-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K8rZl+H+9O7Iz6dr0htbrB8DzC/FW7dQE8MYCt3i6k6SIvsKfwwq5tPC6wkDMRqw GQMgy/mrRBna7ZeajKnYHA== 0000950123-10-083402.txt : 20100902 0000950123-10-083402.hdr.sgml : 20100902 20100902160915 ACCESSION NUMBER: 0000950123-10-083402 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 29 CONFORMED PERIOD OF REPORT: 20100630 FILED AS OF DATE: 20100902 DATE AS OF CHANGE: 20100902 EFFECTIVENESS DATE: 20100902 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN BEACON FUNDS CENTRAL INDEX KEY: 0000809593 IRS NUMBER: 000000000 STATE OF INCORPORATION: MA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: N-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-04984 FILM NUMBER: 101055121 BUSINESS ADDRESS: STREET 1: 4151 AMON CARTER BOULEVARD STREET 2: MD 2450 CITY: FORT WORTH STATE: TX ZIP: 76155 BUSINESS PHONE: 8179673509 MAIL ADDRESS: STREET 1: 4151 AMON CARTER BOULEVARD STREET 2: MD 2450 CITY: FORT WORTH STATE: TX ZIP: 76155 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN AADVANTAGE FUNDS DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN EAGLE FUNDS DATE OF NAME CHANGE: 19890813 0000809593 S000001820 American Beacon Treasury Inflation Protected Securities Fund C000004773 Institutional Class ATPIX C000075101 Investor Class ABTPX C000085579 Y Class ACUYX C000089426 Class A ATSAX 0000809593 S000001827 American Beacon S&P 500 Index Fund C000004791 Institutional Class AASPX C000004792 Investor Class AAFPX 0000809593 S000001828 American Beacon Small Cap Index Fund C000004793 Institutional Class ASCIX 0000809593 S000001829 American Beacon International Equity Index Fund C000004794 Institutional Class AIIIX 0000809593 S000028089 American Beacon Global Real Estate Fund C000085546 Y Class CGLIX C000085547 Investor Class CGLAX C000089433 Class A ABEAX N-CSRS 1 d75832nvcsrs.htm FORM N-CSRS nvcsrs
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-04984
AMERICAN BEACON FUNDS
(Exact name of registrant as specified in charter)
4151 Amon Carter Boulevard, MD 2450
Fort Worth, Texas 76155
(Address of principal executive offices)-(Zip code)
Gene L. Needles, Jr., PRESIDENT
4151 Amon Carter Boulevard, MD 2450
Fort Worth, Texas 76155
(Name and address of agent for service)
Registrant’s telephone number, including area code: (817) 391-6100
Date of fiscal year end: December 31, 2010
Date of reporting period: June 30, 2010
 
 
ITEM 1. REPORTS TO STOCKHOLDERS.

 


 

(GRAPHIC)

 


 

About American Beacon Advisors
     Since 1986, American Beacon Advisors has offered a variety of products and investment advisory services to numerous institutional and retail clients, including a variety of mutual funds, corporate cash management, and separate account management.
     Our clients include defined benefit plans, defined contribution plans, foundations, endowments, corporations, financial planners, and other institutional investors. With American Beacon Advisors, you can put the experience of a multi-billion dollar asset management firm to work for your company.
Contents
         
Message from American Beacon
    1  
 
       
    2  
 
       
    6  
 
       
Additional Information
  Back Cover  

Any opinions herein, including forecasts, reflect our judgment as of the end of the reporting period and are subject to change. Each advisor’s strategies and the Fund’s portfolio composition will change depending on economic and market conditions. This report is not a complete analysis of market conditions and therefore, should not be relied upon as investment advice. Although economic and market information has been compiled from reliable sources, American Beacon Advisors, Inc. makes no representation as to the completeness or accuracy of the statements contained herein.
Investing in debt securities entails interest rate risk which is the risk that debt securities will decrease in value with increases in market interest rates.
     
American Beacon Funds   June 30, 2010

 


 

(PHOTO)
Fellow Shareholders,
     Over the past six months, one universal investing theme seems to have emerged: while significant shifts may characterize recent market activity, it doesn’t mean investors can’t benefit. Opportunity abounds for those know how to capitalize on it...and for those who want to defend against such market shifts by investing in the American Beacon Treasury Inflation Protected Securities (TIPS) Fund.
     Like so many of our funds, our TIPS Fund is conservatively managed for the longer term—helping to keep its investors in a position to ride out the inevitable economic storms, whenever and wherever they occur.
     For the six-month period ended June 30, 2010, the American Beacon TIPS Fund (Institutional Class) generated 3.15%. This return came at a time when inflation has become less of an immediate concern and the federal funds rate finished the reporting period below zero in real terms.
     Given that shifting global markets often give rise to new opportunities, American Beacon continuously looks for new and innovative strategies for capitalizing on them. This year, that led to the addition of three new actively managed funds to our lineup: the American Beacon Global Real Estate, American Beacon Zebra Small Cap Equity and American Beacon Zebra Large Cap Equity Funds.*
     Our fund selection is also a reflection of our commitment to you, a commitment we summarize as: Oversight 360. Ours is a continuous commitment to cast a watchful and analytical eye over all the factors that influence our fellow shareholders’ investments.
Best Regards,
-s- Gene L. Needles, Jr.
Gene L. Needles, Jr.
President
American Beacon Funds
 
*   Securities of these Funds may only be sold by offering each Funds’ Prospectus and Summary Prospectus. You should consider the investment objectives, risks, fees and expenses of any mutual fund carefully before investing. This and other information is available in each Funds’ Prospectus and Summary Prospectus which you may obtain at www.americanbeaconfunds.com or by calling 1-800-967-9009. Please read the Prospectus and Summary Prospectus carefully before investing.
There is no guarantee that the investment objective will be met of the American Beacon Zebra Large Cap Equity Fund. At times, certain securities may have limited marketability and may be difficult to sell.
There is no guarantee that the investment objectives will be met of the American Beacon Zebra Small Cap Equity Fund. Investing in the securities of small capitalization companies involves greater risk and the possibility of greater price volatility than investing in larger capitalization and more established companies. At times, certain securities may have limited marketability and may be difficult to sell.
There is no guarantee that the investment objectives will be met of the American Beacon Global Real Estate Fund. Investing in a global fund concentrating in real estate securities involves special risks, such as declines in the value of real estate as well as increased susceptibility to adverse economic, political, or regulatory developments affecting the industry. Investing in one economic sector, such as real estate, may result in greater price fluctuations than owning a portfolio of diversified investments. Changes in interest rates may also affect the value of the Fund’s investments in real estate securities. The real estate industry tends to be cyclical and therefore such cycles may adversely affect the value of the Fund’s portfolio. The Fund may invest in smaller and mid-size companies. Certain real estate securities have a relatively small market capitalization, which may tend to increase the volatility of the market price of their securities. Investing in the securities of small and mid-capitalization companies involves greater risk and the possibility of greater price volatility than investing in larger capitalization and more established companies. Investing in foreign equities entails additional risk not associated with domestic equities, such as currency fluctuations, economic and political instability, and differences in accounting standards. The risks of investing in foreign equities are heightened when investing in emerging markets. By itself, the Fund does not constitute a complete investment plan and should be considered a long term investment for investors who can afford to weather changes in the value of their investments. Some of the Fund’s investments may be considered speculative and are not appropriate for individuals who require safety of principal or stable income from their investments.

1


 

Market Overview
June 30, 2010 (Unaudited)
     Though the U.S. economy continues to recover, its strength and the sustainability of the recovery remain a matter of concern. The cyclical tailwinds-low inflation, inventory rebuilding and massive government support-have provided a needed boost to growth, but their positive effects may be waning in the face of even stronger structural headwinds. High unemployment, fiscal imbalances among national, state, and local governments, and still-tight credit conditions all remain in place and are not expected to subside any time soon. The estimates for Gross Domestic Product during the second quarter of 2010 reflect this. It’s expected that while the economy was still expanding, it was doing so at a lower rate, which is estimated to be 2.4%. That is far more modest than the 3.7% real rate of growth experienced in the first quarter of 2010.
     Concern for the slowing rate of growth led the Federal Open Market Committee (FOMC) to leave the overnight fed funds rate unchanged at each of its four meetings over the first half of the year. Given the low level of inflation, and persistently high unemployment, it is expected that the FOMC will maintain its overnight rate near the current range of 0.00% to 0.25% for quite some time.
     For its part, inflation, as measured by the Consumer Price Index (CPI), has been extremely tame. In fact, one commonly watched CPI statistic declined in the second quarter of 2010 to its lowest level in over 40 years. This was the year-over-year change in the CPI, excluding food and energy. It rose 0.9% in each month in the second quarter, and these 0.9% increases were the smallest increases since 1966. Inflation expectations as evidenced by market-based breakeven inflation rates (the spread between similar maturity nominal and inflation-protected securities) declined over the first half of the year. For example, according to Bloomberg, the breakeven inflation rate in five years for the 5-Year Treasury Note fell from 2.91% in early February to 2.20% in late June. Significant slack in the U. S. economy, given a high unemployment rate and low capacity utilization rate, suggests that inflation likely will not be a major concern in the near future.
Market Performance
     As a result of moderating growth and low inflation, Treasury Inflation Protected Securities (TIPS) posted solid returns for the first half of 2010 as heightened risk premiums throughout the global financial markets led to lower real yields for these securities. The 30 to 35 basis point (0.30% — 0.35%) decline in real yields began early in the reporting period in response to the increased sovereign debt risk associated with the deteriorating fiscal outlooks for the peripheral European economies.
     However, the early-year rally unwound in late March when concerns over the supply of nominal Treasuries combined with a short-term absence of buyers. That absence was associated with quarter-end reporting requirements for securities dealers. By April, the rally was back in full force as real yields fell almost 60 basis points (0.60%) from early April until the end of June. The increased uncertainty around the European financial markets, including the impact of potential sovereign defaults on the health of European banking system, led to a more widespread downgrading of global growth expectations including the U.S. where market participants began assessing the likelihood of a double dip recession.
     Despite good total returns, TIPS underperformed nominal Treasury securities during the quarter as forces that led to lower yields were also consistent with lower inflation expectations. In addition to lower inflation expectations, the actual inflation reported during the period generally came in below consensus expectations.
     This led to further pressure on TIPS valuations relative to nominal Treasury securities. Standing out among the components leading inflation downward was housing—specifically, the owner’s equivalent rent that carries a weight of about 25% of the total CPI.
     The inflation accrual for the period was a modest 84 basis points (0.84%) as the year-over-year headline CPI fell from 2.7% in December to 1.1% in June. The gross supply in TIPS for the first half was a healthy $37 billion. However, due to maturities, the net supply was minus $9 billion, which helped support values. The material inflows into TIPS funds that characterized much of the second half of 2009—and supported pricing—declined significantly during the reporting period as expectations for rising inflation waned.

2


 

Performance Overview
American Beacon Treasury Inflation Protected Securities FundSM
June 30, 2010 (Unaudited)
     The Institutional Class of the Fund returned 3.15% for the six months ended June 30, 2010, trailing the Barclays Capital 1-10 Year U.S. TIPS Index (the “Index”) return of 3.17% and the Lipper TIPS Index return of 4.60%.
                                 
    Annualized Total Returns    
    Periods Ended 6/30/10   Since
    6                   Inception
    Months*   1 Year   5 Years   6/30/04
Institutional Class(1,6,7)
    3.15 %     8.59 %     4.77 %     4.92 %
Y Class (1,3,6,7)
    3.05 %     8.49 %     4.75 %     4.90 %
Investor Class(1,2,6,7)
    2.86 %     8.17 %     4.65 %     4.81 %
A Class without sales load (1,4,6,7)
    2.76 %     8.07 %     4.63 %     4.80 %
A Class with load (1,4,6,7)
    -2.16 %     2.96 %     3.62 %     3.95 %
Barclays Capital 1-10 Yr. U.S. TIPS Index(5)
    3.17 %     8.52 %     5.07 %     5.32 %
Barclays Capital U.S. TIPS Index(5)
    4.41 %     9.52 %     4.98 %     5.69 %
Lipper TIPS Index(5)
    4.60 %     10.79 %     4.36 %     5.25 %
 
*   Not annualized
 
1.   Performance shown is historical and may not be indicative of future returns. Investment returns and principal value will vary, and shares may be worth more or less at redemption than at original purchase. Performance shown is as of date indicated, and current performance may be lower or higher than the performance data quoted. To obtain performance as of the most recent month end, please visit www.americanbeaconfunds.com or call 1-800-967-9009. Fund performance in the table above does not reflect the deduction of taxes a shareholder would pay on distributions or the redemption of shares.
 
2.   Fund performance for the five-year and since inception periods represents the total returns achieved by the Institutional Class up to 3/2/09, the inception date of the Investor Class, and the returns of the Investor Class since its inception. Expenses of the Investor Class are higher than those of the Institutional Class. As a result, total returns shown may be higher than they would have been had the Investor Class been in existence since 6/30/04.
 
3.   Fund performance represents the total returns achieved by the Institutional Class up to 3/1/10, the inception date of the Y Class, and the returns of the Y Class since its inception. Expenses of the Y Class are higher than those of the Institutional Class. As a result, total returns shown may be higher than they would have been had the Y Class been in existence since 6/30/04.
 
4.   Fund performance represents the total returns achieved by the Institutional Class from 6/30/04 up to 3/1/09, and the Investor Class from 3/2/09 up to 3/1/10, the inception date of the A Class, and the returns of the A Class since its inception. Expenses of the A Class are higher than those of the Institutional and Investor Classes. As a result, total returns shown may be higher than they would have been had the A Class been in existence since 6/30/04. Maximum sales charge is the maximum
front-end sales charge (load) imposed on purchases (as a % of offering price). A Class has a maximum sales charge of 4.75%.
 
5.   The Barclays Capital 1-10 Yr. U.S. TIPS Index is an unmanaged market index comprising U.S. Treasury inflation-indexed securities with maturities between one and ten years while the Barclays Capital U.S. TIPS Index includes all maturities. The Lipper TIPS Index tracks the results of the 30 largest mutual funds in the Lipper TIPS category. Lipper is an independent mutual fund research and ranking service. One cannot directly invest in an index.
 
6.   A portion of the fees charged to the Investor Class of the Fund was waived from its inception. A portion of the fees charged to the Institutional Class of the Fund has been waived since 2005. Performance prior to waiving fees was lower than the actual returns shown.
 
7.   The total annual Fund operating expense ratio set forth in the most recent Fund prospectus for the Institutional, Y, Investor, and A Class shares was 0.36%, 0.46%, 0.68%, and 0.86%, respectively. The expense ratios above may vary from the expense ratios presented in other sections of this report that are based on expenses incurred during the period covered by this report.
     The Fund produced strong absolute returns for the six-month time period. TIPS rallied during the first half of 2010, amid downgraded global growth expectations and the increased risk aversion and uncertainty surrounding the European financial environment.
     From a yield curve positioning standpoint during the period, the Fund’s underweight position in 1-3 year maturity TIPS benefited performance relative to the Index, but not enough to compensate for value lost due to Fund expenses. The Fund’s average modified duration was in-line with the Index for the six-month period.
     The Fund remains focused on investing in TIPS to provide inflation protection and income to its shareholders.

