect to receive
a cash payment directly from the federal government in lieu of holders such as the fund receiving a
tax credit. The interest on Build America Bonds is taxable for Federal income tax purposes. If
the Fund does receive tax credits from Build America Bonds or other tax credit bonds on one or more
specified dates during the funds taxable year, and the Fund satisfies the minimum distribution
requirement, the Fund may elect for U.S. Federal income tax purposes to pass through to
shareholders tax credits otherwise allowable to the Fund for that year with respect to such bonds.
A tax credit bond is defined in the Code as a qualified tax credit bond (which includes a
qualified forestry conservation bond, a new clean renewable energy bond, a qualified energy
conservation bond, or a qualified zone academy bond, each of which must meet certain requirements
specified in the Code), a Build America Bond (which includes certain qualified bonds issued
before January 1, 2011) or certain other specified bonds. If the Fund were to so elect, a
shareholder would be required to include in income and would be entitled to claim as a tax credit
an amount equal to a proportionate share of such credits, and such amount would be subject to
withholding provisions of the Code. Certain limitations may apply on the extent to which the
credit may be claimed.
Net Interest Margin (NIM) Securities. A Fund may invest in net interest margin (NIM) securities.
These securities are derivative interest-only mortgage securities structured off home equity loan
transactions. NIM securities receive any excess interest computed after paying coupon costs,
servicing costs and fees and any credit losses associated with the underlying pool of home equity
loans. Like traditional stripped mortgage-backed securities, the yield to maturity on a NIM
security is sensitive not only to changes in prevailing interest rates but also to the rate of
principal payments (including prepayments) on the underlying home equity loans. NIM securities are
highly sensitive to credit losses on the underlying collateral and the timing in which those losses
are taken.
Participation Notes. A Fund may buy participation notes from a bank or broker-dealer (issuer)
that entitle the Fund to a return measured by the change in value of an identified underlying
security or basket of securities (collectively, the underlying security). Participation notes
are typically used when a direct investment in the underlying security is restricted due to
country-specific regulations.
The Fund is subject to counterparty risk associated with each issuer. Investment in a
participation note is not the same as investment in the constituent shares of the company. A
participation note represents only an obligation of the issuer to provide the Fund the economic
performance equivalent to holding shares of an underlying security. A
II-47
participation note does not
provide any beneficial or equitable entitlement or interest in the relevant underlying security. In
other words, shares of the underlying security are not in any way owned by the Fund. However each
participation note synthetically replicates the economic benefit of holding shares in the
underlying security. Because
a participation note is an obligation of the issuer, rather than a direct investment in shares of
the underlying security, the Fund may suffer losses potentially equal to the full value of the
participation note if the issuer fails to perform its obligations. A Fund attempts to mitigate
that risk by purchasing only from issuers which BlackRock deems to be creditworthy.
The counterparty may, but is not required to, purchase the shares of the underlying security to
hedge its obligation. The fund may, but is not required to, purchase credit protection against the
default of the issuer. When the participation note expires or a Fund exercises the participation
note and closes its position, that Fund receives a payment that is based upon the then-current
value of the underlying security converted into U.S. dollars (less transaction costs). The price,
performance and liquidity of the participation note are all linked directly to the underlying
security. A Funds ability to redeem or exercise a participation note generally is dependent on the
liquidity in the local trading market for the security underlying the participation note.
Pay-in-kind Bonds. Certain Funds may invest in Pay-in-kind, or PIK, bonds. PIK bonds are bonds
which pay interest through the issuance of additional debt or equity securities. Similar to zero
coupon obligations, pay-in-kind bonds also carry additional risk as holders of these types of
securities realize no cash until the cash payment date unless a portion of such securities is sold
and, if the issuer defaults, a Fund may obtain no return at all on its investment. The market
price of pay-in-kind bonds is affected by interest rate changes to a greater extent, and therefore
tends to be more volatile, than that of securities which pay interest in cash. Additionally,
current federal tax law requires the holder of certain pay-in-kind bonds to accrue income with
respect to these securities prior to the receipt of cash payments. To maintain its qualification
as a regulated investment company and avoid liability for federal income and excise taxes, each
Fund may be required to distribute income accrued with respect to these securities and may have to
dispose of portfolio securities under disadvantageous circumstances in order to generate cash to
satisfy these distribution requirements.
Portfolio Turnover Rates. A Funds annual portfolio turnover rate will not be a factor preventing a
sale or purchase when the Manager believes investment considerations warrant such sale or purchase.
Portfolio turnover may vary greatly from year to year as well as within a particular year. High
portfolio turnover (i.e., 100% or more) may result in increased transaction costs to a Fund,
including brokerage commissions, dealer mark-ups and other transaction costs on the sale of the
securities and reinvestment in other securities. The sale of a Funds securities may result in the
recognition of capital gain or loss. Given the frequency of sales, such gain or loss will likely be
short-term capital gain or loss. These effects of higher than normal portfolio turnover may
adversely affect a Funds performance.
Preferred Stock. Certain of the Funds may invest in preferred stocks. Preferred stock has a
preference over common stock in liquidation (and generally dividends as well) but is subordinated
to the liabilities of the issuer in all respects. As a general rule, the market value of preferred
stock with a fixed dividend rate and no conversion element varies inversely with interest rates and
perceived credit risk, while the market price of convertible preferred stock generally also
reflects some element of conversion value. Because preferred stock is junior to debt securities and
other obligations of the issuer, deterioration in the credit quality of the issuer will cause
greater changes in the value of a preferred stock than in a more senior debt security with similar
stated yield characteristics. Unlike interest payments on debt securities, preferred stock
dividends are payable only if declared by the issuers board of directors. Preferred stock also may
be subject to optional or mandatory redemption provisions.
Real Estate Related Securities. Although no Fund may invest directly in real estate, certain Funds
may invest in equity securities of issuers that are principally engaged in the real estate
industry. Such investments are subject to certain risks associated with the ownership of real
estate and with the real estate industry in general. These risks include, among others: possible
declines in the value of real estate; risks related to general and local economic conditions;
possible lack of availability of mortgage funds or other limitations on access to capital;
overbuilding; risks associated with leverage; market illiquidity; extended vacancies of properties;
increase in competition, property taxes, capital expenditures and operating expenses; changes in
zoning laws or other governmental regulation; costs resulting from the clean-up of, and liability
to third parties for damages resulting from, environmental problems; tenant bankruptcies or other
credit problems; casualty or condemnation losses; uninsured damages from floods, earthquakes or
other natural disasters; limitations on and variations in rents, including decreases in market
rates for rents; investment in developments that are not completed or that are subject to delays in
completion; and changes in interest rates. To the extent that assets underlying a Funds
investments are concentrated geographically, by property
II-48
type or in certain other respects, the
Fund may be subject to certain of the foregoing risks to a greater extent. Investments by a Fund in
securities of companies providing mortgage servicing will be subject to the risks associated with
refinancings and their impact on servicing rights.
In addition, if a Fund receives rental income or income from the disposition of real property
acquired as a result of a default on securities the Fund owns, the receipt of such income may
adversely affect the Funds ability to retain its tax status as a regulated investment company
because of certain income source requirements applicable to regulated investment companies under
the Code.
Real Estate Investment Trusts (REITs). In pursuing its investment strategy, a Fund may invest in
shares of REITs. REITs possess certain risks which differ from an investment in common stocks.
REITs are financial vehicles that pool investors capital to purchase or finance real estate.
REITs may concentrate their investments in specific geographic areas or in specific property types,
i.e., hotels, shopping malls, residential complexes and office buildings.
REITs are subject to management fees and other expenses, and so a Fund that invests in REITs will
bear its proportionate share of the costs of the REITs operations. There are three general
categories of REITs: Equity REITs, Mortgage REITs and Hybrid REITs. Equity REITs invest primarily
in direct fee ownership or leasehold ownership of real property; they derive most of their income
from rents. Mortgage REITs invest mostly in mortgages on real estate, which may secure
construction, development or long-term loans; the main source of their income is mortgage interest
payments. Hybrid REITs hold both ownership and mortgage interests in real estate.
Investing in REITs involves certain unique risks in addition to those risks associated with
investing in the real estate industry in general. The market value of REIT shares and the ability
of the REITs to distribute income may be adversely affected by several factors, including rising
interest rates, changes in the national, state and local economic climate and real estate
conditions, perceptions of prospective tenants of the safety, convenience and attractiveness of the
properties, the ability of the owners to provide adequate management, maintenance and insurance,
the cost of complying with the Americans with Disabilities Act, increased competition from new
properties, the impact of present or future environmental legislation and compliance with
environmental laws, failing to maintain their exemptions from registration under the Investment
Company Act, changes in real estate taxes and other operating expenses, adverse changes in
governmental rules and fiscal policies, adverse changes in zoning laws and other factors beyond the
control of the issuers of the REITs. In addition, distributions received by a Fund from REITs may
consist of dividends, capital gains and/or return of capital. As REITs generally pay a higher rate
of dividends (on a pre-tax basis) than operating companies, to the extent application of the Funds
investment strategy results in the Fund investing in REIT shares, the percentage of the Funds
dividend income received from REIT shares will likely exceed the percentage of the Funds portfolio
which is comprised of REIT shares. Generally, dividends received by a Fund from REIT shares and
distributed to the Funds shareholders will not constitute qualified dividend income eligible for
the reduced tax rate applicable to qualified dividend income; therefore, the tax rate applicable to
that portion of the dividend income attributable to REIT shares held by the Fund that shareholders
of the Fund receive will be taxed at a higher rate than dividends eligible for the reduced tax rate
applicable to qualified dividend income.
REITs (especially mortgage REITs) are also subject to interest rate risk. Rising interest rates may
cause REIT investors to demand a higher annual yield, which may, in turn, cause a decline in the
market price of the equity securities issued by a REIT. Rising interest rates also generally
increase the costs of obtaining financing, which could cause the value of a Funds REIT investments
to decline. During periods when interest rates are declining, mortgages are often refinanced.
Refinancing may reduce the yield on investments in mortgage REITs. In addition, since REITs depend
on payment under their mortgage loans and leases to generate cash to make distributions to their
shareholders, investments in REITs may be adversely affected by defaults on such mortgage loans or
leases.
Investing in certain REITs, which often have small market capitalizations, may also involve the
same risks as investing in other small capitalization companies. REITs may have limited financial
resources and their securities may trade less frequently and in limited volume and may be subject
to more abrupt or erratic price movements than larger company securities. Historically, small
capitalization stocks, such as REITs, have been more volatile in price than the larger
capitalization stocks such as those included in the S&P 500 Index. The management of a REIT may be
subject to conflicts of interest with respect to the operation of the business of the REIT and may
be involved in real estate activities competitive with the REIT. REITs may own properties through
joint ventures or in other circumstances in which the REIT may not have control over its
investments. REITs may incur significant amounts of leverage.
II-49
Repurchase Agreements and Purchase and Sale Contracts. Under repurchase agreements and purchase and
sale contracts, the other party agrees, upon entering into the contract with a Fund, to repurchase
a security sold to the
Fund at a mutually agreed-upon time and price in a specified currency, thereby determining the
yield during the term of the agreement.
A purchase and sale contract differs from a repurchase agreement in that the contract arrangements
stipulate that securities are owned by the Fund and the purchaser receives any interest on the
security paid during the period. In the case of repurchase agreements, the prices at which the
trades are conducted do not reflect accrued interest on the underlying obligation; whereas, in the
case of purchase and sale contracts, the prices take into account accrued interest. A Fund may
enter into tri-party repurchase agreements. In tri-party repurchase agreements, an
unaffiliated third party custodian maintains accounts to hold collateral for the Fund and its
counterparties and, therefore, the Fund may be subject to the credit risk of those custodians.
Repurchase agreements and purchase and sale contracts result in a fixed rate of return insulated
from market fluctuations during the term of the agreement, although such return may be affected by
currency fluctuations. However, in the event of a default under a repurchase agreement or under a
purchase and sale contract, instead of the contractual fixed rate, the rate of return to the Fund
would be dependent upon intervening fluctuations of the market values of the securities underlying
the contract and the accrued interest on those securities. In such event, the Fund would have
rights against the seller for breach of contract with respect to any losses arising from market
fluctuations following the default.
Both types of agreement usually cover short periods, such as less than one week, although they may
have longer terms, and may be construed to be collateralized loans by the purchaser to the seller
secured by the securities transferred to the purchaser. In the case of a repurchase agreement, as
a purchaser, a Funds Manager or sub-adviser will monitor the creditworthiness of the seller, and a
Fund will require the seller to provide additional collateral if the market value of the securities
falls below the repurchase price at any time during the term of the repurchase agreement. The Fund
does not have this right to seek additional collateral as a purchaser in the case of purchase and
sale contracts. The Funds Manager or sub-adviser will mark-to-market daily the value of the
securities. Securities subject to repurchase agreements and purchase and sale contracts will be
held by the Funds custodian (or sub-custodian) in the Federal Reserve/Treasury book-entry system
or by another authorized securities depository.
In the event of default by the seller under a repurchase agreement construed to be a collateralized
loan, the underlying securities are not owned by the Fund but only constitute collateral for the
sellers obligation to pay the repurchase price. Therefore, the Fund may suffer time delays and
incur costs or possible losses in connection with disposition of the collateral. If the seller
becomes insolvent and subject to liquidation or reorganization under applicable bankruptcy or other
laws, a Funds ability to dispose of the underlying securities may be restricted. Finally, it is
possible that a Fund may not be able to substantiate its interest in the underlying securities. To
minimize this risk, the securities underlying the repurchase agreement will be held by the
custodian at all times in an amount at least equal to the repurchase price, including accrued
interest. If the seller fails to repurchase the securities, a Fund may suffer a loss to the extent
proceeds from the sale of the underlying securities are less than the repurchase price.
A Fund may not invest in repurchase agreements or purchase and sale contracts maturing in more than
seven days if such investments, together with the Funds other illiquid investments, would exceed
15% of the Funds net assets. Repurchase agreements and purchase and sale contracts may be entered
into only with financial institutions that have capital of at least $50 million or whose
obligations are guaranteed by an entity that has capital of at least $50 million.
Reverse Repurchase Agreements. A Fund may enter into reverse repurchase agreements with the same
parties with whom it may enter into repurchase agreements. Under a reverse repurchase agreement, a
Fund sells securities to another party and agrees to repurchase them at a particular date and
price. A Fund may enter into a reverse repurchase agreement when it is anticipated that the
interest income to be earned from the investment of the proceeds of the transaction is greater than
the interest expense of the transaction.
At the time a Fund enters into a reverse repurchase agreement, it will segregate liquid assets with
a value not less than the repurchase price (including accrued interest). The use of reverse
repurchase agreements may be regarded as leveraging and, therefore, speculative. Furthermore,
reverse repurchase agreements involve the risks that (i) the interest income earned in the
investment of the proceeds will be less than the interest expense, (ii) the market value of the
securities retained in lieu of sale by a Fund may decline below the price of the securities the
Fund has sold but
II-50
is obligated to repurchase, (iii) the market value of the securities sold will
decline below the price at which the Fund is required to repurchase them and (iv) the securities
will not be returned to the Fund.
In addition, if the buyer of securities under a reverse repurchase agreement files for bankruptcy
or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to
determine whether to enforce a Funds obligations to repurchase the securities and the Funds use
of the proceeds of the reverse repurchase agreement may effectively be restricted pending such
decision.
Rights Offerings and Warrants to Purchase. Each Fund may participate in rights offerings and may
purchase warrants, which are privileges issued by corporations enabling the owners to subscribe to
and purchase a specified number of shares of the corporation at a specified price during a
specified period of time. Subscription rights normally have a short life span to expiration. The
purchase of rights or warrants involves the risk that a Fund could lose the purchase value of a
right or warrant if the right to subscribe to additional shares is not exercised prior to the
rights and warrants expiration. Also, the purchase of rights and/or warrants involves the risk
that the effective price paid for the right and/or warrant added to the subscription price of the
related security may exceed the value of the subscribed securitys market price such as when there
is no movement in the level of the underlying security. Buying a warrant does not make the Fund a
shareholder of the underlying stock.
Securities Lending. Each Fund may lend portfolio securities with a value not exceeding 331/3% of its
total assets or the limit prescribed by applicable law to banks, brokers and other financial
institutions. In return, the Fund receives collateral in cash or securities issued or guaranteed by
the U.S. Government or irrevocable letters of credit issued by a bank (other than a borrower of the
Funds portfolio securities or any affiliate of such borrower), which qualifies as a custodian bank
for an investment company under the Investment Company Act, which collateral will be maintained at
all times in an amount equal to at least 100% of the current market value of the loaned securities.
The Manager may instruct the lending agent (as defined below) to terminate loans and recall
securities so that the securities may be voted by a Fund if required by Proxy Voting Guidelines
adopted by a Fund. Such notice shall be provided in advance such that a period of time equal to no
less than the normal settlement period for the securities in question prior to the record date for
the proxy vote or other corporate entitlement is provided.
A Fund receives the equivalent of any income it would have received on the loaned securities. Where
a Fund receives securities as collateral, the Fund receives a fee for its loans from the borrower
and does not receive the income on the collateral. Where a Fund receives cash collateral, it may
invest such collateral and retain the amount earned, net of any amount rebated to the borrower. As
a result, the Funds yield may increase. Loans of securities are terminable at any time and the
borrower, after notice, is required to return borrowed securities within the standard time period
for settlement of securities transactions. The Fund is obligated to return the collateral to the
borrower upon the return of the loaned securities. A Fund could suffer a loss in the event the Fund
must return the cash collateral and there are losses on investments made with the cash collateral.
In the event the borrower defaults on any of its obligations with respect to a securities loan, a
Fund could suffer a loss where the value of the collateral is below the market value of the
borrowed securities plus any other receivables from the Borrower along with any transaction costs
to repurchase the securities. A Fund could also experience delays and costs in gaining access to
the collateral. Each Fund may pay reasonable finders, lending agent, administrative and custodial
fees in connection with its loans.
Each Fund has received an exemptive order from the Commission permitting it to lend portfolio
securities to affiliates of the Fund and to retain an affiliate of the Fund as lending agent.
Pursuant to that order, each Fund has retained an affiliated entity of the Manager as the
securities lending agent (the lending agent) for a fee, including a fee based on a share of the
returns on investment of cash collateral. In connection with securities lending activities, the
lending agent may, upon the advice of the Manager and on behalf of a Fund, invest cash collateral
received by the Fund for such loans, among other things, in a private investment company managed by
the lending agent or in registered money market funds advised by the Manager or its affiliates.
Pursuant to the same order, each Fund may invest its uninvested cash in registered money market
funds advised by the Manager or its affiliates, or in a private investment company managed by the
lending agent. If a Fund acquires shares in either the private investment company or an affiliated
money market fund, shareholders would bear both their proportionate share of the Funds expenses
and, indirectly, the expenses of such other entities. However, in accordance with the exemptive
order, the investment adviser to the private investment company will not charge any advisory fees
with respect to shares purchased by the Fund. Such shares also will not be subject to a sales load,
redemption fee, distribution fee or service fee, or in the case of the shares of an affiliated
money market fund, the payment of any such sales load, redemption fee, distribution fee or service
fee will be offset by the Managers waiver of a portion of its advisory fee.
II-51
A Fund would continue to accrue the equivalent of the same interest or other income on loaned
securities that it would have received had the securities not been on loan, and would also earn
income on investments made with any
cash collateral for such loans. Any cash collateral received by a Fund in connection with such
loans may be invested in a broad range of high quality, U.S. dollar-denominated money market
instruments that meet Rule 2a-7 restrictions for money market funds.
BlackRock Investment Management, LLC (BIM), an affiliate of BlackRock, acts as securities lending
agent for the Funds and will be paid a fee for the provision of these services, including advisory
services with respect to the collateral of the Funds securities lending program.
Securities of Smaller or Emerging Growth Companies. Investment in smaller or emerging growth
companies involves greater risk than is customarily associated with investments in more established
companies. The securities of smaller or emerging growth companies may be subject to more abrupt or
erratic market movements than larger, more established companies or the market average in general.
These companies may have limited product lines, markets or financial resources, or they may be
dependent on a limited management group.
While smaller or emerging growth company issuers may offer greater opportunities for capital
appreciation than large cap issuers, investments in smaller or emerging growth companies may
involve greater risks and thus may be considered speculative. Fund management believes that
properly selected companies of this type have the potential to increase their earnings or market
valuation at a rate substantially in excess of the general growth of the economy. Full development
of these companies and trends frequently takes time.
Small cap and emerging growth securities will often be traded only in the OTC market or on a
regional securities exchange and may not be traded every day or in the volume typical of trading on
a national securities exchange. As a result, the disposition by a Fund of portfolio securities to
meet redemptions or otherwise may require the Fund to make many small sales over a lengthy period
of time, or to sell these securities at a discount from market prices or during periods when, in
Fund managements judgment, such disposition is not desirable.
The process of selection and continuous supervision by Fund management does not, of course,
guarantee successful investment results; however, it does provide access to an asset class not
available to the average individual due to the time and cost involved. Careful initial selection is
particularly important in this area as many new enterprises have promise but lack certain of the
fundamental factors necessary to prosper. Investing in small cap and emerging growth companies
requires specialized research and analysis. In addition, many investors cannot invest sufficient
assets in such companies to provide wide diversification.
Small companies are generally little known to most individual investors although some may be
dominant in their respective industries. Fund management believes that relatively small companies
will continue to have the opportunity to develop into significant business enterprises. A Fund may
invest in securities of small issuers in the relatively early stages of business development that
have a new technology, a unique or proprietary product or service, or a favorable market position.
Such companies may not be counted upon to develop into major industrial companies, but Fund
management believes that eventual recognition of their special value characteristics by the
investment community can provide above-average long-term growth to the portfolio.
Equity securities of specific small cap issuers may present different opportunities for long-term
capital appreciation during varying portions of economic or securities market cycles, as well as
during varying stages of their business development. The market valuation of small cap issuers
tends to fluctuate during economic or market cycles, presenting attractive investment opportunities
at various points during these cycles.
Smaller companies, due to the size and kinds of markets that they serve, may be less susceptible
than large companies to intervention from the Federal government by means of price controls,
regulations or litigation.
Short Sales. Certain Funds may make short sales of securities, either as a hedge against potential
declines in value of a portfolio security or to realize appreciation when a security that the Fund
does not own declines in value. When a Fund makes a short sale, it borrows the security sold short
and delivers it to the broker-dealer through which it made the short sale. A Fund may have to pay a
fee to borrow particular securities and is often obligated to turn over any payments received on
such borrowed securities to the lender of the securities.
A Fund secures its obligation to replace the borrowed security by depositing collateral with the
broker-dealer, usually in cash, U.S. Government securities or other liquid securities similar to
those borrowed. With respect to uncovered short positions, a Fund is required to deposit similar
collateral with its custodian, if necessary, to the extent that the value of both collateral
deposits in the aggregate is at all times equal to at least 100% of the current
II-52
market value of the
security sold short. Depending on arrangements made with the broker-dealer from which the
Fund borrowed the security, regarding payment received by the Fund on such security, a Fund may not
receive any payments (including interest) on its collateral deposited with such broker-dealer.
Because making short sales in securities that it does not own exposes a Fund to the risks
associated with those securities, such short sales involve speculative exposure risk. A Fund will
incur a loss as a result of a short sale if the price of the security increases between the date of
the short sale and the date on which the Fund replaces the borrowed security. As a result, if a
Fund makes short sales in securities that increase in value, it will likely underperform similar
mutual funds that do not make short sales in securities. A Fund will realize a gain on a short sale
if the security declines in price between those dates. There can be no assurance that a Fund will
be able to close out a short sale position at any particular time or at an acceptable price.
Although a Funds gain is limited to the price at which it sold the security short, its potential
loss is limited only by the maximum attainable price of the security, less the price at which the
security was sold and may, theoretically, be unlimited.
A Fund may also make short sales against the box without being subject to such limitations. In
this type of short sale, at the time of the sale, the Fund owns or has the immediate and
unconditional right to acquire the identical security at no additional cost.
Sovereign Debt. Investment in sovereign debt can involve a high degree of risk. The governmental
entity that controls the repayment of sovereign debt may not be able or willing to repay the
principal and/or interest when due in accordance with the terms of such debt. A governmental
entitys willingness or ability to repay principal and interest due in a timely manner may be
affected by, among other factors, its cash flow situation, the extent of its foreign reserves, the
availability of sufficient foreign exchange on the date a payment is due, the relative size of the
debt service burden to the economy as a whole, the governmental entitys policy towards the
International Monetary Fund and the political constraints to which a governmental entity may be
subject. Governmental entities may also be dependent on expected disbursements from foreign
governments, multilateral agencies and others abroad to reduce principal and interest arrearages on
their debt. The commitment on the part of these governments, agencies and others to make such
disbursements may be conditioned on the implementation of economic reforms and/or economic
performance and the timely service of such debtors obligations. Failure to implement such reforms,
achieve such levels of economic performance or repay principal or interest when due may result in
the cancellation of such third parties commitments to lend funds to the governmental entity, which
may further impair such debtors ability or willingness to timely service its debts. Consequently,
governmental entities may default on their sovereign debt.
Holders of sovereign debt may be requested to participate in the rescheduling of such debt and to
extend further loans to governmental entities. In the event of a default by a governmental entity,
there may be few or no effective legal remedies for collecting on such debt.
Standby Commitment Agreements. Standby commitment agreements commit a Fund, for a stated period of
time, to purchase a stated amount of securities that may be issued and sold to that Fund at the
option of the issuer. The price of the security is fixed at the time of the commitment. At the time
of entering into the agreement, the Fund is paid a commitment fee, regardless of whether or not the
security is ultimately issued. A Fund will enter into such agreements for the purpose of investing
in the security underlying the commitment at a price that is considered advantageous to the Fund. A
Fund will limit its investment in such commitments so that the aggregate purchase price of
securities subject to such commitments, together with the value of the Funds other illiquid
investments, will not exceed 15% of its net assets taken at the time of the commitment. A Fund
segregates liquid assets in an aggregate amount equal to the purchase price of the securities
underlying the commitment.
There can be no assurance that the securities subject to a standby commitment will be issued, and
the value of the security, if issued, on the delivery date may be more or less than its purchase
price. Since the issuance of the security underlying the commitment is at the option of the issuer,
the Fund may bear the risk of a decline in the value of such security and may not benefit from an
appreciation in the value of the security during the commitment period.
The purchase of a security pursuant to a standby commitment agreement and the related commitment
fee will be recorded on the date on which the security can reasonably be expected to be issued, and
the value of the security thereafter will be reflected in the calculation of a Funds net asset
value. The cost basis of the security will be adjusted by the amount of the commitment fee. In the
event the security is not issued, the commitment fee will be recorded as income on the expiration
date of the standby commitment.
II-53
Stand-by commitments will only be entered into with dealers, banks and broker-dealers which, in the
Managers or sub-advisers opinion, present minimal credit risks. A Fund will acquire stand-by
commitments solely to facilitate
portfolio liquidity and not to exercise its rights thereunder for trading purposes. Stand-by
commitments will be valued at zero in determining net asset value. Accordingly, where a Fund pays
directly or indirectly for a stand-by commitment, its cost will be reflected as an unrealized loss
for the period during which the commitment is held by such Fund and will be reflected as a realized
gain or loss when the commitment is exercised or expires.
Stripped Securities. Stripped securities are created when the issuer separates the interest and
principal components of an instrument and sells them as separate securities. In general, one
security is entitled to receive the interest payments on the underlying assets (the interest only
or IO security) and the other to receive the principal payments (the principal only or PO
security). Some stripped securities may receive a combination of interest and principal payments.
The yields to maturity on IOs and POs are sensitive to the expected or anticipated rate of
principal payments (including prepayments) on the related underlying assets, and principal payments
may have a material effect on yield to maturity. If the underlying assets experience greater than
anticipated prepayments of principal, a Fund may not fully recoup its initial investment in IOs.
Conversely, if the underlying assets experience less than anticipated prepayments of principal, the
yield on POs could be adversely affected. Stripped securities may be highly sensitive to changes in
interest rates and rates of prepayment.
The International Bond Portfolio also may purchase stripped securities that evidence ownership in
the future interest payments or principal payments on obligations of non-U.S. governments.
Structured Notes . Structured notes and other related instruments purchased by the Fund are
generally privately negotiated debt obligations where the principal and/or interest is determined
by reference to the performance of a specific asset, benchmark asset, market or interest rate
(reference measure). Issuers of structured notes include corporations and banks. The interest
rate or the principal amount payable upon maturity or redemption may increase or decrease,
depending upon changes in the value of the reference measure. The terms of a structured note may
provide that, in certain circumstances, no principal is due at maturity and, therefore, may result
in a loss of invested capital by a Fund. The interest and/or principal payments that may be made on
a structured product may vary widely, depending on a variety of factors, including the volatility
of the reference measure.
Structured notes may be positively or negatively indexed, so the appreciation of the reference
measure may produce an increase or a decrease in the interest rate or the value of the principal at
maturity. The rate of return on structured notes may be determined by applying a multiplier to the
performance or differential performance of reference measures. Application of a multiplier involves
leverage that will serve to magnify the potential for gain and the risk of loss.
The purchase of structured notes exposes a Fund to the credit risk of the issuer of the structured
product. Structured notes may also be more volatile, less liquid, and more difficult to price
accurately than less complex securities and instruments or more traditional debt securities. The
secondary market for structured notes could be illiquid making them difficult to sell when the Fund
determines to sell them. The possible lack of a liquid secondary market for structured notes and
the resulting inability of the Fund to sell a structured note could expose the Fund to losses and
could make structured notes more difficult for the Fund to value accurately.
Supranational Entities. A Fund may invest in debt securities of supranational entities. Examples of
such entities include the International Bank for Reconstruction and Development (the World Bank),
the European Steel and Coal Community, the Asian Development Bank and the Inter-American
Development Bank. The government members, or stockholders, usually make initial capital
contributions to the supranational entity and in many cases are committed to make additional
capital contributions if the supranational entity is unable to repay its borrowings. There is no
guarantee that one or more stockholders of a supranational entity will continue to make any
necessary additional capital contributions. If such contributions are not made, the entity may be
unable to pay interest or repay principal on its debt securities, and a Fund may lose money on such
investments.
Tax-Exempt Derivatives. Certain Funds may hold tax-exempt derivatives which may be in the form of
tender option bonds, participations, beneficial interests in a trust, partnership interests or
other forms. A number of different structures have been used. For example, interests in long-term
fixed-rate municipal debt obligations, held by a bank as trustee or custodian, are coupled with
tender option, demand and other features when the tax-exempt derivatives are created. Together,
these features entitle the holder of the interest to tender (or put) the underlying municipal debt
obligation to a third party at periodic intervals and to receive the principal amount thereof. In
some cases, municipal debt obligations are represented by custodial receipts evidencing rights to
receive specific future interest payments,
II-54
principal payments, or both, on the underlying
securities held by the custodian. Under such arrangements, the holder of the custodial receipt has
the option to tender the underlying securities at their face value to the sponsor
(usually a bank or broker dealer or other financial institution), which is paid periodic fees equal
to the difference between the securities fixed coupon rate and the rate that would cause the
securities, coupled with the tender option, to trade at par on the date of a rate adjustment. A
participation interest gives the Fund an undivided interest in a Municipal Bond in the proportion
the Funds participation bears to the total principal amount of the Municipal Bond, and typically
provides for a repurchase feature for all or any part of the full principal amount of the
participation interest, plus accrued interest. Trusts and partnerships are typically used to
convert long-term fixed rate high quality bonds of a single state or municipal issuer into variable
or floating rate demand instruments. The Municipal Bond Funds may hold tax-exempt derivatives,
such as participation interests and custodial receipts, for municipal debt obligations which give
the holder the right to receive payment of principal subject to the conditions described above. The
Internal Revenue Service (the IRS) has not ruled on whether the interest received on tax-exempt
derivatives in the form of participation interests or custodial receipts is tax-exempt, and
accordingly, purchases of any such interests or receipts are based on the opinions of counsel to
the sponsors of such derivative securities. Neither a Fund nor its investment adviser or
sub-advisers will review the proceedings related to the creation of any tax-exempt derivatives or
the basis for such opinions.
Tax-Exempt Preferred Shares. Certain Funds may invest in preferred interests of other investment
funds that pay dividends that are exempt from regular Federal income tax. Such funds in turn invest
in municipal bonds and other assets that pay interest or make distributions that are exempt from
regular Federal income tax, such as revenue bonds issued by state or local agencies to fund the
development of low-income, multi-family housing. Investment in such tax-exempt preferred shares
involves many of the same issues as investing in other investment companies. These investments also
have additional risks, including liquidity risk, the absence of regulation governing investment
practices, capital structure and leverage, affiliated transactions and other matters, and
concentration of investments in particular issuers or industries. The Municipal Bond Funds will
treat investments in tax-exempt preferred shares as investments in municipal bonds.