3


 

Market Overview
June 30, 2010 (Unaudited)
Top Ten Holdings
         
    % of
    Net Assets
U.S. Treasury Note, 1.875%, Due 7/15/2015
    13.1 %
U.S. Treasury Note, 3.000%, Due 7/15/2012
    11.7 %
U.S. Treasury Note, 1.250%, Due 4/15/2014
    10.2 %
U.S. Treasury Note, 1.625%, Due 1/15/2015
    9.4 %
U.S. Treasury Note, 2.375%, Due 1/15/2017
    7.1 %
U.S. Treasury Note, 2.125%, Due 1/15/2019
    6.3 %
U.S. Treasury Note, 1.875%, Due 7/15/2019
    6.2 %
U.S. Treasury Note, 2.000%, Due 1/15/2014
    6.1 %
U.S. Treasury Note, 2.625%, Due 7/15/2017
    4.7 %
U.S. Treasury Note, 2.500%, Due 7/15/2016
    4.5 %
Sector Allocation
         
    % of
    Fixed Income
U.S. Treasury Obligations
    100.0 %
See accompanying notes

4


 

Fund Expenses
American Beacon Treasury Inflation Protected Securities FundSM
June 30, 2010 (Unaudited)
Fund Expense Example
     As a shareholder of the Fund, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees, administrative service fees, and other Fund expenses. The examples below are intended to help you understand the ongoing cost (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
     The examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period from January 1, 2010 through June 30, 2010.
Actual Expenses
     The “Actual” line of the table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
     The “Hypothetical” line of the table provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed 5% per year rate of return before expenses (not the Fund’s actual return). You may compare the ongoing costs of investing in the Fund with other funds by contrasting this 5% hypothetical example and the 5% hypothetical examples that appear in the shareholder reports of the other funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.
     You should also be aware that the expenses shown in the table highlight only your ongoing costs and do not reflect any transaction costs charged by the Fund. Similarly, the expense examples for other funds do not reflect any transaction costs charged by those funds, such as sales charges (loads), redemption fees or exchange fees. Therefore, the “Hypothetical” line of the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. If you were subject to any transaction costs during the period, your costs would have been higher.
                         
    Beginning   Ending    
    Account   Account   Expenses Paid
    Value   Value   During Period
    1/1/10   6/30/10   1/1/10-6/30/10
Institutional Class*
                       
Actual
  $ 1,000.00     $ 1,031.49     $ 1.26  
Hypothetical
(5% return before expenses)
  $ 1,000.00     $ 1,023.55     $ 1.25  
Y Class**
                       
Actual
  $ 1,000.00     $ 1,021.46     $ 1.91  
Hypothetical
(5% return before expenses)
  $ 1,000.00     $ 1,014.80     $ 1.93  
Investor Class*
                       
Actual
  $ 1,000.00     $ 1,028.63     $ 3.17  
Hypothetical
(5% return before expenses)
  $ 1,000.00     $ 1,021.67     $ 3.16  
A Class***
                       
Actual
  $ 1,000.00     $ 1,005.79     $ 1.18  
Hypothetical
(5% return before expenses)
  $ 1,000.00     $ 1,004.95     $ 1.18  
 
*   Expenses are equal to the Fund’s annualized expense ratios for the six-month period of 0.25% and 0.63% for the Institutional and Investor Classes, multiplied by the average account value over the period, multiplied by the number derived by dividing the number of days in the most recent fiscal half-year (181) by days in the year (365) to reflect the half year period.
 
**   Beginning account value for A Class is the inception date of 3/1/10. Expenses are equal to the Class annualized expense ratio for the period of 0.57% multiplied by the average account value over the period, multiplied by the number derived by dividing the number of days in the period (122) by days in the year (365).
 
***   Beginning account value for A Class is the inception date of 5/17/10. Expenses are equal to the Class annualized expense ratio for the period of 0.98% multiplied by the average account value over the period, multiplied by the number derived by dividing the number of days in the period (45) by days in the year (365).

5


 

American Beacon Treasury Inflation Protected Securities Fund
Schedule of Investments
June 30, 2010 (unaudited)
                 
    Par Amount     Value  
    (dollars in thousands)  
U.S. TREASURY OBLIGATIONS — 98.58%
               
2.00%, Due 4/15/2012*
  $ 4,029     $ 4,173  
3.00%, Due 7/15/2012*
    22,448       23,881  
0.63%, Due 4/15/2013*
    6,523       6,657  
1.88%, Due 7/15/2013*
    4,878       5,160  
2.00%, Due 1/15/2014*
    11,796       12,566  
1.25%, Due 4/15/2014*
    20,061       20,943  
2.00%, Due 7/15/2014*
    2,743       2,943  
1.63%, Due 1/15/2015*
    18,272       19,289  
0.50%, Due 4/15/2015*
    1,152       1,167  
1.88%, Due 7/15/2015*
    25,082       26,876  
2.00%, Due 1/15/2016*
    6,310       6,807  
2.50%, Due 7/15/2016*
    8,368       9,312  
2.38%, Due 1/15/2017*
    13,269       14,649  
2.63%, Due 7/15/2017*
    8,514       9,605  
1.63%, Due 1/15/2018*
    1,738       1,832  
1.38%, Due 7/15/2018*
    6,788       7,036  
2.13%, Due 1/15/2019*
    11,910       12,997  
1.88%, Due 7/15/2019*
    11,940       12,800  
1.38%, Due 1/15/2020*
    3,730       3,819  
 
             
Total U.S. Treasury Obligations
            202,512  
 
             
                 
    Shares          
SHORT-TERM INVESTMENTS — 0.24%
               
JPMorgan U.S. Government Money Market Fund
    487,576       488  
 
             
 
TOTAL INVESTMENTS — 98.82% (Cost $199,670)
            203,000  
OTHER ASSETS, NET OF LIABILITIES — 1.18%
            2,416  
TOTAL NET ASSETS — 100.00%
          $ 205,416  
 
             
 
               
Percentages are stated as a percent of net assets.                
 
*   Inflation-Indexed Note.
See accompanying notes

6


 

American Beacon Treasury Inflation Protected Securities Fund
Statement of Assets and Liabilities
June 30, 2010 (Unaudited) (in thousands, except share and per share amounts)
         
Assets:
       
Investments in securities, at value A
  $ 203,000  
Dividends and interest receivable
    1,623  
Receivable for fund shares sold
    1,221  
Receivable for expense reimbursement
    16  
Prepaid expenses
    24  
 
     
Total assets
    205,884  
 
     
Liabilities:
       
Payable for fund shares redeemed
    375  
Management and investment advisory fees payable (Note 2)
    39  
Administrative service and service fees payable
    27  
Professional fees payable
    11  
Other liabilities
    16  
 
     
Total liabilities
    468  
 
     
Net assets
  $ 205,416  
 
     
 
       
Analysis of Net Assets:
       
Paid-in-capital
    218,419  
Undistributed net investment income
    2,172  
Accumulated net realized loss
    (18,505 )
Unrealized appreciation of investments, futures contracts, and foreign currency
    3,330  
 
     
Net assets
  $ 205,416  
 
     
 
       
Shares outstanding (no par value):
       
Institutional Class
    18,184,627  
 
     
Y Class
    19,095  
 
     
Investor Class
    1,411,341  
 
     
A Class
    97  
 
     
 
       
Net asset value, offering and redemption price per share:
       
Institutional Class
  $ 10.48  
 
     
Y Class
  $ 10.47  
 
     
Investor Class
  $ 10.42  
 
     
Net asset value and redemption price per share:
       
A Class
  $ 10.41  
 
     
Maximum offering price per share:
       
A Class
  $ 10.93  
 
     
 
       
 
       
A Cost of investments in securities
  $ 199,670  
See accompanying notes

7


 

American Beacon Treasury Inflation Protected Securities Fund
Statement of Operations
Six Months ended June 30, 2010 (Unaudited) (in thousands)
         
Investment Income:
       
Dividend income from unaffiliated securities
  $ 1  
Interest income
    2,243  
 
     
Total investment income
    2,244  
 
     
Expenses:
       
Management and investment advisory fees (Note 2)
    109  
Administrative service fees (Note 2):
       
Institutional Class
    124  
Investor Class
    20  
Transfer agent fees:
       
Institutional Class
    8  
Custody and fund accounting fees
    18  
Professional fees
    17  
Registration fees and expenses
    14  
Service fees:
       
Investor Class (Note 2)
    17  
Prospectus and shareholder reports
    5  
Trustee fees
    6  
Other expenses
    5  
 
     
Total expenses
    343  
 
     
Net fees waived and expenses reimbursed by Manager (Note 2)
    (90 )
 
     
Net expenses
    253  
 
     
Net investment income
    1,991  
 
     
 
       
Realized and unrealized gain (loss) on investments:
       
Net realized gain (loss) from:
       
Investments
    2,395  
Change in net unrealized appreciation or depreciation of:
       
Investments
    1,243  
 
     
Net gain on investments
    3,638  
 
     
Net increase in net assets resulting from operations
  $ 5,629  
 
     
See accompanying notes

8


 

American Beacon Treasury Inflation Protected Securities Fund
Statement of Changes of Net Assets (in thousands)
                 
    Six Months        
    Ended     Year Ended  
    June 30,     December  
    2010     31, 2009  
    (unaudited)          
Increase (Decrease) in Net Assets:
               
Operations:
               
Net investment income
  $ 1,991     $ 953  
Net realized gain on investments, futures contracts, and foreign currency transactions
    2,395       2,897  
Change in net unrealized appreciation of investments, futures contracts, and foreign currency translations
    1,243       9,275  
 
           
Net increase in net assets resulting from operations
    5,629       13,124  
 
           
 
               
Distributions to Shareholders:
               
Net investment income:
               
Institutional Class
          (789 )
Investor Class
          (28 )
 
           
Net distributions to shareholders
          (817 )
 
           
 
               
Capital Share Transactions:
               
Proceeds from sales of shares
    67,122       82,724  
Reinvestment of dividends and distributions
          615  
Cost of shares redeemed
    (29,036 )     (74,134 )
 
           
Net increase in net assets from capital share transactions
    38,086       9,205  
 
           
Net increase in net assets
    43,715       21,512  
 
           
Net Assets:
               
Beginning of period
    161,701       140,189  
 
           
End of Period *
  $ 205,416     $ 161,701  
 
           
* Includes undistributed net investment income of
  $ 2,172     $ 181  
 
           
See accompanying notes

9


 

American Beacon Treasury Inflation Protected Securities Fund
Notes to Financial Statements
June 30, 2010 (Unaudited)
1. Organization and Significant Accounting Policies
     American Beacon Funds (the “Trust”) is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940 (the “Act”), as amended, as a diversified, open-end management investment company. These financial statements and notes to the financial statements relate to the American Beacon Treasury Inflation Protected Securities Fund (the “Fund”), a series of the Trust.
     American Beacon Advisors, Inc. (the “Manager”) is a wholly-owned subsidiary of Lighthouse Holdings, Inc. and was organized in 1986 to provide business management, advisory, administrative and asset management consulting services to the Trust and other investors.
Class Disclosure
     March 1 and May 17, 2010 are the inception dates of the Y and A Classes, respectively.
     The Fund has multiple classes of shares designed to meet the needs of different groups of investors. The following table sets forth the differences amongst the classes:
     
Class:   Offered to:
Institutional Class
  Investors making an initial investment of $250,000
Y Class
  Investors making an initial investment of $100,000
Investor Class
  General public and investors investing through an intermediary
A Class
  General public and investors investing through an intermediary with applicable sales charges
     Administrative service fees, service fees and distribution fees vary amongst the classes as described more fully in footnote 2.
     Investment income, net capital gains (losses) and all expenses incurred by the Fund are allocated based on the relative net assets of each class, except for service fees and certain other fees and expenses related solely to one class of shares.
Security Valuation
     Investments are valued at the close of the New York Stock Exchange (the “Exchange”), normally 4 p.m. ET, each day that the Exchange is open for business.
     Debt securities (other than short-term securities) normally are valued on the basis of prices provided by an independent pricing service and may take into account appropriate factors such as institution-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. The prices of debt securities may be determined using quotes obtained from brokers.
     Investments in mutual funds are valued at the closing net asset value per share of the mutual fund on the day of valuation. Investment grade short-term obligations with 60 days or less to maturity are valued using the amortized cost method, which approximates market value.
     Securities for which market prices are not readily available or are not reflective of the fair value of the security, as determined by the Manager, will be priced at fair value following procedures approved by the Board of Trustees (the “Board”).

10


 

American Beacon Treasury Inflation Protected Securities Fund
Notes to Financial Statements
June 30, 2010 (Unaudited)
Valuation Inputs
     Various inputs may be used to determine the value of the Fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
  Level 1 — Quoted prices in active markets for identical securities.
  Level 2 — Prices determined using other significant observable inputs. These may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, and others.
  Level 3 — Prices determined using significant unobservable inputs. Unobservable inputs reflect the Fund’s own assumptions about the factors market participants would use in pricing an investment, and would be based on the best information available.
     The Fund’s investments are summarized by level based on the inputs used to determine their values. As of June 30, 2010 the Fund’s investments were classified as follows (in thousands):
                                 
Description   Level 1     Level 2     Level 3     Total  
U.S. Treasury Obligations
  $     $ 202,512     $     $ 202,512  
Short-Term Investments
    488                   488  
 
                       
Total Investments
    488       202,512             203,000  
Security Transactions and Investment Income
     Security transactions are recorded on the trade date of the security purchase or sale. The Fund may purchase securities with delivery or payment to occur at a later date. At the time the Fund enters into a commitment to purchase a security, the transaction is recorded, and the value of the security is reflected in the net asset value. The value of the security may vary with market fluctuations.
     Dividend income is recorded on the ex-dividend date. Interest income is earned from settlement date, recorded on the accrual basis, and adjusted, if necessary, for accretion of discounts and amortization of premiums. For financial and tax reporting purposes, realized gains and losses are determined on the basis of specific lot identification.
     Inflation-indexed bonds are fixed-income securities whose principal value is periodically adjusted to the rate of inflation. Interest is accrued based on the principal value, which is adjusted for inflation. Any increase in the principal amount of an inflation-indexed bond is recorded as interest income, even though principal is not received until maturity.
Dividends to Shareholders
     Dividends from net investment income of the Fund normally will be declared and paid at least semi-annually. Distributions, if any, of net realized capital gains are generally paid at least annually and recorded on the ex-dividend date.
Use of Estimates
     The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimated.

11


 

American Beacon Treasury Inflation Protected Securities Fund
Notes to Financial Statements
June 30, 2010 (Unaudited)
Other
     Under the Trust’s organizational documents, its officers and directors are indemnified against certain liability arising out of the performance of their duties to the Trust. In the normal course of business, the Trust enters into contracts that provide indemnification to the other party or parties against potential costs or liabilities. The Trust’s maximum exposure under these arrangements is dependent on claims that may be made in the future and, therefore, cannot be estimated. The Trust has had no prior claims or losses pursuant to any such agreement.
2. Transactions with Affiliates
Management Agreement
     The Trust and the Manager are parties to a Management Agreement that obligates the Manager to provide or oversee the provision of all investment advisory and portfolio management services. Investment assets of the Fund may be managed by multiple investment advisors which have entered into separate investment advisory agreements with the Manager. As compensation for performing the duties required under the Management Agreement, the Manager receives from the Fund an annualized fee equal to 0.05% of the average daily net assets plus amounts paid by the Manager to the investment advisors hired by the Manager to direct investment activities of the Fund. Management fees paid during the six months ended June 30, 2010 were as follows:
             
        Amounts paid to   Net Amounts Retained
Management Fee Rate   Management Fee   Investment Advisors   by Manager
0.15% — 0.19%
  $109,194   $64,480   $44,714
Administrative Services Agreement
     The Manager and the Trust entered into an Administrative Services Agreement which obligates the Manager to provide or oversee administrative services to the Fund. As compensation for performing the duties required under the Administrative Services Agreement, the Manager receives an annualized fee of 0.15% of the average daily net assets of the Institutional Class, 0.30% of the average daily net assets of the Y and Investor Classes and 0.40% of the average daily net assets of the A Class of the Fund.
Distribution Plans
     The Trust, except for the A Class of the Fund, has adopted a “defensive” Distribution Plan (the “Plan”) in accordance with Rule 12b-1 under the Act, pursuant to which no fees may be charged to the Fund for distribution purposes. However, the Plan authorizes the management and administrative service fees received by the Manager and the investment advisors hired by the Manager to be used for distribution purposes. Under this Plan, the Trust does not intend to compensate the Manager or any other party, either directly or indirectly, for the distribution of Trust shares.
     A separate Distribution Plan (the “Distribution Plan”) has been adopted pursuant to rule 12b-1 under the Act for the A Class of the Fund. Under the Distribution Plan, as compensation for distribution assistance, the Manager receives an annual fee of 0.25% of the average daily net assets of the A Class. The fee will be payable without regard to whether the amount of the fee is more or less than the actual expenses incurred in a particular month by the Manager for distribution assistance.
Services Plan
     The Manager and the Trust entered into a Service Plan which obligates the Manager to oversee additional shareholder servicing of the Y, Investor, and A Classes of the Fund. As compensation for performing the duties required under the Service Plan, the Manager receives an annualized fee of 0.10% of the average

12


 

American Beacon Treasury Inflation Protected Securities Fund
Notes to Financial Statements
June 30, 2010 (Unaudited)
daily net assets of the Y Class, 0.15% of the average daily net assets of the A Class, and up to 0.375% of the average daily net assets of the Investor Class of the Fund.
Investment in Affiliated Funds
     The Fund may invest in the American Beacon Money Market Select Fund and the American Beacon US Government Money Market Select Fund (collectively the “Select Funds”). The Fund and the Select Funds have the same investment advisor and, therefore, are considered to be affiliated. The Manager serves as investment advisor to the Select Funds and receives from the Select Funds an annualized fee equal to 0.09% of the Select Funds’ average daily net assets. During the six months ended June 30, 2010, the Fund did not invest in the Select Funds.
Interfund Lending Program
     Pursuant to an exemptive order by the Securities Exchange Commission (the “SEC”), the Fund, along with other registered investment companies having management contracts with the Manager, may participate in an interfund lending program as a borrower. This program provides an alternative credit facility allowing the Fund to borrow from other participating Funds. For the six months ended June 30, 2010, the Fund did not utilize the credit facility.
Reimbursement of Expenses
     The Manager voluntarily agreed to reimburse a portion of its Administrative Service fee for the Institutional Class and other expenses of the Investor Class. For the six months ended June 30, 2010, the Manager reimbursed expenses of $82,708 and $7,212 for the Institutional and Investor Classes, respectively.
     The Fund has adopted an Expense Reimbursement Plan whereby the Manager may seek repayment of fees waived or expenses reimbursed for a period of up to three years. However, reimbursement will occur only if the Class’s average net assets have grown or expenses have declined sufficiently to allow reimbursement without causing its expense ratio to exceed the previously agreed upon contractual expense limit. The Fund has not recorded a liability for potential reimbursement, due to the current assessment that a reimbursement is unlikely.
Sales Commissions
     The Fund’s distributor, Foreside Fund Services, LLC (“Foreside”) may receive a portion of A Class sales charges from broker dealers and it may be used to offset expenses that the Manager pays to Foreside. Since May 17th (the inception date of the A Class) there has been $0 in sales commissions from the sale of Class A shares that were received by Foreside.
3. Federal Income and Excise Taxes
     It is the policy of the Fund to comply with the requirements of Subchapter M of the Internal Revenue Code and to distribute substantially all net investment income as well as any net realized capital gains on the sale of investments. Therefore, no federal income or excise tax provision is required.
     The Fund does not have any unrecognized tax benefits in the accompanying financial statements. Each of the tax years in the four year period ended December 31, 2009, remains subject to examination by the Internal Revenue Service. If applicable, the Fund recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in “Other expenses” on the Statement of Operations.
     Dividends are categorized in accordance with income tax regulations which may treat certain transactions differently than U.S. generally accepted accounting principles. Accordingly, the character of

13


 

American Beacon Treasury Inflation Protected Securities Fund
Notes to Financial Statements
June 30, 2010 (Unaudited)
distributions and composition of net assets for tax purposes may differ from those reflected in the accompanying financial statements.
     The tax character of distributions paid during the period ended June 30, 2010 and the fiscal year ended December 31, 2009 were as follows (in thousands):
                                 
    Institutional   Y
    Six Months            
    Ended   Year Ended   Period Ended   Year Ended
    June 30, 2010   December 31,   June 30, 2010   December 31,
Distributions paid from:   (unaudited)   2009   (unaudited)   2009
Ordinary income*
  $     $ 789     $       N/A  
                                 
    Investor   A
    Six Months            
    Ended   Year Ended   Period Ended   Year Ended
    June 30, 2010   December 31,   June 30, 2010   December 31,
Distributions paid from:   (unaudited)   2009   (unaudited)   2009
Ordinary income*
  $     $ 28     $       N/A  
 
*   For tax purposes, short-term capital gains distributions are considered ordinary income distributions.
     As of June 30, 2010, the components of distributable earnings on a tax basis were as follows (in thousands):
         
Cost basis of investments for federal income tax purposes
  $ 199,842  
Unrealized appreciation
    3,159  
Unrealized depreciation
    (1 )
 
     
Net unrealized appreciation/(depreciation)
    3,158  
Undistributed ordinary income
    (1,461 )
Undistributed long-term gain/(loss)
    (2,172 )
 
     
Distributable earnings
  $ 13,003  
 
     
     Financial reporting records are adjusted for permanent book/tax differences to reflect tax character. Financial records are not adjusted for temporary differences. The temporary differences between financial reporting and tax-basis reporting of unrealized appreciation/(depreciation) are attributable primarily to the tax deferral of losses from wash.
     Due to inherent differences in the recognition of income, expenses and realized gains/(losses) under U.S. generally accepted accounting principles and federal income tax regulations, permanent differences between book and tax reporting have been identified and appropriately reclassified on the Statement of Assets and Liabilities.
     Accordingly, the following amounts represent current year permanent differences that have been reclassified as of June 30, 2010 (in thousands):
         
Paid in capital
  $ 0  
Undistributed net investment income
    0  
Accumulated net realized gain (loss)
    (1 )
Unrealized appreciation (depreciation) of investments and foreign currency
    1  
     At June 30, 2010, the capital loss carry forward positions for federal income tax purposes were $12,965 and $5,368 expiring in 2016 and 2017, respectively (in thousands).
     The Fund utilized $2,275 (in thousands) of net capital loss carryovers for the six months ended June 30, 2010.

14


 

American Beacon Treasury Inflation Protected Securities Fund
Notes to Financial Statements
June 30, 2010 (Unaudited)
4. Investment Transactions
     Purchases and proceeds from sales of investments for the six months ended June 30, 2010, excluding short-term investments, were $197,635,867 and $158,026,026, respectively. These amounts also represent purchases and sales of U.S. Government securities.
5. Capital Share Transactions
     The tables below summarize the activity in capital shares (dollars and shares in thousands):
Six Months Ended June 30, 2010
                                                                 
    Institutional Class     Y Class     Investor Class     A Class  
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount  
Shares sold
    5,412     $ 55,905       19     $ 198       1,079     $ 11,018           $ 1  
Reinvestment of dividends
                                               
Shares redeemed
    (2,569 )     (26,496 )                 (247 )     (2,540 )            
 
                                               
Net increase in shares outstanding
    2,843     $ 29,409       19     $ 198       832     $ 8,478           $ 1  
 
                                               
Year Ended December 31, 2009
                                 
    Institutional Class     Investor Class  
    Shares     Amount     Shares     Amount  
Shares sold
    7,637     $ 75,743       709     $ 6,981  
Reinvestment of dividends
    58       587       3       28  
Shares redeemed
    (7,594 )     (72,804 )     (132 )     (1,330 )
 
                       
Net increase in shares outstanding
    101     $ 3,526       580     $ 5,679  
 
                       
6. Subsequent Events
     Management has evaluated the possibility of subsequent events existing in the Fund’s financial statements and determined that there are no material events that would require disclosure in the Fund’s financial statements.

15


 

American Beacon Treasury Inflation Protected Securities Fund
Financial Highlights
(For a share outstanding throughout the period)
                                                                                 
    Institutional Class     Y Class     Investor Class     A Class  
    Six                                                                      
    Months                                                             March     May  
    Ended                                             March     Six Months     2 to     17 to  
    June 30,     Year Ended December 31,     1 to June     Ended June     December     June 30,  
    2010     2009A     2008     2007B     2006     2005     30, 2010     30, 2010     31, 2009A     2010  
    (unaudited)                                             (unaudited)     (unaudited)     (unaudited)  
Net asset value, beginning of period
  $ 10.16     $ 9.20     $ 10.18     $ 9.53     $ 9.75     $ 10.16     $ 10.25     $ 10.13     $ 9.25     $ 10.35  
 
                                                           
Income from investment operations:
                                                                               
Net investment income
    0.10       0.06       0.80       0.45       0.29       0.56 C     0.03       0.10 C     0.14       0.03  
Net gains (losses) on securities (both realized and unrealized)
    0.22       0.95       (0.98 )     0.59       (0.19 )     (0.37 )     0.19       0.19 C     0.79       0.03  
 
                                                           
Total income (loss) from investment operations
    0.32       1.01       (0.18 )     1.04       0.10       0.19       0.22       0.29       0.93       0.06  
 
                                                           
Less distributions:
                                                                               
Dividends from net investment income
          (0.05 )     (0.80 )     (0.39 )     (0.29 )     (0.55 )                 (0.05 )      
Distributions from net realized gains on securities
                                  (0.05 )                        
Tax return of capital
                      0.00 D,E     (0.03 )D                              
 
                                                           
Total distributions
          (0.05 )     (0.80 )     (0.39 )     (0.32 )     (0.60 )                 (0.05 )      
 
                                                           
Net asset value, end of period
  $ 10.48     $ 10.16     $ 9.20     $ 10.18     $ 9.53     $ 9.75     $ 10.47     $ 10.42     $ 10.13     $ 10.41  
 
                                                           
Total return
    3.15 %F     11.00 %     (2.09 )%     11.22 %     1.05 %     1.86 %     2.15 %F     2.86 %F     10.05 %F     0.58 %F
 
                                                           
Ratios and supplemental data:
                                                                               
Net assets, end of period (in thousands)
  $ 190,508     $ 155,833     $ 140,189     $ 223,697     $ 33,792     $ 30,584     $ 200     $ 14,707     $ 5,868     $ 1  
Ratios to average net assets (annualized):
                                                                               
 
                                                                               
Expenses, after expense reimbursements (recoupments)
    0.25 %     0.26 %     0.25 %     0.43 %     0.49 %     0.44 %     0.57 %G     0.63 %     0.65 %G     0.98 %G
 
                                                                               
Expenses, before expense reimbursements (recoupments)
    0.35 %     0.36 %     0.29 %     0.43 %     0.49 %     0.39 %     0.57 %G     0.74 %     0.81 %G     0.98 %G
 
                                                                               
Net investment income, after expense reimbursements (recoupements)
    2.25 %     0.69 %     5.19 %     4.74 %     2.94 %     5.45 %     2.83 %G     1.88 %     3.20 %G     2.58 %G
 
                                                                               
Net investment income, before expense reimbursements (recoupments)
    2.15 %     0.59 %     5.15 %     4.74 %     2.94 %     5.50 %     2.83 %G     1.78 %     3.04 %G     2.58 %G
Portfolio turnover rate
    88 %F     180 %     128 %     139 %     259 %     355 %     88 %F,I     88 %F     180 %H     88 %F,I
 
A   Standish Mellon Asset Management Company, LLC was added as an investment advisor on December 11, 2009.
 
B   Brown Brothers Harriman & Co. was removed as an investment advisor to the Treasury Inflation Protected Securities Fund on November 30, 2007.
 
C   Based on average shares outstanding.
 
D   The tax return of capital is calculated based on outstanding shares at the time of distribution.
 
E   Amount represents less than $0.01 per share.
 
F   Not annualized.
 
G   Annualized.
 
H   Portfolio turnover rate is for the period from January 1 through December 31, 2009.
 
I   Portfolio turnover rate is for the period from January 1 through June 30, 2010.

16


 

Disclosure Regarding the Board of Trustees’ Approval of the Management Agreement and Investment Advisory Agreements of the Fund
(Unaudited)
     At its May 25, 2010 meeting, the Board of Trustees (“Board”) considered the renewal of each existing Management Agreement between the Manager and the American Beacon Funds (the “Funds”) and each Investment Advisory Agreement between the Manager and a subadvisor (“Investment Advisory Agreements”) In preparation for the Board’s consideration to renew the Management Agreement and each Investment Advisory Agreement, the Board and its Investment Committee undertook steps to gather and consider information furnished by the Manager, the subadvisors and Lipper, Inc. (“Lipper”). The Board, with the assistance of independent legal counsel, requested and received certain relevant information from the Manager and each subadvisor.
     In addition, the Board’s Investment Committee worked with Lipper to obtain relevant comparative information regarding the performance, fees and expenses of the Funds. The Investment Committee held a separate meeting on May 10, 2010 to consider the information provided by Lipper. Further, the Board took into consideration information furnished for the Board’s review and consideration throughout the year at regular Board and Investment Committee meetings, as well as information specifically prepared in connection with the renewal process.
     In connection with the Board’s consideration of the Management Agreement and each Investment Advisory Agreement, the Trustees considered, among other materials, responses by the Manager and the subadvisors to inquiries requesting:
    a description of any significant changes (actual or anticipated) to principal activities, personnel, services provided to the Funds, or any other area, including how these changes might affect the Funds;
 
    a copy of the firm’s most recent audited or unaudited financial statements, as well as Parts 1 and II of its Form ADV registration statement with the SEC;
 
    a summary of any material pending or anticipated litigation or regulatory proceedings involving the firm or its personnel, including the results of any recent regulatory examination or independent audit;
 
    a comparison of the performance of that portion of Fund assets managed by each firm with performance of other similar accounts managed by the firm, including a discussion of relative performance versus a peer group average and any remedial measures if the firm’s performance was materially below that of the peer group;
 
    a profit/loss analysis of the firm and any actual or anticipated economies of scale in relation to the services it provides to each Fund;
 
    an analysis of compensation, including a comparison with fees charged to other clients for which similar services are provided, any proposed changes to the fee schedule and the effect of any fee waivers;
 
    a description of any payments by the subadvisers to the manager to support the Funds’ marketing efforts;
 
    an evaluation of any other benefits to the firm or Funds as a result of their relationship, if any;
 
    confirmation that the firm’s financial condition would not impair its ability to provide high-quality advisory services to the Funds;
 
    a description of any internal actions the firm has taken or anticipates taking in light of the current and projected decrease in revenues from prior years as a result of the current economic environment that may affect or are expected to affect the services performed for the Funds;

17


 

Disclosure Regarding the Board of Trustees’ Approval of the Management Agreement and Investment Advisory Agreements of the Fund
(Unaudited)
    a description of the scope of portfolio management services provided to the Funds, including whether such services differ from the services provided to other clients, including other registered investment companies, and any advantages or disadvantages that might accrue to the Funds due to the firm’s involvement in other activities;
 
    a description of the personnel who are assigned primary responsibility for managing the Funds, including any changes during the past year, and a discussion of the adequacy of current and projected staffing levels to service the Funds;
 
    a description of the basis upon which portfolio managers are compensated, including any “incentive” arrangements, and a description of the oversight mechanisms used to prevent a portfolio manager whose compensation is tied to performance of a Fund from taking undue risks;
 
    a discussion regarding the firm’s participation in “soft dollar” arrangements, if any, or other brokerage allocation policies with respect to Fund transactions, including the firm’s methodology for obtaining best execution and the use of any affiliated broker-dealers;
 
    a description of any actual or potential conflicts of interest anticipated in managing Fund assets;
 
    a discussion of whether the firm has identified any investment or operational matters that likely present a high risk in managing Fund assets;
 
    a description of trade allocation procedures among accounts managed by the firm;
 
    a discussion of whether the firm receives, with respect to the Funds, other compensation, including any payment for order flow or ECN liquidity rebates
 
    a certification by the firm regarding the reasonable design of its compliance program;
 
    information regarding the firm’s code of ethics, insider trading policy and disaster recovery plan, including a description of any material changes thereto and a related certification of compliance by the firm;
 
    a description of the firm’s affiliation with any broker-dealer;
 
    a discussion of any anticipated change in the firm’s controlling persons; and
 
    verification of the firm’s insurance coverage with regards to the services provided to the Funds.
     In addition to the foregoing, the Manager provided the following information specific to the renewal of the Management Agreement:
    a comparison of the performance of each Fund to comparable investment companies and appropriate indices, including comments on the relative performance of, as applicable, each subadvisor and each Fund versus the respective peer group average;
 
    a discussion, if applicable, of any underperformance by a subadvisor relative to its peer group and what, if any, remedial measures the Manager has or intends to take;
 
    a comparison of advisory fees and expense ratios for comparable mutual funds;
 
    an analysis of any material complaints received from Fund shareholders;

18


 