Taxability Risk. Certain of the Funds intends to minimize the payment of taxable income to
shareholders by investing in tax-exempt or municipal securities in reliance at the time of purchase
on an opinion of bond counsel to the issuer that the interest paid on those securities will be
excludable from gross income for Federal income tax purposes. Such securities, however, may be
determined to pay, or have paid, taxable income subsequent to the Funds acquisition of the
securities. In that event, the IRS may demand that the Fund pay Federal income taxes on the
affected interest income, and, if the Fund agrees to do so, the Funds yield could be adversely
affected. In addition, the treatment of dividends previously paid or to be paid by the Fund as
exempt interest dividends could be adversely affected, subjecting the Portoflios shareholders to
increased Federal income tax liabilities. If the interest paid on any tax-exempt or municipal
security held by the Fund is subsequently determined to be taxable, the Fund will dispose of that
security as soon as reasonably practicable. In addition, the treatment of dividends previously paid
or to be paid by the Fund as exempt interest dividends could be adversely affected, subjecting
the Funds shareholders to increased Federal income tax liabilities. If the interest paid on any
tax-exempt or municipal security held by the Fund is subsequently determined to be taxable, the
Fund will dispose of that security as soon as reasonably practicable. In addition, future laws,
regulations, rulings or court decisions may cause interest on municipal securities to be subject,
directly or indirectly, to Federal income taxation or interest on state municipal securities to be
subject to state or local income taxation, or the value of state municipal securities to be subject
to state or local intangible personal property tax, or may otherwise prevent the Fund from
realizing the full current benefit of the tax-exempt status of such securities. Any such change
could also affect the market price of such securities, and thus the value of an investment in the
Fund.
Trust Preferred Securities. Certain of the Funds may invest in trust preferred securities. Trust
preferred securities are typically issued by corporations, generally in the form of interest
bearing notes with preferred securities characteristics, or by an affiliated business trust of a
corporation, generally in the form of beneficial interests in subordinated debentures or similarly
structured securities. The trust preferred securities market consists of both fixed and adjustable
coupon rate securities that are either perpetual in nature or have stated maturity dates.
Trust preferred securities are typically junior and fully subordinated liabilities of an issuer and
benefit from a guarantee that is junior and fully subordinated to the other liabilities of the
guarantor. In addition, trust preferred securities typically permit an issuer to defer the payment
of income for five years or more without triggering an event of default. Because of their
subordinated position in the capital structure of an issuer, the ability to defer payments for
extended periods of time without default consequences to the issuer, and certain other features
(such as
II-55
restrictions on common dividend payments by the issuer or ultimate guarantor when full
cumulative payments on
the trust preferred securities have not been made), these trust preferred securities are often
treated as close substitutes for traditional preferred securities, both by issuers and investors.
Trust preferred securities include but are not limited to trust originated preferred securities
(TOPRS(r)); monthly income preferred securities (MIPS(r)); quarterly income bond securities
(QUIBS(r) ); quarterly income debt securities (QUIDS(r)); quarterly income preferred securities
(QUIPS/sm/); corporate trust securities (CORTS(r)); public income notes (PINES(r)); and other
trust preferred securities.
Trust preferred securities are typically issued with a final maturity date, although some are
perpetual in nature. In certain instances, a final maturity date may be extended and/or the final
payment of principal may be deferred at the issuers option for a specified time without default.
No redemption can typically take place unless all cumulative payment obligations have been met,
although issuers may be able to engage in open-market repurchases without regard to whether all
payments have been paid.
Many trust preferred securities are issued by trusts or other special purpose entities established
by operating companies and are not a direct obligation of an operating company. At the time the
trust or special purpose entity sells such preferred securities to investors, it purchases debt of
the operating company (with terms comparable to those of the trust or special purpose entity
securities), which enables the operating company to deduct for tax purposes the interest paid on
the debt held by the trust or special purpose entity. The trust or special purpose entity is
generally required to be treated as transparent for Federal income tax purposes such that the
holders of the trust preferred securities are treated as owning beneficial interests in the
underlying debt of the operating company. Accordingly, payments on the trust preferred securities
are treated as interest rather than dividends for Federal income tax purposes. The trust or special
purpose entity in turn would be a holder of the operating companys debt and would have priority
with respect to the operating companys earnings and profits over the operating companys common
shareholders, but would typically be subordinated to other classes of the operating companys debt.
Typically a preferred share has a rating that is slightly below that of its corresponding operating
companys senior debt securities.
U.S. Government Obligations. A Fund may purchase obligations issued or guaranteed by the U.S.
Government and U.S. Government agencies and instrumentalities. Obligations of certain agencies and
instrumentalities of the U.S. Government are supported by the full faith and credit of the U.S.
Treasury. Others are supported by the right of the issuer to borrow from the U.S. Treasury; and
still others are supported only by the credit of the agency or instrumentality issuing the
obligation. No assurance can be given that the U.S. Government will provide financial support to
U.S. Government-sponsored instrumentalities if it is not obligated to do so by law. Certain U.S.
Treasury and agency securities may be held by trusts that issue participation certificates (such as
Treasury income growth receipts (TIGRs) and certificates of accrual on Treasury certificates
(CATs)). These certificates, as well as Treasury receipts and other stripped securities,
represent beneficial ownership interests in either future interest payments or the future principal
payments on U.S. Government obligations. These instruments are issued at a discount to their face
value and may (particularly in the case of stripped mortgage-backed securities) exhibit greater
price volatility than ordinary debt securities because of the manner in which their principal and
interest are returned to investors.
Examples of the types of U.S. Government obligations that may be held by the Funds include U.S.
Treasury Bills, Treasury Notes and Treasury Bonds and the obligations of the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United States, Small
Business Administration, Ginnie Mae, Fannie Mae, Federal Financing Bank, General Services
Administration, Student Loan Marketing Association, Central Bank for Cooperatives, Federal Home
Loan Banks, Freddie Mac, Federal Intermediate Credit Banks, Federal Land Banks, Farm Credit Banks
System, Maritime Administration, Tennessee Valley Authority and Washington D.C. Armory Board. The
Funds may also invest in mortgage-related securities issued or guaranteed by U.S. Government
agencies and instrumentalities, including such instruments as obligations of Ginnie Mae, Fannie Mae
and Freddie Mac.
Utility Industries
Risks that are intrinsic to the utility industries include difficulty in obtaining an adequate
return on invested capital, difficulty in financing large construction programs during an
inflationary period, restrictions on operations and increased cost and delays attributable to
environmental considerations and regulation, difficulty in raising capital in adequate amounts on
reasonable terms in periods of high inflation and unsettled capital markets, technological
innovations that may render existing plants, equipment or products obsolete, the potential impact
of natural or man-
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made disasters, increased costs and reduced availability of certain types of
fuel, occasional reduced availability and
high costs of natural gas for resale, the effects of energy conservation, the effects of a national
energy policy and lengthy delays and greatly increased costs and other problems associated with the
design, construction, licensing, regulation and operation of nuclear facilities for electric
generation, including, among other considerations, the problems associated with the use of
radioactive materials and the disposal of radioactive wastes. There are substantial differences
among the regulatory practices and policies of various jurisdictions, and any given regulatory
agency may make major shifts in policy from time to time. There is no assurance that regulatory
authorities will, in the future, grant rate increases or that such increases will be adequate to
permit the payment of dividends on common stocks issued by a utility company. Additionally,
existing and possible future regulatory legislation may make it even more difficult for utilities
to obtain adequate relief. Certain of the issuers of securities held in the Funds portfolio may
own or operate nuclear generating facilities. Governmental authorities may from time to time review
existing policies and impose additional requirements governing the licensing, construction and
operation of nuclear power plants. Prolonged changes in climatic conditions can also have a
significant impact on both the revenues of an electric and gas utility as well as the expenses of a
utility, particularly a hydro-based electric utility.
Utility companies in the United States and in foreign countries are generally subject to
regulation. In the United States, most utility companies are regulated by state and/or federal
authorities. Such regulation is intended to ensure appropriate standards of service and adequate
capacity to meet public demand. Generally, prices are also regulated in the United States and in
foreign countries with the intention of protecting the public while ensuring that the rate of
return earned by utility companies is sufficient to allow them to attract capital in order to grow
and continue to provide appropriate services. There can be no assurance that such pricing policies
or rates of return will continue in the future.
The nature of regulation of the utility industries continues to evolve both in the United States
and in foreign countries. In recent years, changes in regulation in the United States increasingly
have allowed utility companies to provide services and products outside their traditional
geographic areas and lines of business, creating new areas of competition within the industries. In
some instances, utility companies are operating on an unregulated basis. Because of trends toward
deregulation and the evolution of independent power producers as well as new entrants to the field
of telecommunications, non-regulated providers of utility services have become a significant part
of their respective industries. The Manager believes that the emergence of competition and
deregulation will result in certain utility companies being able to earn more than their
traditional regulated rates of return, while others may be forced to defend their core business
from increased competition and may be less profitable. Reduced profitability, as well as new uses
of funds (such as for expansion, operations or stock buybacks) could result in cuts in dividend
payout rates. The Manager seeks to take advantage of favorable investment opportunities that may
arise from these structural changes. Of course, there can be no assurance that favorable
developments will occur in the future.
Foreign utility companies are also subject to regulation, although such regulations may or may not
be comparable to those in the United States. Foreign utility companies may be more heavily
regulated by their respective governments than utilities in the United States and, as in the United
States, generally are required to seek government approval for rate increases. In addition, many
foreign utilities use fuels that may cause more pollution than those used in the United States,
which may require such utilities to invest in pollution control equipment to meet any proposed
pollution restrictions. Foreign regulatory systems vary from country to country and may evolve in
ways different from regulation in the United States.
A Funds investment policies are designed to enable it to capitalize on evolving investment
opportunities throughout the world. For example, the rapid growth of certain foreign economies will
necessitate expansion of capacity in the utility industries in those countries. Although many
foreign utility companies currently are government-owned, thereby limiting current investment
opportunities for a Fund, the Manager believes that, in order to attract significant capital for
growth, foreign governments are likely to seek global investors through the privatization of their
utility industries. Privatization, which refers to the trend toward investor ownership of assets
rather than government ownership, is expected to occur in newer, faster-growing economies and in
mature economies. Of course, there is no assurance that such favorable developments will occur or
that investment opportunities in foreign markets will increase.
The revenues of domestic and foreign utility companies generally reflect the economic growth and
development in the geographic areas in which they do business. The Manager will take into account
anticipated economic growth rates and other economic developments when selecting securities of
utility companies.
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Electric. The electric utility industry consists of companies that are engaged principally in the
generation, transmission and sale of electric energy, although many also provide other
energy-related services. In the past,
electric utility companies, in general, have been favorably affected by lower fuel and financing
costs and the full or near completion of major construction programs. In addition, many of these
companies have generated cash flows in excess of current operating expenses and construction
expenditures, permitting some degree of diversification into unregulated businesses. Some electric
utilities have also taken advantage of the right to sell power outside of their traditional
geographic areas. Electric utility companies have historically been subject to the risks associated
with increases in fuel and other operating costs, high interest costs on borrowings needed for
capital construction programs, costs associated with compliance with environmental and safety
regulations and changes in the regulatory climate. As interest rates declined, many utilities
refinanced high cost debt and in doing so improved their fixed charges coverage. Regulators,
however, lowered allowed rates of return as interest rates declined and thereby caused the benefits
of the rate declines to be shared wholly or in part with customers. In a period of rising interest
rates, the allowed rates of return may not keep pace with the utilities increased costs. The
construction and operation of nuclear power facilities are subject to strict scrutiny by, and
evolving regulations of, the Nuclear Regulatory Commission and state agencies which have comparable
jurisdiction. Strict scrutiny might result in higher operating costs and higher capital
expenditures, with the risk that the regulators may disallow inclusion of these costs in rate
authorizations or the risk that a company may not be permitted to operate or complete construction
of a facility. In addition, operators of nuclear power plants may be subject to significant costs
for disposal of nuclear fuel and for decommissioning such plants.
The rating agencies look closely at the business profile of utilities. Ratings for companies are
expected to be impacted to a greater extent in the future by the division of their asset base.
Electric utility companies that focus more on the generation of electricity may be assigned less
favorable ratings as this business is expected to be competitive and the least regulated. On the
other hand, companies that focus on transmission and distribution, which is expected to be the
least competitive and the more regulated part of the business, may see higher ratings given the
greater predictability of cash flow.
A number of states are considering or have enacted deregulation proposals. The introduction of
competition into the industry as a result of such deregulation has at times resulted in lower
revenue, lower credit ratings, increased default risk, and lower electric utility security prices.
Such increased competition may also cause long-term contracts, which electric utilities previously
entered into to buy power, to become stranded assets which have no economic value. Any loss
associated with such contracts must be absorbed by ratepayers and investors. In addition, some
electric utilities have acquired electric utilities overseas to diversify, enhance earnings and
gain experience in operating in a deregulated environment. In some instances, such acquisitions
have involved significant borrowings, which have burdened the acquirers balance sheet. There is no
assurance that current deregulation proposals will be adopted. However, deregulation in any form
could significantly impact the electric utilities industry.
Telecommunications. The telecommunications industry today includes both traditional telephone
companies, with a history of broad market coverage and highly regulated businesses, and cable
companies, which began as small, lightly regulated businesses focused on limited markets. Today
these two historically different businesses are converging in an industry that is trending toward
larger, competitive national and international markets with an emphasis on deregulation. Companies
that distribute telephone services and provide access to the telephone networks still comprise the
greatest portion of this segment, but non-regulated activities such as wireless telephone services,
paging, data transmission and processing, equipment retailing, computer software and hardware and
internet services are becoming increasingly significant components as well. In particular, wireless
and internet telephone services continue to gain market share at the expense of traditional
telephone companies. The presence of unregulated companies in this industry and the entry of
traditional telephone companies into unregulated or less regulated businesses provide significant
investment opportunities with companies that may increase their earnings at faster rates than had
been allowed in traditional regulated businesses. Still, increasing competition, technological
innovations and other structural changes could adversely affect the profitability of such utilities
and the growth rate of their dividends. Given mergers and proposed legislation and enforcement
changes, it is likely that both traditional telephone companies and cable companies will continue
to provide an expanding range of utility services to both residential, corporate and governmental
customers.
Gas. Gas transmission companies and gas distribution companies are undergoing significant changes.
In the United States, interstate transmission companies are regulated by the Federal Energy
Regulatory Commission, which is reducing its regulation of the industry. Many companies have
diversified into oil and gas exploration and development, making returns more sensitive to energy
prices. In the recent decade, gas utility companies have been adversely affected by disruptions in
the oil industry and have also been affected by increased concentration and
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competition. In the
opinion of the Manager, however, environmental considerations could improve the gas industry
outlook in the future. For example, natural gas is the cleanest of the hydrocarbon fuels, and this
may result in incremental shifts in fuel consumption toward natural gas and away from oil and coal,
even for electricity generation. However, technological or regulatory changes within the industry
may delay or prevent this result.
Water. Water supply utilities are companies that collect, purify, distribute and sell water. In the
United States and around the world the industry is highly fragmented because most of the supplies
are owned by local authorities. Companies in this industry are generally mature and are
experiencing little or no per capita volume growth. In the opinion of the Manager, there may be
opportunities for certain companies to acquire other water utility companies and for foreign
acquisition of domestic companies. The Manager believes that favorable investment opportunities may
result from consolidation of this segment. As with other utilities, however, increased regulation,
increased costs and potential disruptions in supply may adversely affect investments in water
supply utilities.
Utility Industries Generally. There can be no assurance that the positive developments noted above,
including those relating to privatization and changing regulation, will occur or that risk factors
other than those noted above will not develop in the future.
When Issued Securities, Delayed Delivery Securities and Forward Commitments. A Fund may purchase or
sell securities that it is entitled to receive on a when issued basis. A Fund may also purchase or
sell securities on a delayed delivery basis or through a forward commitment (including on a TBA
(to be announced) basis). These transactions involve the purchase or sale of securities by a Fund
at an established price with payment and delivery taking place in the future. The Fund enters into
these transactions to obtain what is considered an advantageous price to the Fund at the time of
entering into the transaction. When a Fund purchases securities in these transactions, the Fund
segregates liquid securities in an amount equal to the amount of its purchase commitments.
There can be no assurance that a security purchased on a when issued basis will be issued or that a
security purchased or sold on a delayed delivery basis or through a forward commitment will be
delivered. Also, the value of securities in these transactions on the delivery date may be more or
less than the price paid by the Fund to purchase the securities. The Fund will lose money if the
value of the security in such a transaction declines below the purchase price and will not benefit
if the value of the security appreciates above the sale price during the commitment period.
If deemed advisable as a matter of investment strategy, a Fund may dispose of or renegotiate a
commitment after it has been entered into, and may sell securities it has committed to purchase
before those securities are delivered to the Fund on the settlement date. In these cases the Fund
may realize a taxable capital gain or loss.
When a Fund engages in when-issued, TBA or forward commitment transactions, it relies on the other
party to consummate the trade. Failure of such party to do so may result in the Funds incurring a
loss or missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a commitment to purchase securities, and any
subsequent fluctuations in their market value, is taken into account when determining the market
value of a Fund starting on the day the Fund agrees to purchase the securities. The Fund does not
earn interest on the securities it has committed to purchase until they are paid for and delivered
on the settlement date.
Yields and Ratings. The yields on certain obligations are dependent on a variety of factors,
including general market conditions, conditions in the particular market for the obligation, the
financial condition of the issuer, the size of the offering, the maturity of the obligation and the
ratings of the issue. The ratings of Moodys, Fitch and S&P represent their respective opinions as
to the quality of the obligations they undertake to rate. Ratings, however, are general and are
not absolute standards of quality. Consequently, obligations with the same rating, maturity and
interest rate may have different market prices. Subsequent to its purchase by a Fund, a rated
security may cease to be rated. A Funds Manager or sub-adviser will consider such an event in
determining whether the Fund should continue to hold the security.
Zero Coupon Securities. Zero coupon securities are securities that are sold at a discount to par
value and do not pay interest during the life of the security. The discount approximates the total
amount of interest the security will accrue and compound over the period until maturity at a rate
of interest reflecting the market rate of the security at the time of issuance. Upon maturity, the
holder of a zero coupon security is entitled to receive the par value of the security.
While interest payments are not made on such securities, holders of such securities are deemed to
have received income (phantom income) annually, notwithstanding that cash may not be received
currently. The effect of
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owning instruments that do not make current interest payments is that a
fixed yield is earned not only on the original
investment but also, in effect, on all discount accretion during the life of the obligations. This
implicit reinvestment of earnings at a fixed rate eliminates the risk of being unable to invest
distributions at a rate as high as the implicit yield on the zero coupon bond, but at the same time
eliminates the holders ability to reinvest at higher rates in the future. For this reason, some of
these securities may be subject to substantially greater price fluctuations during periods of
changing market interest rates than are comparable securities that pay interest currently. Longer
term zero coupon bonds are more exposed to interest rate risk than shorter term zero coupon bonds.
These investments benefit the issuer by mitigating its need for cash to meet debt service, but also
require a higher rate of return to attract investors who are willing to defer receipt of cash.
A Fund accrues income with respect to these securities for Federal income tax and accounting
purposes prior to the receipt of cash payments. Zero coupon securities may be subject to greater
fluctuation in value and less liquidity in the event of adverse market conditions than comparably
rated securities that pay cash interest at regular intervals.
Further, to maintain its qualification for pass-through treatment under the Federal tax laws, a
Fund is required to distribute income to its shareholders and, consequently, may have to dispose of
other, more liquid portfolio securities under disadvantageous circumstances or may have to leverage
itself by borrowing in order to generate the cash to satisfy these distributions. The required
distributions may result in an increase in a Funds exposure to zero coupon securities.
In addition to the above-described risks, there are certain other risks related to investing in
zero coupon securities. During a period of severe market conditions, the market for such securities
may become even less liquid. In addition, as these securities do not pay cash interest, a Funds
investment exposure to these securities and their risks, including credit risk, will increase
during the time these securities are held in the Funds portfolio.
Suitability (All Funds)
The economic benefit of an investment in any Fund depends upon many factors beyond the control of
the Fund, the Manager and its affiliates. Each Fund should be considered a vehicle for
diversification and not as a balanced investment program. The suitability for any particular
investor of a purchase of shares in a Fund will depend upon, among other things, such investors
investment objectives and such investors ability to accept the risks associated with investing in
securities, including the risk of loss of principal.
Investment Restrictions (All Funds)
See Investment Restrictions in Part I of each Funds Statement of Additional Information for the
specific fundamental and non-fundamental investment restrictions adopted by each Fund. In addition
to those investment restrictions, each Fund is also subject to the restrictions discussed below.
The staff of the Commission has taken the position that purchased OTC options and the assets used
as cover for written OTC options are illiquid securities. Therefore, each Fund has adopted an
investment policy pursuant to which it will not purchase or sell OTC options (including OTC options
on futures contracts) if, as a result of any such transaction, the sum of the market value of OTC
options currently outstanding that are held by the Fund, the market value of the underlying
securities covered by OTC call options currently outstanding that were sold by the Fund and margin
deposits on the Funds existing OTC options on financial futures contracts would exceed 15% of the
net assets of the Fund, taken at market value, together with all other assets of the Fund that are
determined to be illiquid. However, if an OTC option is sold by a Fund to a primary U.S. Government
securities dealer recognized by the Federal Reserve Bank of New York and if the Fund has the
unconditional contractual right to repurchase such OTC option from the dealer at a predetermined
price, then the Fund will treat as illiquid only such amount of the underlying securities as is
equal to the repurchase price less the amount by which the option is in-the-money (i.e., current
market value of the underlying securities minus the options strike price). The repurchase price
with the primary dealers is typically a formula price that is generally based on a multiple of the
premium received for the option, plus the amount by which the option is in-the-money. This policy
as to OTC options is not a fundamental policy of any Fund and may be amended by the Board of
Directors of the Fund without the approval of the Funds shareholders.
Each Funds investments will be limited in order to allow the Fund to qualify as a regulated
investment company for purposes of the Code. See Dividends and Taxes Taxes. To qualify, among
other requirements, each Fund will limit its investments so that, at the close of each quarter of
the taxable year, (i) at least 50% of the market value of each Funds assets is represented by
cash, securities of other regulated investment companies, U.S. government securities and other
securities, with such other securities limited, in respect of any one issuer, to an amount not
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greater than 5% of the Funds assets and not greater than 10% of the outstanding voting securities
of such issuer and
(ii) not more than 25% of the value of its assets is invested in the securities (other than U.S.
government securities or securities of other regulated investment companies) of any one issuer, any
two or more issuers of which 20% or more of the voting stock is held by the Fund and that are
determined to be engaged in the same or similar trades or businesses or related trades or
businesses or in the securities of one or more qualified publicly traded partnerships (i.e.,
partnerships that are traded on an established securities market or tradable on a secondary market,
other than partnerships that derive 90% of their income from interest, dividends, capital gains and
other traditionally permitted mutual fund income). For purposes of this restriction, the Municipal
Funds generally will regard each state and each of its political subdivisions, agencies or
instrumentalities and each multi-state agency of which the state is a member as a separate issuer.
Each public authority that issues securities on behalf of a private entity generally will also be
regarded as a separate issuer, except that if the security is backed only by the assets and
revenues of a non-government entity, then the entity with the ultimate responsibility for the
payment of interest and principal may be regarded as the sole issuer. Foreign government securities
(unlike U.S. government securities) are not exempt from the diversification requirements of the
Code and the securities of each foreign government issuer are considered to be obligations of a
single issuer. These tax-related limitations may be changed by the Directors of a Fund to the
extent necessary to comply with changes to the Federal tax requirements. A Fund that is
diversified under the Investment Company Act must satisfy the foregoing 5% and 10% requirements
with respect to 75% of its total assets.
Code of Ethics
Each Fund, the Manager, each Sub-Adviser and the Distributor has adopted a Code of Ethics pursuant
to Rule 17j-1 under the Investment Company Act. The Codes of Ethics establish procedures for
personal investing and restrict certain transactions. Employees subject to the Code of Ethics may
invest in securities for their personal investment accounts, including securities that may be
purchased or held by a Fund.
Management and Other Service Arrangements
Directors and Officers
See Information on Directors and Officers, Biographical Information, Share Ownership and
Compensation of Directors in Part I of each Funds Statement of Additional Information for
biographical and certain other information relating to the Directors and officers of your Fund,
including Directors compensation.
Management Arrangements
Management Services. The Manager provides each Fund with investment advisory and management
services. Subject to the oversight of the Board of Directors, the Manager is responsible for the
actual management of a Funds portfolio and reviews the Funds holdings in light of its own
research analysis and that from other relevant sources. The responsibility for making decisions to
buy, sell or hold a particular security rests with the Manager. The Manager performs certain of the
other administrative services and provides all the office space, facilities, equipment and
necessary personnel for management of each Fund.
Each Feeder Fund invests all or a portion of its assets in shares of a Master Portfolio. To the
extent a Feeder Fund invests all of its assets in a Master Portfolio, it does not invest directly
in portfolio securities and does not require management services. For such Feeder Funds, portfolio
management occurs at the Master Portfolio level.
Management Fee. Each Fund has entered into a Management Agreement with the Manager pursuant to
which the Manager receives for its services to the Fund monthly compensation at an annual rate
based on the average daily net assets of the Fund. For information regarding specific fee rates for
your Fund and the fees paid by your Fund to the Manager for the Funds last three fiscal years or
other applicable periods, see Management and Advisory Arrangements in Part I of each Funds
Statement of Additional Information.
For Funds that do not have an administrator, each Management Agreement obligates the Manager to
provide management services and to pay all compensation of and furnish office space for officers
and employees of a Fund in connection with investment and economic research, trading and investment
management of the Fund, as well as the fees of all Directors of the Fund who are interested persons
of the Fund. Each Fund pays all other expenses incurred in the operation of that Fund, including
among other things: taxes; expenses for legal and auditing services;
II-61
costs of preparing, printing
and mailing proxies, shareholder reports, prospectuses and statements of additional
information, except to the extent paid by BlackRock Investments, LLC (BRIL or the Distributor);
charges of the custodian and sub-custodian, and the transfer agent; expenses of redemption of
shares; Commission fees; expenses of registering the shares under Federal, state or foreign laws;
fees and expenses of Directors who are not interested persons of a Fund as defined in the
Investment Company Act; accounting and pricing costs (including the daily calculations of net asset
value); insurance; interest; brokerage costs; litigation and other extraordinary or non-recurring
expenses; and other expenses properly payable by the Fund. Certain accounting services are provided
to each Fund by State Street Bank and Trust Company (State Street) or BNY Mellon Investment
Servicing (US) Inc. (BNY Mellon) pursuant to an agreement between State Street or BNY Mellon, as
applicable, and each Fund. Each Fund pays a fee for these services. In addition, the Manager
provides certain accounting services to each Fund and the Fund pays the Manager a fee for such
services. The Distributor pays certain promotional expenses of the Funds incurred in connection
with the offering of shares of the Funds. Certain expenses are financed by each Fund pursuant to
distribution plans in compliance with Rule 12b-1 under the Investment Company Act. See Purchase of
Shares Distribution Plans.
Sub-Advisory Fee. The Manager of certain Funds has entered into one or more sub-advisory agreements
(the Sub-Advisory Agreements) with the sub-adviser or sub-advisers identified in each such Funds
prospectus (the Sub-Adviser) pursuant to which the Sub-Adviser provides sub-advisory services to
the Manager with respect to the Fund. For information relating to the fees, if any, paid by the
Manager to the Sub-Adviser pursuant to the Sub-Advisory Agreement for the Funds last three fiscal
years or other applicable periods, see Management and Advisory Arrangements in Part I of each
Funds Statement of Additional Information.
Organization of the Manager. The Manager, BlackRock Advisors, LLC, is a Delaware limited liability
company and an indirect, wholly owned subsidiary of BlackRock, Inc. BlackRock, Inc., through its
subsidiaries and divisions, provides (i) investment management services to individuals and
institutional investors through separate account management, non-discretionary advisory programs
and commingled investment vehicles; (ii) risk management services, investment accounting and trade
processing tools; (iii) transition management services, and (iv) securities lending services.
Duration and Termination. Unless earlier terminated as described below, each Management Agreement
and each Sub-Advisory Agreement will remain in effect for an initial two year period and from year
to year thereafter if approved annually (a) by the Board of Directors or by a vote of a majority of
the outstanding voting securities of a Fund and (b) by a majority of the Directors of the Fund who
are not parties to such agreement or interested persons (as defined in the Investment Company Act)
of any such party. Each Management Agreement automatically terminates on assignment and may be
terminated without penalty on 60 days written notice at the option of either party thereto or by
the vote of the shareholders of the applicable Fund.
Other Service Arrangements
Administrative Services and Administrative Fee. Certain Funds have entered into an administration
agreement (the Administration Agreement) with an administrator identified in the Funds
Prospectus and Part I of the Funds Statement of Additional Information (each an Administrator).
For its services to a Fund, the Administrator receives monthly compensation at the annual rate set
forth in each applicable Funds prospectus. For information regarding any administrative fees paid
by your Fund to the Administrator for the periods indicated, see Management and Advisory
Arrangements in Part I of that Funds Statement of Additional Information.
For Funds that have an Administrator, the Administration Agreement obligates the Administrator to
provide certain administrative services to the Fund and to pay, or cause its affiliates to pay, for
maintaining its staff and personnel and to provide office space, facilities and necessary personnel
for the Fund. Each Administrator is also obligated to pay, or cause its affiliates to pay, the fees
of those officers and Directors of the Fund who are affiliated persons of the Administrator or any
of its affiliates.
Duration and Termination of Administration Agreement. Unless earlier terminated as described below,
each Administration Agreement will continue for an initial two year period and from year to year if
approved annually (a) by the Board of Directors of each applicable Fund or by a vote of a majority
of the outstanding voting securities of such Fund and (b) by a majority of the Directors of the
Fund who are not parties to such contract or interested persons (as defined in the Investment
Company Act) of any such party. Such contract is not assignable and may be
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terminated without penalty on 60 days written notice at the option of either party thereto or by
the vote of the shareholders of the Fund.
Transfer Agency Services. BNY Mellon Investment Servicing (US) Inc. (in this capacity, the
Transfer Agent), a subsidiary of The Bank of New York Mellon Corporation, acts as each Funds
Transfer Agent pursuant to a Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing
Agency Agreement (the Transfer Agency Agreement) with the Funds. Pursuant to the Transfer Agency
Agreement, the Transfer Agent is responsible for the issuance, transfer and redemption of shares
and the opening and maintenance of shareholder accounts. Each Fund pays the Transfer Agent a fee
for the services it receives based on the type of account and the level of services required. Each
Fund reimburses the Transfer Agents reasonable out-of-pocket expenses and pays a fee of 0.10% of
account assets for certain accounts that participate in certain fee-based programs sponsored by the
Manager or its affiliates. For purposes of each Transfer Agency Agreement, the term account
includes a shareholder account maintained directly by the Transfer Agent and any other account
representing the beneficial interest of a person in the relevant share class on a recordkeeping
system. Effective July 1, 2010, the Transfer Agent ceased to be an affiliate of the Funds.
Information on the transfer agency fees paid by your Fund for the periods indicated prior to July
1, 2010 can be found under Management and Advisory Arrangements Transfer Agency Services in
Part I of each Funds Statement of Additional Information.
Independent Registered Public Accounting Firm. The Audit Committee of each Fund, which is comprised
of all of the Funds non-interested Directors, has selected an independent registered public
accounting firm for that Fund that audits the Funds financial statements. Please see the inside
back cover page of your Funds Prospectus for information on your Funds independent registered
public accounting firm.
Custodian Services. The name and address of the custodian (the Custodian) of each Fund are
provided on the inside back cover page of the Funds Prospectus. The Custodian is responsible for
safeguarding and controlling the Funds cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Funds investments. The Custodian is
authorized to establish separate accounts in foreign currencies and to cause foreign securities
owned by the Fund to be held in its offices outside the United States and with certain foreign
banks and securities depositories.
For certain Feeder Funds, the Custodian also acts as the custodian of the Master Portfolios
assets.
With respect to each Fund, under an arrangement effective January 1, 2010, on a monthly basis, the
Custodian nets the Funds daily positive and negative cash balances and calculates a credit
(custody credit) or a charge based on that net amount. The custodian fees, including the amount
of any overdraft charges, may be reduced by the amount of such custody credits, and any unused
credits at the end of a given month may be carried forward to a subsequent month. Any such credits
unused by the end of a Funds fiscal year will not expire. Net debits at the end of a given month
are added to the Funds custody bill and paid by the Fund.
Accounting Services. Each Fund has entered into an agreement with State Street or BNY Mellon,
pursuant to which State Street or BNY Mellon provides certain accounting services to the Fund. Each
Fund pays a fee for these services. State Street or BNY Mellon provides similar accounting services
to the Master LLCs. The Manager or the Administrator also provides certain accounting services to
each Fund and each Fund reimburses the Manager or the Administrator for these services.