Disclosure Regarding the Board of Trustees’ Approval of the Management Agreement and Investment Advisory Agreements of the Fund
(Unaudited)
    a description of the extent to which the Manager monitors the investment activities and financial conditions of each subadvisor to the Funds;
 
    a description of the Manager’s distribution activities with respect to promoting sales of Fund shares, including any revenue sharing practices;
 
    a description of the Manager’s securities lending practices and the fees received from such practices;
 
    a discussion of any rebate arrangements between the Manager and a service provider to the Funds pursuant to which the Manager receives direct or indirect benefits from the service provider;
 
    a description of the portfolio turnover rate and average execution costs for each Fund and, as applicable, each subadvisor to a Fund; and
 
    a description of how expenses that are not readily identifiable to a particular Fund are allocated.
     In connection with the Management Agreement and each Investment Advisory Agreement, the Board also obtained an analysis provided by Lipper that compared: (i) investment performance of each Fund versus comparable investment companies and appropriate indices; (ii) total Fund expenses of each Fund versus comparable mutual funds; and (iii) each Fund’s investment advisory fees versus comparable mutual funds. For each Fund with more than one class of shares, the class of shares used for comparative purposes was the class with the longest performance history, which in most cases was the Institutional Class. References below to each Fund’s Lipper peer group are to the group of comparable mutual funds included in the analysis provided by Lipper.
     Provided below is an overview of the primary factors the Trustees considered at the Investment Committee meeting on May 10, 2010 at which the Trustees reviewed the investment performance of the Manager and each subadvisor and the primary factors considered by the Board at its May 25, 2010 meeting at which the Board considered the renewal of the Agreements. The Board did not identify any particular information that was most relevant to its consideration to renew the Management Agreement and each Investment Advisory Agreement, and each Trustee may have afforded different weight to the various factors. Legal counsel to the independent Trustees provided the Board with a memorandum regarding its responsibilities pertaining to the renewal of the Agreements. The memorandum explained the regulatory requirements surrounding the Trustees’ process for evaluating investment advisors and the terms of the contracts. Based on its evaluation, the Board unanimously concluded that the terms of each Agreement were reasonable and fair and that the renewal of each Agreement was in the best interests of the Funds and their shareholders.
Considerations With Respect to All Funds
     In determining whether to renew the Management Agreement and each Investment Advisory Agreement, the Trustees considered the best interests of each Fund separately. While the Management Agreement and the Investment Advisory Agreements for all of the Funds were considered at the May 25, 2010 meeting, the Board considered each Fund’s investment management and subadvisory relationships separately. In each instance, the Board considered, among other things, the following factors: (1) the nature and quality of the services provided; (2) the investment performance of a Fund and, as applicable, each subadvisor for a Fund; (3) the costs incurred by the Manager and (to the extent provided) the subadvisors in rendering their services and their resulting profits or losses; (4) the extent to which economies of scale have been taken into account in setting each fee schedule; (5) whether fee levels reflect these economies of scale for the benefit of Fund investors; (6) comparisons of services and fees with contracts entered into by the Manager or a subadvisor or their affiliates with other clients (such as pension funds and other institutional funds); and (7) any other

19


 

Disclosure Regarding the Board of Trustees’ Approval of the Management Agreement and Investment Advisory Agreements of the Fund
(Unaudited)
benefits derived or anticipated to be derived by the Manager or a subadvisor from their relationship with a Fund. The Trustees posed questions to various management personnel of the Manager regarding certain key aspects of the materials submitted in support of the renewal.
     Nature, Extent and Quality of Services. With respect to the renewal of the Management Agreement, the Board considered, among other factors: each Fund’s generally favorable long-term performance and the background and experience of key investment personnel at the Manager; the low cost structure of the Funds; the Manager’s culture of compliance and support for compliance operations that reduce risks to the Funds; the manager’s commitment to increase assets in the Funds as demonstrated, for example, by the recent substantial increase in sales personnel; the Manager’s continuing efforts to add new series and share classes to enhance the Funds’ product line; the Manager’s high quality of services; the Manager’s active role in monitoring and, as appropriate recommending additional or replacement subadvisors; and efforts made by the Manager to retain key employees and maintain staff levels.
     With respect to the renewal of each Investment Advisory Agreement, the Trustees considered the background and experience of each subadvisor’s investment personnel responsible for managing the Funds, the size of the subadvisor and their ability to continue to attract and retain qualified investment personnel. Based on the foregoing information, the Board concluded that the nature, extent and quality of the management and advisory services provided by the Manager and each subadvisor were appropriate for each Fund and, thus, determined to renew the Management Agreement and the Investment Advisory Agreement for each Fund.
     Investment Performance. The Board evaluated the comparative information provided by Lipper and the Manager regarding each Fund’s investment performance relative to its benchmark index(es) and peer group. The Board considered the information provided by Lipper regarding its independent peer selection methodology to select all peer groups and universes. The Board also considered the performance reports and discussions with management at Board and Committee meetings throughout the year. The Manager also noted that it generally was satisfied with the performance of the subadvisors. A discussion regarding the Board’s considerations with respect to each Fund’s performance appears below under “Additional Considerations and Conclusions with Respect to Each Fund.”
     Costs of the Services Provided to the Funds and the Profits Realized by the Manager from its Relationship with the Funds. In analyzing the cost of services and profitability of the Manager and a subadvisor by Fund, the Board considered the revenues earned and the expenses incurred by the Manager. The profits or losses were noted at both an individual Fund level and at an aggregate level for all Funds. Although the Board noted that, in certain cases, the fee rates paid by other clients is lower than the fee rates paid by the Funds, the difference reflects the greater level of responsibility and regulatory requirements associated with managing the Funds.
     The Board also noted that the Manager proposed to continue the expense waivers and reimbursements for certain Funds and classes that were in place during the last fiscal year and to put in place new expense waivers and reimbursements for certain classes of the Funds. The Board further considered that each subadvised Fund pays the Manager the amounts due to its subadvisors, and the Manager remits these amounts directly to the applicable subadvisors. The Board considered that the Manager receives service and administrative fees to compensate the Manager for providing administrative services to the Funds and to compensate third-party administrators and broker-dealers for services to Fund shareholders. In addition, the Board considered that the Manager receives management fees for overseeing the securities lending program on behalf of various Funds. The Board also noted that certain classes of the Funds maintain higher expense ratios in order to compensate third-party distributors.
     In analyzing the cost of services and profitability for each subadvisor in connection with its investment advisory services to the Fund, the Board considered that, in many cases, the Manager has negotiated the lowest subadvisory fee a subadvisor charges for any comparable client accounts. The Board gave less weight to profitability considerations or did not view this data as imperative to its deliberations given the arm’s length

20


 

Disclosure Regarding the Board of Trustees’ Approval of the Management Agreement and Investment Advisory Agreements of the Fund
(Unaudited)
nature of the relationship between the Manager and the subadvisors with respect to the negotiation of subadvisory fees.
     Based on the foregoing information, the Board concluded that the profitability levels were reasonable in light of the services performed by the Manager and the subadvisors. A discussion regarding the Board’s considerations with respect to each Fund’s fee rates is set forth below under “Additional Considerations and Conclusions with Respect to Each Fund.”
     Economies of Scale. In considering the reasonableness of the management and investment advisory fees, the Board considered whether economies of scale will be realized as the Funds grow and whether fee levels reflect these economies of scale for the benefit of Fund shareholders. In this regard, the Board considered that the Manager has negotiated breakpoints in many subadvisory fee rates. The Board also noted that, for purposes of determining the fee rates chargeable to the Funds, many subadvisors have agreed to take into account assets of AMR and its pension plans that are managed by the subadvisors. Thus, the Funds are able to receive lower effective fee rates. The Board also noted the Manager’s representation that assets in the Funds’ complex increased during 2009, primarily due to market appreciation.
     In addition, the Board noted the Manager’s representation that, due to the existing low cost structure of the Funds, further breakpoints in the management fee would not be appropriate at this time. The Board also considered that the management fee for the Money Market Funds is amongst the lowest in the industry. Based on the foregoing information, the Board concluded that the Manager and subadvisor fee schedules for each Fund provides for a reasonable sharing of benefits from any economies of scale with the Fund.
     Benefits Derived from the Relationship with the Funds. The Board considered the “fall-out” or ancillary benefits that accrue to the Manager and/or the subadvisors as a result of the advisory relationships with the Funds, including greater exposure in the marketplace with respect to the Manager’s or subadvisor’s investment process and expanding the level of assets under management by the Manager and the subadvisors. The Board also considered that the Manager’s relationship with the Funds and the money market portfolios continues to be a significant factor in attracting separate account assets for the Manager and the Manager’s use of the Large Cap Value Fund model for an actively managed exchange traded fund, managed by the Manager.
     In addition, the Manager noted that the Funds also derive benefits from their association with the Manager. Specifically, the Board noted that the benefit plans of AMR Corporation, which are managed by the Manager, remain the largest or one of the largest shareholders in most of the Funds and the Manager’s representation that it provides services to the Funds at a lower than industry average cost. The Board considered that certain of the subadvisors reimburse the Manager for certain of its costs relating to distribution activities for the Funds. The Board also considered that, with the exception of the Emerging Markets Fund, the Funds did not pay commissions to any affiliated broker-dealer of the Manager or the relevant subadvisor during the most recent fiscal year ended December 31, 2009.
     Based on the foregoing information, the Board concluded that the potential benefits accruing to the Manager and the subadvisors by virtue of their relationships with the Funds appear to be fair and reasonable.
Additional Considerations and Conclusions with Respect to the Treasury Inflation Protected Securities Fund
     The performance comparisons below were made versus each Fund’s Lipper peer universe median. References to the Lipper expense universe below are to the universe of comparable mutual funds included in the analysis provided to the Trustees by Lipper.
     In considering the renewal of the Management Agreement for the Treasury Inflation Protected Securities Fund, the Trustees considered the following additional factors: (1) the Treasury Inflation Protected Securities Fund outperformed the peer universe median for the one-, three- and five-year periods ended March 31, 2010;

21


 

Disclosure Regarding the Board of Trustees’ Approval of the Management Agreement and Investment Advisory Agreements of the Fund
(Unaudited)
and (2) the expense ratio of the Institutional Class of Fund shares was the lowest of its Lipper expense universe.
     In considering the renewal of the Investment Advisory Agreement with NISA Investment Advisors LLC (“NISA”), the Trustees considered the following additional factors: (1) NISA outperformed the peer universe median for the one-, three- and five-year periods ended March 31, 2010; (2) representations by NISA regarding fee rates charged it charges to other comparable clients; (3) whether NISA uses Fund commissions to obtain proprietary or third-party research; and (4) the Manager’s recommendation to continue to retain NISA.
     Based on these and other considerations the Trustees (1) concluded that the fees paid to the Manager and the subadvisor under the Agreements are fair and reasonable, (2) determined that the Treasury Inflation Protected Securities Fund and its shareholders would benefit from the Manager’s and subadvisor’s continued management of the Fund and (3) approved the renewal of the Management and Investment Advisory Agreements with respect to the Treasury Inflation Protected Securities Fund.

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(AMERICAN BEACON LOGO)
Delivery of Documents
To reduce expenses, your financial institution may mail only one copy of the Summary Prospectus, Annual Report and Semi-Annual Report to those addresses shared by two or more accounts. If you wish to receive individual copies of these documents, please contact your financial institution. Delivery of individual copies will commence thirty days after receiving your request.
If you invest in the Fund through a financial institution, you may be able to receive the Fund’s regulatory mailings, such as the Summary Prospectus, Annual Report and Semi-Annual Report, by e-mail. If you are interested in this option, please go to www.icsdelivery.com and search for your financial institution’s name or contact your financial institution directly.
To obtain more information about the Fund:
     
(E-MAIL LOGO)
  (INTERNET LOGO)
     
By E-mail:   On the Internet:
american_beacon.funds@ambeacon.com   Visit our website at www.americanbeaconfunds.com
     
(TELEPHONE LOGO)   (MAIL LOGO)
     
By Telephone:   By Mail:
Call (800) 658-5811   American Beacon Funds
    P.O. Box 219643
    Kansas City, MO 64121-9643
     
Availability of Quarterly Portfolio Schedules   Availability of Proxy Voting Policy and Records
     
 In addition to the Schedule of Investments provided in each semi-annual and annual report, the Fund files a complete schedule of its portfolio holdings with the Securities and Exchange Commission (“SEC”) on Form N-Q as of the first and third fiscal quarters. The Fund’s Forms N-Q are available on the SEC’s website at www.sec.gov. The Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room, 450 Fifth Street, NW, Washington, DC 20549. Information regarding the operation of the SEC’s Public Reference Room may be obtained by calling 1-800-SEC-0330. A complete schedule of the Fund’s portfolio holdings is also available on the Funds’ website (www.americanbeaconfunds.com) approximately twenty days after the end of each month.   A description of the policies and procedures the Fund uses to determine how to vote proxies relating to portfolio securities is available in the Fund’s Statement of Additional Information, is available free of charge on the Fund’s website (www.americanbeaconfunds.com) and by calling 1-800-967-9009 or by accessing the SEC’s website at www.sec.gov. The Fund’s proxy voting record for the most recent year ended June 30 is filed annually with the SEC on Form N-PX. The Fund’s Forms N-PX are available on the SEC’s website at www.sec.gov. The Fund’s proxy voting record may also be obtained by calling 1-800-967-9009.
Fund Service Providers:
             
Custodian
  Transfer Agent   Independent Registered   Distributor
State Street Bank and
  Boston Financial Data   Public Accounting   Foreside Fund Services,
Trust
  Services   Firm   LLC
Boston, Massachusetts
  Kansas City, Missouri   Ernst & Young LLP   Portland, Maine
 
      Dallas, Texas    
This report is prepared for shareholders of the American Beacon Funds and may be distributed to others only if preceded or accompanied by a current prospectus or summary prospectus.
American Beacon Funds and American Beacon Treasury Inflation Protected Securities Fund are service marks of American Beacon Advisors, Inc
SAR 6/10

 


 

(IMAGE)

 


 

About American Beacon Advisors
Since 1986, American Beacon Advisors has offered a variety of products and investment advisory services to numerous institutional and retail clients, including a variety of mutual funds, corporate cash management, and separate account management.
Our clients include defined benefit plans, defined contribution plans, foundations, endowments, corporations, financial planners, and other institutional investors. With American Beacon Advisors, you can put the experience of a multi-billion dollar asset management firm to work for your company.
Contents
     
Message from American Beacon
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  86
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Additional Information
  Back Cover
Investing in foreign equities entails additional risk not associated with domestic equities, such as currency fluctuations, economic and political instability and differences in accounting standards. Investing in the securities of small capitalization companies involves greater risk and the possibility of greater price volatility than investing in larger capitalization and more established companies.

Any opinions herein, including forecasts, reflect our judgment as of the end of the reporting period and are subject to change. Each advisor’s strategies and each Fund’s portfolio composition will change depending on economic and market conditions. This report is not a complete analysis of market conditions and therefore, should not be relied upon as investment advice. Although economic and market information has been compiled from reliable sources, American Beacon Advisors, Inc. makes no representation as to the completeness or accuracy of the statements contained herein.
     
American Beacon Funds
  June 30, 2010

 


 

(PHOTO OF GENE L. NEEDLES)
Fellow Shareholders,
     Over the past six months, one universal investing theme seems to have emerged: while significant shifts may characterize recent market activity, it doesn’t mean investors can’t benefit. Opportunity abounds for those know how to capitalize on it.
     Each Fund seeks to match the performance of its underlying index as closely as possible before the deduction of fund expenses. This means that while investors may ride the index down, they will capture the entirety of the move back up during a recovery.
     During the six-month period ended June 30, 2010, index investors experienced the downside market turn as the American Beacon S&P Index Fund (Institutional Class) declined 6.67%; the American Beacon Small Cap Index Fund (Institutional Class) experienced a downturn of 1.89% and the American Beacon International Equity Index Fund (Institutional Class) finished the reporting period down 14.07%.
     Given that shifting global markets often give rise to new opportunities, American Beacon continuously looks for new and innovative strategies for capitalizing on them. This year, that led to the addition of three new actively managed funds to our lineup: the American Beacon Global Real Estate, American Beacon Zebra Small Cap Equity and American Beacon Zebra Large Cap Equity Funds.*
     As you review the enclosed market overview, portfolio listings, and detailed financial data, please know that we welcome the opportunity to serve your financial needs. To obtain further details about the American Beacon Funds family or to access your account information, please visit our website at americanbeaconfunds.com.
     Thank you for your continued investment in the American Beacon Funds, and know that we remain dedicated to offering you and your advisor the level of service and broad range of well-managed investment products you’ve come to expect from us.
             
 
      Sincerely,    
 
           
    -s- Gene L. Needles    
         
 
      Gene L. Needles, Jr.    
 
      President    
 
      American Beacon Funds    
Securities of these Funds may only be sold by offering each Funds’ Prospectus and Summary Prospectus. You should consider the investment objectives, risks, fees and expenses of any mutual fund carefully before investing. This and other information is available in each Funds’ Prospectus and Summary Prospectus which you may obtain at www.americanbeaconfunds.com or by calling 1-800-967-9009. Please read the Prospectus and Summary Prospectus carefully before investing.
There is no guarantee that the investment objective will be met of the American Beacon Zebra Large Cap Equity Fund. At times, certain securities may have limited marketability and may be difficult to sell.
There is no guarantee that the investment objectives will be met of the American Beacon Zebra Small Cap Equity Fund. Investing in the securities of small capitalization companies involves greater risk and the possibility of greater price volatility than investing in larger capitalization and more established companies. At times, certain securities may have limited marketability and may be difficult to sell.
There is no guarantee that the investment objectives will be met of the American Beacon Global Real Estate Fund. Investing in a global fund concentrating in real estate securities involves special risks, such as declines in the value of real estate as well as increased susceptibility to adverse economic, political, or regulatory developments affecting the industry. Investing in one economic sector, such as real estate, may result in greater price fluctuations than owning a portfolio of diversified investments. Changes in interest rates may also affect the value of the Fund’s investments in real estate securities. The real estate industry tends to be cyclical and therefore such cycles may adversely affect the value of the Fund’s portfolio. The Fund may invest in smaller and mid-size companies. Certain real estate securities have a relatively small market capitalization, which may tend to increase the volatility of the market price of their securities. Investing in the securities of small and mid-capitalization companies involves greater risk and the possibility of greater price volatility than investing in larger capitalization and more established companies. Investing in foreign equities entails additional risk not associated with domestic equities, such as currency fluctuations, economic and political instability, and differences in accounting standards. The risks of investing in foreign equities are heightened when investing in emerging markets. By itself, the Fund does not constitute a complete investment plan and should be considered a long term investment for investors who can afford to weather changes in the value of their investments. Some of the Fund’s investments may be considered speculative and are not appropriate for individuals who require safety of principal or stable income from their investments.

1


 

Performance Overview
American Beacon S&P 500® Index Fund
June 30, 2010 (Unaudited)
     For the six months ended June 30, 2010, the total return of the Institutional Class of the American Beacon S&P 500 Index Fund was -6.67%, slightly behind the S&P 500 Index (the “Index”) return of -6.65% but ahead of the Lipper S&P 500 Objective Funds Index return of -6.77%.
                                 
    Annualized Total Returns
    Periods Ended 6/30/10
    6 Months*   1 Year   5 Years   10 Years
Institutional Class(1,4)
    -6.67 %     14.57 %     -0.83 %     -1.70 %
Investor Class(1,2,4)
    -6.91 %     14.18 %     -1.28 %     -2.13 %
Lipper S&P 500 Objective Funds Index (3)
    -6.77 %     14.18 %     -0.99 %     -1.82 %
S&P 500 Index (3)
    -6.65 %     14.43 %     -0.79 %     -1.59 %
 
*   Not annualized
 
1.   Performance shown is historical and may not be indicative of future returns. Investment returns and principal value will vary, and shares may be worth more or less at redemption than at original purchase. Performance shown is as of date indicated, and current performance may be lower or higher than the performance data quoted. To obtain performance as of the most recent month end, please visit www.americanbeaconfunds.com or call 1-800-967-9009. Fund performance in the table above does not reflect the deduction of taxes a shareholder would pay on distributions or the redemption of shares.
 
2.   A portion of the fees charged to the Investor Class of the Fund was waived through 2002. Performance prior to waiving fees was lower than the actual returns shown for periods prior to 2002.
 
3.   The Lipper S&P 500 Objective Funds Index tracks the results of the 30 largest mutual funds in the Lipper S&P 500 Objective Funds category. Lipper is an independent mutual fund research and ranking service. The S&P 500 Index is a market capitalization weighted index of common stocks publicly traded in the U.S. One cannot invest directly in an index.
 
4.   The total annual Fund operating expense ratios set forth in the most recent prospectus for the Institutional and Investor Class shares were 0.15% and 0.60%, respectively. The expense ratios above may vary from the expense ratios presented in other sections of this report which are based on expenses incurred during the period covered by this report.
Performance Summary
     All ten sectors within the Index lost value during the first six months of 2010. The Materials, Energy and Information Technology sectors were particularly hard hit, down 12.4%, 12.2% and 10.6%, respectively, as fears of a double-dip recession weighed heavily on the minds of investors. For the Energy sector, the Gulf of Mexico situation further exacerbated the decline in share prices. The Industrial sector was the best performing in the Index, down only 0.7% for the period. A fall of nearly 10% in June erased gains earlier in the year leaving the Consumer Discretionary sector down 1.7% for the semi-annual period. The Financials sector likewise posted gains during the first quarter that were erased in the second quarter, resulting in a decline of 3.6% for the six-month period.
     Notable individual performers were Apple, Inc. (up 19.4%), Citigroup, Inc. (up 13.6%) and Berkshire Hathaway, Inc. (up 3.6%). Apple launched its “iPad” and early sales results were impressive. Citigroup also performed well due to its turnaround and continued recovery from a near collapse. Berkshire Hathaway was a new entrant to the Fund and the Index during the period. The stock was added with a weight of roughly 1% making it the largest addition to the Index in years.
     Exxon Mobil Corporation (down 15.2%), Microsoft Corporation (down 23.8%), and Google, Inc. (down 28.2%), three large and well known firms, were notable laggards during the period. Exxon Mobil appeared hurt by the disaster in the Gulf of Mexico, Microsoft suffered from investor fears of a slowing recovery, and Google sank as fallout from its battle with the Chinese government over censorship weighed on the stock price.
Portfolio Strategy
     The investment manager continues to utilize a replication strategy, owning all 500 names in the S&P 500 Index in approximately the same weightings as the Index. Therefore, the Fund is expected to continue to meet its objective of closely tracking, before expenses, the return of its benchmark, the S&P 500 Index.
 
  The S&P 500 Index Fund is not sponsored, sold or promoted by Standard & Poor’s, and Standard & Poor’s makes no representation regarding the advisability of investing in this fund.
S&P is a trademark of the McGraw-Hill Companies, Inc. and has been licensed for use, “Standard and Poor’s®”, “S&P”, “Standard & Poor’s 500”, “S&P 500” are all trademarks of the McGraw-Hill Companies, Inc. and have been licensed for use by State Street Bank and Trust Company.

2


 

Performance Overview
American Beacon S&P 500® Index Fund
June 30, 2010 (Unaudited)
Top Ten Holdings
         
    % of
    Equities*
Exxon Mobil Corp.
    3.1 %
Apple, Inc.
    2.5 %
Microsoft Corp.
    1.9 %
Procter & Gamble Co.
    1.9 %
Johnson & Johnson
    1.8 %
International Business Machines Corp.
    1.7 %
General Electric Co.
    1.7 %
JPMorgan Chase & Co.
    1.6 %
Bank of America Corp.
    1.5 %
AT&T, Inc.
    1.5 %
 
*   Percent of the equities of State Street Equity 500 Index Portfolio
Equity Sector Allocation
         
    % of
    Equities*
Information Technology
    18.7 %
Financials
    16.3 %
Health Care
    12.1 %
Consumer Staples
    11.6 %
Energy
    10.7 %
Industrials
    10.3 %
Consumer Discretionary
    10.2 %
Utilities
    3.7 %
Materials
    3.4 %
Telecommunication Services
    3.0 %
 
*   Percent of the equities of State Street Equity 500 Index Portfolio
 
  The S&P 500 Index Fund is not sponsored, sold or promoted by Standard & Poor’s, and Standard & Poor’s makes no representation regarding the advisability of investing in this fund.
S&P is a trademark of the McGraw-Hill Companies, Inc. and has been licensed for use, “Standard and Poor’s®”, “S&P”, “Standard & Poor’s 500”, “S&P 500” are all trademarks of the McGraw-Hill Companies, Inc. and have been licensed for use by State Street Bank and Trust Company.

3


 

Performance Overview
American Beacon Small Cap Index FundSM
June 30, 2010 (Unaudited)
     For the six months ended June 30, 2010, the total return of the Institutional Class of the American Beacon Small Cap Index Fund was -1.89%. The Fund’s performance was slightly ahead of the Russell 2000â Index (the “Index”) return of -1.95% and also ahead of the Lipper Small-Cap Core Funds Index return of -2.09% which consists primarily of actively managed funds.
                                 
    Annualized Total Returns
    Periods Ended 6/30/10
                            Since
    6                   Inception
    Months*   1 Year   5 Years   (7/31/00)
Institutional Class(1,3)
    -1.89 %     21.62 %     0.35 %     3.28 %
Lipper Small-Cap Core Funds Index(2)
    -2.09 %     21.67 %     1.15 %     4.52 %
Russell 2000 Index(2)
    -1.95 %     21.48 %     0.37 %     3.37 %
 
*   Not annualized
 
1.   Performance shown is historical and may not be indicative of future returns. Investment returns and principal value will vary, and shares may be worth more or less at redemption than at original purchase. Performance shown is as of date indicated, and current performance may be lower or higher than the performance data quoted. To obtain performance as of the most recent month end, please visit www.americanbeaconfunds.com or call 1-800-967-9009. Fund performance in the table above does not reflect the deduction of taxes a shareholder would pay on distributions or the redemption of shares. Please note that the recent growth rate in the stock market helped to produce short-term returns that are not typical and may not continue in the future.
 
2.   The Lipper Small-Cap Core Funds Index tracks the results of the 30 largest mutual funds in the Lipper Small-Cap Core Funds category. Lipper is an independent mutual fund research and ranking service. The Russell 2000 Index is an unmanaged index comprising approximately 2,000 smaller-capitalization stocks from various industrial sectors. One cannot invest directly in an index.
 
3.   The total annual Fund operating expense ratio set forth in the most recent prospectus for the Fund was 0.23%. The expense ratio above may vary from the expense ratio presented in other sections of this report which is based on expenses incurred during the period covered by this report.
Performance Summary provided by Blackrock Advisors, LLC
     At the beginning of 2010, we expected to see a modest cyclical recovery that was countered by the structural problems facing most of the developed world. For the first four months of the year, the cyclical recovery did dominate, but over the past two months, structural problems (especially those in Europe) began to win out, and risk assets (including US equities) have been struggling.
     Financial markets took a dramatic turn in late April, as investor sentiment became dominated by concerns over the European sovereign debt crisis, some less-positive economic data and uncertainty over financial regulatory reform in the United States. Volatility levels moved noticeably higher over the past several months, and investors embarked on a renewed “flight to quality,” abandoning risk assets such as stocks in favor of safer alternatives, most notably US Treasury bonds and gold.
     In the United States, the Dow Jones Industrial Average fell 5.0% to 9,774, the S&P 500 Index declined 6.7% to 1,030 and the Nasdaq Composite lost 7.1% to end the period at 2,109.
Portfolio Strategy
     The Fund will continue to strive to meet its objective of closely replicating, before expenses, the return of its benchmark, the Russell 2000 Index. It does so by investing in a subset of the securities in the Index such that the characteristics of the portfolio closely track the characteristics of the Index.

4


 

Performance Overview
American Beacon Small Cap Index FundSM
June 30, 2010 (Unaudited)
Top Ten Holdings
         
    % of
    Equities*
Salix Pharmaceuticals Ltd.
    0.2 %
Jack Henry & Associates, Inc.
    0.2 %
MFA Financial, Inc.
    0.2 %
TIBCO Software, Inc.
    0.2 %
Rock-Tenn Co.
    0.2 %
Nordson Corp.
    0.2 %
Highwoods Properties, Inc.
    0.2 %
Psychiatric Solutions, Inc.
    0.2 %
ev3, Inc.
    0.2 %
Deckers Outdoor Corp.
    0.2 %
 
*   Percent of equity portion of Master Small Cap Index Series
Equity Sector Allocation
         
    % of
    Equities
Financials
    22 %
Information Technology
    16 %
Consumer Discretionary
    15 %
Health Care
    14 %
Producer Durables
    14 %
Materials
    7 %
Energy
    5 %
Utilities
    4 %
Consumer Staples
    3 %
 
*   Percent of equity portion of Master Small Cap Index Series

5


 

Performance Overview
American Beacon International Equity Index FundSM
June 30, 2010 (Unaudited)
     For the six months ended June 30, 2010, the Institutional Class of the American Beacon International Equity Index Fund posted a total return of -14.07%, underperforming the MSCI EAFE Index (the “Index”) return of -13.23% and the Lipper International Funds Index return of -10.89%. Other than deduction of Fund expenses, the investment manager’s application of its fair valuation policy during the period was a significant driver of the Fund’s underperformance.
                                 
    Annualized Total Returns
    Periods Ended 6/30/10
                            Since
                            Inception
    6 Months*   1 Year   5 Years   (7/31/00)
Institutional Class(1,3)
    -14.07 %     4.44 %     0.67 %     0.42 %
Lipper International Funds Index(2)
    -10.89 %     9.50 %     2.62 %     1.55 %
MSCI EAFE Index(2)
    -13.23 %     5.92 %     0.88 %     0.60 %
 
*   Not annualized
 
1.   Performance shown is historical and may not be indicative of future returns. Investment returns and principal value will vary, and shares may be worth more or less at redemption than at original purchase. Performance shown is as of date indicated, and current performance may be lower or higher than the performance data quoted. To obtain performance as of the most recent month end, please visit www.americanbeaconfunds.com or call 1-800-967-9009. Fund performance in the table above does not reflect the deduction of taxes a shareholder would pay on distributions or the redemption of shares.
 
2.   The Lipper International Funds Index tracks the results of the 30 largest mutual funds in the Lipper International Funds category. Lipper is an independent mutual fund research and ranking service. The MSCI EAFE Index is a market capitalization weighted index of international stock performance composed of equities from developed markets excluding the U.S. and Canada. One cannot invest directly in an index.
 
3.   The total annual Fund operating expense ratio set forth in the most recent prospectus for the Fund was 0.23%. The expense ratio above may vary from the expense ratio presented in other sections of this report, which is based on expenses incurred during the period covered by this report.
Performance Summary provided by Blackrock Advisors, LLC
     At the beginning of 2010, we expected to see a modest cyclical recovery that was countered by the structural problems facing most of the developed world. For the first four months of the year, the cyclical recovery did dominate, but over the last two months of the period, structural problems (especially those in Europe) began to win out, and risk assets (including global equities) struggled.
     Financial markets took a dramatic turn in late April, as investor sentiment became dominated by concerns over the European sovereign debt crisis and some less-positive economic data. Volatility levels moved noticeably higher over the past several months, and investors embarked on a renewed “flight to quality,” abandoning risk assets such as stocks in favor of safer alternatives, most notably US Treasury bonds and gold.
     International equities, as represented by the MSCI EAFE Index, declined 13.2% over the first six months of the year. Within international developed markets, Denmark (+3.8%) was the lone country to experience positive returns over the six month period, with Sweden (-0.2%) and Singapore (-1.3%) also outperforming on a relative basis.
     From a global sector perspective, all sectors experienced declines for the first six months of 2010, but on a relative basis the Industrials (-3.7%), Consumer Discretionary (-4.2%) and Consumer Staples (-4.5%) sectors were the best performers, while Energy (-17.2%), Materials (-13.8%) and Utilities (-12.8%) were the worst.
Portfolio Strategy
     The Fund continues to pursue its objective of closely replicating, before expenses, the return of its benchmark, the MSCI EAFE Index. It does so by investing in a subset of the securities in the Index such that the characteristics of the portfolio closely track the characteristics of the Index.