See Management and Advisory Arrangements Accounting Services in Part I of each Funds
Statement of Additional Information for information on the amounts paid by your Fund and, if
applicable, Master LLC to State Street and the Manager or, if applicable, the Administrator for the
periods indicated.
Distribution Expenses. Each Fund has entered into a distribution agreement with the Distributor in
connection with the continuous offering of each class of shares of the Fund (the Distribution
Agreements). The Distribution Agreements obligate the Distributor to pay certain expenses in
connection with the offering of each class of shares of the Funds. After the prospectuses,
statements of additional information and periodic reports have been prepared, set in type and
mailed to shareholders, the Distributor pays for the printing and distribution of these documents
used in connection with the offering to dealers and investors. The Distributor also pays for other
supplementary sales literature and advertising costs. Each Distribution Agreement is subject to the
same renewal requirements and termination provisions as the Management Agreement described above.
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Code of Ethics
Each Fund, the Manager, each Sub-Adviser and the Distributor has adopted a Code of Ethics pursuant
to Rule 17j-1 under the Investment Company Act. The Codes of Ethics establish procedures for
personal investing and restrict certain transactions. Employees subject to the Code of Ethics may
invest in securities for their personal investment accounts, including securities that may be
purchased or held by a Fund.
Selective Disclosure of Portfolio Holdings
The Board of Directors/Trustees each of the Funds and the Board of Directors of the Manager have
each approved Portfolio Information Distribution Guidelines (the Guidelines) regarding the
disclosure of the Funds portfolio securities, as applicable, and other portfolio information. The
purpose of the Guidelines is to ensure that (i) shareholders and prospective shareholders of the
Fund have equal access to portfolio holdings and characteristics and (ii) third parties (such as
consultants, intermediaries and third-party data providers) have access to such information no more
frequently than shareholders and prospective shareholders.
Pursuant to the Guidelines, the Funds and the Manager may, under certain circumstances as set forth
below, make selective disclosure with respect to the Funds portfolio holdings. The Funds Board
has approved the adoption by the Funds of the Guidelines, and employees of the Manager are
responsible for adherence to the Guidelines. The Funds Board provides ongoing oversight of the
Funds and Managers compliance with the Guidelines. Examples of the types of information that may
be disclosed pursuant to the Guidelines are provided below. This information may be both material
non-public information (Confidential Information) and proprietary information of the Manager.
Information that is non-material or that may be obtained from public sources (i.e., information
that has been publicly disclosed via a filing with the Securities and Exchange Commission (e.g.,
fund annual report), through a press release or placement on a publicly-available internet web
site) shall not be deemed Confidential Information.
Except as otherwise provided in the Guidelines, Confidential Information relating to the Funds may
not be distributed to persons not employed by the Manager unless: the Fund has a legitimate
business purpose for doing so. Confidential Information may be disclosed to the Funds Board
members and their counsel, outside counsel for the Funds and the Funds auditors, and may be
disclosed to the Funds service providers and other appropriate parties with the approval of the
Funds Chief Compliance Officer, the Managers General Counsel, the Managers Chief Compliance
Officer or the designee of such persons, and in addition, in the case of disclosure to third
parties, subject to a confidentiality or non-disclosure agreement, as necessary in accordance with
the Guidelines. Information may also be disclosed as required by applicable laws and regulation.
Examples of instances in which selective disclosure of a Funds portfolio securities or other
portfolio information may be appropriate include: (i) disclosure for due diligence purposes to an
investment adviser that is in merger or acquisition talks with the Manager; (ii) disclosure to a
newly-hired investment adviser or sub-adviser prior to its commencing its duties; (iii) disclosure
to a third-party feeder fund consistent with its agreement with a master portfolio advised by
BlackRock; (iv) disclosure to third-party service providers of legal, auditing, custody, proxy
voting, pricing and other services to the Fund; or (v) disclosure to a rating or ranking
organization.
Asset and Return Information. Data on NAVs, asset levels (by total fund and share class), accruals,
yields, capital gains, dividends and fund returns (net of fees by share class) are generally
available to shareholders, prospective shareholders, consultants and third-party data providers
upon request, as soon as such data is available. Data on number of shareholders (total and by share
class) and benchmark returns (including performance measures such as standard deviation,
information ratio, Sharpe ratio, alpha, and beta) are generally available to shareholders,
prospective shareholders, consultants and third-party data providers as soon as such data is
released after month-end.
Portfolio Characteristics. Examples of portfolio characteristics include sector allocation, credit
quality breakdown, maturity distribution, duration and convexity measures, average credit quality,
average maturity, average coupon, top 10 holdings with percent of the fund held, average market
capitalization, capitalization range, ROE, P/E, P/B, P/CF, P/S and EPS.
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1. Month-end portfolio characteristics are available to shareholders, prospective shareholders,
intermediaries and consultants on the fifth calendar day after month-end.1
2. Fund Fact Sheets, which contain certain portfolio characteristics, are available, in both hard
copy and electronically, to shareholders, prospective shareholders, intermediaries and consultants
on a monthly or quarterly basis no earlier than the fifth calendar day after the end of a month or
quarter.
3. Money Market Performance Reports, which contain money market fund performance for the recent
month, rolling 12-month average yields and benchmark performance, are available on a monthly basis
to shareholders, prospective shareholders, intermediaries and consultants by the tenth calendar day
of the month. This information may also be obtained electronically upon request.
Portfolio Holdings. In addition to position description, portfolio holdings may also include issuer
name, CUSIP, ticker symbol, total shares and market value for equity portfolios and issuer name,
CUSIP, ticker symbol, coupon, maturity, current face value and market value for fixed income
portfolios. Other information that may be provided includes quantity, SEDOL, market price, yield,
weighted average life, duration and convexity of each security in the Fund as of a specific date.
The following shall not be deemed a disclosure of Confidential Information:
|
|
|
Generally, month-end portfolio holdings may be made available to fund shareholders,
prospective shareholders, intermediaries, consultants and third party data providers (e.g.,
Lipper, Morningstar and Bloomberg) on the 20th calendar day after the end of each month;
except for Global Allocation Fund, Global Dynamic Equity Fund, Global Allocation Portfolio
of BlackRock Series Fund, Inc. and Global Allocation V.I. Fund, whose holdings may be made
available on the 40th calendar day after the end of the quarter (based on each
Funds fiscal year end).2 |
The following information as it relates to money market funds, unless made available to the public,
shall be deemed a disclosure of Confidential Information and, subject to the Guidelines, requires a
confidentiality or non-disclosure arrangement:
|
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|
Weekly portfolio holdings made available to fund shareholders, prospective shareholders,
intermediaries and consultants on the next business day after the end of the weekly period. |
|
|
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|
Weekly portfolio holdings and characteristics made available to third-party data
providers (e.g., Lipper, Morningstar, Bloomberg, S&P, Fitch, Moodys, Crane Data and
iMoneyNet, Inc.) on the next business day after the end of the weekly period. |
Other Information. The Guidelines shall also apply to other Confidential Information of a Fund such
as attribution analyses or security-specific information (e.g., information about Fund holdings
where an issuer has been downgraded, been acquired or declared bankruptcy).
Implementation. All employees of the Manager must adhere to the Guidelines when responding to
inquiries from shareholders, prospective shareholders, consultants, and third-party databases. The
Funds Chief Compliance Officer is responsible for oversight of compliance with the Guidelines and
will recommend to the Funds Board any changes to the Guidelines that he or she deems necessary or
appropriate to ensure the Funds and the Managers compliance.
Ongoing Arrangements. The Manager has entered into ongoing agreements to provide selective
disclosure of Fund portfolio holdings to the following persons or entities:
1. |
|
Funds Board of Directors and, if necessary independent Directors counsel and Fund counsel |
|
2. |
|
Funds Transfer Agent |
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1 |
|
The precise number of days specified above
may vary slightly from period to period depending on whether the specified
calendar day falls on a weekend or holiday. |
|
2 |
|
The precise number of days specified above
may vary slightly from period to period depending on whether the specified
calendar day falls on a weekend or holiday. |
II-65
3. |
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Funds Custodian |
|
4. |
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Funds Administrator, if applicable |
|
5. |
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Funds independent registered public accounting firm |
|
6. |
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Funds accounting services provider |
|
7. |
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Independent rating agencies Morningstar, Inc., Lipper Inc., S&P, Moodys, Fitch |
|
8. |
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Information aggregators Wall Street on Demand, Thomson Financial and Bloomberg, eVestments
Alliance, Informa /PSN, Investment Solutions, Crane Data, and iMoneyNet |
|
9. |
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Sponsors of 401(k) plans that include BlackRock-advised funds E.I. Dupont de Nemours and
Company, Inc. |
|
10. |
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Consultants for pension plans that invest in BlackRock-advised funds Rocaton Investment
Advisors, LLC; Mercer Investment Consulting; Pinnacle West; Callan Associates; Brockhouse & Cooper; Cambridge Associates;
Mercer; Morningstar/Investorforce; Russell Investments (Mellon Analytical Solutions) and
Wilshire Associates |
|
11. |
|
Pricing Vendors Reuters Pricing Service, Bloomberg, FT Interactive Data (FT IDC), ITG,
Telekurs Financial, FactSet, Pricing Direct (formerly Bear Stearns Pricing Service), Standard
and Poors Security Evaluations Service, Lehman Index Pricing, Bank of America High Yield
Index, Loan Pricing Corporation (LPC), LoanX, Super Derivatives, IBOXX Index, Barclays Euro
Govt Inflation-Linked Bond Index, JPMorgan Emerging & Developed Market Index, Reuters/WM
Company, Nomura BPI Index, Japan Securities Dealers Association |
|
12. |
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Portfolio Compliance Consultants Oracle/i-Flex Solutions, Inc. |
|
13. |
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Third-party feeder funds Hewitt Money Market Fund, Hewitt Series Fund, Hewitt Financial
Services LLC, Homestead, Inc., Transamerica, State Farm Mutual Fund, Sterling Capital Funds
and their respective boards, sponsors, administrators and other service providers |
|
14. |
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Affiliated feeder funds BlackRock Cayman Prime Money Market Fund, Ltd. and BlackRock
Cayman Treasury Money Market Fund Ltd., and their respective boards, sponsors, administrators
and other service providers |
|
15. |
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Other Chicago Mercantile Exchange, Inc., Be Creative, Inc. and Investment Company
Institute |
With respect to each such arrangement, the Fund has a legitimate business purpose for the release
of information. The release of the information is subject to confidential treatment to prohibit the
entity from sharing with an unauthorized source or trading upon the information provided. The Fund,
the Manager and their affiliates do not receive any compensation or other consideration in
connection with such arrangements.
The Funds and the Manager monitor, to the extent possible, the use of Confidential Information by
the individuals or firms to which it has been disclosed. To do so, in addition to the requirements
of any applicable confidentiality agreement and/or the terms and conditions of the Funds and
Managers Code of Ethics and Code of Business Conduct and Ethics all of which require persons or
entities in possession of Confidential Information to keep such information confidential and not to
trade on such information for their own benefit the Managers compliance personnel under the
supervision of the Funds Chief Compliance Officer, monitor the Managers securities trading desks
to determine whether individuals or firms who have received Confidential Information have made any
trades on the basis of that information. In addition, the Manager maintains an internal restricted
list to prevent trading by the personnel of the Manager or its affiliates in securities
including securities held by the Funds about which the Manager has Confidential Information.
There can be no assurance, however, that the Funds policies and procedures with respect to the
selective disclosure of Fund portfolio holdings will prevent the misuse of such information by
individuals or firms that receive such information.
II-66
Potential Conflicts of Interest
Barclays PLC (Barclays), and The PNC Financial Services Group, Inc. (PNC) each has a
significant economic interest in BlackRock, Inc., the parent of BlackRock Advisors, LLC, the Funds
investment adviser. PNC is considered to be an affiliate of BlackRock, Inc., under the Investment
Company Act. Certain activities of BlackRock Advisors, LLC, BlackRock, Inc. and their affiliates
(collectively, BlackRock) and PNC and its affiliates (collectively, PNC and together with
BlackRock, Affiliates), and those of Barclays and its affiliates (collectively, the Barclays
Entities), with respect to the Funds and/or other accounts managed by BlackRock, PNC or Barclays
Entities, may give rise to actual or perceived conflicts of interest such as those described below.
BlackRock is one of the worlds largest asset management firms. PNC is a diversified financial
services organization spanning the retail, business and corporate markets. Barclays is a major
global financial services provider engaged in a range of activities including retail and commercial
banking, credit cards, investment banking, and wealth management. BlackRock, PNC, Barclays and
their respective affiliates (including, for these purposes, their directors, partners, trustees,
managing members, officers and employees), including the entities and personnel who may be involved
in the investment activities and business operations of a Fund, are engaged worldwide in
businesses, including equity, fixed income, cash management and alternative investments, and have
interests other than that of managing the Funds. These are considerations of which investors in a
Fund should be aware, and which may cause conflicts of interest that could disadvantage the Fund
and its shareholders. These activities and interests include potential multiple advisory,
transactional, financial and other interests in securities and other instruments, and companies
that may be purchased or sold by a Fund.
BlackRock and its Affiliates, as well as the Barclays Entities, have proprietary interests in, and
may manage or advise with respect to, accounts or funds (including separate accounts and other
funds and collective investment vehicles) that have investment objectives similar to those of a
Fund and/or that engage in transactions in the same types of securities, currencies and instruments
as the Fund. One or more Affiliates and Barclays Entities are also major participants in the global
currency, equities, swap and fixed income markets, in each case both on a proprietary basis and for
the accounts of customers. As such, one or more Affiliates or Barclays Entities are or may be
actively engaged in transactions in the same securities, currencies, and instruments in which a
Fund invests. Such activities could affect the prices and availability of the securities,
currencies, and instruments in which a Fund invests, which could have an adverse impact on the
Funds performance. Such transactions, particularly in respect of most proprietary accounts or
customer accounts, will be executed independently of a Funds transactions and thus at prices or
rates that may be more or less favorable than those obtained by the Fund. When BlackRock and its
Affiliates or the Barclays Entities seek to purchase or sell the same assets for their managed
accounts, including a Fund, the assets actually purchased or sold may be allocated among the
accounts on a basis determined in their good faith discretion to be equitable. In some cases, this
system may adversely affect the size or price of the assets purchased or sold for a Fund. In
addition, transactions in investments by one or more other accounts managed by BlackRock or its
Affiliates or a Barclays Entity may have the effect of diluting or otherwise disadvantaging the
values, prices or investment strategies of a Fund, particularly, but not limited to, with respect
to small capitalization, emerging market or less liquid strategies. This may occur when investment
decisions regarding a Fund are based on research or other information that is also used to support
decisions for other accounts. When BlackRock or its Affiliates or a Barclays Entity implements a
portfolio decision or strategy on behalf of another account ahead of, or contemporaneously with,
similar decisions or strategies for a Fund, market impact, liquidity constraints, or other factors
could result in the Fund receiving less favorable trading results and the costs of implementing
such decisions or strategies could be increased or the Fund could otherwise be disadvantaged.
BlackRock or its Affiliates or a Barclays Entity may, in certain cases, elect to implement internal
policies and procedures designed to limit such consequences, which may cause a Fund to be unable to
engage in certain activities, including purchasing or disposing of securities, when it might
otherwise be desirable for it to do so.
Conflicts may also arise because portfolio decisions regarding a Fund may benefit other accounts
managed by BlackRock or its Affiliates or a Barclays Entity. For example, the sale of a long
position or establishment of a short position by a Fund may impair the price of the same security
sold short by (and therefore benefit) one or more Affiliates or Barclays Entities or their other
accounts, and the purchase of a security or covering of a short position in a security by a Fund
may increase the price of the same security held by (and therefore benefit) one or more Affiliates
or Barclays Entities or their other accounts.
II-67
BlackRock and its Affiliates or a Barclays Entity and their clients may pursue or enforce rights
with respect to an issuer in which a Fund has invested, and those activities may have an adverse
effect on the Fund. As a result, prices, availability, liquidity and terms of the Funds
investments may be negatively impacted by the activities of BlackRock or its Affiliates or a
Barclays Entity or their clients, and transactions for the Fund may be impaired or effected at
prices or terms that may be less favorable than would otherwise have been the case.
The results of a Funds investment activities may differ significantly from the results achieved by
BlackRock and its Affiliates or the Barclays Entities for their proprietary accounts or other
accounts (including investment companies or collective investment vehicles) managed or advised by
them. It is possible that one or more Affiliate- or Barclays Entity-managed accounts and such other
accounts will achieve investment results that are substantially more or less favorable than the
results achieved by a Fund. Moreover, it is possible that a Fund will sustain losses during periods
in which one or more Affiliates or Barclays Entity-managed accounts achieve significant profits on
their trading for proprietary or other accounts. The opposite result is also possible. The
investment activities of one or more Affiliates or Barclays Entities for their proprietary accounts
and accounts under their management may also limit the investment opportunities for a Fund in
certain emerging and other markets in which limitations are imposed upon the amount of investment,
in the aggregate or in individual issuers, by affiliated foreign investors.
From time to time, a Funds activities may also be restricted because of regulatory restrictions
applicable to one or more Affiliates or Barclays Entities, and/or their internal policies designed
to comply with such restrictions. As a result, there may be periods, for example, when BlackRock,
and/or one or more Affiliates or Barclays Entities, will not initiate or recommend certain types of
transactions in certain securities or instruments with respect to which BlackRock and/or one or
more Affiliates or Barclays Entities are performing services or when position limits have been
reached.
In connection with its management of a Fund, BlackRock may have access to certain fundamental
analysis and proprietary technical models developed by one or more Affiliates or Barclays Entities.
BlackRock will not be under any obligation, however, to effect transactions on behalf of a Fund in
accordance with such analysis and models. In addition, neither BlackRock nor any of its Affiliates,
nor any Barclays Entity, will have any obligation to make available any information regarding their
proprietary activities or strategies, or the activities or strategies used for other accounts
managed by them, for the benefit of the management of a Fund and it is not anticipated that
BlackRock will have access to such information for the purpose of managing the Fund. The
proprietary activities or portfolio strategies of BlackRock and its Affiliates and the Barclays
Entities, or the activities or strategies used for accounts managed by them or other customer
accounts could conflict with the transactions and strategies employed by BlackRock in managing a
Fund.
In addition, certain principals and certain employees of BlackRock are also principals or employees
of BlackRock or another Affiliate. As a result, the performance by these principals and employees
of their obligations to such other entities may be a consideration of which investors in a Fund
should be aware.
BlackRock may enter into transactions and invest in securities, instruments and currencies on
behalf of a Fund in which customers of BlackRock or its Affiliates or a Barclays Entity, or, to the
extent permitted by the Commission, BlackRock or another Affiliate or a Barclays Entity, serves as
the counterparty, principal or issuer. In such cases, such partys interests in the transaction
will be adverse to the interests of the Fund, and such party may have no incentive to assure that
the Fund obtains the best possible prices or terms in connection with the transactions. In
addition, the purchase, holding and sale of such investments by a Fund may enhance the
profitability of BlackRock or its Affiliates or a Barclays Entity. One or more Affiliates or
Barclays Entities may also create, write or issue derivatives for their customers, the underlying
securities, currencies or instruments of which may be those in which a Fund invests or which may be
based on the performance of the Fund. A Fund may, subject to applicable law, purchase investments
that are the subject of an underwriting or other distribution by one or more Affiliates or Barclays
Entities and may also enter into transactions with other clients of an Affiliate or Barclays Entity
where such other clients have interests adverse to those of the Fund.
At times, these activities may cause departments of BlackRock or its Affiliates or a Barclays
Entity to give advice to clients that may cause these clients to take actions adverse to the
interests of the Fund. To the extent affiliated transactions are permitted, a Fund will deal with
BlackRock and its Affiliates or Barclays Entities on an arms-length basis. BlackRock or its
Affiliates or a Barclays Entity may also have an ownership interest in certain trading or
II-68
information systems used by a Fund. A Funds use of such trading or information systems may enhance
the profitability of BlackRock and its Affiliates or the Barclays Entities.
One or more Affiliates or one of the Barclays Entities may act as broker, dealer, agent, lender or
adviser or in other commercial capacities for a Fund. It is anticipated that the commissions,
mark-ups, mark-downs, financial advisory fees, underwriting and placement fees, sales fees,
financing and commitment fees, brokerage fees, other fees, compensation or profits, rates, terms
and conditions charged by an Affiliate or Barclays Entity will be in its view commercially
reasonable, although each Affiliate or Barclays Entity, including its sales personnel, will have an
interest in obtaining fees and other amounts that are favorable to the Affiliate or Barclays Entity
and such sales personnel.
Subject to applicable law, the Affiliates and Barclays Entities (and their personnel and other
distributors) will be entitled to retain fees and other amounts that they receive in connection
with their service to the Funds as broker, dealer, agent, lender, adviser or in other commercial
capacities and no accounting to the Funds or their shareholders will be required, and no fees or
other compensation payable by the Funds or their shareholders will be reduced by reason of receipt
by an Affiliate or Barclays Entity of any such fees or other amounts.
When an Affiliate or Barclays Entity acts as broker, dealer, agent, adviser or in other commercial
capacities in relation to the Funds, the Affiliate or Barclays Entity may take commercial steps in
its own interests, which may have an adverse effect on the Funds. A Fund will be required to
establish business relationships with its counterparties based on the Funds own credit standing.
Neither BlackRock nor any of the Affiliates, nor any Barclays Entity, will have any obligation to
allow their credit to be used in connection with a Funds establishment of its business
relationships, nor is it expected that the Funds counterparties will rely on the credit of
BlackRock or any of the Affiliates or Barclays Entities in evaluating the Funds creditworthiness.
Purchases and sales of securities for a Fund may be bunched or aggregated with orders for other
BlackRock client accounts. BlackRock and its Affiliates and the Barclays Entities, however, are not
required to bunch or aggregate orders if portfolio management decisions for different accounts are
made separately, or if they determine that bunching or aggregating is not practicable, required or
with cases involving client direction.
Prevailing trading activity frequently may make impossible the receipt of the same price or
execution on the entire volume of securities purchased or sold. When this occurs, the various
prices may be averaged, and the Funds will be charged or credited with the average price. Thus, the
effect of the aggregation may operate on some occasions to the disadvantage of the Funds. In
addition, under certain circumstances, the Funds will not be charged the same commission or
commission equivalent rates in connection with a bunched or aggregated order.
BlackRock may select brokers (including, without limitation, Affiliates or Barclays Entities) that
furnish BlackRock, the Funds, other BlackRock client accounts or other Affiliates or Barclays
Entities or personnel, directly or through correspondent relationships, with research or other
appropriate services which provide, in BlackRocks view, appropriate assistance to BlackRock in the
investment decision-making process (including with respect to futures, fixed-price offerings and
over-the-counter transactions). Such research or other services may include, to the extent
permitted by law, research reports on companies, industries and securities; economic and financial
data; financial publications; proxy analysis; trade industry seminars; computer data bases;
research-oriented software and other services and products. Research or other services obtained in
this manner may be used in servicing any or all of the Funds and other BlackRock client accounts,
including in connection with BlackRock client accounts other than those that pay commissions to the
broker relating to the research or other service arrangements. Such products and services may
disproportionately benefit other BlackRock client accounts relative to the Funds based on the
amount of brokerage commissions paid by the Funds and such other BlackRock client accounts. For
example, research or other services that are paid for through one clients commissions may not be
used in managing that clients account. In addition, other BlackRock client accounts may receive
the benefit, including disproportionate benefits, of economies of scale or price discounts in
connection with products and services that may be provided to the Funds and to such other BlackRock
client accounts. To the extent that BlackRock uses soft dollars, it will not have to pay for those
products and services itself.
BlackRock may receive research that is bundled with the trade execution, clearing, and/or
settlement services provided by a particular broker-dealer. To the extent that BlackRock receives
research on this basis, many of the same conflicts related to traditional soft dollars may exist.
For example, the research effectively will be paid by
II-69
client commissions that also will be used to pay for the execution, clearing, and settlement
services provided by the broker-dealer and will not be paid by BlackRock.
BlackRock may endeavor to execute trades through brokers who, pursuant to such arrangements,
provide research or other services in order to ensure the continued receipt of research or other
services BlackRock believes are useful in its investment decision-making process. BlackRock may
from time to time choose not to engage in the above described arrangements to varying degrees.
BlackRock may also enter into commission sharing arrangements under which BlackRock may execute
transactions through a broker-dealer, including, where permitted, an Affiliate or Barclays Entity,
and request that the broker-dealer allocate a portion of the commissions or commission credits to
another firm that provides research to BlackRock. To the extent that BlackRock engages in
commission sharing arrangements, many of the same conflicts related to traditional soft dollars may
exist.
BlackRock may utilize certain electronic crossing networks (ECNs) in executing client securities
transactions for certain types of securities. These ECNs may charge fees for their services,
including access fees and transaction fees. The transaction fees, which are similar to commissions
or markups/markdowns, will generally be charged to clients and, like commissions and
markups/markdowns, would generally be included in the cost of the securities purchased. Access fees
may be paid by BlackRock even though incurred in connection with executing transactions on behalf
of clients, including the Funds. In certain circumstances, ECNs may offer volume discounts that
will reduce the access fees typically paid by BlackRock. This would have the effect of reducing the
access fees paid by BlackRock. BlackRock will only utilize ECNs consistent with its obligation to
seek to obtain best execution in client transactions.
BlackRock has adopted policies and procedures designed to prevent conflicts of interest from
influencing proxy voting decisions that it makes on behalf of advisory clients, including the
Funds, and to help ensure that such decisions are made in accordance with BlackRocks fiduciary
obligations to its clients. Nevertheless, notwithstanding such proxy voting policies and
procedures, actual proxy voting decisions of BlackRock may have the effect of favoring the
interests of other clients or businesses of other divisions or units of BlackRock and/or its
Affiliates or a Barclays Entity, provided that BlackRock believes such voting decisions to be in
accordance with its fiduciary obligations. For a more detailed discussion of these policies and
procedures, see Proxy Voting Policies and Procedures.
It is also possible that, from time to time, BlackRock or its Affiliates or a Barclays Entity may,
although they are not required to, purchase and hold shares of a Fund. Increasing a Funds assets
may enhance investment flexibility and diversification and may contribute to economies of scale
that tend to reduce the Funds expense ratio. BlackRock and its Affiliates or Barclays Entities
reserve the right to redeem at any time some or all of the shares of a Fund acquired for their own
accounts. A large redemption of shares of a Fund by BlackRock or its Affiliates or by a Barclays
Entity could significantly reduce the asset size of the Fund, which might have an adverse effect on
the Funds investment flexibility, portfolio diversification and expense ratio. BlackRock will
consider the effect of redemptions on a Fund and other shareholders in deciding whether to redeem
its shares.
It is possible that a Fund may invest in securities of companies with which an Affiliate or a
Barclays Entity has or is trying to develop investment banking relationships as well as securities
of entities in which BlackRock or its Affiliates or a Barclays Entity has significant debt or
equity investments or in which an Affiliate or Barclays Entity makes a market. A Fund also may
invest in securities of companies to which an Affiliate or a Barclays Entity provides or may
someday provide research coverage. Such investments could cause conflicts between the interests of
a Fund and the interests of other clients of BlackRock or its Affiliates or a Barclays Entity. In
making investment decisions for a Fund, BlackRock is not permitted to obtain or use material
non-public information acquired by any division, department or Affiliate of BlackRock or of a
Barclays Entity in the course of these activities. In addition, from time to time, the activities
of an Affiliate or a Barclays Entity may limit a Funds flexibility in purchases and sales of
securities. When an Affiliate is engaged in an underwriting or other distribution of securities of
an entity, BlackRock may be prohibited from purchasing or recommending the purchase of certain
securities of that entity for a Fund.
BlackRock and its Affiliates and the Barclays Entities, their personnel and other financial service
providers have interests in promoting sales of the Funds. With respect to BlackRock and its
Affiliates and the Barclays Entities and their personnel, the remuneration and profitability
relating to services to and sales of the Funds or other products may be greater than remuneration
and profitability relating to services to and sales of certain funds or other products that might
be provided or offered. BlackRock and its Affiliates or the Barclays Entities and their sales
personnel
II-70
may directly or indirectly receive a portion of the fees and commissions charged to the Funds or
their shareholders. BlackRock and its advisory or other personnel may also benefit from increased
amounts of assets under management. Fees and commissions may also be higher than for other products
or services, and the remuneration and profitability to BlackRock or its Affiliates or a Barclays
Entity and such personnel resulting from transactions on behalf of or management of the Funds may
be greater than the remuneration and profitability resulting from other funds or products.
BlackRock and its Affiliates or a Barclays Entity and their personnel may receive greater
compensation or greater profit in connection with an account for which BlackRock serves as an
adviser than with an account advised by an unaffiliated investment adviser. Differentials in
compensation may be related to the fact that BlackRock may pay a portion of its advisory fee to its
Affiliate or to a Barclays Entity, or relate to compensation arrangements, including for portfolio
management, brokerage transactions or account servicing. Any differential in compensation may
create a financial incentive on the part of BlackRock or its Affiliates or the Barclays Entities
and their personnel to recommend BlackRock over unaffiliated investment advisers or to effect
transactions differently in one account over another.
BlackRock and its Affiliates or a Barclays Entity may provide valuation assistance to certain
clients with respect to certain securities or other investments and the valuation recommendations
made for their clients accounts may differ from the valuations for the same securities or
investments assigned by a Funds pricing vendors, especially if such valuations are based on
broker-dealer quotes or other data sources unavailable to the Funds pricing vendors. While
BlackRock will generally communicate its valuation information or determinations to a Funds
pricing vendors and/or fund accountants, there may be instances where the Funds pricing vendors or
fund accountants assign a different valuation to a security or other investment than the valuation
for such security or investment determined or recommended by BlackRock.
As disclosed in more detail in Pricing of Shares Determination of Net Asset Value in this
Statement of Additional Information, when market quotations are not readily available or are
believed by BlackRock to be unreliable, a Funds investments may be valued at fair value by
BlackRock, pursuant to procedures adopted by the Funds Board of Directors. When determining an
assets fair value, BlackRock seeks to determine the price that a Fund might reasonably expect to
receive from the current sale of that asset in an arms-length transaction. The price generally may
not be determined based on what a Fund might reasonably expect to receive for selling an asset at a
later time or if it holds the asset to maturity. While fair value determinations will be based upon
all available factors that BlackRock deems relevant at the time of the determination, and may be
based on analytical values determined by BlackRock using proprietary or third party valuation
models, fair value represents only a good faith approximation of the value of a security. The fair
value of one or more securities may not, in retrospect, be the price at which those assets could
have been sold during the period in which the particular fair values were used in determining a
Funds net asset value. As a result, a Funds sale or redemption of its shares at net asset value,
at a time when a holding or holdings are valued by BlackRock (pursuant to Board-adopted procedures)
at fair value, may have the effect of diluting or increasing the economic interest of existing
shareholders.
To the extent permitted by applicable law, a Fund may invest all or some of its short term cash
investments in any money market fund or similarly-managed private fund advised or managed by
BlackRock. In connection with any such investments, a Fund, to the extent permitted by the
Investment Company Act, may pay its share of expenses of a money market fund in which it invests,
which may result in a Fund bearing some additional expenses.
BlackRock and its Affiliates or a Barclays Entity and their directors, officers and employees, may
buy and sell securities or other investments for their own accounts, and may have conflicts of
interest with respect to investments made on behalf of a Fund. As a result of differing trading and
investment strategies or constraints, positions may be taken by directors, officers, employees and
Affiliates of BlackRock or by Barclays Entities that are the same, different from or made at
different times than positions taken for the Fund. To lessen the possibility that a Fund will be
adversely affected by this personal trading, the Fund, BRIL and BlackRock each have adopted a Code
of Ethics in compliance with Section 17(j) of the Investment Company Act that restricts securities
trading in the personal accounts of investment professionals and others who normally come into
possession of information regarding the Funds portfolio transactions. Each Code of Ethics can be
reviewed and copied at the Commissions Public Reference Room in Washington, D.C. Information about
obtaining documents on the Commissions website may be obtained by calling the Commission at (800)
SEC-0330. Each Code of Ethics is also available on the EDGAR Database on the Commissions Internet
site at http://www.sec.gov, and copies may be obtained, after paying a
II-71
duplicating fee, by e-mail at publicinfo@sec.gov or by writing the Commissions Public Reference
Section, Washington, DC 20549-0102.
BlackRock and its Affiliates will not purchase securities or other property from, or sell
securities or other property to, a Fund, except that the Fund may in accordance with rules adopted
under the Investment Company Act engage in transactions with accounts that are affiliated with the
Fund as a result of common officers, directors, or investment advisers or pursuant to exemptive
orders granted to the Funds and/or BlackRock by the Commission. These transactions would be
affected in circumstances in which BlackRock determined that it would be appropriate for the Fund
to purchase and another client of BlackRock to sell, or the Fund to sell and another client of
BlackRock to purchase, the same security or instrument on the same day. From time to time, the
activities of a Fund may be restricted because of regulatory requirements applicable to BlackRock
or its Affiliates or a Barclays Entity and/or BlackRocks internal policies designed to comply
with, limit the applicability of, or otherwise relate to such requirements. A client not advised by
BlackRock would not be subject to some of those considerations. There may be periods when BlackRock
may not initiate or recommend certain types of transactions, or may otherwise restrict or limit
their advice in certain securities or instruments issued by or related to companies for which an
Affiliate or a Barclays Entity is performing investment banking, market making, advisory or other
services or has proprietary positions. For example, when an Affiliate is engaged in an underwriting
or other distribution of securities of, or advisory services for, a company, the Funds may be
prohibited from or limited in purchasing or selling securities of that company. In addition, when
BlackRock is engaged to provide advisory or risk management services for a company, BlackRock may
be prohibited from or limited in purchasing or selling securities of that company on behalf of a
Fund, particularly where such services result in BlackRock obtaining material non-public
information about the company. Similar situations could arise if personnel of BlackRock or its
Affiliates or a Barclays Entity serve as directors of companies the securities of which the Funds
wish to purchase or sell. However, if permitted by applicable law, and where consistent with
BlackRocks policies and procedures (including the necessary implementation of appropriate
information barriers), the Funds may purchase securities or instruments that are issued by such
companies, are the subject of an underwriting, distribution, or advisory assignment by an Affiliate
or a Barclays Entity or are the subject of an advisory or risk management assignment by BlackRock,
or where personnel of BlackRock or its Affiliates or of the Barclays Entities are directors or
officers of the issuer.
In certain circumstances where the Funds invest in securities issued by companies that operate in
certain regulated industries, in certain emerging or international markets, or are subject to
corporate or regulatory ownership definitions, there may be limits on the aggregate amount invested
by Affiliates (including BlackRock) or the Barclays Entities for their proprietary accounts and for
client accounts (including the Funds) that may not be exceeded without the grant of a license or
other regulatory or corporate consent, or, if exceeded, may cause BlackRock, the Funds or other
client accounts to suffer disadvantages or business restrictions. As a result, BlackRock on behalf
of its clients (including the Funds) may limit purchases, sell existing investments, or otherwise
restrict or limit the exercise of rights (including voting rights) when BlackRock, in its sole
discretion, deems it appropriate in light of potential regulatory or other restrictions on
ownership or other consequences resulting from reaching investment thresholds.
In those circumstances where ownership thresholds or limitations must be observed, BlackRock seeks
to allocate limited investment opportunities equitably among clients (including the Funds), taking
into consideration benchmark weight and investment strategy. When ownership in certain securities
nears an applicable threshold, BlackRock may limit purchases in such securities to the issuers
weighting in the applicable benchmark used by BlackRock to manage the Fund. If client (including
Fund) holdings of an issuer exceed an applicable threshold and BlackRock is unable to obtain relief
to enable the continued holding of such investments, it may be necessary to sell down these
positions to meet the applicable limitations. In these cases, benchmark overweight positions will
be sold prior to benchmark positions being reduced to meet applicable limitations.
In addition to the foregoing, other ownership thresholds may trigger reporting requirements to
governmental and regulatory authorities, and such reports may entail the disclosure of the identity
of a client or BlackRocks intended strategy with respect to such security or asset.
BlackRock and its Affiliates and the Barclays Entities may maintain securities indices as part of
their product offerings. Index based funds seek to track the performance of securities indices and
may use the name of the index in the fund name. Index providers, including BlackRock and its
Affiliates and Barclays Entities may be paid licensing fees for use of their index or index name.
BlackRock and its Affiliates and Barclays Entities will not be
II-72
obligated to license their indices to BlackRock, and BlackRock cannot be assured that the terms of
any index licensing agreement with BlackRock and its Affiliates and the Barclays Entities will be
as favorable as those terms offered to other index licensees.
BlackRock and its Affiliates and the Barclays Entities may serve as Authorized Participants in the
creation and redemption of exchange traded funds, including funds advised by affiliates of
BlackRock. BlackRock and its Affiliates and the Barclays Entities may therefore be deemed to be
participants in a distribution of such exchange traded funds, which could render them statutory
underwriters.
The custody arrangement described in Management and Other Service Arrangements may lead to
potential conflicts of interest with BlackRock where BlackRock has agreed to waive fees and/or
reimburse ordinary operating expenses in order to cap expenses of the Funds. This is because the
custody arrangements with the Funds custodian may have the effect of reducing custody fees when
the Funds leave cash balances uninvested. When a Funds actual operating expense ratio exceeds a
stated cap, a reduction in custody fees reduces the amount of waivers and/or reimbursements
BlackRock would be required to make to the Fund. This could be viewed as having the potential to
provide BlackRock an incentive to keep high positive cash balances for Funds with expense caps in
order to offset fund custody fees that BlackRock might otherwise reimburse. However, BlackRocks
portfolio managers do not intentionally keep uninvested balances high, but rather make investment
decisions that they anticipate will be beneficial to fund performance.
Present and future activities of BlackRock and its Affiliates and the Barclays Entities, including
BlackRock Advisors, LLC, in addition to those described in this section, may give rise to
additional conflicts of interest.
Purchase of Shares
Most BlackRock-advised open-end fund offers multiple classes of shares under a plan adopted
under Rule 18f-3 under the Investment Company Act. Investor A Shares are sold to investors choosing
the initial sales charge alternative and Investor B and Investor C Shares are sold to investors
choosing the deferred sales charge alternative. Effective July 1, 2009, Investor B Shares of each
Fund are no longer available for purchase except through exchanges, dividend reinvestments, and for
purchase by certain qualified employee benefit plans. Shareholders with investments in Investor B
Shares as of July 1, 2009 may continue to hold such shares until they automatically convert to
Investor A Shares under the existing conversion schedule. All other features of Investor B Shares,
including the Rule 12b-1 distribution and service fees, contingent deferred sales charge schedules
and conversion features, remain unchanged and continue in effect. Institutional Shares are sold to
certain eligible investors without a sales charge. Certain Funds offer Class R Shares, which are
available only to certain retirement plans and are sold without a sales charge. In addition,
certain Funds offer Service Shares and/or BlackRock Shares that are available only to certain
eligible investors. Please see the appropriate Prospectus for your Fund to determine which classes
are offered by your Fund and under what circumstances. Each class has different exchange
privileges. See Shareholder Services Exchange Privilege.
The applicable offering price for purchase orders is based on the net asset value of a Fund next
determined after receipt of the purchase order by a dealer or other financial intermediary
(Selling Dealer) that has been authorized by the Distributor by contract to accept such orders.
As to purchase orders received by Selling Dealers prior to the close of business on the New York
Stock Exchange (NYSE) (generally, the NYSE closes at 4:00 p.m. Eastern time), on the day the
order is placed, including orders received after the close of business on the previous day, the
applicable offering price is based on the net asset value determined as of the close of business on
the NYSE on that day. If the purchase orders are not received by the Selling Dealer before the
close of business on the NYSE, such orders are deemed received on the next business day. It is the
responsibility of brokers to transmit purchase orders and payment on a timely basis. Generally, if
payment is not received within the period described in the prospectuses, the order will be
canceled, notice thereof will be given, and the broker and its customers will be responsible for
any loss to the Fund or its shareholders. Orders of less than $500 may be mailed by a broker to the
Transfer Agent.
The minimum investment for the initial purchase of shares is set forth in the prospectus for each
Fund. The minimum initial investment for employees of a Fund, a Funds Manager, Sub-Advisers or
BRIL or employees of their affiliates is $100, unless payment is made through a payroll deduction
program in which case the minimum investment is $25.
II-73
Each Fund has lower investment minimums for other categories of shareholders eligible to purchase
Institutional Shares, including selected fee-based programs. Each Fund may permit a lower initial
investment for certain investors if their purchase, combined with purchases by other investors
received together by the Fund, meets the minimum investment requirement. Each Fund may reject any
purchase order, modify or waive the minimum initial or subsequent investment requirements and
suspend and resume the sale of any share class of any Fund at any time.
Under certain circumstances, each Fund may permit certain firms to convert shares of a Fund from
one class of shares to another class of shares of the same Fund. Shareholders should consult with
their own tax advisors regarding any tax consequences relating to such conversions.
Each Fund or the Distributor may suspend the continuous offering of the Funds shares of any class
at any time in response to conditions in the securities markets or otherwise and may resume
offering the shares from time to time. Any order may be rejected by a Fund or the Distributor.
Neither the Distributor, the securities dealers nor other financial intermediaries are permitted to
withhold placing orders to benefit themselves by a price change.
The term purchase, as used in the Prospectus and this Statement of Additional Information, refers
to (i) a single purchase by an individual, (ii) concurrent purchases by an individual, his or her
spouse and their children under the age of 21 years purchasing shares for his, her or their own
account, and (iii) single purchases by a trustee or other fiduciary purchasing shares for a single
trust estate or single fiduciary account although more than one beneficiary may be involved. The
term purchase also includes purchases by any company, as that term is defined in the Investment
Company Act, but does not include purchases by (i) any company that has not been in existence for
at least six months, (ii) a company that has no purpose other than the purchase of shares of a Fund
or shares of other registered investment companies at a discount, or (iii) any group of individuals
whose sole organizational nexus is that its participants are credit cardholders of a company,
policyholders of an insurance company, customers of either a bank or broker-dealer or clients of an
investment adviser.
In-Kind Purchases. Payment for shares of a Fund may, at the discretion of BlackRock, be made in the
form of securities that are permissible investments for the Fund and that meet the investment
objective, policies and limitations of the Fund as described herein. In connection with an in-kind
securities payment, the Fund may require, among other things, that the securities: (i) be valued on
the day of purchase in accordance with the pricing methods used by the Fund; (ii) be accompanied by
satisfactory assurance that the Fund will have good and marketable title to such securities; (iii)
not be subject to any restrictions upon resale by the Fund; (iv) be in proper form for transfer to
the Fund; and (v) be accompanied by adequate information concerning the basis and other tax matters
relating to the securities. All dividends, interest, subscription or other rights pertaining to
such securities shall become the property of the Fund engaged in the in-kind purchase transaction
and must be delivered to the Fund by the investor upon receipt from the issuer. Shares purchased in
exchange for securities generally cannot be redeemed until the transfer has settled.
Institutional Shares
Institutional Shares may be purchased at net asset value without a sales charge. Only certain
investors are eligible to purchase Institutional Shares. Investors who are eligible to purchase
Institutional Shares should purchase Institutional Shares because they are not subject to any sales
charge and have lower ongoing expenses than Investor A, Investor A1, Investor B, Investor B1,
Investor B2, Investor B3, Investor C, Investor C1, Investor C2, Investor C3, Class R or Service
Shares. A Fund may in its discretion waive or modify any minimum investment amount, may reject any
order for any class of shares and may suspend and resume the sale of shares of any Fund at any
time.
Eligible Institutional Share Investors. Institutional Shares of the Funds may be purchased by
customers of broker-dealers and agents that have established a servicing relationship with the Fund
on behalf of their customers. These broker-dealers and agents may impose additional or different
conditions on the purchase or redemption of Fund shares by their customers and may charge their
customers transaction, account or other fees on the purchase and redemption of Fund shares. Each
broker-dealer or agent is responsible for transmitting to its customers a schedule of any such fees
and information regarding any additional or different conditions regarding purchases and
redemptions. Shareholders who are customers of such broker-dealers or agents should consult them
for information regarding these fees and conditions.
II-74
Payment for Institutional Shares must normally be made in Federal funds or other funds immediately
available by 4 p.m. (Eastern time) on the first business day following receipt of the order.
Payment may also, in the discretion of the Fund, be made in the form of securities that are
permissible investments for the Fund. If payment for a purchase order is not received by the
prescribed time, an investor may be liable for any resulting losses or expenses incurred by the
Fund.
Investors who currently own Institutional Shares in a shareholder account are entitled to purchase
additional Institutional Shares of a Fund in that account. In addition, the following investors may
purchase Institutional Shares: employees, officers, directors/trustees of BlackRock, Inc.,
BlackRock Funds, Merrill Lynch & Co., Inc., The PNC Financial Services Group Inc., Barclays PLC or
their respective affiliates and any trust, pension, profit-sharing or other benefit plan for such
persons; institutional and individual retail investors with a minimum investment of $2 million who
purchase through certain broker-dealers or directly from the Fund; certain qualified retirement
plans; investors in selected fee based programs; clients of registered investment advisers who have
$250,000 invested in the Funds; clients of the Trust departments of PNC Bank and Merrill Lynch
Trust Company and their affiliates for whom they (i) act in a fiduciary capacity (excluding
participant directed employee benefit plans); (ii) otherwise have investment discretion; or (iii)
act as custodian for at least $2 million in assets; unaffiliated banks, thrifts or trust companies
that have agreements with a Distributor; certain state sponsored 529 college savings plans; and
holders of certain Merrill Lynch sponsored unit investment trusts (UITs) who reinvest dividends
received from such UITs in shares of a Fund.
Purchase Privileges of Certain Persons. Employees, officers, directors/trustees of BlackRock, Inc.,
BlackRock Funds, Merrill Lynch & Co., Inc., The PNC Financial Services Group Inc., or their
respective affiliates; and any trust, pension, profit-sharing or other benefit plan for such
persons may purchase Institutional Shares at lower investment minimums than stated in each Funds
prospectus. In addition, employees, officers, directors/trustees previously associated with PNC
Global Investment Servicing (U.S.) Inc. in its capacity as the Funds former Transfer Agent and/or
accounting agent, and who, prior to July 1, 2010, acquired Investor A Shares in a Fund without
paying a sales charge based on a waiver for such persons previously in effect, may continue to buy
Investor A Shares in such Fund without paying a sales charge. A Fund realizes economies of scale
and reduction of sales-related expenses by virtue of the familiarity of these persons with the
Fund. Employees, directors, and board members of other funds wishing to purchase shares of a Fund
must satisfy the Funds suitability standards.
Initial Sales Charge Alternative Investor A Shares
Investors who prefer an initial sales charge alternative may elect to purchase Investor A Shares.
Investor A1 Shares generally are not continuously offered but are offered (i) for purchase by
certain authorized employee benefit plans and (ii) to certain investors who currently hold Investor
A1 Shares for dividend and capital gain reinvestment only. For ease of reference, Investor A and
Investor A1 Shares are sometimes referred to herein as front-end load shares.
Investors qualifying for significantly reduced initial sales charges may find the initial sales
charge alternative particularly attractive because similar sales charge reductions are not
available with respect to the deferred sales charges imposed in connection with investments in
Investor B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2 and
Investor C3 Shares (sometimes referred to herein as CDSC shares). Investors who do not qualify
for reduced initial sales charges and who expect to maintain their investment for an extended
period of time also may elect to purchase Investor A Shares, because over time the accumulated
ongoing service and distribution fees on CDSC shares may exceed the front-end load shares initial
sales charge and service fee. Although some investors who previously purchased Institutional Shares
may no longer be eligible to purchase Institutional Shares of other Funds, those previously
purchased Institutional Shares, together with all BlackRock front-end load and CDSC share holdings,
will count toward a right of accumulation that may qualify the investor for a reduced initial sales
charge on new initial sales charge purchases. In addition, the ongoing CDSC shares service and
distribution fees will cause CDSC shares to have higher expense ratios, pay lower dividends and
have lower total returns than the initial sales charge shares. The ongoing front-end load shares
service fees will cause Investor A, Investor A1 and Service Shares to have a higher expense ratio,
pay lower dividends and have a lower total return than Institutional Shares.
II-75
See Information on Sales Charges and Distribution Related Expenses Investor A Sales Charge
Information in Part I of each Funds Statement of Additional Information for information about
amounts paid to the Distributor in connection with Investor A and Investor A1 Shares for the
periods indicated.
The Distributor may reallow discounts to selected securities dealers and other financial
intermediaries and retain the balance over such discounts. At times a Distributor may reallow the
entire sales charge to such dealers. Since securities dealers and other financial intermediaries
selling front-end load shares of a Fund will receive a concession equal to most of the sales
charge, they may be deemed to be underwriters under the Securities Act.
Reduced Initial Sales Charges
Certain investors may be eligible for a reduction in or waiver of a sales load due to the nature of
the investors and/or the reduced sales efforts necessary to obtain their investments.
Reinvested Dividends. No sales charges are imposed upon shares issued as a result of the automatic
reinvestment of dividends.
Rights of Accumulation. Investors have a right of accumulation under which the current value of
an investors existing Investor A, Investor A1, Investor B, Investor B1, Investor B2, Investor B3,
Investor C, Investor C1, Investor C2, Investor C3 and Institutional Shares in most BlackRock Funds
and the investment in the BlackRock College Advantage 529 Program by the investor or by or on
behalf of the investors spouse and minor children may be combined with the amount of the current
purchase in determining whether an investor qualifies for a breakpoint and a reduced front-end
sales charge. Financial intermediaries may value current holdings of their customers differently
for purposes of determining whether an investor qualifies for a breakpoint and a reduced front-end
sales charge, although customers of the same financial intermediary will be treated similarly. In
order to use this right, the investor must alert BlackRock to the existence of any previously
purchased shares.
Letter of Intent. An investor may qualify for a reduced front-end sales charge immediately by
signing a Letter of Intent stating the investors intention to buy a specified amount of Investor
A, Investor B, Investor C or Institutional Shares in one or more BlackRock Funds within the next 13
months that would, if bought all at once, qualify the investor for a reduced sales charge. The
initial investment must meet the minimum initial purchase requirement. The 13-month Letter of
Intent period commences on the day that the Letter of Intent is received by the Fund, and the
investor must tell the Fund that later purchases are subject to the Letter of Intent. Purchases
submitted prior to the date the Letter of Intent is received by the Fund are not counted toward the
sales charge reduction. During the term of the Letter of Intent, the Fund will hold Investor A
Shares representing up to 5% of the indicated amount in an escrow account for payment of a higher
sales load if the full amount indicated in the Letter of Intent is not purchased. If the full
amount indicated is not purchased within the 13-month period, and the investor does not pay the
higher sales load within 20 days, the Fund will redeem enough of the Investor A Shares held in
escrow to pay the difference.
Purchase Privileges of Certain Persons.
Qualified Plans. In general, no sales charge will apply to purchases by authorized qualified
employee benefit plans (Qualified Plans) of Investor A or Investor A1 Shares. BlackRock may pay
placement fees to dealers on purchases of Investor A Shares of all Funds by Qualified Plans.
Except as noted below these placement fees may be up to the following amounts:
|
|
|
|
|
$1 million but less than $3 million |
|
|
0.50 |
% |
$3 million but less than $15 million |
|
|
0.25 |
% |
$15 million and above |
|
|
0.15 |
% |
With respect to BlackRock Balanced Capital Fund and U.S. Mortgage Portfolio the placement fees may
be up to the following amounts:
|
|
|
|
|
$1 million but less than $3 million |
|
|
0.75 |
% |
$3 million but less than $15 million |
|
|
0.50 |
% |
$15 million and above |
|
|
0.25 |
% |
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With respect to the BlackRock Income Portfolio, BlackRock Global Dividend Income Portfolio,
BlackRock Aggressive Growth Prepared Portfolio, BlackRock Conservative Prepared Portfolio,
BlackRock Moderate Prepared Portfolio, BlackRock Growth Prepared Portfolio, and the BlackRock
Lifecycle Prepared Portfolios, the placement fees may be up to the following amounts:
|
|
|
|
|
$1 million but less than $3 million |
|
|
1.00 |
% |
$3 million but less than $15 million |
|
|
0.50 |
% |
$15 million and above |
|
|
0.25 |
% |
For the tables above, the placement fees indicated will apply up to the indicated breakpoint (so
that, for example, a sale of $4 million worth of Bond Fund Investor A Shares will result in a
placement fee of up to 0.50% on the first $3 million and 0.25% on the final $1 million).
Other. The following persons associated with the Funds, the Funds investment adviser,
sub-advisers, distributors, fund accounting agent or transfer agent and their affiliates may buy
Investor A or, where applicable, Investor A1 Shares of each of the Funds without paying a sales
charge to the extent permitted by these firms: (a) officers, directors and partners; (b) employees
and retirees; (c) representatives of firms who have entered into selling agreements to distribute
shares of BlackRock-advised funds; (d) immediate family members of such persons; and (e) any trust,
pension, profit-sharing or other benefit plan for any of the persons set forth in (a) through (d).
In addition, persons previously associated with PNC Global Investment Servicing (U.S.) Inc. (in
any of the roles outlined in (a)-(d) above) in its capacity as the Funds former Transfer Agent
and/or accounting agent, and who, prior to July 1, 2010, acquired Investor A Shares in a Fund
without paying a sales charge based on a waiver for such persons previously in effect, may continue
to buy Investor A Shares in such Fund without paying a sales charge. The following persons may also
buy Investor A Shares without paying a sales charge: (a) authorized qualified employee benefit
plans and rollovers of current investments in a Fund through such plans; (b) persons investing
through an authorized payroll deduction plan; (c) persons investing through an authorized
investment plan for organizations which operate under Section 501(c)(3) of the Code; (d) clients of
registered investment advisers, trust companies and bank trust departments exercising discretionary
investment authority with respect to amounts to be invested in a Fund; (e) persons associated with
the Fund, the Funds Distributor, the Funds Manager, sub-advisers, Barclays PLC and their
affiliates; (f) persons participating in a wrap account or similar program under which they pay
advisory fees to a broker-dealer or other financial institution; (g) persons participating in an
account or program under which they pay fees to a broker-dealer or other financial institution for
providing transaction processing and other administrative services, but not investment advisory
services; (h) certain state sponsored 529 college savings plans; and (i) MetLife employees.
Investors who qualify for any of these exemptions from the sales charge may purchase Investor A
Shares.
If you invest $1,000,000 ($250,000 for BlackRock Short-Term Municipal Fund of BlackRock Municipal
Bond Fund, Inc., $500,000 for BlackRock Low Duration Bond Portfolio and BlackRock Floating Rate
Income Portfolio of BlackRock Funds II) or more in Investor A or Investor A1 Shares, you may not
pay an initial sales charge. However, if you redeem your Investor A or Investor A1 Shares within
eighteen months after purchase, you may be charged a deferred sales charge. The deferred sales
charge on Investor A Shares is not charged in connection with: (a) redemptions of Investor A Shares
purchased through authorized qualified employee benefit plans or savings plans and rollovers of
current investments in a Fund through such plans; (b) exchanges described in Exchange Privilege
below; (c) redemptions made in connection with minimum required distributions due to the
shareholder reaching age 70 1/2 from IRA and 403(b)(7) accounts; (d) certain post-retirement
withdrawals from an IRA or other retirement plan if you are over 59 1/2 years old and you purchased
your shares prior to October 2, 2006; (e) redemptions made with respect to certain retirement plans
sponsored by a Fund, BlackRock or its affiliates; (f) redemptions (i) within one year of a
shareholders death or, if later, the receipt of a certified probate settlement (including in
connection with the distribution of account assets to a beneficiary of the decedent) or (ii) in
connection with a shareholders disability (as defined in the Code) subsequent to the purchase of
Investor A Shares; (g) involuntary redemptions of Investor A Shares in accounts with low balances;
(h) certain redemptions made pursuant to the Systematic Withdrawal Plan (described below); (i)
redemptions related to the payment of BNY Mellon Investment Servicing Trust Company custodial IRA
fees; and (j) redemptions when a shareholder can demonstrate hardship, in the absolute discretion
of a Fund.
II-77
With respect to Qualified Plans, if a dealer waives its right to receive a placement fee, the Fund
may, at its own discretion, waive the CDSC (as defined below) related to purchases of $1,000,000
($250,000 for BlackRock Short-Term Municipal Fund of BlackRock Municipal Bond Fund, Inc., and
$500,000 for BlackRock Low Duration Bond Portfolio of BlackRock Funds II and BlackRock Floating
Rate Income Portfolio of BlackRock Funds II) or more of Investor A Shares.
Investor A Shares are also available at net asset value to investors that, for regulatory reasons,
are required to transfer investment positions from a foreign registered investment company advised
by BlackRock or its affiliates to a U.S. registered BlackRock-advised fund.
Acquisition of Certain Investment Companies. Investor A Shares may be offered at net asset value in
connection with the acquisition of the assets of or merger or consolidation with a personal holding
company or a public or private investment company.
Purchases Through Certain Financial Intermediaries. Reduced sales charges may be applicable for
purchases of Investor A or Investor A1 Shares of a Fund through certain financial advisers,
selected securities dealers and other financial intermediaries that meet and adhere to standards
established by the Manager from time to time.
Deferred Sales Charge Alternative Investor B and Investor C Shares
Investor B, Investor B1, Investor B2 and Investor B3 Shares generally are not continuously offered
but are offered by exchange (Investor B Shares only) and also to certain investors who currently
hold Investor B, Investor B1, Investor B2 or Investor B3 Shares for dividend and capital gain
reinvestment. In addition, certain qualified employee benefit plans that currently hold Investor B,
Investor B1, Investor B2 or Investor B3 Shares may purchase additional Investor B, Investor B1,
Investor B2 or Investor B3 Shares or effect exchanges between Funds in those classes.
Investors choosing the deferred sales charge alternative should consider Investor C Shares if they
are uncertain as to the length of time they intend to hold their assets in a Fund. If you select
Investor C Shares, you do not pay an initial sales charge at the time of purchase. A Fund will not
accept a purchase order of $500,000 or more for Investor C Shares.
If you select Investor C, Investor C1, Investor C2 or Investor C3 Shares, you do not pay an initial
sales charge at the time of purchase. Investor C1, Investor C2 and Investor C3 Shares generally are
not continuously offered but are offered (i) for purchase by certain qualified employee benefit
plans and (ii) to certain investors who currently hold Investor C1, Investor C2 or Investor C3
Shares for dividend and capital gain reinvestment.
The deferred sales charge alternatives may be particularly appealing to investors who do not
qualify for the reduction in initial sales charges. CDSC shares are subject to ongoing service fees
and distribution fees; however, these fees potentially may be offset to the extent any return is
realized on the additional funds initially invested in CDSC shares. In addition, certain Investor
B, Investor B1, Investor B2 and Investor B3 Shares will be converted into Investor A or Investor A1
Shares, as set forth in each Funds prospectus, of a Fund after a conversion period of
approximately eight years, and, thereafter, investors will be subject to lower ongoing fees.
BlackRock compensates financial advisers and other financial intermediaries for selling CDSC shares
at the time of purchase from its own funds. Proceeds from the CDSC (as defined below) and the
distribution fee are paid to the Distributor and are used by the Distributor to defray the expenses
of securities dealers or other financial intermediaries related to providing distribution-related
services to each Fund in connection with the sale of the CDSC shares. The combination of the CDSC
and the ongoing distribution fee facilitates the ability of each Fund to sell the CDSC shares
without a sales charge being deducted at the time of purchase. See Distribution Plans below.
Imposition of the CDSC and the distribution fee on CDSC shares is limited by the NASD asset-based
sales charge rule. See Limitations on the Payment of Deferred Sales Charges below.
Dealers will generally receive commissions equal to 4.00% of Investor B Shares sold by them plus
ongoing fees under the Funds Distribution and Service Plan. Dealers may not receive a commission
in connection with sales of Investor B, Investor B1, Investor B2 or Investor B3 Shares to certain
qualified employee benefit plans sponsored by the Fund, BlackRock or its affiliates, but may
receive fees under the Distribution and Service Plan. These
II-78
commissions and payments may be different than the reallowances, placement fees and commissions
paid to dealers in connection with sales of Investor A, Investor A1, Investor C, Investor C1,
Investor C2 and Investor C3 Shares.
Dealers will generally immediately receive commissions equal to 1.00% of the Investor C Shares sold
by them plus ongoing fees under the Funds Distribution and Service Plan. Dealers may not receive a
commission in connection with sales of Investor C, Investor C1, Investor C2 or Investor C3 Shares
to certain qualified employee benefit plans sponsored by the Fund, BlackRock or its affiliates, but
may receive fees under the Amended and Restated Distribution and Service Plan. These commissions
and payments may be different than the reallowances, placement fees and commissions paid to dealers
in connection with sales of Investor A, Investor A1, Investor B, Investor B1, Investor B2 and
Investor B3 Shares.
Contingent Deferred Sales Charges Investor B, Investor B1, Investor B2 and Investor B3 Shares.
If you redeem Investor B, Investor B1, Investor B2 or Investor B3 Shares within six years of
purchase (three years for Investor B1 Shares of BlackRock Total Return Fund of BlackRock Bond Fund,
Inc., and Investor B Shares of BlackRock Short Term Municipal Fund and BlackRock Intermediate
Municipal Fund), you may be charged a contingent deferred sales charge (CDSC) at the rates
indicated in the Funds Prospectus and below. The CDSC will be calculated in a manner that results
in the lowest applicable rate being charged. The charge will be assessed on an amount equal to the
lesser of the proceeds of redemption or the cost of the shares being redeemed. Accordingly, no CDSC
will be imposed on increases in net asset value above the initial purchase price. In addition, no
CDSC will be assessed on shares acquired through reinvestment of dividends. The order of redemption
will be first of shares held for over six years or three years, as applicable, in the case of
Investor B Shares, next of shares acquired pursuant to reinvestment of dividends, and finally of
shares in the order of those held longest. The same order of redemption will apply if you transfer
shares from your account to another account. If you exchange your Investor B or Investor B1 Shares
for Investor B Shares of another fund, the CDSC schedule that applies to the shares that you
originally purchased will continue to apply to the shares you acquire in the exchange.
The following table sets forth the CDSC schedule that applies to the Investor B Shares for the
following Funds: BlackRock Total Return Fund of BlackRock Bond Fund, Inc., BlackRock World Income
Fund, Inc., Franklin Templeton FDP Fund of FDP Series, Inc., BlackRock California Municipal Bond
Fund of BlackRock California Municipal Series Trust, BlackRock Municipal Fund and BlackRock
National Municipal Bond Fund of BlackRock Municipal Series Fund, Inc., BlackRock New York Municipal
Bond Fund of BlackRock Multi-State Municipal Series Trust, and to the Investor B1 Shares for all
Funds, as applicable, except for BlackRock Total Return Fund of BlackRock Bond Fund, Inc. and
BlackRock National Municipal Fund, and to the Investor B3 Shares for all Funds, as applicable:
|
|
|
|
|
CDSC as a Percentage |
Years Since Purchase |
|
of Dollar Amount |
Payment Made |
|
Subject to Charge* |
0 1 |
|
4.00% |
1 2 |
|
4.00% |
2 3 |
|
3.00% |
3 4 |
|
3.00% |
4 5 |
|
2.00% |
5 6 |
|
1.00% |
6 and thereafter |
|
None |
The following table sets forth the CDSC schedule that applies to the Investor B Shares of BlackRock
GNMA Portfolio, BlackRock High Yield Bond Portfolio, BlackRock Inflation Protected Bond Portfolio,
BlackRock U.S. Government Bond Portfolio, BlackRock International Bond Portfolio, BlackRock Core
Bond Portfolio, BlackRock Low Duration Bond Portfolio, each of BlackRock Funds II, and BlackRock
New Jersey Municipal Fund and BlackRock Pennsylvania Municipal Fund of BlackRock Multi-State
Municipal Series Trust, to the Investor B2 Shares of BlackRock Total Return Fund of BlackRock Bond
Fund, Inc., and to Investor B1 Shares of BlackRock National Municipal Fund:
II-79
|
|
|
|
|
CDSC as a Percentage |
Years Since Purchase |
|
of Dollar Amount |
Payment Made |
|
Subject to Charge* |
0 1 |
|
4.50% |
1 2 |
|
4.00% |
2 3 |
|
3.50% |
3 4 |
|
3.00% |
4 5 |
|
2.00% |
5 6 |
|
1.00% |
6 and thereafter |
|
None |
To provide an example, assume an investor purchased 100 shares at $10 per share (at a cost of
$1,000) and in the third year after purchase, the net asset value per share is $12 and, during such
time, the investor has acquired 10 additional shares upon dividend reinvestment. If at such time
the investor makes his or her first redemption of 50 shares (proceeds of $600), 10 shares will not
be subject to a CDSC because they were issued through dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per share and not to
the increase in net asset value of $2 per share. Therefore, $400 of the $600 redemption proceeds
will be charged at a rate of 3.00% (the applicable rate in the third year after purchase).