6


 

Performance Overview
American Beacon International Equity Index FundSM
June 30, 2010 (Unaudited)
Top Ten Holdings
         
    % of
    Equities*
Nestle S.A.
    1.9 %
HSBC Holdings plc.
    1.8 %
Vodafone Group plc.
    1.2 %
BHP Billiton Ltd.
    1.2 %
Novartis AG.
    1.1 %
Roche Holding Ltd.
    1.1 %
Toyota Motor Corp.
    1.1 %
Total S.A.
    1.1 %
Royal Dutch Shell plc.
    1.0 %
BP plc.
    1.0 %
Equity Sector Allocation
         
    % of
    Equities*
Financials
    21.2 %
Industrials
    17.6 %
Consumer Discretionary
    15.2 %
Health Care
    9.6 %
Materials
    8.4 %
Energy
    7.8 %
Telecommunication Services
    6.8 %
Consumer Staples
    5.3 %
Information Technology
    5.2 %
Utilities
    2.9 %
 
*   Percent of equity portion of Master Small Cap Index Series
Country Allocation
(PIE CHART)
         
    % of
    Equities*
Japan
    23.3 %
United Kingdom
    21.2 %
France
    9.9 %
Australia
    8.2 %
Switzerland
    8.0 %
Germany
    7.9 %
Spain
    3.5 %
Sweden
    2.9 %
Italy
    2.9 %
Netherlands
    2.7 %
Hong Kong
    2.5 %
Singapore
    1.7 %
Belgium
    1.0 %
Denmark
    1.0 %
Finland
    1.0 %
Israel
    0.9 %
Norway
    0.7 %
Other
    0.8 %
 
*   Percent of equity portion of Master Small Cap Index Series

7


 

Fund Expenses
June 30, 2010 (Unaudited)
Fund Expense Example
     As a shareholder of a Fund, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees, administrative service fees, and other Fund expenses. The examples below are intended to help you understand the ongoing cost (in dollars) of investing in a particular Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period from January 1, 2010 through June 30, 2010.
Actual Expenses
     The following table provides information about actual account values and actual expenses. You may use the information in this table, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the “Expenses Paid During Period” row to estimate the expenses you paid on your account during this period. Shareholders of the Institutional and Investor Classes that invest in a Fund through an IRA may be subject to a custodial IRA fee of $15 that is typically deducted each December. If your account was subject to a custodial IRA fee during the period, your costs would have been $15 higher.
Actual
                                     
    S&P 500   Small Cap   International       S&P 500
Institutional Class   Index   Index   Equity Index   Investor Class   Index
Beginning Account Value 1/1/10
  $ 1,000.00     $ 1,000.00     $ 1,000.00    
Beginning Account Value 1/1/10
  $ 1,000.00  
Ending Account Value 6/30/10
  $ 933.26     $ 981.12     $ 859.28    
Ending Account Value 6/30/10
  $ 930.94  
Expenses Paid During Period* 1/1/10 — 6/30/10
  $ 0.67     $ 0.93     $ 1.15    
Expenses Paid During Period* 1/1/10 — 6/30/10
  $ 2.87  
Annualized Expense Ratio
    0.14 %     0.19 %     0.25 %   Annualized Expense Ratio     0.60 %
Hypothetical Example for Comparison Purposes
     The following table provides information about hypothetical account values and hypothetical expenses based on a Fund’s actual expense ratio and an assumed 5% per year rate of return before expenses (not the Fund’s actual return). You may compare the ongoing costs of investing in a particular Fund with other funds by contrasting this 5% hypothetical example and the 5% hypothetical examples that appear in the shareholder reports of the other funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. Shareholders of the Institutional and Investor Classes that invest in a Fund through an IRA may be subject to a custodial IRA fee of $15 that is typically deducted each December. If your account was subject to a custodial IRA fee during the period, your costs would have been $15 higher.
     You should also be aware that the expenses shown in the table highlight only your ongoing costs and do not reflect any transaction costs charged by a Fund. Similarly, the expense examples for other funds do not reflect any transaction costs charged by those funds, such as sales charges (loads), redemption fees or exchange fees. Therefore, the “Expenses Paid During Period” line of the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. If you were subject to any transaction costs during the period, your costs would have been higher.
Hypothetical
                                     
    S&P 500   Small Cap   International       S&P 500
Institutional Class   Index   Index   Equity Index   Investor Class   Index
Beginning Account Value 1/1/10
  $ 1,000.00     $ 1,000.00     $ 1,000.00    
Beginning Account Value 1/1/10
  $ 1,000.00  
Ending Account Value 6/30/10
  $ 1,024.10     $ 1,023.85     $ 1,023.55     Ending Account Value 6/30/10   $ 1,021.82  
Expenses Paid During Period* 1/1/10 — 6/30/10
  $ 0.70     $ 0.95     $ 1.25    
Expenses Paid During Period* 1/1/10 — 6/30/10
  $ 3.01  
Annualized Expense Ratio
    0.14 %     0.19 %     0.25 %   Annualized Expense Ratio     0.60 %
 
*   Expenses are equal to each Fund’s annualized expense ratio for the six-month period multiplied by the average account value over the period, multiplied by the number derived by dividing the number of days in the most recent fiscal half-year (181) by days in the year (365) to reflect the half-year period.

8


 

American Beacon Funds
Statements of Assets and Liabilities
June 30, 2010 (Unaudited) (in thousands, except share and per share amounts)
                         
                    International  
    S&P 500 Index     Small Cap Index     Equity Index  
    Fund     Fund     Fund  
Assets:
                       
Investment in Portfolio, at value
  $ 313,605     $ 107,203     $ 231,401  
Receivable for fund shares sold
    881       1       745  
Prepaid expenses
    19             1  
 
                 
Total assets
    314,505       107,204       232,147  
 
                 
 
                       
Liabilities:
                       
Payable for fund shares redeemed
    10       220       1  
Administrative service and service fees payable (Note 2)
    20       4       9  
Printing fees payable
    27       8       34  
Professional fees payable
    4       7       2  
Fund accounting fees payable
          1       4  
Sub-administration fees payable
          3       4  
Transfer agent fees payable
    6             4  
Trustee fees payable
    3             2  
Insurance fees payable
    2              
Registration fees payable
          1        
Other liabilities
    5       1       2  
 
                 
Total liabilities
    77       245       62  
 
                 
Net Assets
  $ 314,428     $ 106,959     $ 232,085  
 
                 
 
                       
Analysis of Net Assets:
                       
Paid-in-capital
    370,397       135,679       333,926  
Undistributed net investment income (expense)
    2,404       315       4,271  
Accumulated net realized gain (loss)
    (83,776 )     (11,040 )     (37,575 )
Unrealized net appreciation (depreciation) of investments and futures contracts
    25,403       (17,995 )     (68,537 )
 
                 
Net assets
  $ 314,428     $ 106,959     $ 232,085  
 
                 
 
                       
Shares outstanding (no par value):
                       
Institutional Class
    21,143,768       10,841,557       28,776,677  
 
                 
Investor Class
    1,199,584              
 
                 
 
                       
Net asset value, offering and redemption price per share:
                       
Institutional Class
  $ 14.08     $ 9.87     $ 8.07  
 
                 
Investor Class
  $ 13.92     $     $  
 
                 
See accompanying notes
See accompanying Financial Statements of the respective Master Portfolios

9


 

American Beacon Funds
Statements of Operations
Six Months ended June 30, 2010 (Unaudited) (in thousands)
                         
                    International  
    S&P 500 Index     Small Cap Index     Equity Index  
    Fund     Fund     Fund  
Investment Income Allocated From Portfolio:
                       
Dividend income
  $ 3,295     $ 348     $ 4,626  
Interest income
    6       2       1  
Securities lending income
          25        
Portfolio expenses
    (77 )     (24 )     (146 )
 
                 
Net investment income allocated from Portfolio
    3,224       351       4,481  
 
                 
Fund Expenses:
                       
Administrative service fees (Note 2):
                       
Institutional Class
    80       16       64  
Investor Class
    28              
Sub-administrative service fees:
                       
Institutional Class
          2       6  
Transfer agent fees:
                       
Institutional Class
    9       2       10  
Investor Class
    2              
Custody and accounting fees
    5       4       6  
Professional fees
    13       8       10  
Registration fees
    15             1  
Service fees — Investor Class (Note 2)
    28              
Printing
    10             11  
Trustee fees
    11       1       12  
Insurance
    5       1       3  
Other expenses
    4       2       3  
 
                 
Total fund expenses
    210       36       126  
 
                 
Net investment income
    3,014       315       4,355  
 
                 
 
                       
Realized and Unrealized Gain (Loss) Allocated From Master Portfolio
                       
Net realized gain (loss) from:
                       
Investments
    2,998       27       (3,967 )
Foreign currency transactions
                (406 )
Futures contracts
    (50 )           (785 )
Change in net unrealized appreciation or depreciation of:
                       
Investments
    (27,998 )     (14,318 )     (38,803 )
Foreign currency transactions
                (1,070 )
Futures contracts
    (550 )     331       3,438  
 
                 
Net loss on investments
    (25,600 )     (13,960 )     (41,593 )
 
                 
Net decrease in net assets resulting from operations
  $ (22,586 )   $ (13,645 )   $ (37,238 )
 
                 
See accompanying notes
See accompanying Financial Statements of the respective Master Portfolios

10


 

American Beacon Funds
Statements of Changes in Net Assets (in thousands)
                                                 
                                    International Equity Index  
    S&P 500 Index Fund     Small Cap Index Fund     Fund  
    Six Months     Year ended     Six Months     Year ended     Six Months     Year ended  
    ended June 30,     December 31,     ended June 30,     December 31,     ended June 30,     December 31,  
    2010     2009     2010     2009     2010     2009  
    (unaudited)             (unaudited)             (unaudited)          
Increase (Decrease) in Net Assets:
                                               
Operations:
                                               
Net investment income
  $ 3,014     $ 6,450     $ 315     $ 396     $ 4,355     $ 6,171  
Net realized gain (loss) on investments, foreign currency, and futures contracts
    2,948       (14,452 )     27       (1,771 )     (5,158 )     6,591  
Change in net unrealized appreciation or depreciation of investments and futures contracts
    (28,548 )     78,871       (13,987 )     9,739       (36,435 )     45,505  
 
                                   
Net increase (decrease) in net assets resulting from operations
    (22,586 )     70,869       (13,645 )     8,364       (37,238 )     58,267  
 
                                   
Distributions to Shareholders:
                                               
Net investment income:
                                               
Institutional Class
    (1,422 )     (5,395 )           (451 )           (6,410 )
Investor Class
    (76 )     (325 )                        
 
                                   
Total distributions to shareholders
    (1,498 )     (5,720 )           (451 )           (6,410 )
 
                                   
Capital Share Transactions:
                                               
Proceeds from sales of shares
    23,911       71,955       88,303       10,774       30,150       180,859  
Reinvestment of dividends and distributions
    1,497       5,714             451             6,409  
Cost of shares redeemed
    (26,132 )     (41,080 )     (7,657 )     (10,732 )     (40,937 )     (144,875 )
 
                                   
Net increase (decrease) in net assets from capital share transactions
    (724 )     36,589       80,646       493       (10,787 )     42,393  
 
                                   
Net increase (decrease) in net assets
    (24,808 )     101,738       67,001       8,406       (48,025 )     94,250  
 
                                   
Net Assets:
                                               
Beginning of period
    339,236       237,498       39,958       31,552       280,110       185,860  
 
                                   
End of Period *
  $ 314,428     $ 339,236     $ 106,959     $ 39,958     $ 232,085     $ 280,110  
 
                                   
*Includes undistributed net investment income (loss) of
  $ 2,404     $ 888     $ 315     $     $ 4,271     $ (84 )
 
                                   
See accompanying notes
See accompanying Financial Statements of the respective Master Portfolios

11


 

American Beacon Funds
Notes to Financial Statements
June 30, 2010 (Unaudited)
1. Organization and Significant Accounting Policies
          American Beacon Funds (the “Trust”) is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940 (the “Act”), as amended, as a no load, open-end management investment company. These financial statements and notes to the financial statements relate to the American Beacon S&P 500 Index Fund, the American Beacon Small Cap Index Fund and the American Beacon International Equity Index Fund (each a “Fund” and collectively, the “Funds”), each a series of the Trust.
          American Beacon Advisors, Inc. (the “Manager”) is a wholly-owned subsidiary of Lighthouse Holdings, Inc. and was organized in 1986 to provide business management, advisory, administrative and asset management consulting services to the Trust and other investors.
          Each Fund invests all of its investable assets in a corresponding portfolio. The State Street Equity 500 Index Portfolio, Master Small Cap Index Series and the Master International Index Series (each a “Portfolio” and collectively the “Portfolios”) are open-ended management investment companies registered under the Act. The value of such investment reflects each Fund’s proportionate interest in the net assets of the corresponding Portfolio.
             
        % of Portfolio
        Held by Fund at
American Beacon:   Portfolios:   June 30, 2010
S&P 500 Index Fund
  State Street Equity 500 Index Portfolio     18.1 %
Small Cap Index Fund
  Master Small Cap Index Series     36.9 %
International Equity Index Fund
  Master International Index Series     31.3 %
          The financial statements of the Portfolios are included elsewhere in this report and should be read in conjunction with the Funds’ financial statements.
          The following is a summary of the significant accounting policies followed by the Funds.
     Class Disclosure
          The S&P 500 Index Fund has two classes of shares designed to meet the needs of different groups of investors. The following table sets forth the differences amongst the classes:
             
Class:   Offered to:   Service Fees:
Institutional Class
  Investors making an initial investment of $2 million   Administrative Service Fee - 0.05%
Investor Class
 
  General public and investors investing through an intermediary   Administrative Service Fee - 0.25%
Service Fee - 0.25%
          Administrative service fees and service fees vary amongst the classes as described more fully in footnote 2.
          Investment income, net capital gains (losses) and all expenses incurred by the S&P 500 Index Fund are allocated based on the relative net assets of each class, except for service fees and certain other fees and expenses related solely to one class of shares.
     Security Valuation and Valuation Inputs
          Valuation of securities by each Portfolio as well as the inputs used to value the Portfolios’ net assets is discussed in the Portfolios’ Notes to Financial Statements, which are included elsewhere in this report.

12


 

American Beacon Funds
Notes to Financial Statements
June 30, 2010 (Unaudited)
     Investment Income
          Each Fund records its share of net investment income and realized and unrealized gains and losses from the security transactions of its corresponding Portfolio each day. All net investment income and realized and unrealized gains (losses) of each Portfolio are allocated pro rata among the investors in that Portfolio at the time of such determination.
     Dividends to Shareholders
          Dividends from net investment income of the Small Cap Index and International Equity Index Funds normally will be declared and paid annually. The S&P 500 Index Fund normally will declare and pay dividends quarterly. Distributions, if any, of net realized capital gains are generally paid annually and recorded on the ex-dividend date. Dividends are determined in accordance with income tax principles that may treat certain transactions differently than generally accepted accounting principles.
     Allocation of Income, Expenses, Gains and Losses
          Income, expenses (other than those attributable to a specific class), gains and losses are allocated daily to each class of shares based upon the relative proportion of net assets represented by such class. Operating expenses directly attributable to a specific class are charged against the operations of that class.
     Valuation of Shares
          The price per share is calculated on each day on which shares are offered for sale. Net asset value per share is computed by dividing the value of each Fund’s total assets (which includes the value of the Fund’s investments in its Portfolio) less liabilities, by the number of Fund shares outstanding.
     Use of Estimates
          The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimated.
     Other
          Under the Trust’s organizational documents, its officers and directors are indemnified against certain liability arising out of the performance of their duties to the Trust. In the normal course of business, the Trust enters into contracts that provide indemnification to the other party or parties against potential costs or liabilities. The Trust’s maximum exposure under these arrangements is dependent on claims that may be made in the future and, therefore, cannot be estimated. The Trust has had no prior claims or losses pursuant to any such agreement.
2. Fees and Transactions with Affiliates
     Administrative Services Agreement
          The Manager and the Trust entered into an Administrative Services Agreement which obligates the Manager to provide or oversee administrative services to each Fund. As compensation for performing the duties required under the Administrative Services Agreement, the Manager receives an annualized fee of 0.05% of the average daily net assets of the Institutional Class of the S&P 500 Index Fund, International Equity Index Fund and the Small Cap Index Fund and an annualized fee of 0.25% of the average daily net assets of the Investor Class of the S&P 500 Index Fund.

13


 

American Beacon Funds
Notes to Financial Statements
June 30, 2010 (Unaudited)
     Service Plans
          The Manager and the Trust entered into a Service Plan that obligates the Manager to oversee additional shareholder servicing of the Investor Class of S&P 500 Index Fund. As compensation for performing the duties required under the Service Plan, the Manager receives 0.25% of the average daily net assets of the Investor Class of the S&P 500 Index Fund.
     Subadministration Agreement
          The Trust, the Manager and BlackRock Advisors, LLC (“BlackRock”) entered into a Subadministration Agreement that obligates BlackRock to provide certain other administrative services to the Small Cap Index Fund and the International Equity Index Fund. As compensation for performing these services, BlackRock receives an annualized fee of 0.08% of the average daily net assets of the Small Cap Index Fund and 0.12% of the average daily net assets of the International Equity Index Fund; however, the fee of each is reduced by the total expense ratio of its corresponding Portfolio, net of any fee waivers.
3. Federal Income and Excise Taxes
          It is the policy of each of the Funds to comply with the requirements of Subchapter M of the Internal Revenue Code and to distribute substantially all net investment income as well as any net realized capital gains on the sale of investments. Therefore, no federal income or excise tax provision is required.
          The Funds do not have any unrecognized tax benefits in the accompanying financial statements. Each of the tax years in the four year period ended December 31, 2009, remains subject to examination by the Internal Revenue Service. If applicable, the Funds recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in “Other expenses” on the Statement of Operations.
          Dividends are categorized in accordance with income tax regulations which may treat certain transactions differently than U.S. generally accepted accounting principles. Accordingly, the character of distributions and composition of net assets for tax purposes may differ from those reflected in the accompanying financial statements.
          The International Equity Index Fund may be subject to taxes imposed by countries in which it invests. Such taxes are generally based on returns of income earned or gains realized or repatriated. Taxes are accrued and applied to net investment income, net realized capital gains and net unrealized appreciation, as applicable, as the income is earned or capital gains are recorded.
          The tax character of distributions paid during the six months ended June 30, 2010 and fiscal year ended December 31, 2009 were as follows (in thousands):
                                                 
    S&P 500 Index     Small Cap Index     International Equity Index  
    Six Months     Year     Six Months     Year     Six Months     Year  
    Ended     Ended     Ended     Ended     Ended     Ended  
    June 30,     December 31,     June 30,     December 31,     June 30,     December 31,  
    2010     2009     2010     2009     2010     2009  
    (Unaudited)             (Unaudited)             (Unaudited)          
Distributions paid from:
                                               
Ordinary income:*
                                               
Institutional Class
  $ 1,422     $ 5,395     $     $ 397     $     $ 6,410  
Investor Class
    76       325                          
Return of Capital:
                                               
Institutional Class
                      54              
 
                                   
Total taxable distributions
  $ 1,498     $ 5,720     $     $ 451     $     $ 6,410  
 
                                   
 
*   For tax purposes, short-term capital gains are considered ordinary income distributions.

14


 

American Beacon Funds
Notes to Financial Statements
June 30, 2010 (Unaudited)
          At June 30, 2010 capital loss carry forward positions for federal income tax purposes were as follows (in thousands):
                                                                         
Fund   2010   2011   2012   2013   2014   2015   2016   2017   Total
S&P 500 Index Fund
  $ 7,852     $ 635     $ 1,060     $ 2,311     $ 286     $     $ 11,180     $ 28,055     $ 51,379  
Small Cap Index Fund
                                            $ 9,383     $ 9,383  
International Equity Index Fund
                                      $ 9,746     $ 13,890     $ 23,636  
4. Capital Share Transactions
          The tables below summarize the activity in capital shares for each Class of the Funds (shares and dollars in thousands):
Six Months ended June 30, 2010
                                 
    Institutional Class     Investor Class  
S&P 500 Index Fund   Shares     Amount     Shares     Amount  
Shares sold
    1,334     $ 20,315       236     $ 3,596  
Reinvestment of dividends
    89       1,422       5       76  
Shares redeemed
    (1,202 )     (18,421 )     (526 )     (7,711 )
 
                       
Net increase (decrease) in shares outstanding
    221     $ 3,316       (285 )   $ (4,039 )
 
                       
                 
    Institutional Class  
Small Cap Index Fund   Shares     Amount  
Shares sold
    7,626     $ 88,302  
Reinvestment of dividends
           
Shares redeemed
    (758 )     (7,657 )
 
           
Net increase in shares outstanding
    6,868     $ 80,645  
 
           
                 
    Institutional Class  
International Equity Index Fund   Shares     Amount  
Shares sold
    3,349     $ 30,150  
Reinvestment of dividends
           
Shares redeemed
    (4,441 )     (40,938 )
 
           
Net (decrease) in shares outstanding
    (1,092 )   $ (10,788 )
 
           
Year ended December 31, 2009
                                 
    Institutional Class     Investor Class  
S&P 500 Index Fund   Shares     Amount     Shares     Amount  
Shares sold
    4,250     $ 54,132       1,580     $ 17,823  
Reinvestment of dividends
    416       5,395       26       319  
Shares redeemed
    (2,132 )     (26,685 )     (1,193 )     (14,395 )
 
                       
Net increase in shares outstanding
    2,534     $ 32,842       413     $ 3,747  
 
                       
                 
    Institutional Class  
Small Cap Index Fund   Shares     Amount  
Shares sold
    1,305     $ 10,774  
Reinvestment of dividends
    45       451  
Shares redeemed
    (1,321 )     (10,732 )
 
           
Net increase in shares outstanding
    29     $ 493  
 
           
                 
    Institutional Class  
International Equity Index Fund   Shares     Amount  
Shares sold
    20,666     $ 180,859  
Reinvestment of dividends
    691       6,409  
Shares redeemed
    (16,414 )     (144,875 )
 
           
Net increase in shares outstanding
    4,943     $ 42,393  
 
           

15


 

American Beacon Funds
Notes to Financial Statements
June 30, 2010 (Unaudited)
5. Subsequent Events
          Management has evaluated the possibility of subsequent events existing in the Funds’ financial statements. Management has determined that there are no material events that would require disclosure in the Funds’ financial statements through this date.

16


 

American Beacon S&P 500 Index FundSM
Financial Highlights
(For a share outstanding throughout each period)
                                                 
    Institutional Class  
    Six Months        
    ended June     Year Ended December 31,  
    30, 2010     2009     2008     2007     2006     2005  
    (unaudited)                                          
Net asset value, beginning of period
  $ 15.15     $ 12.21     $ 19.85     $ 19.19     $ 16.90     $ 16.43  
 
                                   
Income from investment operations:
                                               
Net investment income:A
    0.13       0.30       0.35       0.39       0.34 B,E     0.29  
Net gain (loss) on investments, foreign currency and futures transactions (both realized and unrealized)
    (1.13 )     2.91       (7.64 )     0.65       2.29 E     0.47  
 
                                   
Total income (loss) from investment operations
    (1.00 )     3.21       (7.29 )     1.04       2.63       0.76  
 
                                   
Less distributions:
                                               
Dividends from net investment income
    (0.07 )     (0.27 )     (0.35 )     (0.38 )     (0.34 )     (0.29 )
Tax return of capital
                                  0.00 C
 
                                   
Total distributions
    (0.07 )     (0.27 )     (0.35 )     (0.38 )     (0.34 )     (0.29 )
 
                                   
Net asset value, end of period
  $ 14.08     $ 15.15     $ 12.21     $ 19.85     $ 19.19     $ 16.90  
 
                                   
Total return
    (6.67 )%D     26.70 %     (37.08 )%     5.39 %     15.69 %     4.74 %
 
                                   
Ratios and supplemental data:
                                               
Net assets, end of period (in thousands)
  $ 297,725     $ 316,975     $ 224,583     $ 271,746     $ 223,008     $ 225,857  
 
                                               
Ratios to average net assets (annualized):A
                                               
Net investment income
    1.78 %     2.39 %     2.23 %     1.89 %     1.85 %     1.75 %
Expenses, including expenses of the master portfolio
    0.14 %     0.15 %     0.13 %     0.13 %     0.14 %     0.13 %
 
A   The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund’s proportionate share of the income and expenses of the State Street Equity 500 Index Portfolio.
 
B   Based on average shares outstanding.
 
C   The tax return of capital is calculated based upon outstanding shares at the time of distribution. Amounts are less than $0.01 per share.
 
D   Not annualized.
 
E   For the year ended December 31, 2006, the net investment income and net gains on securities (both realized and unrealized) have been restated from $0.33 and $2.30, respectively.

17


 

American Beacon S&P 500 Index FundSM
Financial Highlights
(For a share outstanding throughout each period)
                                                 
    Investor Class  
    Six Months        
    ended June     Year Ended December 31,  
    30, 2010     2009     2008     2007     2006     2005  
    (unaudited)                                          
Net asset value, beginning of period
  $ 15.00     $ 12.06     $ 19.60     $ 18.97     $ 16.69     $ 16.23  
 
                                   
Income from investment operations:
                                               
Net investment income:A
    0.11       0.33       0.33       0.31 C     0.23 B,C     0.21  
Net gain (loss) on investments, foreign currency and futures transactions (both realized and unrealized)
    (1.14 )     2.80       (7.60 )     0.62 C     2.27 C     0.48  
 
                                   
Total income (loss) from investment operations
    (1.03 )     3.13       (7.27 )     0.93       2.50       0.69  
 
                                   
Less distributions:
                                               
Dividends from net investment income
    (0.05 )     (0.19 )     (0.27 )     (0.30 )     (0.22 )     (0.23 )
Tax return of capital
                                  0.00 D
 
                                   
Total distributions
    (0.05 )     (0.19 )     (0.27 )     (0.30 )     (0.22 )     (0.23 )
 
                                   
Net asset value, end of period
  $ 13.92     $ 15.00     $ 12.06     $ 19.60     $ 18.97     $ 16.69  
 
                                   
Total return
    (6.91 )%E     26.26 %     (37.35 )%     4.88 %     15.09 %     4.32 %
 
                                   
Ratios and supplemental data:
                                               
Net assets, end of period (in thousands)
  $ 16,703     $ 22,261     $ 12,915     $ 18,430     $ 16,056     $ 48,985  
 
                                               
Ratios to average net assets (annualized):A
                                               
Net investment income
    1.31 %     2.01 %     1.73 %     1.38 %     1.37 %     1.28 %
Expenses, including expenses of the master portfolio
    0.60 %     0.60 %     0.62 %     0.63 %     0.61 %     0.61 %
 
A   The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund’s proportionate share of the income and expenses of the State Street Equity 500 Index Portfolio.
 
B   Based on average shares outstanding.
 
C   For the years ended December 31, 2006 and 2007, the net investment income and net gains on securities (both realized and unrealized) have been restated from 0.27 and 2.23 and 0.28 and 0.65, respectively.
 
D   The tax return of capital is calculated based upon outstanding shares at the time of distribution. Amounts are less than $0.01 per share.
 
E   Not annualized.

18


 

American Beacon Small Cap Index Fund
Financial Highlights
(For a share outstanding throughout each period)
                                                 
    Institutional Class  
    Six Months        
    ended June     Year Ended December 31,  
    30, 2010     2009     2008     2007     2006     2005  
    (unaudited)                                          
Net asset value, beginning of period
  $ 10.06     $ 8.00     $ 13.51     $ 14.89     $ 12.78     $ 12.57  
 
                                   
Income from investment operations:
                                               
Net investment incomeA
    0.03       0.10       0.18       0.32       0.17       0.16  
Net gain (loss) on investments, foreign currency and futures transactions (both realized and unrealized)
    (0.22 )     2.08       (4.78 )     (0.53 )     2.11       0.42  
 
                                   
Total income (loss) from investment operations
    (0.19 )     2.18       (4.60 )     (0.21 )     2.28       0.58  
 
                                   
Less distributions:
                                               
Dividends from net investment income
          (0.11 )     (0.17 )     (0.31 )     (0.17 )     (0.17 )
Distributions from net realized gains on investments
                (0.61 )     (0.80 )           (0.15 )
Tax return of capital
          (0.01 )B     (0.13 )B     (0.06 )B           (0.05 )B
 
                                   
Total distributions
          (0.12 )     (0.91 )     (1.17 )     (0.17 )     (0.37 )
 
                                   
Net asset value, end of period
  $ 9.87     $ 10.06     $ 8.00     $ 13.51     $ 14.89     $ 12.78  
 
                                   
Total return
    (1.89 )%C     27.21 %     (33.58 )%     (1.63 )%     17.85 %     4.51 %
 
                                   
Ratios and supplemental data:
                                               
Net assets, end of period (in thousands)
  $ 106,959     $ 39,958     $ 31,552     $ 52,325     $ 151,878     $ 46,113  
 
                                               
Ratios to average net assets (annualized):A
                                               
Net investment income
    0.95 %     1.18 %     1.54 %     1.49 %     1.49 %     1.12 %
Expenses, including expenses of the master portfolio
    0.18 %     0.23 %     0.20 %     0.20 %     0.18 %     0.18 %
 
A   The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund’s proportionate share of the income and expenses of the Master Small Cap Index Series.
 
B   The tax return of capital is calculated based upon outstanding shares at the time of distribution.
 
C   Not annualized.

19


 

American Beacon International Equity Index Fund
Financial Highlights
(For a share outstanding throughout each period)
                                                 
    Institutional Class  
    Six Months        
    ended June     Year Ended December 31,  
    30, 2010     2009     2008     2007     2006     2005  
    (unaudited)                                          
Net asset value, beginning of period
  $ 9.38     $ 7.46     $ 13.37     $ 12.76     $ 10.33     $ 9.39  
 
                                   
Income from investment operations:
                                               
Net investment incomeA
    0.08       0.21       0.39       0.51 B     0.23       0.22 B
Net gain (loss) on investments, foreign currency and futures transactions (both realized and unrealized)
    (1.39 )     1.93       (6.00 )     0.86 B     2.50       1.05 B
 
                                   
Total income (loss) from investment operations
    (1.31 )     2.14       (5.61 )     1.37       2.73       1.27  
 
                                   
Less distributions:
                                               
Dividends from net investment income
          (0.22 )     (0.30 )     (0.53 )     (0.23 )     (0.24 )
Distributions from net realized gains on investments
                      (0.22 )     (0.07 )      
Tax return of capital
                      (0.01 )C           (0.09 )C
 
                                   
Total distributions
          (0.22 )     (0.30 )     (0.76 )     (0.30 )     (0.33 )
 
                                   
Net asset value, end of period
  $ 8.07     $ 9.38     $ 7.46     $ 13.37     $ 12.76     $ 10.33  
 
                                   
Total return
    (13.97 )%D     28.72 %     (41.85 )%     10.68 %     26.52 %     13.58 %
 
                                   
Ratios and supplemental data:
                                               
Net assets, end of period (in thousands)
  $ 232,084     $ 280,110     $ 185,860     $ 267,293     $ 162,113     $ 90,200  
 
                                               
Ratios to average net assets (annualized):A
                                               
Net investment income
    3.42 %     2.66 %     3.58 %     2.96 %     2.44 %     2.49 %
Expenses, including expenses of the master portfolio
    0.21 %     0.23 %     0.19 %     0.19 %     0.22 %     0.23 %
 
A   The per share amounts and ratios reflect income and expenses assuming inclusion of the Fund’s proportionate share of the income and expenses of the Master International Index Series.
 
B   For the years ended December 31, 2005 and 2007, the net investment income and net gains on securities (both realized and unrealized) have been restated from $0.21 and $1.06 and $0.52 and $0.85, respectively.
 
C   The tax return of capital is calculated based upon outstanding shares at the time of distribution.
 
D   Not annualized.