The following table sets forth the CDSC schedule that applies to the Investor B Shares for
BlackRock Short-Term Municipal Fund of BlackRock Municipal Bond Fund and BlackRock Intermediate
Municipal Fund and to the Investor B1 Shares for Total Return Fund of BlackRock Bond Fund, Inc.:
|
|
|
|
|
CDSC as a Percentage |
Years Since Purchase |
|
of Dollar Amount |
Payment Made |
|
Subject to Charge* |
0 1 |
|
1.00% |
1 2 |
|
0.50% |
2 3 |
|
0.25% |
3 and thereafter |
|
None |
|
|
|
* |
|
The percentage charge will apply to the lesser of the original cost of the shares being
redeemed or the proceeds of your redemption. Shares acquired through reinvestment of dividends
are not subject to a deferred sales charge. Shares purchased prior to June 1, 2001 were
subject to the four-year contingent deferred sales charge schedule then in effect which has
now expired. Shares purchased prior to October 2, 2006 are subject to the 4.00% six-year CDSC
schedule in effect at that time. Not all BlackRock funds have identical deferred sales charge
schedules. If you exchange your shares for shares of another fund, the original charge will
apply. |
Conversion of Investor B Shares, Investor B1 and Investor B3 Shares to Investor A Shares or A1
Shares. Approximately eight years after purchase (the Conversion Period), Investor B, Investor
B1, Investor B2 and Investor B3 Shares of each Fund will convert automatically into Investor A or
Investor A1 Shares, as set forth each Funds prospectus, of that Fund (the Conversion). The
Conversion will occur at least once each month (on the Conversion Date) on the basis of the
relative net asset value of the shares of the two classes on the Conversion Date, without the
imposition of any sales load, fee or other charge. The Conversion will not be deemed a purchase or
sale of the shares for Federal income tax purposes.
Shares acquired through reinvestment of dividends on Investor B, Investor B1, Investor B2 or
Investor B3 Shares will also convert automatically to Investor A or Investor A1 Shares, as set
forth in each Funds prospectus. The Conversion Date for dividend reinvestment shares will be
calculated taking into account the length of time the shares underlying the dividend reinvestment
shares were outstanding.
II-80
In general, Investor B Shares of equity funds will convert approximately eight years after initial
purchase and Investor B, Investor B1, Investor B2 or Investor B3 Shares of taxable and tax-exempt
fixed income Funds will convert approximately ten years after initial purchase. A seven year
Conversion Period will apply to certain shares of certain Funds issued in connection with the
acquisition of another fund. If you exchange Investor B, Investor B1, Investor B2 or Investor B3
Shares with an eight-year Conversion Period for Investor B Shares with a ten-year Conversion
Period, or vice versa, the Conversion Period that applies to the shares you acquire in the exchange
will apply and the holding period for the shares exchanged will be tacked on to the holding period
for the shares acquired. The Conversion Period also may be modified for investors that participate
in certain fee-based programs. See Shareholder Services Fee-Based Programs.
If you own shares of a Fund that, in the past, issued stock certificates and you continue to hold
such stock certificates, you must deliver any certificates for Investor B Shares of the Fund to be
converted to the Transfer Agent at least one week prior to the Conversion Date applicable to those
shares. If the Transfer Agent does not receive the certificates at least one week prior to the
Conversion Date, your Investor B, Investor B1, Investor B2 or Investor B3 Shares will convert to
Investor A or Investor A1 Shares, as set forth in each Funds prospectus, on the next scheduled
Conversion Date after the certificates are delivered.
Contingent Deferred Sales Charge Investor C Shares
Investor C, Investor C1, Investor C2 and Investor C3 Shares that are redeemed within one year of
purchase may be subject to a 1.00% CDSC charged as a percentage of the dollar amount subject
thereto. In determining whether an Investor C, Investor C1, Investor C2 or Investor C3 Shares CDSC
is applicable to a redemption, the calculation will be determined in the manner that results in the
lowest possible rate being charged. The charge will be assessed on an amount equal to the lesser of
the proceeds of redemption or the cost of the shares being redeemed. Accordingly, no CDSC will be
imposed on increases in net asset value above the initial purchase price of Investor C, Investor
C1, Investor C2 and Investor C3 Shares. In addition, no CDSC will be assessed on Investor C,
Investor C1, Investor C2 and Investor C3 Shares acquired through reinvestment of dividends. It will
be assumed that the redemption is first of shares held for over one year or shares acquired
pursuant to reinvestment of dividends and then of shares held longest during the one-year period. A
transfer of shares from a shareholders account to another account will be assumed to be made in
the same order as a redemption.
See Information on Sales Charges and Distribution Related Expenses Investor B and Investor C
Sales Charge Information in Part I of each Funds Statement of Additional Information for
information about amounts paid to the Distributor in connection with CDSC shares for the periods
indicated.
Investor B and Investor C Shares Contingent Deferred Sales Charge Waivers and Reductions
The CDSC on Investor B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2
and Investor C3 Shares is not charged in connection with: (1) redemptions of Investor B, Investor
B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2 and Investor C3 Shares purchased
through certain authorized qualified employee benefit plans and rollovers of current investments in
the Fund through such plans; (2) exchanges described in Exchange Privilege below; (3) redemptions
made in connection with minimum required distributions due to the shareholder reaching age 70 1/2
from IRA and 403(b)(7) accounts; (4) certain post-retirement withdrawals from an IRA or other
retirement plan if you are over 59 1/2 years old and you purchased your shares prior to October 2,
2006; (5) redemptions made with respect to certain retirement plans sponsored by the Fund,
BlackRock or its affiliates; (6) redemptions in connection with a shareholders death as long as
the waiver request is made within one year of death or, if later, reasonably promptly following
completion of probate (including in connection with the distribution of account assets to a
beneficiary of the decedent) or disability (as defined in the Code) subsequent to the purchase of
Investor B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2 or Investor
C3 Shares; (7) withdrawals resulting from shareholder disability (as defined in the Code) as long
as the disability arose subsequent to the purchase of the shares; (8) involuntary redemptions of
Investor B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2 or Investor
C3 Shares in accounts with low balances as described in Redemption of Shares below; (9)
redemptions made pursuant to a systematic withdrawal plan, subject to the limitations set forth
under Systematic Withdrawal Plan below; (10) redemptions related to the payment of BNY Mellon
Investment Servicing Trust Company custodial IRA fees; and (11) redemptions when a shareholder can
demonstrate hardship, in the absolute discretion of the Fund. In addition, no CDSC is charged on
Investor B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2 or Investor
C3 Shares acquired through the reinvestment of dividends or distributions.
II-81
Class R Shares
Certain of the Funds offer Class R Shares as described in each such Funds Prospectus. Class R
Shares are available only to certain retirement plans. Class R Shares are not subject to an initial
sales charge or a CDSC but are subject to an ongoing distribution fee of 0.25% per year and an
ongoing service fee of 0.25% per year. Distribution fees are used to support the Funds marketing
and distribution efforts, such as compensating financial advisers and other financial
intermediaries, advertising and promotion. Service fees are used to compensate securities dealers
and other financial intermediaries for service activities.
If Class R Shares are held over time, these fees may exceed the maximum sales charge that an
investor would have paid as a shareholder of one of the other share classes.
Service Shares. Certain Funds offer Service Shares, which are available only to certain investors,
including: (i) certain financial institutions, such as banks and brokerage firms, acting on behalf
of their customers; (ii) certain persons who were shareholders of the Compass Capital Group of
Funds at the time of its combination with The PNC® Fund in 1996; and (iii) participants in the
Capital DirectionsSM asset allocation program. Service Shares are not subject to an initial sales
charge or a CDSC but are subject to an ongoing service fee of 0.25% per year. Service Shares are
offered to financial institutions (such as banks and brokerage firms) acting on behalf of their
customers, certain persons who were shareholders of the Compass Capital Group of Funds at the time
of its combination with The PNC® Fund in 1996 and investors that participate in the Capital
DirectionsSM asset allocation program.
BlackRock Shares. Certain Funds offer BlackRock shares, which are available only to certain
investors. BlackRock shares are offered without a sales charge to institutional investors,
registered investment advisers and certain fee-based programs.
Distribution Plans
Each Fund has entered into a distribution agreement with BRIL under which BRIL, as agent, offers
shares of each Fund on a continuous basis. BRIL has agreed to use appropriate efforts to effect
sales of the shares, but it is not obligated to sell any particular amount of shares. BRILs
principal business address is 40 East 52nd Street, New York, NY 10022. BRIL is an affiliate of
BlackRock.
Pursuant to the distribution plans of the Investor A, Investor A1, Investor B, Investor B1,
Investor B2, Investor B3, Investor C, Investor C1, Investor C2, Investor C3 and Class R Shares
(each, a Plan), the Fund may pay BRIL and/or BlackRock or any other affiliate or significant
shareholder of BlackRock fees for distribution and sales support services. Currently, as described
further below, only Investor B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1,
Investor C2, Investor C3 and Class R Shares bear the expense of distribution fees under a Plan. In
addition, the Fund may pay to brokers, dealers, financial institutions and industry professionals
(including BlackRock, BRIL, PNC, Barclays and their affiliates) (collectively, Service
Organizations) fees for the provision of personal services to shareholders. In the past, BlackRock
or BRIL has retained a portion of the shareholder servicing fees paid by the Fund.
Each Funds Plans are subject to the provisions of Rule 12b-1 under the Investment Company Act. In
their consideration of a Plan, the Directors must consider all factors they deem relevant,
including information as to the benefits of the Plan to the Fund and the related class of
shareholders. In approving a Plan in accordance with Rule 12b-1, the non-interested Directors
concluded that there is reasonable likelihood that the Plan will benefit the Fund and its related
class of shareholders.
The Plan provides, among other things, that: (i) the Board of Directors shall receive quarterly
reports regarding the amounts expended under the Plan and the purposes for which such expenditures
were made; (ii) the Plan will continue in effect for so long as its continuance is approved at
least annually by the Board of Directors in accordance with Rule 12b-1 under the Investment Company
Act; (iii) any material amendment thereto must be approved by the Board of Directors, including the
directors who are not interested persons of the Fund (as defined in the Investment Company Act)
and who have no direct or indirect financial interest in the operation of the Plan or any agreement
entered into in connection with the Plan (the 12b-1 Directors), acting in person at a meeting
called for said purpose; (iv) any amendment to increase materially the costs which any class of
shares may bear for distribution services pursuant to the Plan shall be effective only upon
approval by a vote of a majority of the outstanding shares of such class and by a majority of the
12b-1 Directors; and (v) while the Plan remains in effect, the selection and nomination of the
Funds Directors who are not interested persons of the Fund shall be committed to the discretion
of the Funds non-interested directors. Rule 12b-1 further requires that each Fund
II-82
preserve copies of each Plan and any report made pursuant to such plan for a period of not less
than six years from the date of the Plan or such report, the first two years in an easily
accessible place.
Payments under the Plans are based on a percentage of average daily net assets attributable to the
shares regardless of the amount of expenses incurred. As a result, distribution-related revenues
from the Plans may be more or less than distribution-related expenses of the related class.
Information with respect to the distribution-related revenues and expenses is presented to the
Directors for their consideration quarterly. Distribution-related revenues consist of the service
fees, the distribution fees and the CDSCs. Distribution-related expenses consist of financial
adviser compensation, branch office and regional operation center selling and transaction
processing expenses, advertising, sales promotion and marketing expenses and interest expense.
Distribution-related revenues paid with respect to one class will not be used to finance the
distribution expenditures of another class. Sales personnel may receive different compensation for
selling different classes of shares.
The Plan is terminable as to any class of shares without penalty at any time by a vote of a
majority of the 12b-1 Directors, or by vote of the holders of a majority of the shares of such
class.
See Distribution Related Expenses in Part I of each Funds Statement of Additional Information
for information relating to the fees paid by your Fund to a Distributor under each Plan during the
Funds most recent fiscal year.
Limitations on the Payment of Deferred Sales Charges
The maximum sales charge rule in the Conduct Rules of the NASD imposes a limitation on certain
asset-based sales charges such as the distribution fee borne by Class R Shares, and the
distribution fee and the CDSC borne by the CDSC shares. This limitation does not apply to the
service fee. The maximum sales charge rule is applied separately to each class and limits the
aggregate of distribution fee payments and CDSCs payable by a Fund to (1) 6.25% of eligible gross
sales of CDSC shares and Class R Shares, computed separately (excluding shares issued pursuant to
dividend reinvestments and exchanges), plus (2) interest on the unpaid balance for the respective
class, computed separately, at the prime rate plus 1% (the unpaid balance being the maximum amount
payable minus amounts received from the payment of the distribution fee and the CDSC).
See Part I, Section V Information on Sales Charges and Distribution Related Expenses of each
Funds Statement of Additional Information for comparative information as of your Funds most
recent fiscal year end with respect to the CDSC shares and, if applicable, Class R Shares of your
Fund.
Other Compensation to Selling Dealers
Pursuant to each Funds Distribution Agreements and Distribution and Service Plans (the Plans),
each Fund may pay BRIL and/or BlackRock or any other affiliate of BlackRock fees for distribution
and sales support services. In addition, each Fund may pay to brokers, dealers, financial
institutions and industry professionals (including BlackRock, Merrill Lynch, Hilliard Lyons and
their affiliates) (collectively, Service Organizations) fees for the provision of personal
services to shareholders. In the past, BlackRock has retained a portion of the shareholder
servicing fees paid by a Fund.
With respect to Class R Shares, the front-end sales charge and the applicable distribution fee
payable under the Plan are used to pay commissions and other fees payable to Service Organizations
and other broker/dealers who sell Class R Shares.
With respect to Investor B, Investor B1, Investor B2 and Investor B3 Shares, Service Organizations
and other broker/dealers receive commissions from BRIL for selling Investor B, Investor B1,
Investor B2 and Investor B3 Shares, which are paid at the time of the sale. The applicable
distribution fees payable under the Plans are intended to cover the expense to BRIL of paying such
up-front commissions, as well as to cover ongoing commission payments to broker-dealers or other
Service Organizations. The contingent deferred sales charge is calculated to charge the investor
with any shortfall that would occur if Investor B, Investor B1, Investor B2 or Investor B3 Shares
are redeemed prior to the expiration of the conversion period, after which Investor B, Investor B1,
Investor B2 and Investor B3 Shares automatically convert to Investor A Shares or Investor A1
Shares, as applicable.
With respect to Investor C, Investor C1, Investor C2 and Investor C3 Shares, Service Organizations
and other broker-dealers receive commissions from BRIL for selling Investor C, Investor C1,
Investor C2 and Investor C3 Shares, which are paid at the time of the sale. The applicable
distribution fees payable under the Plans are intended to cover the expense to BRIL of paying such
up-front commissions, as well as to cover ongoing commission payments to the broker-dealers or
other Service Organizations. The contingent deferred sales charge is calculated to
II-83
charge the investor with any shortfall that would occur if Investor C, Investor C1, Investor C2 or
Investor C3 Shares are redeemed within 12 months of purchase.
From time to time BRIL and/or BlackRock and their affiliates may voluntarily waive receipt of
distribution fees under each Plan, which waivers may be terminated at any time. Payments are made
by the Fund pursuant to each Plan regardless of expenses incurred by BRIL or BlackRock.
The Funds currently do not make distribution payments with respect to Investor A, Investor A1,
Service, Institutional or BlackRock Shares under the Plans. However, the Plans permit BRIL,
BlackRock and certain of their affiliates to make payments relating to distribution and sales
support activities out of their past profits or other sources available to them (and not as an
additional charge to the Fund). From time to time, BRIL, BlackRock or their affiliates may
compensate affiliated and unaffiliated Service Organizations for the sale and distribution of
shares of a Fund or for services to a Fund and its shareholders. These non-Plan payments would be
in addition to a Fund payments described in this Statement of Additional Information for
distribution and shareholder servicing. These non-Plan payments may take the form of, among other
things, due diligence payments for a dealers examination of the Funds and payments for providing
extra employee training and information relating to Funds; listing fees for the placement of the
Funds on a dealers list of mutual funds available for purchase by its customers; finders fees
for directing investors to the Fund; distribution and marketing support fees or revenue sharing
for providing assistance in promoting the sale of the Funds shares; payments for the sale of
shares and/or the maintenance of share balances; CUSIP fees; maintenance fees; and set-up fees
regarding the establishment of new accounts. The payments made by BRIL, BlackRock and their
affiliates may be a fixed dollar amount or may be based on a percentage of the value of shares sold
to, or held by, customers of the Service Organization involved, and may be different for different
Service Organizations. The payments described above are made from BRILs, BlackRocks or their
affiliates own assets pursuant to agreements with Service Organizations and do not change the
price paid by investors for the purchase of the Funds shares or the amount the Fund will receive
as proceeds from such sales.
As of the date of this Statement of Additional Information, as amended or supplemented from time to
time, the following Service Organizations are receiving such payments: Ameriprise Financial
Services, AXA Advisors, Chase Investment Services Corp, CCO Investment Services, Commonwealth
Equity Services (Commonwealth Financial Network), Donegal Securities, Financial Network Investment
Corporation, FSC Securities Corporation, ING Financial Partners, LPL Financial Corporation, Merrill
Lynch, MetLife Securities, Morgan Stanley Smith Barney, Multi-Financial Securities Corporation, New
England Securities Corporation, Oppenheimer & Co., PFS Investments, PrimeVest Financial Services,
Raymond James, RBC Capital Markets, Royal Alliance Associates, SagePoint Financial, Securities
America, Tower Square Securities, UBS Financial Services, Walnut Street Securities, U.S. Bancorp
Investments, Wells Fargo and/or broker dealers and other financial services firms under common
control with the above organizations (or their successors or assignees). The level of payments made
to these Service Organizations in any year will vary, may be limited to specific Funds or share
classes, and normally will not exceed the sum of (a) 0.25% of such years Fund sales by that
Service Organization, and (b) 0.21% of the assets attributable to that Service Organization
invested in a Fund. In certain cases, the payments described in the preceding sentence are subject
to certain minimum payment levels.
Other Distribution Arrangements
Certain Funds and BlackRock have entered into distribution agreements with UBS AG and BMO Harris
Investment Management Inc. whereby those firms may, in certain circumstances, sell certain shares
of the Funds in certain jurisdictions. The level of payments made to UBS AG in any year for the
sale and distribution of a Funds shares will vary and normally will not exceed the sum of the
service fee payable on the assets attributable to UBS AG plus an additional fee equal to a
percentage of such assets which shall range up to 0.25%. BMO Harris Investment Management Inc. does
not receive payments in connection with the sale and distribution of Fund shares.
In lieu of payments pursuant to the foregoing, BRIL, BlackRock, PNC or their affiliates may make
payments to the above named Service Organizations of an agreed-upon amount which, subject to
certain agreed-upon minimums, will generally not exceed the amount that would have been payable
pursuant to the formula, and may also make similar payments to other Service Organizations.
If investment advisers, distributors or affiliates of mutual funds pay bonuses and incentives in
differing amounts, financial firms and their financial consultants may have financial incentives
for recommending a particular mutual fund over other mutual funds. In addition, depending on the
arrangements in place at any particular time, a financial firm and its financial consultants may
also have a financial incentive for recommending a particular share class over
II-84
other share classes. You should consult your financial adviser and review carefully any disclosure
by the financial firm as to compensation received by your financial adviser for more information
about the payments described above.
Furthermore, BRIL, BlackRock and their affiliates may contribute to various non-cash and cash
incentive arrangements to promote the sale of shares, and may sponsor various contests and
promotions subject to applicable FINRA regulations in which participants may receive prizes such as
travel awards, merchandise and cash. Subject to applicable FINRA regulations, BRIL, BlackRock and
their affiliates may also: (i) pay for the travel expenses, meals, lodging and entertainment of
broker/dealers, financial institutions and their salespersons in connection with educational and
sales promotional programs, (ii) sponsor speakers, educational seminars and charitable events and
(iii) provide other sales and marketing conferences and other resources to broker-dealers,
financial institutions and their salespersons.
BlackRock, Inc., the parent company of BlackRock, has agreed to pay PNC Bank, National Association
and certain of its affiliates fees for administration and servicing with respect to assets of the
Fund attributable to shares held by customers of such entities. These assets are predominantly in
the Institutional Share Class of a Fund, with respect to which the Fund does not pay shareholder
servicing fees under a Plan. The fees are paid according to the following schedule: certain money
market funds .15% of net assets; certain fixed income funds .20% of net assets; and certain
equity funds .25% of net assets (except that with respect to the Index Equity Fund, the fee is
.04% of net assets).
Service Organizations may charge their clients additional fees for account-related services.
Service Organizations may charge their customers a service fee in connection with the purchase or
redemption of Fund shares. The amount and applicability of such a fee is determined and disclosed
to its customers by each individual Service Organization. Service fees typically are fixed, nominal
dollar amounts and are in addition to the sales and other charges described in the Prospectuses and
this Statement of Additional Information. Your Service Organization will provide you with specific
information about any service fees you will be charged.
Pursuant to the Plans, each Fund enters into service arrangements with Service Organizations
pursuant to which Service Organizations will render certain support services to their customers
(Customers) who are the beneficial owners of Service, Investor A, Investor A1, Investor B,
Investor B1, Investor B2, Investor C, Investor C1, Investor C2 and Class R Shares of all Funds.
Such services will be provided to Customers who are the beneficial owners of Shares of such classes
and are intended to supplement the services provided by the Funds Administrators and transfer
agent to the Funds shareholders of record. In consideration for payment of the applicable service
fee Service Organizations may provide general shareholder liaison services, including, but not
limited to: (i) answering customer inquiries regarding account status and history, the manner in
which purchases, exchanges and redemptions of shares may be effected and certain other matters
pertaining to the Customers investments; and (ii) assisting Customers in designating and changing
dividend options, account designations and addresses.
To the extent a shareholder is not associated with a Service Organization, the shareholder
servicing fees will be paid to BlackRock, and BlackRock will provide services. In addition to,
rather than in lieu of, distribution and shareholder servicing fees that a Fund may pay to a
Service Organization pursuant to the Plan and fees the Fund pays to its transfer agent, the Fund
may enter into non-Plan agreements with Service Organizations pursuant to which the Fund will pay a
Service Organization for administrative, networking, recordkeeping, sub-transfer agency and
shareholder services. These non-Plan payments are generally based on either: (1) a percentage of
the average daily net assets of Fund shareholders serviced by a Service Organization or (2) a fixed
dollar amount for each account serviced by a Service Organization. The aggregate amount of these
payments may be substantial. From time to time, BlackRock, BRIL or their affiliates also may pay a
portion of the fees for administrative, networking, omnibus, operational and recordkeeping,
sub-transfer agency and shareholder services described above at its or their own expense and out of
its or their legitimate profits.
Redemption of Shares
Shares normally will be redeemed for cash upon receipt of a request in proper form, although
each Fund retains the right to redeem some or all of its shares in-kind under unusual circumstances
(valued in the same way as they would be valued for purposes of computing a Funds NAV), in order
to protect the interests of remaining shareholders, or to accommodate a request by a particular
shareholder that does not adversely affect the interest of the remaining shareholders, by delivery
of securities selected from the Funds assets at its discretion. In-kind payment means payment will
be made in portfolio securities rather than cash. If this occurs, the redeeming shareholder might
incur
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brokerage or other transaction costs to convert the securities to cash. Each Fund has elected,
however, to be governed by Rule 18f-1 under the Investment Company Act so that the Fund is
obligated to redeem its shares solely in cash up to the lesser of $250,000 or 1% of its net asset
value during any 90-day period for any shareholder of the Fund. The redemption price is the net
asset value per share next determined after the initial receipt of proper notice of redemption. The
value of shares of each Fund at the time of redemption may be more or less than your cost at the
time of purchase, depending in part on the market value of the securities held by the Fund at such
time. Except for any CDSC or redemption fee that may be applicable, there will be no redemption
charge if your redemption request is sent directly to the Transfer Agent. If you are liquidating
your holdings you will receive all dividends reinvested through the date of redemption.
The right to redeem shares may be suspended or payment upon redemption may be delayed for more than
seven days only (i) for any period during which trading on the NYSE is restricted as determined by
the Commission or during which the NYSE is closed (other than customary weekend and holiday
closings), (ii) for any period during which an emergency exists, as defined by the Commission, as a
result of which disposal of portfolio securities or determination of the net asset value of the
Fund is not reasonably practicable, or (iii) for such other periods as the Commission may by order
permit for the protection of shareholders of the Fund. (A Fund may also suspend or postpone the
recordation of the transfer of its shares upon the occurrence of any of the foregoing conditions.)
Each Fund, with other investment companies advised by the Manager, has entered into a joint
committed line of credit with a syndicate of banks that is intended to provide the Fund with a
temporary source of cash to be used to meet redemption requests from shareholders in extraordinary
or emergency circumstances.
The Fund may redeem shares involuntarily to reimburse a Fund for any loss sustained by reason of
the failure of a shareholder to make full-payment for shares purchased by the shareholder or to
collect any charge relating to a transaction effected for the benefit of a shareholder. The Fund
reserves the express right to redeem shares of each Fund involuntarily at any time if the Funds
Board determines, in its sole discretion, that failure to do so may have adverse consequences to
the holders of shares in the Fund. Upon such redemption the holders of shares so redeemed shall
have no further right with respect thereto other than to receive payment of the redemption price.
Redemption
Investor, Institutional and Class R Shares
Redeem by Telephone: You may sell Investor Shares held at BlackRock by telephone request if certain
conditions are met and if the amount being sold is less than (i) $100,000 for payments by check or
(ii) $250,000 for payments through the Automated Clearing House Network (ACH) or wire transfer.
Certain redemption requests, such as those in excess of these amounts, and those where (i) the Fund
does not have verified banking information on file; or (ii) the proceeds are not paid to the record
owner at the record address, must be in writing with a medallion signature guarantee provided by
any eligible guarantor institution as defined in Rule 17Ad-15 under the Securities Exchange Act
of 1934 (the Exchange Act), whose existence and validity may be verified by the Transfer Agent
through the use of industry publications. For Institutional Shares, certain redemption requests may
require written instructions with a medallion signature guarantee. Call (800) 441-7762 for details.
You can obtain a medallion signature guarantee stamp from a bank, securities dealer, securities
broker, credit union, savings and loan association, national securities exchange or registered
securities association. The three recognized medallion programs are Securities Transfer Agent
Medallion Program, Stock Exchanges Medallion Program and New York Stock Exchange, Inc. Medallion
Signature Program. Signature guarantees which are not a part of these programs will not be
accepted. A notary public seal will not be acceptable. Generally, a properly signed written request
with any required signature guarantee is all that is required for a redemption. In some cases,
however, other documents may be necessary. Additional documentary evidence of authority is required
by BNY Mellon in the event redemption is requested by a corporation, partnership, trust, fiduciary,
executor or administrator.
If you make a redemption request before a Fund has collected payment for the purchase of shares,
the Fund may delay mailing your proceeds. This delay will usually not exceed ten days. A Fund, its
Administrators and the Distributor will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. Telephone redemption requests will not be honored if: (i)
the accountholder is deceased, (ii) the proceeds are to be sent to someone other than the
shareholder of record, (iii) a Fund does not have verified information on file, (iv) the request is
by an individual other than the accountholder of record, (v) the account is held by joint tenants
who are
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divorced, (vi) the address on the account has changed within the last 30 days or share certificates
have been issued on the account, or (vii) to protect against fraud, if the caller is unable to
provide the account number, the name and address registered on the account and the social security
number registered on the account. The Fund and its service providers will not be liable for any
loss, liability, cost or expense for acting upon telephone instructions that are reasonably
believed to be genuine in accordance with such procedures. Before telephone requests will be
honored, signature approval from all shareholders of record on the account must be obtained. The
Fund may refuse a telephone redemption request if it believes it is advisable to do so. During
periods of substantial economic or market change, telephone redemptions may be difficult to
complete. Please find below alternative redemption methods.
Redeem by VRU: Investor Shares may also be redeemed by use of a Funds automated voice response
unit service (VRU). Payment for Investor Shares redeemed by VRU may be made for non-retirement
accounts in amounts up to $25,000, either through check, ACH or wire.
Redeem by Internet: You may redeem in your account, by logging onto the BlackRock website at
www.blackrock.com/funds. Proceeds from Internet redemptions may be sent via check, ACH or wire to
the bank account of record. Payment for Investor Shares redeemed by Internet may be made for
non-retirement accounts in amounts up to $25,000, either through check, ACH or wire. Different
maximums may apply to investors in Institutional Shares.
Redeem in Writing: If you hold shares with the Transfer Agent you may redeem such shares without
charge by writing to BlackRock, P.O. Box 9819, Providence, Rhode Island 02940-8019. Redemption
requests delivered other than by mail should be sent to BlackRock, 4400 Computer Drive,
Westborough, Massachusetts 01588. If you hold share certificates issued by your Fund, the letter
must be accompanied by certificates for the shares. All shareholders on the account must sign the
letter. A medallion signature guarantee will generally be required but may be waived in certain
limited circumstances. You can obtain a medallion signature guarantee stamp from a bank, securities
dealer, securities broker, credit union, savings and loan association, national securities exchange
or registered securities association. A notary public seal will not be acceptable. If you hold
stock certificates, return the certificates with the letter. Proceeds from redemptions may be sent
via check, ACH or wire to the bank account of record.
The Funds or the Transfer Agent may temporarily suspend telephone transactions at any time.
If you redeem shares directly with the Transfer Agent, payments will generally be mailed within
seven days of receipt of the proper notice of redemption. A Fund may delay the mailing of a
redemption check until good payment (that is, cash, Federal funds or certified check drawn on a
U.S. bank) has been collected for the purchase of Fund shares, which delay will usually not exceed
10 days. If your account is held directly with the Transfer Agent and contains a fractional share
balance following a redemption, the fractional share balance will be automatically redeemed by the
Fund.
Note on Low Balance Accounts. Because of the high cost of maintaining smaller shareholder
accounts, BlackRock has set a minimum balance of $500 in each Fund position you hold within your
account (Fund Minimum), and may take one of two actions if the balance in your Fund falls below
the Fund Minimum.
First, the Fund may redeem the shares in your account (without charging any deferred sales charge)
if the net asset value of your account falls below $250 for any reason, including market
fluctuation. You will be notified that the value of your account is less than $250 before the Fund
makes an involuntary redemption. The notification will provide you with a 90 calendar day period to
make an additional investment in order to bring the value of your account to at least $250 before
the Fund makes an involuntary redemption or to the Fund Minimum in order not to be assessed an
annual low balance fee of $20, as set forth below. This involuntary redemption may not apply to
accounts of authorized qualified employee benefit plans, selected fee-based programs, accounts
established under the Uniform Gifts or Transfers to Minors Acts, and certain intermediary accounts.
Second, the Fund charges an annual $20 low balance fee on all Fund accounts that have a balance
below the Fund Minimum for any reason, including market fluctuation. The fee will be deducted from
the Fund account only once per calendar year. You will be notified that the value of your account
is less than the Fund Minimum before the fee is imposed. You will then have a 90 calendar day
period to make an additional investment to bring the value of your account to the Fund Minimum
before the Fund imposes the low balance fee. This low balance fee does not apply to
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accounts of authorized qualified employee benefit plans, selected fee-based programs, or accounts
established under the Uniform Gifts or Transfers to Minors Acts.
Repurchase
A Fund normally will accept orders to repurchase shares from Selling Dealers for their customers.
Shares will be priced at the net asset value of the Fund next determined after receipt of the
repurchase order by a Selling Dealer that has been authorized by the Distributor by contract to
accept such orders. As to repurchase orders received by Selling Dealers prior to the close of
business on the NYSE (generally, the NYSE closes at 4:00 p.m. Eastern time), on the day the order
is placed, which includes orders received after the close of business on the previous day, the
repurchase price is the net asset value determined as of the close of business on the NYSE on that
day. If the orders for repurchase are not received by the Selling Dealer before the close of
business on the NYSE, such orders are deemed received on the next business day.
These repurchase arrangements are for your convenience and do not involve a charge by the Fund
(other than any applicable CDSC). However, Selling Dealers may charge a processing fee in
connection with such transactions. In addition, securities firms that do not have selected dealer
agreements with the Distributor may impose a transaction charge for transmitting the notice of
repurchase to the Fund. Each Fund reserves the right to reject any order for repurchase. A
shareholder whose order for repurchase is rejected by a Fund, however, may redeem shares as set out
above.
Reinstatement Privilege Investor A Shares
Upon redemption of Investor A, Investor A1 or Institutional Shares, as applicable, shareholders may
reinvest all or a portion of their redemption proceeds (after paying any applicable CDSC) in
Investor A Shares of the same or another BlackRock fund without paying a front-end sales charge.
This right may be exercised once a year and within 60 days of the redemption, provided that the
Investor A share class of that fund is currently open to new investors or the shareholder has a
current account in that closed fund. Shares will be purchased at the NAV calculated at the close of
trading on the day the request is received in good order. To exercise this privilege, the Transfer
Agent must receive written notification from the shareholder of record or the registered
representative of record, at the time of purchase. Investors should consult a tax adviser
concerning the tax consequences of exercising this reinstatement privilege.
Shareholder Services
Each Fund offers one or more of the shareholder services described below that are designed to
facilitate investment in its shares. You can obtain more information about these services from each
Fund by calling the telephone number on the cover page, or from the Distributor, your financial
adviser, your selected securities dealer or other financial intermediary. Certain of these services
are available only to U.S. investors.
Investment Account
If your account is maintained at the Transfer Agent (an Investment Account) you will receive
statements, at least quarterly, from the Transfer Agent. These statements will serve as
confirmations for automatic investment purchases and the reinvestment of dividends. The statements
also will show any other activity in your Investment Account since the last statement. You also
will receive separate confirmations for each purchase or sale transaction other than automatic
investment purchases and the reinvestment of dividends. If your Investment Account is held at the
Transfer Agent you may make additions to it at any time by mailing a check directly to the Transfer
Agent. You may also maintain an account through a selected securities dealer or other financial
intermediary. If you transfer shares out of an account maintained with a selected securities dealer
or other financial intermediary, an Investment Account in your name may be opened automatically at
the Transfer Agent.
You may transfer Fund shares from a selected securities dealer or other financial intermediary to
another securities dealer or other financial intermediary that has entered into an agreement with a
Distributor. Certain shareholder services may not be available for the transferred shares. All
future trading of these assets must be coordinated by the new firm. If you wish to transfer your
shares to a securities dealer or other financial intermediary that has not entered into an
agreement with a Distributor, you must either (i) redeem your shares, paying any applicable CDSC
II-88
or (ii) continue to maintain an Investment Account at the Transfer Agent for those shares. You also
may request that the new securities dealer or other financial intermediary maintain the shares in
an account at the Transfer Agent registered in the name of the securities dealer or other financial
intermediary for your benefit whether the securities dealer or other financial intermediary has
entered into a selected dealer agreement or not. In the interest of economy and convenience and
because of the operating procedures of each Fund, share certificates will not be issued physically.
Shares are maintained by each Fund on its register maintained by the Transfer Agent and the holders
thereof will have the same rights and ownership with respect to such shares as if certificates had
been issued.
If you are considering transferring a tax-deferred retirement account, such as an individual
retirement account, from one selected securities dealer to another securities dealer or other
financial intermediary, you should be aware that if the new firm will not take delivery of shares
of the Fund, you must either redeem the shares (paying any applicable CDSC) so that the cash
proceeds can be transferred to the account at the new firm, or you must continue to maintain a
retirement account at the original selected securities dealer for those shares.
Exchange Privilege
U.S. shareholders of Investor A, Investor A1, Investor B, Investor B1, Investor B2, Investor B3,
Investor C, Investor C1, Investor C2, Investor C3 and Institutional Shares of each Fund have an
exchange privilege with certain other Funds. The minimum amount for exchanges of Investor class
shares is $1,000, although you may exchange less than $1,000 if you already have an account in the
Fund into which you are exchanging. You may only exchange into a share class and a Fund that are
open to new investors or in which you have a current account if the class or fund is closed to new
investors. If you held the shares used in the exchange for 30 days or less, you may be charged a
redemption fee at the time of the exchange. Before effecting an exchange, you should obtain a
currently effective prospectus of the fund into which you wish to make the exchange. Exercise of
the exchange privilege is treated as a sale of the exchanged shares and a purchase of the acquired
shares for Federal income tax purposes.
Exchanges of Investor A, Investor A1 and Institutional Shares. Institutional Shares are
exchangeable with shares of the same class of other Funds. Investor A and Investor A1 Shares are
exchangeable for Investor A Shares of other Funds.
Exchanges of Institutional Shares outstanding (outstanding Institutional Shares) for
Institutional Shares of a second fund or for shares of a money market fund (new Institutional
Shares) are effected on the basis of relative net asset value per Institutional share. Exchanges
of Investor A or Investor A1 Shares outstanding (outstanding Investor A Shares) for Investor A
Shares of a second fund, or for shares of a money market fund (new Investor A Shares) are
effected on the basis of relative net asset value per share.
Exchanges of Investor B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1, Investor
C2 and Investor C3 Shares. Shareholders of certain Funds with Investor B, Investor B1, Investor B2,
Investor B3, Investor C, Investor C1, Investor C2 and Investor C3 Shares outstanding (outstanding
Investor B or Investor C Shares) may exchange their shares for Investor B or Investor C Shares,
respectively, of a second fund or for shares of a money market fund (new Investor B or Investor C
Shares) on the basis of relative net asset value per Investor B or Investor C share, without the
payment of any CDSC. Certain funds impose different CDSC schedules. If you exchange your Investor B
Shares for shares of a fund with a different CDSC schedule, the CDSC schedule that applies to the
shares exchanged will continue to apply. For purposes of computing the CDSC upon redemption of new
Investor B or Investor C Shares, the time you held both the exchanged Investor B or Investor C
Shares and the new Investor B Shares or Investor C Shares will count towards the holding period of
the new Investor B or Investor C Shares. For example, if you exchange Investor B Shares of a Fund
for those of a second Fund after having held the first Funds Investor B Shares for two-and-a-half
years, the 3.00% CDSC that generally would apply to a redemption would not apply to the exchange.
Four years later if you decide to redeem the Investor B Shares of the second Fund and receive cash,
there will be no CDSC due on this redemption since by adding the two-and-a-half year holding period
of the first Funds Investor B Shares to the four year holding period for the second Funds
Investor B Shares, you will be deemed to have held the second Funds Investor B Shares for more
than six years.
Exchanges for Shares of a Money Market Fund. You may exchange any class of Investor shares for
shares of an affiliated money market fund. If you exchange into BlackRock Summit Cash Reserves Fund
(Summit), a series of BlackRock Financial Institutions Series Trust, you will receive one of two
classes of shares: exchanges of Investor A, Investor A1 and Institutional Shares of a Fund will
receive Investor A Shares of Summit and exchanges of
II-89
Investor B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2 and
Investor C3 Shares of a Fund will receive Investor B Shares of Summit. You may exchange Investor A
Shares of Summit back into Investor A or Institutional Shares of a Fund. You may exchange Investor
B Shares of Summit back into Investor B or Investor C Shares of a Fund and, in the event of such an
exchange, the period of time that you held Investor B Shares of Summit will count toward
satisfaction of the holding period requirement for purposes of reducing any CDSC and toward
satisfaction of any Conversion Period with respect to Investor B Shares. Investor B Shares of
Summit are subject to a distribution fee at an annual rate of 0.75% of average daily net assets of
such Investor B Shares. Exchanges of Investor B or Investor C Shares of a money market fund other
than Summit for Investor B or Investor C Shares of a Fund will be exercised at net asset value.
However, a CDSC may be charged in connection with any subsequent redemption of the Investor B or
Investor C Shares of the Fund received in the exchange. In determining the holding period for
calculating the CDSC payable on redemption of Investor B and Investor C Shares of the Fund received
in the exchange, the holding period of the money market fund Investor B or Investor C Shares
originally held will be added to the holding period of the Investor B or Investor C Shares acquired
through exchange.
Exchanges by Participants in Certain Programs. The exchange privilege may be modified with respect
to certain participants in mutual fund advisory programs and other fee-based programs sponsored by
the Manager, an affiliate of the Manager, or selected securities dealers or other financial
intermediaries that have an agreement with a Distributor. See Fee-Based Programs below.
Exercise of the Exchange Privilege. To exercise the exchange privilege, you should contact your
financial adviser or the Transfer Agent, who will advise each Fund of the exchange. If you do not
hold share certificates, you may exercise the exchange privilege by wire through your securities
dealer or other financial intermediary. Each Fund reserves the right to require a properly
completed exchange application.
A shareholder who wishes to make an exchange may do so by sending a written request to the Fund c/o
the Transfer Agent at the following address: P.O. Box 9819, Providence, RI 02940-8019. Shareholders
are automatically provided with telephone exchange privileges when opening an account, unless they
indicate on the Application that they do not wish to use this privilege. To add this feature to an
existing account that previously did not provide this option, a Telephone Exchange Authorization
Form must be filed with the Transfer Agent. This form is available from the Transfer Agent. Once
this election has been made, the shareholder may simply contact the Fund by telephone at (800)
441-7762 to request the exchange. During periods of substantial economic or market change,
telephone exchanges may be difficult to complete and shareholders may have to submit exchange
requests to the Transfer Agent in writing.
If the exchanging shareholder does not currently own shares of the investment portfolio whose
shares are being acquired, a new account will be established with the same registration, dividend
and capital gain options and broker of record as the account from which shares are exchanged,
unless otherwise specified in writing by the shareholder with all signatures guaranteed by an
eligible guarantor institution as defined below. In order to participate in the Automatic
Investment Program or establish a Systematic Withdrawal Plan for the new account, however, an
exchanging shareholder must file a specific written request.
Any share exchange must satisfy the requirements relating to the minimum initial investment
requirement, and must be legally available for sale in the state of the investors residence. For
Federal income tax purposes, a share exchange is a taxable event and, accordingly, a capital gain
or loss may be realized. Before making an exchange request, shareholders should consult a tax or
other financial adviser and should consider the investment objective, policies and restrictions of
the investment portfolio into which the shareholder is making an exchange. Brokers may charge a fee
for handling exchanges.
The Funds reserve the right to suspend, modify or terminate the exchange privilege at any time.
Notice will be given to shareholders of any material modification or termination except where
notice is not required. The Funds reserve the right to reject any telephone exchange request.
Telephone exchanges may be subject to limitations as to amount or frequency, and to other
restrictions that may be established from time to time to ensure that exchanges do not operate to
the disadvantage of any portfolio or its shareholders.
The Funds, the Administrators and BRIL will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. The Funds, the Administrators and BRIL will
not be liable for any loss,
II-90
liability, cost or expense for acting upon telephone instructions reasonably believed to be
genuine in accordance with such procedures. By use of the exchange privilege, the investor
authorizes the Funds transfer agent to act on telephonic or written exchange instructions from any
person representing himself to be the investor and believed by the Funds transfer agent to be
genuine. The records of the Funds transfer agent pertaining to such instructions are binding. The
exchange privilege may be modified or terminated at any time upon 60 days notice to affected
shareholders. The exchange privilege is only available in states where the exchange may legally be
made.
Each Fund reserves the right to limit the number of times an investor may exercise the exchange
privilege. Certain Funds may suspend the continuous offering of their shares to the general public
at any time and may resume such offering from time to time. The exchange privilege is available
only to U.S. shareholders in states where the exchange legally may be made. The exchange privilege
may be applicable to other new mutual funds whose shares may be distributed by a Distributor.
Fee-Based Programs
If you participate in certain fee-based programs offered by BlackRock or an affiliate of BlackRock,
or selected securities dealers or other financial intermediaries that have agreements with the
Distributor or in certain fee-based programs in which BlackRock participates, you may be able to
buy Institutional Shares, including by exchanges from other share classes. Sales charges on the
shares being exchanged may be reduced or waived under certain circumstances. You generally cannot
transfer shares held through a fee-based program into another account. Instead, you will have to
redeem your shares held through the program and purchase shares of another class, which may be
subject to distribution and service fees. This may be a taxable event and you will pay any
applicable sales charges or redemption fee.
Shareholders that participate in a fee-based program generally have two options at termination. The
program can be terminated and the shares liquidated or the program can be terminated and the shares
held in an account. In general, when a shareholder chooses to continue to hold the shares, whatever
share class was held in the program can be held after termination. Shares that have been held for
less than specified periods within the program may be subject to a fee upon redemption.
Shareholders that held Investor A or Institutional Shares in the program are eligible to purchase
additional shares of the respective share class of a Fund, but may be subject to upfront sales
charges with respect to Investor A Shares. Additional purchases of Institutional Shares are
available only if you have an existing position at the time of purchase or are otherwise eligible
to purchase Institutional Shares.
Details about these features and the relevant charges are included in the client agreement for
each fee-based program and are available from your financial professional, selected securities
dealer or other financial intermediary.
Retirement and Education Savings Plans
Individual retirement accounts and other retirement and education savings plans are available from
your financial intermediary. Under these plans, investments may be made in a Fund (other than a
Municipal Fund) and certain of the other mutual funds sponsored by the Manager or its affiliates as
well as in other securities. There may be fees associated with investing through these plans.
Information with respect to these plans is available on request from your financial intermediary.
Dividends received in each of the plans referred to above are exempt from Federal taxation until
distributed from the plans and, in the case of Roth IRAs and education savings plans, may be exempt
from taxation when distributed as well. Investors considering participation in any retirement or
education savings plan should review specific tax laws relating to the plan and should consult
their attorneys or tax advisers with respect to the establishment and maintenance of any such plan.
Automatic Investment Plans
Investor Share shareholders and certain Service Share shareholders who were shareholders of the
Compass Capital Group of Funds at the time of its combination with The PNC® Fund in 1996 may
arrange for periodic investments in that Fund through automatic deductions from a checking or
savings account. The minimum pre-authorized investment amount is $50. If you buy shares of a Fund
through certain accounts, no minimum charge to your bank account is required. Contact your
financial adviser or other financial intermediary for more information.
II-91
Automatic Dividend Reinvestment Plan
Each Fund will distribute substantially all of its net investment income and net realized capital
gains, if any, to shareholders. All distributions are reinvested at net asset value in the form of
additional full and fractional shares of the same class of shares of the relevant Fund unless a
shareholder elects otherwise. Such election, or any revocation thereof, must be made in writing to
the Transfer Agent, and will become effective with respect to dividends paid after its receipt by
the Transfer Agent. Each Fund declares a dividend each day on settled shares (i.e., shares for
which the particular Fund has received payment in Federal funds) on the first business day after a
purchase order is placed with the Fund. Payments by check are normally converted to Federal funds
within two business days of receipt. Over the course of a year, substantially all of the Funds net
investment income will be declared as dividends. The amount of the daily dividend for each Fund
will be based on periodic projections of its net investment income. All dividends are paid within
ten days after the end of each month. Net realized capital gains (including net short-term capital
gains), if any, will be distributed by each Fund at least annually.
Systematic Withdrawal Plans
Shareholders may receive regular distributions from their accounts via a Systematic Withdrawal Plan
(SWP). Upon commencement of the SWP, the account must have a current value of $10,000 or more in
a Fund. Shareholders may elect to receive automatic cash payments of $50 or more at any interval.
You may choose any day for the withdrawal. If no day is specified, the withdrawals will be
processed on the 25th day of the month or, if such day is not a business day, on the prior business
day and are paid promptly thereafter. An investor may utilize the SWP by completing the Systematic
Withdrawal Plan Application Form which may be obtained by visiting our website at
www.blackrock.com/funds.
Shareholders should realize that if withdrawals exceed income dividends their invested principal in
the account will be depleted. To participate in the SWP, shareholders must have their dividends
automatically reinvested. Shareholders may change or cancel the SWP at any time, upon written
notice to the Fund, or by calling the Fund at (800) 441-7762. Purchases of additional Investor A
Shares of the Fund concurrently with withdrawals may be disadvantageous to investors because of the
sales charges involved and, therefore, are discouraged. No CDSC will be assessed on redemptions of
Investor B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2 or Investor
C3 Shares made through the SWP that do not exceed 12% of the original investment on an annualized
basis. For example, monthly, quarterly and semi-annual SWP redemptions of Investor B, Investor B1,
Investor B2, Investor B3, Investor C, Investor C1, Investor C2 or Investor C3 Shares will not be
subject to the CDSC if they do not exceed 1% (monthly), 3% (quarterly) and 6% (semi-annually),
respectively, of an accounts net asset value on the redemption date. SWP redemptions of Investor
B, Investor B1, Investor B2, Investor B3, Investor C, Investor C1, Investor C2 or Investor C3
Shares in excess of this limit are still subject to the applicable CDSC.
For this reason, a shareholder may not participate in the Automatic Investment Plan described above
(see How to Buy, Sell, Transfer and Exchange Shares in the Funds Prospectus) and the SWP at the
same time.
Dividend Allocation Plan
The Dividend Allocation Plan allows shareholders to elect to have all their dividends and any other
distributions from any Eligible Fund (which means funds so designated by the Distributor from time
to time) automatically invested at net asset value in one other such Eligible Fund designated by
the shareholder, provided the account into which the dividends and distributions are directed is
initially funded with the requisite minimum amount.
Pricing of Shares
Determination of Net Asset Value
Valuation of Shares. The net asset value for each class of shares of each Fund is generally
calculated as of the close of regular trading hours on the NYSE (currently 4:00 p.m. Eastern Time)
on each business day the NYSE is open.
Valuation of securities held by each Fund is as follows:
Equity Investments. Equity securities traded on a recognized securities exchange (e.g., NYSE),
separate trading boards of a securities exchange or through a market system that provides
contemporaneous transaction pricing
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information (an Exchange) are valued via independent pricing services generally at the Exchange
closing price or if an Exchange closing price is not available, the last traded price on that
Exchange prior to the time as of which the assets or liabilities are valued, however, under certain
circumstances other means of determining current market value may be used. If an equity security
is traded on more than one Exchange, the current market value of the security where it is primarily
traded generally will be used. In the event that there are no sales involving an equity security
held by a Fund on a day on which the Fund values such security, the last bid (long positions) or
ask (short positions) price, if available, will be used as the value of such security. If a Fund
holds both long and short positions in the same security, the last bid price will be applied to
securities held long and the last ask price will be applied to securities sold short. If no bid or
ask price is available on a day on which a Fund values such security, the prior days price will be
used, unless BlackRock determines that such prior days price no longer reflects the fair value of
the security, in which case such asset would be treated as a fair value asset.
Fixed Income Investments. Fixed income securities for which market quotations are readily available
are generally valued using such securities most recent bid prices provided directly from one or
more broker-dealers, market makers, or independent third-party pricing services which may use
matrix pricing and valuation models to derive values, each in accordance with valuation procedures
approved by the Funds Board. The amortized cost method of valuation may be used with respect to
debt obligations with sixty days or less remaining to maturity unless the Manager and/or
Sub-Adviser determine such method does not represent fair value. Loan participation notes are
generally valued at the mean of the last available bid prices from one or more brokers or dealers
as obtained from independent third-party pricing services. Certain fixed income investments
including asset-backed and mortgage-related securities may be valued based on valuation models that
consider the estimated cash flows of each tranche of the entity, establish a benchmark yield and
develop an estimated tranche specific spread to the benchmark yield based on the unique attributes
of the tranche. Fixed income securities for which market quotations are not readily available may
be valued by third-party pricing services that make a valuation determination by securing
transaction data (e.g., recent representative bids), credit quality information, perceived market
movements, news, and other relevant information and by other methods, which may include
consideration of: yields or prices of securities of comparable quality, coupon, maturity and type;
indications as to values from dealers; and general market conditions.
Options, Futures, Swaps and Other Derivatives. Exchange-traded equity options for which market
quotations are readily available are valued at the mean of the last bid and ask prices as quoted on
the Exchange or the board of trade on which such options are traded. In the event that there is no
mean price available for an exchange traded equity option held by a Fund on a day on which the Fund
values such option, the last bid (long positions) or ask (short positions) price, if available,
will be used as the value of such option. If no bid or ask price is available on a day on which a
Fund values such option, the prior days price will be used, unless BlackRock determines that such
prior days price no longer reflects the fair value of the option in which case such option will be
treated as a fair value asset. OTC derivatives may be valued using a mathematical model which may
incorporate a number of market data factors. Financial futures contracts and options thereon, which
are traded on exchanges, are valued at their last sale price or settle price as of the close of
such exchanges. Swap agreements and other derivatives are generally valued daily based upon
quotations from market makers or by a pricing service in accordance with the valuation procedures
approved by the Board.
Underlying Funds. Shares of underlying open-end funds are valued at net asset value. Shares of
underlying exchange-traded closed-end funds or other exchange-traded funds will be valued at their
most recent closing price.
General Valuation Information
In determining the market value of portfolio investments, the Fund may employ independent third
party pricing services, which may use, without limitation, a matrix or formula method that takes
into consideration market indexes, matrices, yield curves and other specific adjustments. This may
result in the securities being valued at a price different from the price that would have been
determined had the matrix or formula method not been used. All cash, receivables and current
payables are carried on each Funds books at their face value.
Prices obtained from independent third party pricing services, broker-dealers or market makers to
value each Funds securities and other assets and liabilities are based on information available at
the time the Fund values its assets and liabilities. In the event that a pricing service quotation
is revised or updated subsequent to the day on which the Fund valued such security, the revised
pricing service quotation generally will be applied prospectively. Such determination shall be
made considering pertinent facts and circumstances surrounding such revision.
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In the event that application of the methods of valuation discussed above result in a price for a
security which is deemed not to be representative of the fair market value of such security, the
security will be valued by, under the direction of or in accordance with a method specified by the
Funds Board as reflecting fair value. All other assets and liabilities (including securities for
which market quotations are not readily available) held by a Fund (including restricted securities)
are valued at fair value as determined in good faith by the Funds Board or by BlackRock (its
delegate). Any assets and liabilities which are denominated in a foreign currency are translated
into U.S. dollars at the prevailing rates of exchange.
Certain of the securities acquired by the Funds may be traded on foreign exchanges or
over-the-counter markets on days on which a Funds net asset value is not calculated. In such
cases, the net asset value of a Funds shares may be significantly affected on days when investors
can neither purchase nor redeem shares of the Fund.
Fair Value. When market quotations are not readily available or are believed by BlackRock to be
unreliable, a Funds investments are valued at fair value (Fair Value Assets). Fair Value Assets
are valued by BlackRock in accordance with procedures approved by the Funds Board. BlackRock may
conclude that a market quotation is not readily available or is unreliable if a security or other
asset or liability does not have a price source due to its complete lack of trading, if BlackRock
believes a market quotation from a broker-dealer or other source is unreliable (e.g., where it
varies significantly from a recent trade, or no longer reflects the fair value of the security or
other asset or liability subsequent to the most recent market quotation), where the security or
other asset or liability is only thinly traded or due to the occurrence of a significant event
subsequent to the most recent market quotation. For this purpose, a significant event is deemed
to occur if BlackRock determines, in its business judgment prior to or at the time of pricing a
Funds assets or liabilities, that it is likely that the event will cause a material change to the
last exchange closing price or closing market price of one or more assets or liabilities held by
the Fund. On any date the NYSE is open and the primary exchange on which a foreign asset or
liability is traded is closed, such asset or liability will be valued using the prior days price,
provided that BlackRock is not aware of any significant event or other information that would cause
such price to no longer reflect the fair value of the asset or liability, in which case such asset
or liability would be treated as a Fair Value Asset. For certain foreign securities, a third-party
vendor supplies evaluated, systematic fair value pricing based upon the movement of a proprietary
multi-factor model after the relevant foreign markets have closed. This systematic fair value
pricing methodology is designed to correlate the prices of foreign securities following the close
of the local markets to the price that might have prevailed as of a Funds pricing time.
BlackRock, with input from the BlackRock Portfolio Management Group, will submit its
recommendations regarding the valuation and/or valuation methodologies for Fair Value Assets to
BlackRocks Valuation Committee. The Valuation Committee may accept, modify or reject any
recommendations. In addition, the Funds accounting agent periodically endeavors to confirm the
prices it receives from all third party pricing services, index providers and broker-dealers, and,
with the assistance of BlackRock, to regularly evaluate the values assigned to the securities and
other assets and liabilities held by the Funds. The pricing of all Fair Value Assets is
subsequently reported to and ratified by the Board or a Committee thereof.
When determining the price for a Fair Value Asset, the BlackRock Valuation Committee (or the
Pricing Group) shall seek to determine the price that a Fund might reasonably expect to receive
from the current sale of that asset or liability in an arms-length transaction. The price
generally may not be determined based on what a Fund might reasonably expect to receive for selling
an asset or liability at a later time or if it holds the asset or liability to maturity. Fair value
determinations shall be based upon all available factors that the Valuation Committee (or Pricing
Group) deems relevant at the time of the determination, and may be based on analytical values
determined by BlackRock using proprietary or third party valuation models.
Fair value represents a good faith approximation of the value of an asset or liability. The fair
value of one or more assets or liabilities may not, in retrospect, be the price at which those
assets or liabilities could have been sold during the period in which the particular fair values
were used in determining a Funds net asset value. As a result, a Funds sale or redemption of its
shares at net asset value, at a time when a holding or holdings are valued at fair value, may have
the effect of diluting or increasing the economic interest of existing shareholders.
Each Funds annual audited financial statements, which are prepared in accordance with accounting
principles generally accepted in the United States of America (US GAAP), follow the requirements
for valuation set forth in Financial Accounting Standards Board Accounting Standards Codification
Topic 820, Fair Value Measurements
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and Disclosures (ASC 820), which defines and establishes a framework for measuring fair value
under US GAAP and expands financial statement disclosure requirements relating to fair value
measurements.
Generally, ASC 820 and other accounting rules applicable to mutual funds and various assets in
which they invest are evolving. Such changes may adversely affect a Fund. For example, the
evolution of rules governing the determination of the fair market value of assets or liabilities to
the extent such rules become more stringent would tend to increase the cost and/or reduce the
availability of third-party determinations of fair market value. This may in turn increase the
costs associated with selling assets or affect their liquidity due to the Funds inability to
obtain a third-party determination of fair market value.
Portfolio Transactions and Brokerage
Transactions in Portfolio Securities
Subject to policies established by the Board of Directors, BlackRock is primarily responsible for
the execution of a Funds portfolio transactions and the allocation of brokerage. BlackRock does
not execute transactions through any particular broker or dealer, but seeks to obtain the best net
results for the Fund, taking into account such factors as price (including the applicable brokerage
commission or dealer spread), size of order, difficulty of execution, operational facilities of the
firm and the firms risk and skill in positioning blocks of securities. While BlackRock generally
seeks reasonable trade execution costs, a Fund does not necessarily pay the lowest spread or
commission available, and payment of the lowest commission or spread is not necessarily consistent
with obtaining the best price and execution in particular transactions. Subject to applicable legal
requirements, BlackRock may select a broker based partly upon brokerage or research services
provided to BlackRock and its clients, including a Fund. In return for such services, BlackRock may
cause a Fund to pay a higher commission than other brokers would charge if BlackRock determines in
good faith that the commission is reasonable in relation to the services provided.
In the case of Feeder Funds, because each Feeder Fund generally invests exclusively in beneficial
interests of a Master Portfolio, it is expected that all transactions in portfolio securities will
be entered into by the Master Portfolio.
In selecting brokers or dealers to execute portfolio transactions, the Manager and sub-advisers
seek to obtain the best price and most favorable execution for a Fund, taking into account a
variety of factors including: (i) the size, nature and character of the security or instrument
being traded and the markets in which it is purchased or sold; (ii) the desired timing of the
transaction; (iii) BlackRocks knowledge of the expected commission rates and spreads currently
available; (iv) the activity existing and expected in the market for the particular security or
instrument, including any anticipated execution difficulties; (v) the full range of brokerage
services provided; (vi) the brokers or dealers capital (vii) the quality of research and research
services provided; (viii) the reasonableness of the commission, dealer spread or its equivalent for
the specific transaction; and (ix) BlackRocks knowledge of any actual or apparent operational
problems of a broker or dealer.
Section 28(e) of the Exchange Act (Section 28(e)) permits an investment adviser, under certain
circumstances, to cause an account to pay a broker or dealer a commission for effecting a
transaction that exceeds the amount another broker or dealer would have charged for effecting the
same transaction in recognition of the value of brokerage and research services provided by that
broker or dealer. This includes commissions paid on riskless principal transactions under certain
conditions. Brokerage and research services include: (1) furnishing advice as to the value of
securities, including pricing and appraisal advice, credit analysis, risk measurement analysis,
performance and other analysis, as well as the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of securities; (2)
furnishing analyses and reports concerning issuers, industries, securities, economic factors and
trends, portfolio strategy, and the performance of accounts; and (3) effecting securities
transactions and performing functions incidental to securities transactions (such as clearance,
settlement, and custody). BlackRock believes that access to independent investment research is
beneficial to its investment decision-making processes and, therefore, to the Funds.
BlackRock may participate in client commission arrangements under which BlackRock may execute
transactions through a broker-dealer and request that the broker-dealer allocate a portion of the
commissions or commission credits to another firm that provides research to BlackRock. BlackRock
believes that research services obtained through soft dollar or commission sharing arrangements
enhance its investment decision-making capabilities, thereby increasing the prospects for higher
investment returns. BlackRock will engage only in soft dollar or
II-95
commission sharing transactions that comply with the requirements of Section 28(e). BlackRock
regularly evaluates the soft dollar products and services utilized, as well as the overall soft
dollar and commission sharing arrangements to ensure that trades are executed by firms that are
regarded as best able to execute trades for client accounts, while at the same time providing
access to the research and other services BlackRock views as impactful to its trading results.
BlackRock may utilize soft dollars and related services, including research (whether prepared by
the broker-dealer or prepared by a third-party and provided to BlackRock by the broker-dealer) and
execution or brokerage services within applicable rules and BlackRocks policies to the extent that
such permitted services do not compromise BlackRocks ability to seek to obtain best execution. In
this regard, the portfolio management investment and/or trading teams may consider a variety of
factors, including the degree to which the broker-dealer: (a) provides access to company
management; (b) provides access to their analysts; (c) provides meaningful/insightful research
notes on companies or other potential investments; (d) facilitates calls on which meaningful or
insightful ideas about companies or potential investments are discussed; (e) facilitates
conferences at which meaningful or insightful ideas about companies or potential investments are
discussed; or (f) provides research tools such as market data, financial analysis, and other third
party related research and brokerage tools that aid in the investment process.
Research-oriented services for which BlackRock might pay with Fund commissions may be in written
form or through direct contact with individuals and may include information as to particular
companies or industries and securities or groups of securities, as well as market, economic, or
institutional advice and statistical information, political developments and technical market
information that assists in the valuation of investments. Except as noted immediately below,
research services furnished by brokers may be used in servicing some or all client accounts and not
all services may be used in connection with the Fund or account that paid commissions to the broker
providing such services. In some cases, research information received from brokers by mutual fund
management personnel, or personnel principally responsible for BlackRocks individually managed
portfolios, is not necessarily shared by and between such personnel. Any investment advisory or
other fees paid by a Fund to BlackRock are not reduced as a result of BlackRocks receipt of
research services. In some cases, BlackRock may receive a service from a broker that has both a
research and a non-research use. When this occurs BlackRock makes a good faith allocation,
under all the circumstances, between the research and non-research uses of the service. The
percentage of the service that is used for research purposes may be paid for with client
commissions, while BlackRock will use its own funds to pay for the percentage of the service that
is used for non-research purposes. In making this good faith allocation, BlackRock faces a
potential conflict of interest, but BlackRock believes that its allocation procedures are
reasonably designed to ensure that it appropriately allocates the anticipated use of such services
to their research and non-research uses.
Payments of commissions to brokers who are affiliated persons of the Fund, or the Master Portfolio
with respect to the Feeder Fund (or affiliated persons of such persons), will be made in accordance
with Rule 17e-1 under the Investment Company Act. Subject to policies established by the Board of
Directors of the Master Portfolio, BlackRock is primarily responsible for the execution of the
Master Portfolios portfolio transactions and the allocation of brokerage.
From time to time, a Fund may purchase new issues of securities in a fixed price offering. In these
situations, the broker may be a member of the selling group that will, in addition to selling
securities, provide BlackRock with research services. FINRA has adopted rules expressly permitting
these types of arrangements under certain circumstances. Generally, the broker will provide
research credits in these situations at a rate that is higher than that available for typical
secondary market transactions. These arrangements may not fall within the safe harbor of Section
28(e).
BlackRock does not consider sales of shares of the mutual funds it advises as a factor in the
selection of brokers or dealers to execute portfolio transactions for a Fund; however, whether or
not a particular broker or dealer sells shares of the mutual funds advised by BlackRock neither
qualifies nor disqualifies such broker or dealer to execute transactions for those mutual funds.
Each Fund anticipates that its brokerage transactions involving foreign securities generally will
be conducted primarily on the principal stock exchanges of the applicable country. Foreign equity
securities may be held by a Fund in the form of depositary receipts, or other securities
convertible into foreign equity securities. Depositary receipts may be listed on stock exchanges,
or traded in over-the-counter markets in the United States or Europe, as
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the case may be. American Depositary Receipts, like other securities traded in the United States,
will be subject to negotiated commission rates. Because the shares of each Fund are redeemable on a
daily basis in U.S. dollars, each Fund intends to manage its portfolio so as to give reasonable
assurance that it will be able to obtain U.S. dollars to the extent necessary to meet anticipated
redemptions. Under present conditions, it is not believed that these considerations will have a
significant effect on a Funds portfolio strategies.
See Portfolio Transactions and Brokerage in the Statement of Additional Information for
information about the brokerage commissions paid by your Fund, including commissions paid to
affiliates, if any, for the periods indicated.
Each Fund may invest in certain securities traded in the OTC market and intends to deal directly
with the dealers who make a market in the particular securities, except in those circumstances in
which better prices and execution are available elsewhere. Under the Investment Company Act,
persons affiliated with a Fund and persons who are affiliated with such affiliated persons are
prohibited from dealing with the Fund as principal in the purchase and sale of securities unless a
permissive order allowing such transactions is obtained from the Commission. Since transactions in
the OTC market usually involve transactions with the dealers acting as principal for their own
accounts, the Funds will not deal with affiliated persons, including PNC and its affiliates, in
connection with such transactions. However, an affiliated person of a Fund may serve as its broker
in OTC transactions conducted on an agency basis provided that, among other things, the fee or
commission received by such affiliated broker is reasonable and fair compared to the fee or
commission received by non-affiliated brokers in connection with comparable transactions. In
addition, a Fund may not purchase securities during the existence of any underwriting syndicate for
such securities of which PNC is a member or in a private placement in which PNC serves as placement
agent except pursuant to procedures approved by the Board of Directors that either comply with
rules adopted by the Commission or with interpretations of the Commission staff.
Over-the-counter issues, including most fixed income securities such as corporate debt and U.S.
Government securities, are normally traded on a net basis without a stated commission, through
dealers acting for their own account and not as brokers. The Funds will primarily engage in
transactions with these dealers or deal directly with the issuer unless a better price or execution
could be obtained by using a broker. Prices paid to a dealer with respect to both foreign and
domestic securities will generally include a spread, which is the difference between the prices
at which the dealer is willing to purchase and sell the specific security at the time, and includes
the dealers normal profit.
Purchases of money market instruments by a Fund are made from dealers, underwriters and issuers.
The Funds do not currently expect to incur any brokerage commission expense on such transactions
because money market instruments are generally traded on a net basis with dealers acting as
principal for their own accounts without a stated commission. The price of the security, however,
usually includes a profit to the dealer. Each Money Market Fund intends to purchase only securities
with remaining maturities of 13 months or less as determined in accordance with the rules of the
Commission. As a result, the portfolio turnover rates of a Money Market Fund will be relatively
high. However, because brokerage commissions will not normally be paid with respect to investments
made by a Money Market Fund, the turnover rates should not adversely affect the Funds net asset
values or net income.
Securities purchased in underwritten offerings include a fixed amount of compensation to the
underwriter, generally referred to as the underwriters concession or discount. When securities are
purchased or sold directly from or to an issuer, no commissions or discounts are paid.
The Manager or sub-advisers may seek to obtain an undertaking from issuers of commercial paper or
dealers selling commercial paper to consider the repurchase of such securities from a Fund prior to
maturity at their original cost plus interest (sometimes adjusted to reflect the actual maturity of
the securities), if it believes that a Funds anticipated need for liquidity makes such action
desirable. Any such repurchase prior to maturity reduces the possibility that a Fund would incur a
capital loss in liquidating commercial paper, especially if interest rates have risen since
acquisition of such commercial paper.
Investment decisions for each Fund and for other investment accounts managed by the Manager or
sub-advisers are made independently of each other in light of differing conditions. BlackRock
allocates investments among client accounts in a fair and equitable manner. A variety of factors
will be considered in making such allocations. These factors include: (i) investment objectives or
strategies for particular accounts, including sector, industry, country or
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region and capitalization weightings, (ii) tax considerations of an account, (iii) risk or
investment concentration parameters for an account, (iv) supply or demand for a security at a given
price level, (v) size of available investment, (vi) cash availability and liquidity requirements
for accounts, (vii) regulatory restrictions, (viii) minimum investment size of an account, (ix)
relative size of account, and (x) such other factors as may be approved by BlackRocks general
counsel. Moreover, investments may not be allocated to one client account over another based on any
of the following considerations: (i) to favor one client account at the expense of another, (ii) to
generate higher fees paid by one client account over another or to produce greater performance
compensation to BlackRock, (iii) to develop or enhance a relationship with a client or prospective
client, (iv) to compensate a client for past services or benefits rendered to BlackRock or to
induce future services or benefits to be rendered to BlackRock, or (v) to manage or equalize
investment performance among different client accounts.
Equity securities will generally be allocated among client accounts within the same investment
mandate on a pro rata basis. This pro-rata allocation may result in a Fund receiving less of a
particular security than if pro-ration had not occurred. All allocations of equity securities will
be subject, where relevant, to share minimums established for accounts and compliance constraints.
Initial public offerings of securities may be over-subscribed and subsequently trade at a premium
in the secondary market. When BlackRock is given an opportunity to invest in such an initial
offering or new or hot issue, the supply of securities available for client accounts is often
less than the amount of securities the accounts would otherwise take. In order to allocate these
investments fairly and equitably among client accounts over time, each portfolio manager or a
member of his or her respective investment team will indicate to BlackRocks trading desk their
level of interest in a particular offering with respect to eligible clients accounts for which that
team is responsible. Initial public offerings of U.S. equity securities will be identified as
eligible for particular client accounts that are managed by portfolio teams who have indicated
interest in the offering based on market capitalization of the issuer of the security and the
investment mandate of the client account and in the case of international equity securities, the
country where the offering is taking place and the investment mandate of the client account.
Generally, shares received during the initial public offering will be allocated among participating
client accounts within each investment mandate on a pro rata basis. In situations where supply is
too limited to be allocated among all accounts for which the investment is eligible, portfolio
managers may rotate such investment opportunities among one or more accounts so long as the
rotation system provides for fair access for all client accounts over time. Other allocation
methodologies that are considered by BlackRock to be fair and equitable to clients may be used as
well.
Because different accounts may have differing investment objectives and policies, BlackRock may buy
and sell the same securities at the same time for different clients based on the particular
investment objective, guidelines and strategies of those accounts. For example, BlackRock may
decide that it may be entirely appropriate for a growth fund to sell a security at the same time a
value fund is buying that security. To the extent that transactions on behalf of more than one
client of BlackRock or its affiliates during the same period may increase the demand for securities
being purchased or the supply of securities being sold, there may be an adverse effect on price.
For example, sales of a security by BlackRock on behalf of one or more of its clients may decrease
the market price of such security, adversely impacting other BlackRock clients that still hold the
security. If purchases or sales of securities arise for consideration at or about the same time
that would involve a Fund or other clients or funds for which BlackRock or an affiliate act as
investment manager, transactions in such securities will be made, insofar as feasible, for the
respective funds and clients in a manner deemed equitable to all.
In certain instances, BlackRock may find it efficient for purposes of seeking to obtain best
execution, to aggregate or bunch certain contemporaneous purchases or sale orders of its advisory
accounts. In general, all contemporaneous trades for client accounts under management by the same
portfolio manager or investment team will be bunched in a single order if the trader believes the
bunched trade would provide each client with an opportunity to achieve a more favorable execution
at a potentially lower execution cost. The costs associated with a bunched order will be shared pro
rata among the clients in the bunched order. Generally, if an order for a particular portfolio
manager or management team is filled at several different prices through multiple trades, all
accounts participating in the order will receive the average price except in the case of certain
international markets where average pricing is not permitted. While in some cases this practice
could have a detrimental effect upon the price or value of the security as far as a Fund is
concerned, in other cases it could be beneficial to the Fund. Transactions effected by BlackRock on
behalf of more than one of its clients during the same period may increase the demand for
securities being purchased or the supply of securities being sold, causing an adverse effect on
price. The trader will give the bunched order to
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the broker dealer that the trader has identified as being able to provide the best execution of the
order. Orders for purchase or sale of securities will be placed within a reasonable amount of time
of the order receipt and bunched orders will be kept bunched only long enough to execute the order.
A Fund will not purchase securities during the existence of any underwriting or selling group
relating to such securities of which BlackRock, PNC, BRIL or any affiliated person (as defined in
the Investment Company Act) thereof is a member except pursuant to procedures adopted by the Board
of Directors in accordance with Rule 10f-3 under the Investment Company Act. In no instance will
portfolio securities be purchased from or sold to BlackRock, PNC, BRIL or any affiliated person of
the foregoing entities except as permitted by Commission exemptive order or by applicable law.
Portfolio Turnover
While a Fund generally does not expect to engage in trading for short term gains, it will effect
portfolio transactions without regard to any holding period if, in Fund managements judgment, such
transactions are advisable in light of a change in circumstances of a particular company or within
a particular industry or in general market, economic or financial conditions. The portfolio
turnover rate is calculated by dividing the lesser of a Funds annual sales or purchases of
portfolio securities (exclusive of purchases or sales of U.S. government securities and all other
securities whose maturities at the time of acquisition were one year or less) by the monthly
average value of the securities in the portfolio during the year. A high rate of portfolio turnover
results in certain tax consequences, such as increased capital gain dividends and/or ordinary
income dividends, and in correspondingly greater transaction costs in the form of dealer spreads
and brokerage commissions, which are borne directly by a Fund.
Dividends and Taxes
Dividends
Each Fund intends to distribute substantially all of its net investment income, if any. Dividends
from such net investment income are paid as set forth in each Funds prospectus. Each Fund will
also distribute all net realized capital gains, if any, as set forth in such Funds prospectus.
From time to time, a Fund may declare a special distribution at or about the end of the calendar
year in order to comply with Federal tax requirements that certain percentages of its ordinary
income and capital gains be distributed during the year. If in any fiscal year, a Fund has net
income from certain foreign currency transactions, such income will be distributed at least
annually.
For information concerning the manner in which dividends may be reinvested automatically in shares
of each Fund, see Shareholder Services Automatic Dividend Reinvestment Plan. Shareholders may
also elect in writing to receive any such dividends in cash. Dividends are taxable to shareholders,
as discussed below, whether they are reinvested in shares of the Fund or received in cash. The per
share dividends on front-end load, CDSC and Service shares will be lower than the per share
dividends on Institutional Shares as a result of the service, distribution and higher transfer
agency fees applicable to CDSC shares, the service fees applicable to front-end load shares and
Service shares, and the service and distribution fees applicable to Class R Shares. Similarly, the
per share dividends on CDSC and Class R Shares will be lower than the per share dividends on
front-end load and Service shares as a result of the distribution fees and higher transfer agency
fees applicable to CDSC shares and the distribution fees applicable to Class R Shares, and the per
share dividends on CDSC shares will be lower than the per share dividends on Class R Shares as a
result of the higher distribution fees and higher transfer agency fees applicable to CDSC shares.
Taxes
Each Fund intends to continue to qualify for the special tax treatment afforded to regulated
investment companies (RICs) under the Code. As long as a Fund so qualifies, the Fund (but not its
shareholders) will not be subject to Federal income tax on the part of its investment company
taxable income and net realized capital gains that it distributes to its shareholders in years in
which it distributes at least 90% of its investment company taxable income and 90% of its net
tax-exempt interest income, if any, for the year. To qualify as a RIC, a Fund must meet certain
requirements regarding the source of its income and the composition and diversification of its
assets. See Part II, Investment Risks and ConsiderationsInvestment Restrictions (All Funds) for
a discussion of the asset diversification requirements. In the case of a Feeder Fund, such Fund may
look to the underlying assets of the
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Master Portfolio in which it has invested for purposes of satisfying the asset diversification
requirement and various other requirements of the Code applicable to RICs.
Each Fund intends to distribute substantially all of its income and gains. If, in any taxable year,
a Fund fails to qualify as a RIC under the Code, such Fund would be taxed in the same manner as an
ordinary corporation and all distributions from earnings and profits (as determined under Federal
income tax principles) to its shareholders would be taxable as ordinary dividend income eligible
for the maximum 15% tax rate for non-corporate shareholders (for taxable years beginning prior to
January 1, 2013) and the dividends-received deduction for corporate shareholders. However, a
Municipal Funds distributions derived from income on tax-exempt obligations, as defined herein,
would no longer qualify for treatment as exempt interest. Each Fund that is a series of a RIC that
consists of multiple series is treated as a separate corporation for Federal income tax purposes,
and therefore is considered to be a separate entity in determining its treatment under the rules
for RICs. Losses in one series of a RIC do not offset gains in another, and the requirements (other
than certain organizational requirements) for qualifying for RIC status will be determined at the
level of the individual series. In the following discussion, the term Fund means each individual
series, if applicable.
The Code requires a RIC to pay a nondeductible 4% excise tax to the extent the RIC does not
distribute, during each calendar year, 98% of its ordinary income, determined on a calendar year
basis, and 98.2% of its capital gain net income, determined, in general, as if the RICs taxable
year ended on October 31, plus certain undistributed amounts from the previous years. While each
Fund intends to distribute its income and capital gains in the manner necessary to avoid imposition
of the 4% excise tax, there can be no assurance that a sufficient amount of the Funds taxable
income and capital gains will be distributed to avoid entirely the imposition of the tax. In such
event, a Fund will be liable for the tax only on the amount by which it does not meet the foregoing
distribution requirements.
Dividends paid by a Fund from its ordinary income or from an excess of net short-term capital gain
over net long-term capital loss (together referred to as ordinary income dividends) are taxable
to shareholders as ordinary income. Distributions made from an excess of net long-term capital gain
over net short-term capital loss (including gains or losses from certain transactions in futures
and options) (capital gain dividends) are taxable to shareholders as long-term capital gains,
regardless of the length of time the shareholder has owned Fund shares. Distributions paid by a
Fund that are reported as exempt-interest dividends will not be subject to regular Federal income
tax. Certain dividend income and long-term capital gains are eligible for taxation at a reduced
rate that applies to non-corporate shareholders for taxable years beginning prior to 2013. Under
these rules, the portion of ordinary income dividends constituting qualified dividend income when
paid by a RIC to non-corporate shareholders may be taxable to such shareholders at long-term
capital gain rates. However, to the extent a Funds distributions are derived from income on debt
securities, certain types of preferred stock treated as debt for Federal income tax purposes and
short-term capital gains, such distributions will not constitute qualified dividend income.
Beginning in 2013, a 3.8 percent Medicare contribution tax will be imposed on net investment
income, including interest, dividends, and capital gain, of U.S. individuals with income exceeding
$200,000 (or $250,000 if married filing jointly), and of estates and trusts.
A Funds net capital gain (the excess of net long-term capital gains over net short-term capital
losses) is not subject to the 90% distribution requirement for taxation as a RIC, described above.
If a Fund retains net capital gain, it is subject to tax on that gain, and may designate the
retained amount as undistributed capital gain in a notice to its shareholders, who will be required
to include in income, as long-term capital gain, their proportionate shares of such undistributed
net capital gain, will be deemed to have paid and may claim as a credit against their Federal
income tax liability (and as a refund to the extent it exceeds that liability) their proportionate
shares of the tax paid by the Fund on that gain, and may increase the basis of their shares in the
Fund by the excess of the amount included in income over the amount allowed as a credit against
their taxes.
Distributions in excess of a Funds earnings and profits will first reduce the adjusted tax basis
of a holders shares and after such adjusted tax basis is reduced to zero, will constitute capital
gains to such holder (assuming the shares are held as a capital asset). Any loss upon the sale or
exchange of Fund shares held for six months or less will be treated as long-term capital loss to
the extent of any capital gain dividends received by the shareholder.
Ordinary income and capital gain dividends are taxable to shareholders even if they are reinvested
in additional shares of a Fund. Distributions by a Fund, whether from ordinary income or capital
gains, generally will not be eligible for the dividends received deduction allowed to corporations
under the Code. If a Fund pays a dividend in January that was declared in the previous October,
November or December to shareholders of record on a specified
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date in one of such months, then such dividend will be treated for tax purposes as being paid by
the Fund and received by its shareholders on December 31 of the year in which the dividend was
declared.
No gain or loss will be recognized by Investor B or Investor B1 shareholders on the conversion of
their Investor B Shares into Investor A Shares or Investor B1 Shares into Investor A1 Shares. A
shareholders tax basis in the Investor A or Investor A1 Shares acquired upon conversion will be
the same as the shareholders tax basis in the converted Investor B or Investor B1 Shares, and the
holding period of the acquired Investor A or Investor A1 Shares will include the holding period for
the converted Investor B or Investor B1 Shares.
If a shareholder of a Fund exercises an exchange privilege within 90 days of acquiring the shares
of a Fund, prior to January 31 of the following year, then the loss that the shareholder recognizes
on the exchange will be reduced (or the gain increased) to the extent any sales charge paid on the
exchanged shares reduces any sales charge the shareholder would have owed upon the purchase of the
new shares in the absence of the exchange privilege. Instead, such sales charge will be treated as
an amount paid for the new shares.
A loss realized on a sale or exchange of shares of a Fund will be disallowed if other substantially
identical shares are acquired (whether through the automatic reinvestment of dividends or
otherwise) within a 61-day period beginning 30 days before and ending 30 days after the date on
which the shares are sold or exchanged. In such case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss.
Certain Funds may invest in derivative contracts such as swap agreements. The federal income tax
treatment of a derivative contract may not be as favorable as a direct investment in the underlying
security and may adversely affect the timing, character and amount of income the Fund realizes from
its investments. As a result, a larger portion of the Funds distributions may be treated as
ordinary income rather than capital gains. In addition, the tax treatment of derivative contracts,
such as swap agreements, is unsettled and may be subject to future legislation, regulation or
administrative pronouncements issued by the IRS. If such future guidance limits the Funds ability
to use derivatives, the Fund may have to find other ways of achieving its investment objectives.
A provision added to the Code by the Dodd-Frank Wall Street Reform and Consumer Protection Act
clarifies that certain swap agreements, including exchange-traded swap agreements, are treated as
notional principal contracts rather than as section 1256 contracts. This can affect the type of
income earned by such swap agreements. Although all of the income on a notional principal contract
is ordinary income, only some of the income on a section 1256 contract is ordinary. The rest is
long-term capital gain, which may be taxable at more favorable rates than ordinary income. Recently
proposed regulations interpret what types of swap agreements are to be treated as notional
principal contracts rather than as section 1256 contracts. When finalized, these regulations could
result in the Fund having to treat more of its income on swap agreements and more of the
distributions made to shareholders as ordinary income and less as long-term capital gains.
Certain Funds may invest in zero coupon U.S. Treasury bonds and other debt securities that are
issued at a discount or provide for deferred interest. Even though a Fund receives no actual
interest payments on these securities, it will be deemed to receive income equal, generally, to a
portion of the excess of the face value of the securities over their issue price (original issue
discount) each year that the securities are held. Since the original issue discount income earned
by a Fund in a taxable year may not be represented by cash income, the Fund may have to dispose of
securities, which it might otherwise have continued to hold, or borrow to generate cash in order to
satisfy its distribution requirements. In addition, a Funds investment in foreign currencies or
foreign currency denominated or referenced debt securities, certain asset-backed securities and
contingent payment and inflation-indexed debt instruments also may increase or accelerate the
Funds recognition of income, including the recognition of taxable income in excess of cash
generated by such investments.
Ordinary income dividends paid to shareholders who are nonresident aliens or foreign entities
generally will be subject to a 30% U.S. withholding tax under existing provisions of the Code
applicable to foreign individuals and entities unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law.
A 30% withholding tax will be imposed on dividends paid after December 31, 2013 and redemption
proceeds paid after December 31, 2014, to (i) foreign financial institutions including non-U.S.
investment funds unless they agree to collect and disclose to the IRS information regarding their
direct and indirect U.S. account holders and (ii) certain other foreign entities unless they
certify certain information regarding their direct and indirect U.S. owners. To avoid withholding,
a foreign financial institution will need to enter into agreements with the IRS regarding providing
the
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IRS information including the name, address and taxpayer identification number of direct and
indirect U.S. account holders, to comply with due diligence procedures with respect to the
identification of U.S. accounts, to report to the IRS certain information with respect to U.S.
accounts maintained, to agree to withhold tax on certain payments made to non-compliant foreign
financial institutions or to account holders who fail to provide the required information, and to
determine certain other information as to their account holders. Other foreign entities will need
to provide the name, address, and TIN of each substantial U.S. owner or certifications of no
substantial U.S. ownership unless certain exceptions apply.
Foreign shareholders of a Fund must generally treat a distribution attributable to gain from a
Funds sale of an interest in a REIT as real property gain if 50% or more of the value of a Funds
assets is invested in REITs. The Fund is required to withhold a 35% tax on a distribution to a
foreign shareholder attributable to real property gain, and such a distribution may subject a
foreign shareholder to a U.S. tax filing obligation and create a branch profits tax liability for
foreign corporate shareholders. Under a de minimis exception to this rule, if the foreign
shareholder has not held more than 5% of a class of stock at any time during the one-year period
ending on the date of the distribution, the foreign shareholder is not treated as receiving real
property gain. There are also certain additional restrictions regarding the use of wash sales and
substitute payments.
Shareholders that are nonresident aliens or foreign entities are urged to consult their own tax
advisers concerning the particular tax consequences to them of an investment in a Fund.
Under certain provisions of the Code, some shareholders may be subject to a withholding tax on
ordinary income dividends, capital gain dividends and redemption payments (backup withholding).
Generally, shareholders subject to backup withholding will be non-corporate shareholders for whom
no certified taxpayer identification number is on file with the Fund or who, to the Funds
knowledge, have furnished an incorrect number. When establishing an account, an investor must
certify under penalty of perjury that such number is correct and that such investor is not
otherwise subject to backup withholding. Backup withholding is not an additional tax. Any amount
withheld generally may be allowed as a refund or a credit against a shareholders Federal income
tax liability, provided that the required information is timely forwarded to the IRS.
If a shareholder recognizes a loss with respect to a Funds shares of $2 million or more for an
individual shareholder or $10 million or more for a corporate shareholder in any single taxable
year (or a greater amount in any combination of taxable years), the shareholder must file a
disclosure statement on Form 8886 with the IRS. Direct shareholders of portfolio securities are in
many cases exempted. That a loss is reportable under these regulations does not affect the legal
determination of whether the taxpayers treatment of the loss is proper. Shareholders should
consult their tax advisers to determine the applicability of these regulations in light of their
individual circumstances.
Dividends and interest received by a Fund may give rise to withholding and other taxes imposed by
foreign countries. Tax conventions between certain foreign countries and the United States may
reduce or eliminate such taxes. Shareholders of a Fund more than 50% by value of the assets of
which at the close of a taxable year are foreign securities may be able to claim U.S. foreign tax
credits with respect to such foreign taxes paid by the Fund, subject to certain requirements and
limitations contained in the Code. For example, certain retirement accounts and certain tax-exempt
organizations cannot claim foreign tax credits on investments in foreign securities held in a Fund.
In addition, a foreign tax credit may be claimed with respect to withholding tax on payments with
respect to a security only if the holder of the security meets certain holding period requirements.
Both the shareholder and the Fund must meet these holding period requirements, and if a Fund fails
to do so, it will not be able to pass through to shareholders the ability to claim a credit or a
deduction for the related foreign taxes paid by the Fund. Further, to the extent that a Fund
engages in securities lending with respect to a security paying income subject to foreign taxes, it
may not be able to pass through to its shareholders the ability to take a foreign tax credit for
those taxes. If a Fund satisfies the applicable requirements, such Fund will be eligible to file an
election with the IRS pursuant to which shareholders of the Fund will be required to include their
proportionate shares of such foreign taxes in their U.S. income tax returns as gross income, treat
such proportionate shares as taxes paid by them, and deduct such proportionate shares in computing
their taxable incomes or, alternatively, use them as foreign tax credits against their U.S. income
taxes. No deductions for foreign taxes, however, may be claimed by noncorporate shareholders who do
not itemize deductions. A shareholder that is a nonresident alien individual or a foreign
corporation may be subject to U.S. withholding tax on the income resulting from a Funds election
described in this paragraph but may
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not be able to claim a credit or deduction against such U.S. tax for the foreign taxes treated as
having been paid by such shareholder. A Fund will report annually to its shareholders the amount
per share of such foreign taxes and other information needed to claim the foreign tax credit.
Certain transactions entered into by the Funds are subject to special tax rules of the Code that
may, among other things, (a) affect the character of gains and losses realized, (b) disallow,
suspend or otherwise limit the allowance of certain losses or deductions, and (c) accelerate the
recognition of income without a corresponding receipt of cash (with which to make the necessary
distributions to satisfy distribution requirements applicable to RICs). Operation of these rules
could, therefore, affect the character, amount and timing of distributions to shareholders. Special
tax rules also may require a Fund to mark to market certain types of positions in its portfolio
(i.e., treat them as sold on the last day of the taxable year), and may result in the recognition
of income without a corresponding receipt of cash. Funds engaging in transactions affected by these
provisions intend to monitor their transactions, make appropriate tax elections and make
appropriate entries in their books and records to lessen the effect of these tax rules and avoid
any possible disqualification from the special treatment afforded RICs under the Code.
If a Fund purchases shares of an investment company (or similar investment entity) organized under
foreign law, the Fund will generally be treated as owning shares in a passive foreign investment
company (PFIC) for Federal income tax purposes. A Fund may be subject to Federal income tax, and
interest charges (at the rate applicable to tax underpayments) on tax liability treated as having
been deferred with respect to certain distributions from such a company and on gain from the
disposition of the shares of such a company (collectively referred to as excess distributions),
even if such excess distributions are paid by the Fund as a dividend to its shareholders. However,
a Fund may elect to mark to market at the end of each taxable year shares that it holds in PFICs.
The election is made separately for each PFIC held and, once made, would be effective for all
subsequent taxable years, unless revoked with consent from the IRS. Under this election, a Fund
would recognize as ordinary income any increase in the value of its shares as of the close of the
taxable year over their adjusted tax basis and as ordinary loss any decrease in such value, but
only to the extent of previously recognized mark-to-market gains. By making the mark-to-market
election, a Fund could avoid imposition of the interest charge with respect to excess distributions
from PFICs, but in any particular year might be required to recognize income in excess of the
distributions it received from PFICs.
If the Fund were to invest in a PFIC and elect to treat the PFIC as a qualified electing fund
under the Code, in lieu of the foregoing requirements, the Fund would be required to include in
income each year a portion of the ordinary earnings and net capital gains of the qualified electing
fund, even if not distributed to the Fund, and such amounts would be subject to the 90% and excise
tax distribution requirements described above. In order to make this election, the Fund would be
required to obtain certain annual information from the PFICs in which it invests, which may be
difficult or impossible to obtain.
Municipal Funds
Each Municipal Fund intends to qualify to pay exempt-interest dividends as defined in Section
852(b)(5) of the Code. Under such section if, at the close of each quarter of a Funds taxable
year, at least 50% of the value of the Funds total assets consists of obligations exempt from
Federal income tax (tax-exempt obligations) under Section 103(a) of the Code (relating generally
to obligations of a state or local governmental unit), the Fund shall be qualified to pay
exempt-interest dividends to holders of all outstanding classes of its shares (together the
shareholders). Exempt-interest dividends are dividends or any part thereof paid by a Fund that
are attributable to interest on tax-exempt obligations and reported by the Fund as exempt-interest
dividends. A Fund will allocate interest from tax-exempt obligations (as well as ordinary income,
capital gains and tax preference items discussed below) among the Funds shareholders according to
a method (that it believes is consistent with the Commission rule permitting the issuance and sale
of multiple classes of shares) that is based upon the gross income that is allocable to each class
of shareholders during the taxable year, or such other method as the IRS may prescribe.
Exempt-interest dividends will be excludable from a shareholders gross income for Federal income
tax purposes. Exempt-interest dividends are included, however, in determining the portion, if any,
of a persons social security and railroad retirement benefits subject to Federal income taxes.
Interest on indebtedness incurred or continued to purchase or carry shares of a RIC paying
exempt-interest dividends, such as the Fund, will not be deductible by the investor for Federal
income tax purposes to the extent attributable to exempt-interest dividends. Shareholders are
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advised to consult their tax advisers with respect to whether exempt-interest dividends retain the
exclusion under Code Section 103(a) if a shareholder would be treated as a substantial user or
related person under Code Section 147(a) with respect to property financed with the proceeds of
an issue of PABs, if any, held by a Fund.
All or a portion of a Funds gains from the sale or redemption of tax-exempt obligations purchased
at a market discount will be treated as ordinary income rather than capital gain. This rule may
increase the amount of ordinary income dividends received by shareholders. Distributions in excess
of a Funds earnings and profits will first reduce the adjusted tax basis of a holders shares and,
after such adjusted tax basis is reduced to zero, will constitute capital gains to such holder
(assuming the shares are held as a capital asset). Any loss upon the sale or exchange of Fund
shares held for six months or less will be disallowed to the extent of any exempt-interest
dividends received by the shareholder. In addition, any such loss that is not disallowed under the
rule stated above will be treated as long-term capital loss to the extent of any capital gain
dividends received by the shareholder.
The Code subjects interest received on certain otherwise tax-exempt securities to a Federal
alternative minimum tax. The alternative minimum tax applies to interest received on certain PABs
issued after August 7, 1986. PABs are bonds that, although tax-exempt, are used for purposes other
than those generally performed by governmental units and that benefit non-governmental entities
(e.g., bonds used for industrial development or housing purposes). Income received on such bonds is
classified as an item of tax preference, which could subject certain investors in such bonds,
including shareholders of a Fund, to a Federal alternative minimum tax. A Fund will purchase such
PABs and will report to shareholders after the close of the calendar year-end the portion of the
Funds dividends declared during the year that constitute an item of tax preference for alternative
minimum tax purposes. The Code further provides that corporations are subject to a Federal
alternative minimum tax based, in part, on certain differences between taxable income as adjusted
for other tax preferences and the corporations adjusted current earnings, which more closely
reflect a corporations economic income. Because an exempt-interest dividend paid by a Fund will be
included in adjusted current earnings, a corporate shareholder may be required to pay alternative
minimum tax on exempt-interest dividends paid by the Fund.
Each Municipal Fund may engage in interest rate swap transactions. The Federal income tax rules
governing the taxation of interest rate swaps are not entirely clear and may require a Fund to
treat payments received under such arrangements as ordinary income and to amortize payments made
under certain circumstances. Because payments received by a Fund in connection with swap
transactions will be taxable rather than tax-exempt, they may result in increased taxable
distributions to shareholders.
Please see Part I of your Funds Statement of Additional Information for certain state tax
information relevant to an investment in BlackRock California Municipal Bond Fund, BlackRock New
Jersey Municipal Bond Fund, BlackRock New York Municipal Bond Fund and BlackRock Pennsylvania
Municipal Bond Fund, as well as information on economic conditions within each applicable state.
The foregoing is a general and abbreviated summary of the applicable provisions of the Code and
Treasury regulations presently in effect. For the complete provisions, reference should be made to
the pertinent Code sections and the Treasury regulations promulgated thereunder. The Code and the
Treasury regulations are subject to change by legislative, judicial or administrative action either
prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and local taxes. Certain
states exempt from state income taxation dividends paid by RICs that are derived from interest on
U.S. government obligations. State law varies as to whether dividend income attributable to U.S.
government obligations is exempt from state income tax.
Shareholders of each Fund are urged to consult their tax advisers regarding specific questions as
to Federal, foreign, state or local taxes with respect to their Fund. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in a Fund.
In the case of a Feeder Fund, such Fund is entitled to look to the underlying assets of the Master
Portfolio in which it has invested for purposes of satisfying various qualification requirements of
the Code applicable to RICs. Each Master Portfolio is classified either as a partnership or a
separate disregarded entity (depending on the particular Master Portfolio) for U.S. Federal income
tax purposes. If applicable tax provisions were to change, then the Board
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of Directors of a Feeder Fund will determine, in its discretion, the appropriate course of action
for the Feeder Fund. One possible course of action would be to withdraw the Feeder Funds
investments from the Master Portfolio and to retain an investment manager to manage the Feeder
Funds assets in accordance with the investment policies applicable to the Feeder Fund.
The foregoing general discussion of Federal income tax consequences is based on the Code and the
regulations issued thereunder as in effect on the date of this Statement of Additional Information.
Future legislative or administrative changes or court decisions may significantly change the
conclusions expressed in this discussion, and any such changes or decisions may have a retroactive
effect.
An investment in a Fund may have consequences under state, local or foreign tax law, about which
investors should consult their tax advisors.
Performance Data
From time to time a Fund may include its average annual total return and other total return
data, and, if applicable, yield and tax-equivalent yield in advertisements or information furnished
to present or prospective shareholders. Total return, yield and tax-equivalent yield each is based
on a Funds historical performance and is not intended to indicate future performance. Average
annual total return is determined separately for each class of shares in accordance with a formula
specified by the Commission.
Quotations of average annual total return, before tax, for the specified periods are computed by
finding the average annual compounded rates of return (based on net investment income and any
realized and unrealized capital gains or losses on portfolio investments over such periods) that
would equate the initial amount invested to the redeemable value of such investment at the end of
each period. Average annual total return before taxes is computed assuming all dividends are
reinvested and taking into account all applicable recurring and nonrecurring expenses, including
the maximum sales charge, in the case of front-end load shares, and the CDSC that would be
applicable to a complete redemption of the investment at the end of the specified period in the
case of CDSC shares, but does not take into account taxes payable on dividends or on redemption.
Quotations of average annual total return, after taxes, on dividends for the specified periods are
computed by finding the average annual compounded rates of return that would equate the initial
amount invested to the ending value of such investment at the end of each period assuming payment
of taxes on dividends received during such period. Average annual total return after taxes on
dividends is computed assuming all dividends, less the taxes due on such dividends, are reinvested
and taking into account all applicable recurring and nonrecurring expenses, including the maximum
sales charge, in the case of front-end load shares and the CDSC that would be applicable to a
complete redemption of the investment at the end of the specified period in the case of CDSC
shares. The taxes due on dividends are calculated by applying to each dividend the highest
applicable marginal Federal individual income tax rates in effect on the reinvestment date for that
dividend. The rates used correspond to the tax character (including eligibility for the maximum 15%
tax rate applicable to qualified dividend income) of each dividend. The taxable amount and tax
character of each dividend are specified by each Fund on the dividend declaration date, but may be
adjusted to reflect subsequent recharacterizations of distributions. The applicable tax rates may
vary over the measurement period. The effects of state and local taxes are not reflected.
Applicable tax credits, such as foreign credits, are taken into account according to Federal law.
The ending value is determined assuming complete redemption at the end of the applicable periods
with no tax consequences associated with such redemption.
Quotations of average annual total return, after taxes, on both dividends and redemption for the
specified periods are computed by finding the average annual compounded rates of return that would
equate the initial amount invested to the ending value of such investment at the end of each period
assuming payment of taxes on dividends received during such period as well as on complete
redemption. Average annual total return after taxes on distributions and redemption is computed
assuming all dividends, less the taxes due on such dividends, are reinvested and taking into
account all applicable recurring and nonrecurring expenses, including the maximum sales charge in
the case of front-end load shares and the CDSC that would be applicable to a complete redemption of
the investment at the end of the specified period in the case of CDSC shares and assuming, for all
classes of shares, complete redemption and payment of taxes due on such redemption. The ending
value is determined assuming complete redemption at the end of the applicable periods, subtracting
capital gains taxes resulting from the redemption and adding the presumed tax
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benefit from capital losses resulting from redemption. The taxes due on dividends and on the deemed
redemption are calculated by applying the highest applicable marginal Federal individual income tax
rates in effect on the reinvestment and/or the redemption date. The rates used correspond to the
tax character (including eligibility for the maximum 15% tax rate applicable to qualified dividend
income) of each component of each dividend and/or the redemption payment. The applicable tax rates
may vary over the measurement period. The effects of state and local taxes are not reflected.
A Fund also may quote annual, average annual and annualized total return and aggregate total return
performance data, both as a percentage and as a dollar amount based on a hypothetical investment of
$1,000 or some other amount, for various periods other than those noted in Part I of each Funds
Statement of Additional Information. Such data will be computed as described above, except that (1)
as required by the periods of the quotations, actual annual, annualized or aggregate data, rather
than average annual data, may be quoted and (2) the maximum applicable sales charges will not be
included with respect to annual or annualized rates of return calculations. Aside from the impact
on the performance data calculations of including or excluding the maximum applicable sales
charges, actual annual or annualized total return data generally will be lower than average annual
total return data since the average rates of return reflect compounding of return; aggregate total
return data generally will be higher than average annual total return data since the aggregate
rates of return reflect compounding over a longer period of time.
Yield quotations will be computed based on a 30-day period by dividing (a) the net income based on
the yield of each security earned during the period by (b) the average daily number of shares
outstanding during the period that were entitled to receive dividends multiplied by the maximum
offering price per share on the last day of the period. Tax equivalent yield quotations will be
computed by dividing (a) the part of a Funds yield that is tax-exempt by (b) one minus a stated
tax rate and adding the result to that part, if any, of the Funds yield that is not tax-exempt.
A Funds total return will vary depending on market conditions, the securities comprising a Funds
portfolio, a Funds operating expenses and the amount of realized and unrealized net capital gains
or losses during the period. The value of an investment in a Fund will fluctuate and an investors
shares, when redeemed, may be worth more or less than their original cost.
In order to reflect the reduced sales charges in the case of front-end load shares or the waiver of
the CDSC in the case of CDSC shares applicable to certain investors, as described under Purchase
of Shares and Redemption of Shares, respectively, the total return data quoted by a Fund in
advertisements directed to such investors may take into account the reduced, and not the maximum,
sales charge or may take into account the CDSC waiver and, therefore, may reflect greater total
return since, due to the reduced sales charges or the waiver of sales charges, a lower amount of
expenses is deducted.
On occasion, a Fund may compare its performance to, among other things, the Funds benchmark index
indicated in the Prospectus, the Value Line Composite Index, the Dow Jones Industrial Average, or
to other published indices, or to performance data published by Lipper Inc., Morningstar, Inc.
(Morningstar), Money Magazine, U.S. News & World Report, BusinessWeek, Forbes Magazine, Fortune
Magazine or other industry publications. When comparing its performance to a market index, a Fund
may refer to various statistical measures derived from the historical performance of a Fund and the
index, such as standard deviation and beta. As with other performance data, performance comparisons
should not be considered indicative of a Funds relative performance for any future period. In
addition, from time to time a Fund may include the Funds Morningstar risk-adjusted performance
ratings assigned by Morningstar in advertising or supplemental sales literature. From time to time
a Fund may quote in advertisements or other materials other applicable measures of Fund performance
and may also make reference to awards that may be given to the Manager. Certain Funds may also
compare their performance to composite indices developed by Fund management.
A Fund may provide information designed to help investors understand how the Fund is seeking to
achieve its investment objectives. This may include information about past, current or possible
economic, market, political or other conditions, descriptive information or general principles of
investing such as asset allocation, diversification and risk tolerance, discussion of a Funds
portfolio composition, investment philosophy, strategy or investment techniques, comparisons of the
Funds performance or portfolio composition to that of other funds or types of investments, indices
relevant to the comparison being made, or to a hypothetical or model portfolio. A Fund may
II-106
also quote various measures of volatility and benchmark correlation in advertising and other
materials, and may compare these measures to those of other funds or types of investments.
Proxy Voting Policies and Procedures
The Board of Directors of the Funds has delegated the voting of proxies for the Funds
securities to the Manager pursuant to the Managers proxy voting guidelines. Under these
guidelines, the Manager will vote proxies related to Fund securities in the best interests of the
Fund and its stockholders. From time to time, a vote may present a conflict between the interests
of the Funds stockholders, on the one hand, and those of the Manager, or any affiliated person of
the Fund or the Manager, on the other. The Manager maintains policies and procedures that are
designed to prevent undue influence on the Managers proxy voting activity that might stem from any
relationship between the issuer of a proxy (or any dissident shareholder) and the Manager, the
Managers affiliates, a Fund or a Funds affiliates. Most conflicts are managed through a
structural separation of the Managers Corporate Governance Group from the Managers employees with
sales and client responsibilities. In addition, the Manager maintains procedures to ensure that
all engagements with corporate issuers or dissident shareholders are managed consistently and
without regard to the Managers relationship with the issuer of the proxy or dissident shareholder.
In certain instances, BlackRock may determine to engage an independent fiduciary to vote proxies
as a further safeguard to avoid potential conflicts of interest or as otherwise required by
applicable law. A copy of the Funds Proxy Voting Policies is attached as Appendix B.
Information on how each Fund voted proxies relating to portfolio securities during the most recent
12-month period ended June 30 is available without charge, (i) at www.blackrock.com and (ii) on the
Commissions website at http://www.sec.gov.
General Information
Description of Shares
Shareholders of a Fund are entitled to one vote for each full share held and fractional votes for
fractional shares held in the election of Directors and generally on other matters submitted to the
vote of shareholders of the Fund. Shareholders of a class that bears distribution and/or service
expenses have exclusive voting rights with respect to matters relating to such distribution and
service expenditures (except that Investor B and Investor B1 shareholders may vote upon any
material changes to such expenses charged under the Investor A Distribution Plan). Voting rights
are not cumulative, so that the holders of more than 50% of the shares voting in the election of
Directors can, if they choose to do so, elect all the Directors of a Fund, in which event the
holders of the remaining shares would be unable to elect any person as a Director.
No Fund intends to hold annual meetings of shareholders in any year in which the Investment Company
Act does not require shareholders to act upon any of the following matters: (i) election of
Directors; (ii) approval of a management agreement; (iii) approval of a distribution agreement; and
(iv) ratification of selection of independent accountants. Shares issued are fully paid and
non-assessable and have no preemptive rights. Redemption and conversion rights are discussed
elsewhere herein and in each Funds Prospectus. Each share of each class of Common Stock is
entitled to participate equally in dividends and distributions declared by a Fund and in the net
assets of the Fund upon liquidation or dissolution after satisfaction of outstanding liabilities.
For Funds organized as Maryland corporations, the by-laws of the Fund require that a special
meeting of shareholders be held upon the written request of a minimum percentage of the outstanding
shares of the Fund entitled to vote at such meeting, if they comply with applicable Maryland law.
Certain of the Funds are organized as Massachusetts business trusts. Under Massachusetts law,
shareholders of such a trust may, under certain circumstances, be held personally liable as
partners for its obligations. However, the Declaration of Trust establishing a trust, a copy of
which for each applicable Fund, together with all amendments thereto (the Declaration of Trust),
is on file in the office of the Secretary of the Commonwealth of Massachusetts, contains an express
disclaimer of shareholder liability for acts or obligations of the trust and provides for
indemnification and reimbursement of expenses out of the trust property for any shareholder held
personally liable for the obligations of the trust. The Declaration of Trust also provides that a
trust may maintain appropriate
II-107
insurance (for example, fidelity bond and errors and omissions insurance) for the protection of the
trust, its shareholders, Trustees, officers, employees and agents covering possible tort and other
liabilities. Thus, the risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which both inadequate insurance existed and the trust
itself was unable to meet its obligations.
Certain Funds are organized as Delaware statutory trusts.
See Additional Information Description of Shares in Part I of each Funds Statement of
Additional Information for additional capital stock information for your Fund.
Additional Information
Under a separate agreement, BlackRock has granted certain Funds the right to use the BlackRock
name and has reserved the right to (i) withdraw its consent to the use of such name by a Fund if
the Fund ceases to retain BlackRock Advisors, LLC as investment adviser and (ii) to grant the use
of such name to any other company.
See Additional Information Principal Shareholders in Part I of each Funds Statement of
Additional Information for information on the holders of 5% or more of any class of shares of your
Fund.
II-108
APPENDIX A
Description of Bond Ratings
Description of Moodys Investors Service, Inc.s (Moodys) Bond Ratings
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Aaa
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Bonds which are rated Aaa are judged
to be of the best quality. They
carry the smallest degree of
investment risk and are generally
referred to as gilt edge. Interest
payments are protected by a large or
by an exceptionally stable margin
and principal is secure. While the
various protective elements are
likely to change, such changes as
can be visualized are most unlikely
to impair the fundamentally strong
position of such issues. |
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Aa
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Bonds which are rated Aa are judged
to be of high quality by all
standards. Together with the Aaa
group they comprise what are
generally known as high grade bonds.
They are rated lower than the best
bonds because margins of protection
may not be as large as in Aaa
securities or fluctuation of
protective elements may be of
greater amplitude or there may be
other elements present which make
the long-term risks appear somewhat
larger than in Aaa securities. |
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A
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Bonds which are rated A possess many
favorable investment attributes and
are to be considered as upper medium
grade obligations. Factors giving
security to principal and interest
are considered adequate, but
elements may be present which
suggest a susceptibility to
impairment sometime in the future. |
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Baa
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Bonds which are rated Baa are
considered as medium grade
obligations, i.e., they are neither
highly protected nor poorly secured.
Interest payments and principal
security appear adequate for the
present, but certain protective
elements may be lacking or may be
characteristically unreliable over
any great length of time. Such bonds
lack outstanding investment
characteristics and in fact have
speculative characteristics as well. |
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Ba
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Bonds which are rated Ba are judged
to have speculative elements; their
future cannot be considered as well
assured. Often the protection of
interest and principal payments may
be very moderate and thereby not
well safeguarded during both good
and bad times over the future.
Uncertainty of position
characterizes bonds in this class. |
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B
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Bonds which are rated B generally
lack characteristics of the
desirable investment. Assurance of
interest and principal payments or
of maintenance of other terms of the
contract over any long period of
time may be small. |
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Caa
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Bonds which are rated Caa are of
poor standing. Such issues may be in
default or there may be present
elements of danger with respect to
principal or interest. |
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Ca
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Bonds which are rated Ca represent
obligations which are speculative in
a high degree. Such issues are often
in default or have other marked
shortcomings. |
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C
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Bonds which are rated C are the
lowest rated class of bonds and
issues so rated can be regarded as
having extremely poor prospects of
ever attaining any real investment
standing. |
Note: Moodys applies numerical modifiers 1, 2, and 3 in each generic rating classification from Aa
through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a
ranking in the lower end of that generic rating category.
A-1
Description of Moodys U.S. Short-Term Ratings
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MIG 1/VMIG 1
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This designation denotes superior credit quality. Excellent
protection is afforded by established cash flows, highly
reliable liquidity support, or demonstrated broad-based
access to the market for refinancing. |
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MIG 2/VMIG 2
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This designation denotes strong credit quality. Margins of
protection are ample, although not as large as in the
preceding group. |
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MIG 3/VMIG 3
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This designation denotes acceptable credit quality. Liquidity
and cash-flow protection may be narrow, and market access for
refinancing is likely to be less well-established. |
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SG
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This designation denotes speculative-grade credit quality.
Debt instruments in this category may lack sufficient margins
of protection. |
Description of Moodys Commercial Paper Ratings / Demand Obligation Ratings
Moodys Commercial Paper ratings are opinions of the ability of issuers to repay punctually
promissory obligations not having an original maturity in excess of nine months. Moodys employs
the following three designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
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P-1
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Issuers (or supporting institutions) rated Prime-1 have a superior ability for
repayment of short term promissory obligations. Prime-1 repayment ability will often be
evidenced by many of the following characteristics: leading market positions in well
established industries; high rates of return on funds employed; conservative capitalization
structures with moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well established
access to a range of financial markets and assured sources of alternate liquidity. |
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P-2
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Issuers (or supporting institutions) rated Prime-2 have a strong ability for
repayment of short term promissory obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, may be more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate liquidity is
maintained. |
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P-3
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Issuers (or supporting institutions) rated Prime-3 have an acceptable ability for
repayment of short term promissory obligations. The effects of industry characteristics and
market composition may be more pronounced. Variability in earnings and profitability may
result in changes to the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained. |
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Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime
rating categories. |
Description of Standard & Poors, a Division of The McGraw-Hill Companies, Inc. (Standard &
Poors), Debt Ratings
A Standard & Poors issue credit rating is a current opinion of the creditworthiness of an
obligor with respect to a specific financial obligation, a specific class of financial obligations
or a specific program. It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation.
The issue credit rating is not a recommendation to purchase, sell or hold a financial
obligation, inasmuch as it does not comment as to market price or suitability for a particular
investor.
The issue credit ratings are based on current information furnished by the obligors or
obtained by Standard & Poors from other sources Standard & Poors considers reliable. Standard &
Poors does not perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended, or withdrawn as a result of
changes in, or unavailability of, such information, or based on other circumstances.
A-2
The issue credit ratings are based, in varying degrees, on the following considerations:
I. Likelihood of paymentcapacity and willingness of the obligor as to the timely payment of
interest and repayment of principal in accordance with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded to, and relative position of, the obligation in the event of
bankruptcy, reorganization or other arrangement under the laws of bankruptcy and other laws
affecting creditors rights.
Long Term Issue Credit Ratings
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AAA
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An obligation rated AAA has the highest rating assigned by
Standard & Poors. Capacity to meet its financial
commitment on the obligation is extremely strong. |
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AA
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An obligation rated AA differs from the highest rated issues
only in small degree. The Obligors capacity to meet its
financial commitment on the obligation is very strong. |
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A
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An obligation rated A is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories. However,
the obligors capacity to meet its financial commitment
on the obligation is still strong. |
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BBB
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An obligation rated BBB exhibits adequate protection
parameters. However, adverse economic conditions or
changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial
commitment on the obligation. An obligation rated BB,
B, CCC, CC and C are regarded as |
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BB
B
CCC
CC
C
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having significant speculative characteristics. BB indicates
the least degree of speculation and C the highest
degree of speculation. While such debt will likely have
some quality and protective characteristics, these may be
outweighed by large uncertainties or major risk exposures
to adverse conditions. |
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D
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An obligation rated D is in payment default. The D rating
category is used when payments on an obligation are not made
on the date due even if the applicable grace period has
not expired, unless Standard & Poors believes that such
payments will be made during such grace period. The D
rating also will be used upon the filing of a bankruptcy
petition or the taking of similar action if payments on
an obligation are jeopardized. |
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c
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The c subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase
tendered bonds if the long term credit rating of the issuer is below
an investment-grade level and/or the issuers bonds are deemed
taxable. |
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p
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The letter p indicates that the rating is provisional. A provisional
rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful,
timely completion of the project. This rating, however, while
addressing credit quality subsequent to the completion of the project,
makes no comment on the likelihood of or the risk of default upon
failure of such completion. The investor should exercise his own
judgment with respect to such likelihood and risk. |
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*
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Continuance of the ratings is contingent upon Standard & Poors receipt of an executed copy
of the escrow agreement or closing documentation confirming investments and cash flows. |
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r
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This symbol is attached to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or
volatility of expected returns which are not addressed in the credit
rating. |
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N.R.
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This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard
& Poors does not rate a particular obligation as a matter of policy. |
A-3
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.
Description of Standard & Poors Commercial Paper Ratings
A Standard & Poors commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days. Ratings are graded
into several categories, ranging from A-1 for the highest-quality obligations to D for the
lowest. These categories are as follows:
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A-1
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A short-term obligation rated A-1 is rated in the highest category
by Standard & Poors. The obligors capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that
the obligors capacity to meet its financial commitment on these
obligations is extremely strong. |
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A-2
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A short-term obligation rated A-2 is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than obligations in higher rating categories. However, the
obligors capacity to meet its financial commitment on the obligation
is satisfactory. |
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A-3
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A short-term obligation rated A-3 exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation. |
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B
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A short-term obligation rated B is regarded as having significant
speculative characteristics. The obligor currently has the capacity to
meet its financial commitment on the obligation; however, it faces
major ongoing uncertainties that could lead to the obligors
inadequate capacity to meet its financial commitment on the
obligation. |
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C
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A short-term obligation rated C is currently vulnerable to
nonpayment and is dependent upon favorable business, financial and
economic conditions for the obligor to meet its financial commitment
on the obligation. |
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D
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A short-term obligation rated D is in payment default. The D
rating category is used when interest payments or principal payments
are not made on the date due even if the applicable grace period has
not expired, unless Standard & Poors believes that such payments will
be made during such grace period. The D rating will also be used
upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized. |
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c
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The c subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase
tendered bonds if the long term credit rating of the issuer is below
an investment-grade level and/or the issuers bonds are deemed
taxable. |
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p
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The letter p indicates that the rating is provisional. A provisional
rating assumes the successful completion of the project financed by
the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful,
timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project,
makes no comment on the likelihood of or the risk of default upon
failure of such completion. The investor should exercise his own
judgment with respect to such likelihood and risk. |
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*
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Continuance of the ratings is contingent upon Standard & Poors
receipt of an executed copy of the escrow agreement or closing
documentation confirming investments and cash flows. |
A-4
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r
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The r highlights derivative, hybrid, and certain other obligations
that Standard & Poors believes may experience high volatility or high
variability in expected returns as a result of noncredit risks.
Examples of such obligations are securities with principal or interest
return indexed to equities, commodities, or currencies; certain swaps
and options, and interest-only and principal-only mortgage securities.
The absence of an r symbol should not be taken as an indication that
an obligation will exhibit no volatility or variability in total
return. |
A commercial paper rating is not a recommendation to purchase or sell a security. The ratings
are based on current information furnished to Standard & Poors by the issuer or obtained by
Standard & Poors from other sources it considers reliable. The ratings may be changed, suspended,
or withdrawn as a result of changes in, or unavailability of, such information.
A Standard & Poors note rating reflects the liquidity factors and market access risks unique
to notes. Notes due in three years or less will likely receive a note rating. Notes maturing beyond
three years will most likely receive a long term debt rating. The following criteria will be used
in making that assessment.
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Amortization schedulethe larger the final maturity relative to other maturities, the
more likely it will be treated as a note. |
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Source of paymentthe more dependent the issue is on the market for its refinancing,
the more likely it will be treated as a note. |
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Note rating symbols are as follows: |
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SP-1
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Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus
(+) designation. |
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SP-2
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Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the notes. |
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SP-3
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Speculative capacity to pay principal and interest. |
Description of Fitch Ratings (Fitch) Investment Grade Bond Ratings
Fitch investment grade bond ratings provide a guide to investors in determining the credit
risk associated with a particular security. The rating represents Fitchs assessment of the
issuers ability to meet the obligations of a specific debt issue or class of debt in a timely
manner.
The rating takes into consideration special features of the issue, its relationship to other
obligations of the issuer, the current and prospective financial condition and operating
performance of the issuer and any guarantor, as well as the economic and political environment that
might affect the issuers future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by insurance policies
or financial guarantees unless otherwise indicated.
Bonds carrying the same rating are of similar but not necessarily identical credit quality
since the rating categories do not fully reflect small differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security. Ratings do not
comment on the adequacy of market price, the suitability of any security for a particular investor,
or the tax-exempt nature or taxability of payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other obligors, underwriters,
their experts, and other sources Fitch believes to be reliable. Fitch does not audit or verify the
truth or accuracy of such information. Ratings may be changed, suspended, or withdrawn as a result
of changes in, or the unavailability of, information or for other reasons.
A-5
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AAA
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Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events. |
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AA
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Bonds considered to be investment grade and of very high credit
quality. The obligors ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA.
Because bonds rated in the AAA and AA categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+. |
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A
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Bonds considered to be investment grade and of high credit quality.
The obligors ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings. |
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BBB
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Bonds considered to be investment grade and of satisfactory-credit
quality. The obligors ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on
these bonds, and therefore impair timely payment. The likelihood that
the ratings of these bonds will fall below investment grade is higher
than for bonds with higher ratings. |
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs, however, are not
used in the AAA category.
Description of Fitchs Speculative Grade Bond Ratings
Fitch speculative grade bond ratings provide a guide to investors in determining the credit
risk associated with a particular security. The ratings (BB to C) represent Fitchs assessment
of the likelihood of timely payment of principal and interest in accordance with the terms of
obligation for bond issues not in default. For defaulted bonds, the rating (DDD to D) is an
assessment of the ultimate recovery value through reorganization or liquidation. The rating takes
into consideration special features of the issue, its relationship to other obligations of the
issuer, the current and prospective financial condition and operating performance of the issuer and
any guarantor, as well as the economic and political environment that might affect the issuers
future financial strength.
Bonds that have the rating are of similar but not necessarily identical credit quality since
rating categories cannot fully reflect the differences in degrees of credit risk.
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BB
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Bonds are considered speculative. The obligors ability to pay
interest and repay principal may be affected over time by
adverse economic changes. However, business and financial
alternatives can be identified which could assist the
obligor in satisfying its debt service requirements. |
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B
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Bonds are considered highly speculative. While bonds in this class
are currently meeting debt service requirements, the
probability of continued timely payment of principal and
interest reflects the obligors limited margin of safety and
the need for reasonable business and economic activity
throughout the life of the issue. |
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CCC
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Bonds have certain identifiable characteristics that, if not
remedied, may lead to default. The ability to meet
obligations requires an advantageous business and economic
environment. |
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CC
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Bonds are minimally protected. Default in payment of interest
and/or principal seems probable over time. |
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C
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Bonds are in imminent default in payment of interest or principal. |
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D
DD
DDD
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Bonds are in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the
basis of their ultimate recovery value in liquidation or
reorganization of the obligor. DDD represents the highest
potential for recovery on these bonds, and D represents
the lowest potential for recovery. |
A-6
Plus (+) or Minus (-): Plus and minus signs are used with a rating symbol to indicate the relative position of a credit
within the rating category. Plus and minus signs, however, are not used in the DDD, DD, or D categories.
Description of Fitchs Short term Ratings
Fitchs short-term ratings apply to debt obligations that are payable on demand or have
original maturities of up to three years, including commercial paper, certificates of deposit,
medium-term notes, and investment notes.
The short term rating places greater emphasis than a long term rating on the existence of
liquidity necessary to meet the issuers obligations in a timely manner.
Fitch short-term ratings are as follows:
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F-1+
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Exceptionally Strong Credit Quality. Issues assigned this rating are regarded
as having the strongest degree of assurance for timely payment. |
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F-1
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Very Strong Credit Quality. Issues assigned this rating reflect an assurance
of timely payment only slightly less in degree than issues rated F-1+. |
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F-2
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Good Credit Quality. Issues assigned this rating have a satisfactory degree of
assurance for timely payment, but the margin of safety is not as great as for
issues assigned F-1+ and F-1 ratings. |
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F-3
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Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate;
however, near-term adverse changes could cause these securities to be rated
below investment grade. |
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F-S
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Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are vulnerable
to near-term adverse changes in financial and economic conditions. |
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D
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Default. Issues assigned this rating are in actual or imminent payment default. |
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LOC
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The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank. |
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NR
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Indicates that Fitch does not rate the specific issue. |
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Conditional
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A conditional rating is premised on the successful completion of a project or
the occurrence of a specific event. |
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Suspended
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A rating is suspended when Fitch deems the amount of information available
from the issuer to be inadequate for rating purposes. |
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Withdrawn
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A rating will be withdrawn when an issue matures or is called or refinanced
and, at Fitchs discretion, when an issuer fails to furnish proper and timely
information. |
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FitchAlert
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Ratings are placed on FitchAlert to notify investors of an occurrence that is
likely to result in a rating change and the likely direction of such change.
These are designated as Positive, indicating a potential upgrade,
Negative, for potential downgrade, or Evolving, where ratings may be
raised or lowered. FitchAlert is relatively short term, and should be resolved
within 12 months. |
Ratings Outlook: An outlook is used to describe the most likely direction of any rating change
over the intermediate term. It is described as Positive or Negative. The absence of a
designation indicates a stable outlook.
A-7
CONFIDENTIAL
Appendix B
Proxy Voting Policies
For The BlackRock-Advised Funds
December, 2009
Copyright © 2009 BlackRock, Inc.
All rights reserved.
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CONFIDENTIAL
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I. INTRODUCTION
The Trustees/Directors (Directors) of the BlackRock-Advised Funds (the Funds) have the
responsibility for voting proxies relating to portfolio securities of the Funds, and have
determined that it is in the best interests of the Funds and their shareholders to delegate that
responsibility to BlackRock Advisors, LLC and its affiliated U.S. registered investment advisers
(BlackRock), the investment adviser to the Funds, as part of BlackRocks authority to manage,
acquire and dispose of account assets. The Directors hereby direct BlackRock to vote such proxies
in accordance with this Policy, and any proxy voting guidelines that the Adviser determines are
appropriate and in the best interests of the Funds shareholders and which are consistent with the
principles outlined in this Policy. The Directors have authorized BlackRock to utilize an
unaffiliated third-party as its agent to vote portfolio proxies in accordance with this Policy and
to maintain records of such portfolio proxy voting.
Rule 206(4)-6 under the Investment Advisers Act of 1940 requires, among other things, that an
investment adviser that exercises voting authority over clients proxy voting adopt policies and
procedures reasonably designed to ensure that the adviser votes proxies in the best interests of
clients, discloses to its clients information about those policies and procedures and also
discloses to clients how they may obtain information on how the adviser has voted their proxies.
BlackRock has adopted separate but substantially similar guidelines and procedures that are
consistent with the principles of this Policy. BlackRocks Corporate Governance Committee (the
Committee), addresses proxy voting issues on behalf of BlackRock and its clients, including the
Funds. The Committee is comprised of senior members of BlackRocks Portfolio Management and
Administration Groups and is advised by BlackRocks Legal and Compliance Department.
BlackRock votes (or refrains from voting) proxies for each Fund in a manner that BlackRock, in the
exercise of its independent business judgment, concludes are in the best economic interests of such
Fund. In some cases, BlackRock may determine that it is in the best economic interests of a Fund to
refrain from exercising the Funds proxy voting rights (such as, for example, proxies on certain
non-U.S. securities that might impose costly or time-consuming in-person voting requirements). With
regard to the relationship between securities lending and proxy voting, BlackRocks approach is
also driven by our clients economic interests. The evaluation of the economic desirability of
recalling loans involves balancing the revenue producing value of loans against the likely economic
value of casting votes. Based on our evaluation of this relationship, BlackRock believes that the
likely economic value of casting a vote generally is less than the securities lending income,
either because the votes will not have significant economic consequences or because the outcome of
the vote would not be affected by BlackRock recalling loaned securities in order to ensure they are
voted. Periodically, BlackRock analyzes the process and benefits of voting proxies for securities
on loan, and will consider whether any modification of its proxy voting policies or procedures are
necessary in light of any regulatory changes.
BlackRock will normally vote on specific proxy issues in accordance with BlackRocks proxy voting
guidelines. BlackRocks proxy voting guidelines provide detailed guidance as to how to vote proxies
on certain important or commonly raised issues. BlackRock may, in the exercise of its business
judgment, conclude that the proxy voting guidelines do not cover the specific matter upon which a
proxy vote is requested, or that an exception to the proxy voting guidelines would
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be in the best
economic interests of a Fund. BlackRock votes (or refrains from voting) proxies without regard to
the relationship of the issuer of the proxy (or any shareholder of such issuer) to the Fund, the
Funds affiliates (if any), BlackRock or BlackRocks affiliates. When voting proxies, BlackRock
attempts to encourage companies to follow practices that enhance shareholder value and increase
transparency and allow the market to place a proper value on their assets.
II. PROXY VOTING POLICIES
A. Boards of Directors
The Funds generally support the boards nominees in the election of directors and generally
supports proposals that strengthen the independence of boards of directors. As a general matter,
the Funds believe that a companys board of directors (rather than shareholders) is most likely to
have access to important, nonpublic information regarding a companys business and prospects, and
is therefore best-positioned to set corporate policy and oversee management. The Funds therefore
believe that the foundation of good corporate governance is the election of responsible, qualified,
independent corporate directors who are likely to diligently represent the interests of
shareholders and oversee management of the corporation in a manner that will seek to maximize
shareholder value over time. In individual cases, consideration may be given to a director
nominees history of representing shareholder interests as a director of the company issuing the
proxy or other companies, or other factors to the extent deemed relevant by the Committee.
B. Auditors
These proposals concern those issues submitted to shareholders related to the selection of
auditors. As a general matter, the Funds believe that corporate auditors have a responsibility to
represent the interests of shareholders and provide an independent view on the propriety of
financial reporting decisions of corporate management. While the Funds anticipate that BlackRock
will generally defer to a corporations choice of auditor, in individual cases, consideration may
be given to an auditors history of representing shareholder interests as auditor of the company
issuing the proxy or other companies, to the extent deemed relevant.
C. Compensation and Benefits
These proposals concern those issues submitted to shareholders related to management compensation
and employee benefits. As a general matter, the Funds favor disclosure of a companys compensation
and benefit policies and oppose excessive compensation, but believe that compensation matters are
normally best determined by a corporations board of directors, rather than shareholders. Proposals
to micro-manage a companys compensation practices or to set arbitrary restrictions on
compensation or benefits should therefore generally not be supported.
D. Capital Structure
These proposals relate to various requests, principally from management, for approval of amendments
that would alter the capital structure of a company, such as an increase in authorized shares. As a
general matter, the Funds expect that BlackRock will support requests that it believes enhance the
rights of common shareholders and oppose requests that appear to be unreasonably dilutive.
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E. Corporate Charter and By-Laws
These proposals relate to various requests for approval of amendments to a corporations charter or
by-laws. As a general matter, the Funds generally vote against anti-takeover proposals and
proposals that would create additional barriers or costs to corporate transactions that are likely
to deliver a premium to shareholders.
F. Environmental and Social Issues
These are shareholder proposals addressing either corporate social and environmental policies or
requesting specific reporting on these issues. The Funds generally do not support proposals on
social issues that lack a demonstrable economic benefit to the issuer and the Fund investing in
such issuer. BlackRock seeks to make proxy voting decisions in the manner most likely to protect
and promote the long-term economic value of the securities held in client accounts. We intend to
support economically advantageous corporate practices while leaving direct oversight of company
management and strategy to boards of directors. We seek to avoid micromanagement of companies, as
we believe that a companys board of directors is best positioned to represent shareholders and
oversee management on shareholders behalf. Issues of corporate social and environmental
responsibility are evaluated on a case-by-case basis within this framework.
III. CONFLICTS MANAGEMENT
BlackRock maintains policies and procedures that are designed to prevent any relationship between
the issuer of the proxy (or any shareholder of the issuer) and a Fund, a Funds affiliates (if
any), BlackRock or BlackRocks affiliates, from having undue influence on BlackRocks proxy voting
activity. In certain instances, BlackRock may determine to engage an independent fiduciary to vote
proxies as a further safeguard against potential conflicts of interest or as otherwise required by
applicable law. The independent fiduciary may either vote such proxies or provide BlackRock with
instructions as to how to vote such proxies. In the latter case, BlackRock votes the proxy in
accordance with the independent fiduciarys determination.
IV. REPORTS TO THE BOARD
BlackRock will report to the Directors on proxy votes it has made on behalf of the Funds at least
annually.
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