20


 

American Beacon Funds
Disclosure Regarding the Board of Trustees’ Approval of the
Management Agreement of the Funds (Unaudited)
          At its May 25, 2010 meeting, the Board of Trustees (“Board”) considered the renewal of the existing Management Agreement between the Manager and the American Beacon Funds (collectively, the “Funds”). In preparation for the Board’s consideration to renew the Agreement, the Board and its Investment Committee undertook steps to gather and consider information furnished by the Manager and Lipper, Inc. (“Lipper”). The Board, with the assistance of independent legal counsel, requested and received certain relevant information from the Manager.
          In addition, the Board’s Investment Committee worked with Lipper to obtain relevant comparative information regarding the performance, fees and expenses of the Funds. The Investment Committee held a separate meeting on May 10, 2010 to consider the information provided by Lipper. Further, the Board took into consideration information furnished for the Board’s review and consideration throughout the year at regular Board and Investment Committee meetings, as well as information specifically prepared in connection with the renewal process.
          In connection with the Board’s consideration of the Management Agreement, the Trustees considered, among other materials, responses by the Manager to inquiries requesting:
    a description of any significant changes (actual or anticipated) to principal activities, personnel, services provided to the Funds, or any other area, including how these changes might affect the Funds;
 
    a copy of the firm’s most recent audited or unaudited financial statements, as well as Parts 1 and II of its Form ADV registration statement with the SEC;
 
    a summary of any material pending or anticipated litigation or regulatory proceedings involving the firm or its personnel, including the results of any recent regulatory examination or independent audit;
 
    a comparison of the performance of that portion of Fund assets managed by each firm with performance of other similar accounts managed by the firm, including a discussion of relative performance versus a peer group average and any remedial measures if the firm’s performance was materially below that of the peer group;
 
    a profit/loss analysis of the firm and any actual or anticipated economies of scale in relation to the services it provides to each Fund;
 
    an analysis of compensation, including a comparison with fees charged to other clients for which similar services are provided, any proposed changes to the fee schedule and the effect of any fee waivers;
 
    a description of any payments by the subadvisors to the manager to support the Funds’ marketing efforts;
 
    an evaluation of any other benefits to the firm or Funds as a result of their relationship, if any;
 
    confirmation that the firm’s financial condition would not impair its ability to provide high-quality advisory services to the Funds;
 
    a description of any internal actions the firm has taken or anticipates taking in light of the current and projected decrease in revenues from prior years as a result of the current economic environment that may affect or are expected to affect the services performed for the Funds;
 
    a description of the scope of portfolio management services provided to the Funds, including whether such services differ from the services provided to other clients, including other registered investment companies, and any advantages or disadvantages that might accrue to the Funds due to the firm’s involvement in other activities;
 
    a description of the personnel who are assigned primary responsibility for managing the Funds, including any changes during the past year, and a discussion of the adequacy of current and projected staffing levels to service the Funds;
 
    a description of the basis upon which portfolio managers are compensated, including any “incentive” arrangements, and a description of the oversight mechanisms used to prevent a portfolio manager whose compensation is tied to performance of a Fund from taking undue risks;
 
    a discussion regarding the firm’s participation in “soft dollar” arrangements, if any, or other brokerage allocation policies with respect to Fund transactions, including the firm’s methodology for obtaining best execution and the use of any affiliated broker-dealers;

21


 

American Beacon Funds
Disclosure Regarding the Board of Trustees’ Approval of the
Management Agreement of the Funds (Unaudited)
    a description of any actual or potential conflicts of interest anticipated in managing Fund assets;
 
    a discussion of whether the firm has identified any investment or operational matters that likely present a high risk in managing Fund assets;
 
    a description of trade allocation procedures among accounts managed by the firm;
 
    a discussion of whether the firm receives, with respect to the Funds, other compensation, including any payment for order flow or ECN liquidity rebates
 
    a certification by the firm regarding the reasonable design of its compliance program;
 
    information regarding the firm’s code of ethics, insider trading policy and disaster recovery plan, including a description of any material changes thereto and a related certification of compliance by the firm;
 
    a description of the firm’s affiliation with any broker-dealer;
 
    a discussion of any anticipated change in the firm’s controlling persons; and
 
    verification of the firm’s insurance coverage with regards to the services provided to the Funds.
          In addition to the foregoing, the Manager provided the following information specific to the renewal of the Management Agreement:
    a comparison of the performance of each Fund to comparable investment companies and appropriate indices, including comments on the relative performance of, as applicable, each subadvisor and each Fund versus the respective peer group average;
 
    a discussion, if applicable, of any underperformance by a subadvisor relative to its peer group and what, if any, remedial measures the Manager has or intends to take;
 
    a comparison of advisory fees and expense ratios for comparable mutual funds;
 
    an analysis of any material complaints received from Fund shareholders;
 
    a description of the extent to which the Manager monitors the investment activities and financial conditions of each subadvisor to the Funds;
 
    a description of the Manager’s distribution activities with respect to promoting sales of Fund shares, including any revenue sharing practices;
 
    a description of the Manager’s securities lending practices and the fees received from such practices;
 
    a discussion of any rebate arrangements between the Manager and a service provider to the Funds pursuant to which the Manager receives direct or indirect benefits from the service provider;
 
    a description of the portfolio turnover rate and average execution costs for each Fund and, as applicable, each subadvisor to a Fund; and
 
    a description of how expenses that are not readily identifiable to a particular Fund are allocated.
          In connection with the Management Agreement, the Board also obtained an analysis provided by Lipper that compared: (i) investment performance of each Fund versus comparable investment companies and appropriate indices; (ii) total Fund expenses of each Fund versus comparable mutual funds; and (iii) each Fund’s investment advisory fees versus comparable mutual funds. For each Fund with more than one class of shares, the class of shares used for comparative purposes was the class with the longest performance history, which in most cases was the Institutional Class. References below to each Fund’s Lipper peer group are to the group of comparable mutual funds included in the analysis provided by Lipper.
          Provided below is an overview of the primary factors the Trustees considered at the Investment Committee meeting on May 10, 2010 at which the Trustees reviewed the investment performance of the Manager and the primary factors considered by the Board at its May 25, 2010 meeting at which the Board considered the renewal of the Agreements. The Board did not identify any particular information that was most relevant to its consideration to renew the Management Agreement, and each Trustee may have afforded different weight to the various factors. Legal counsel to the independent Trustees provided the Board with a memorandum regarding its responsibilities pertaining to the renewal of the Management Agreement. The memorandum explained the regulatory requirements surrounding the Trustees’ process for evaluating investment advisors and the terms of the contracts. Based on its evaluation, the Board unanimously concluded

22


 

American Beacon Funds
Disclosure Regarding the Board of Trustees’ Approval of the
Management Agreement of the Funds (Unaudited)
that the terms of the Management Agreement were reasonable and fair and that the renewal of the Management Agreement was in the best interests of the Funds and their shareholders.
Considerations With Respect to All Funds
          In determining whether to renew the Management Agreement, the Trustees considered the best interests of each Fund separately. While the Management Agreement for all of the Funds were considered at the May 25, 2010 meeting, the Board considered each Fund’s investment management and subadvisory relationships separately. In each instance, the Board considered, among other things, the following factors: (1) the nature and quality of the services provided; (2) the investment performance of a Fund and, as applicable, each subadvisor for a Fund; (3) the costs incurred by the Manager and (to the extent provided) the subadvisors in rendering their services and their resulting profits or losses; (4) the extent to which economies of scale have been taken into account in setting each fee schedule; (5) whether fee levels reflect these economies of scale for the benefit of Fund investors; (6) comparisons of services and fees with contracts entered into by the Manager or a subadvisor or their affiliates with other clients (such as pension funds and other institutional funds); and (7) any other benefits derived or anticipated to be derived by the Manager or a subadvisor from their relationship with a Fund. The Trustees posed questions to various management personnel of the Manager regarding certain key aspects of the materials submitted in support of the renewal.
          Nature, Extent and Quality of Services. With respect to the renewal of the Management Agreement, the Board considered, among other factors: each Fund’s generally favorable long-term performance and the background and experience of key investment personnel at the Manager; the low cost structure of the Funds; the Manager’s culture of compliance and support for compliance operations that reduce risks to the Funds; the manager’s commitment to increase assets in the Funds as demonstrated, for example, by the recent substantial increase in sales personnel; the Manager’s continuing efforts to add new series and share classes to enhance the Funds’ product line; the Manager’s high quality of services; and efforts made by the Manager to retain key employees and maintain staff levels.
          Investment Performance. The Board evaluated the comparative information provided by Lipper and the Manager regarding each Fund’s investment performance relative to its benchmark index(es) and peer group. The Board considered the information provided by Lipper regarding its independent peer selection methodology to select all peer groups and universes. The Board also considered the performance reports and discussions with management at Board and Committee meetings throughout the year. A discussion regarding the Board’s considerations with respect to each Fund’s performance appears below under “Additional Considerations and Conclusions with Respect to Each Fund.”
          Costs of the Services Provided to the Funds and the Profits Realized by the Manager from its Relationship with the Funds. In analyzing the cost of services and profitability of the Manager, the Board considered the revenues earned and the expenses incurred by the Manager. The profits or losses were noted at both an individual Fund level and at an aggregate level for all Funds. The Board also considered that the Management Agreement for the Funds stipulate that, to the extent that a Fund invests all of its investable assets in another registered investment company (i.e., is a “Feeder Fund”), the Fund will not pay the Manager a management fee. The index series of the Funds also operate under a master-feeder structure, but each of these series invests in a master portfolio that is not managed by the Manager. As such, the Board considered that the Manager does not receive a management fee with respect to the International Equity Index, S&P 500 Index, or Small Cap Index Funds. Although the Board noted that, in certain cases, the fee rates paid by other clients is lower than the fee rates paid by the Funds, the difference reflects the greater level of responsibility and regulatory requirements associated with managing the Funds.
          The Board also noted that the Manager proposed to continue the expense waivers and reimbursements for certain Funds and classes that were in place during the last fiscal year and to put in place new expense waivers and reimbursements for certain new classes of the Funds and new series of the Beacon Trust. The Board considered that the Manager receives service and administrative fees to compensate the Manager for providing administrative services to the Funds and to compensate third-party administrators and broker-dealers for services to Fund shareholders. In addition, the Board considered that the Manager receives

23


 

American Beacon Funds
Disclosure Regarding the Board of Trustees’ Approval of the
Management Agreement of the Funds (Unaudited)
management fees for overseeing the securities lending program on behalf of various Funds. The Board also noted that certain classes of the Funds maintain higher expense ratios in order to compensate third-party distributors.
          In analyzing the cost of services and profitability for each subadvisor in connection with its investment advisory services to the Fund, the Board considered that, in many cases, the Manager has negotiated the lowest subadvisory fee a subadvisor charges for any comparable client accounts. The Board gave less weight to profitability considerations or did not view this data as imperative to its deliberations given the arm’s length nature of the relationship between the Manager and the subadvisors with respect to the negotiation of subadvisory fees.
          Based on the foregoing information, the Board concluded that the profitability levels were reasonable in light of the services performed by the Manager. A discussion regarding the Board’s considerations with respect to each Fund’s fee rates is set forth below under “Additional Considerations and Conclusions with Respect to Each Fund.”
          Economies of Scale. In considering the reasonableness of the management fees, the Board considered whether economies of scale will be realized as the Funds grow and whether fee levels reflect these economies of scale for the benefit of Fund shareholders. The Board also noted the Manager’s representation that assets in the Funds’ complex increased during 2009, primarily due to market appreciation.
          In addition, the Board noted the Manager’s representation that, due to the existing low cost structure of the Funds, further breakpoints in the management fee would not be appropriate at this time. Based on the foregoing information, the Board concluded that the Manager fee schedules for each Fund provides for a reasonable sharing of benefits from any economies of scale with the Fund.
          Benefits Derived from the Relationship with the Funds. The Board considered the “fall-out” or ancillary benefits that accrue to the Manager and/or the subadvisors as a result of the advisory relationships with the Funds, including greater exposure in the marketplace with respect to the Manager’s or subadvisor’s investment process and expanding the level of assets under management by the Manager and the subadvisors. The Board also considered that the Manager’s relationship with the Funds and the money market portfolios continues to be a significant factor in attracting separate account assets for the Manager and the Manager’s use of the Large Cap Value Fund model for an actively managed exchange traded fund, managed by the Manager.
          In addition, the Manager noted that the Funds also derive benefits from their association with the Manager. Specifically, the Board noted that the benefit plans of AMR Corporation, which are managed by the Manager, remain the largest or one of the largest shareholders in most of the Funds and the Manager’s representation that it provides services to the Funds at a lower than industry average cost. The Board considered that certain of the subadvisors reimburse the Manager for certain of its costs relating to distribution activities for the Funds. The Board also considered that, with the exception of the Emerging Markets Fund, the Funds did not pay commissions to any affiliated broker-dealer of the Manager or the relevant subadvisor during the most recent fiscal year ended December 31, 2009.
          Based on the foregoing information, the Board concluded that the potential benefits accruing to the Manager and the subadvisors by virtue of their relationships with the Funds appear to be fair and reasonable.
Additional Considerations and Conclusions with Respect to the International Equity Index Fund
          The performance comparisons below were made versus each Fund’s Lipper peer universe median. References to the Lipper expense universe below are to the universe of comparable mutual funds included in the analysis provided to the Trustees by Lipper.
          In considering the renewal of the Management Agreement for the International Equity Index Fund, the Trustees considered the following additional factors: (1) the performance of the Fund’s master portfolio outperformed the peer universe median for the one- and five-year periods ended March 31, 2010, but underperformed for the three-year period; (2) the Fund’s master portfolio underperformed the MSCI EAFE

24


 

American Beacon Funds
Disclosure Regarding the Board of Trustees’ Approval of the
Management Agreement of the Funds (Unaudited)
Index, the Fund’s benchmark index, for the one- and three-year periods; (3) management’s explanation that the International Equity Index Fund’s underperformance was due, in part, to the impact of fair valuation; and (3) the Fund’s expense ratio ranked better than the median of its Lipper expense universe.
          Based on these and other considerations the Trustees (1) concluded that the fees paid to the Manager under the Management Agreement are fair and reasonable, (2) determined that the International Equity Index Fund and its shareholders would benefit from the Manager’s continued management of the Fund and (3) approved the renewal of the Management Agreement with respect to the International Equity Index Fund.
Additional Considerations and Conclusions with Respect to the S&P 500 Index Fund
          In considering the renewal of the Management Agreement for the S&P 500 Index Fund, the Trustees considered the following additional factors: (1) the Fund’s master portfolio outperformed the peer universe median for the one-, three- and five-year periods ended March 31, 2010 and (2) the Fund’s expense ratio ranked better than the median of its Lipper expense universe.
          Based on these and other considerations the Trustees (1) concluded that the fees paid to the Manager under the Management Agreement are fair and reasonable, (2) determined that the S&P 500 Index Fund and its shareholders would benefit from the Manager’s continued management of the Fund and (3) approved the renewal of the Management Agreement with respect to the S&P 500 Index Fund.
Additional Considerations and Conclusions with Respect to the Small Cap Index Fund
          In considering the renewal of the Management Agreement for the Small Cap Index Fund, the Trustees considered the following additional factors: (1) The Fund’s master portfolio underperformed the Russell 2000 Index, the Fund’s benchmark index, for the three- and five-year periods; (2) the Fund’s master portfolio outperformed the peer universe median for the one-, three- and five-year periods ended March 31, 2010; (3) management’s analysis regarding the rationale for the underperformance of the Fund’s master portfolio compared to the performance of the Russell 2000 Index; and (4) the Fund’s expense ratio was the lowest of its Lipper expense universe.
          Based on these and other considerations the Trustees (1) concluded that the fees paid to the Manager under the Management Agreement are fair and reasonable, (2) determined that the Small Cap Index Fund and its shareholders would benefit from the Manager’s continued management of the Fund and (3) approved the renewal of the Management Agreement with respect to the Small Cap Index Fund.

25


 

State Street Equity 500 Index Portfolio
Portfolio of Investments
June 30, 2010 (Unaudited)
                 
            Market  
            Value  
    Shares     (000)  
COMMON STOCKS — 97.4%
               
Consumer Discretionary — 10.2%
               
Abercrombie & Fitch Co. Class A
    15,846     $ 486  
Amazon.Com, Inc.(a)
    61,992       6,773  
Apollo Group, Inc. Class A(a)
    23,129       982  
AutoNation, Inc.(a)
    16,963       331  
AutoZone, Inc.(a)
    5,464       1,056  
Bed Bath & Beyond, Inc.(a)
    45,645       1,693  
Best Buy Co., Inc.
    64,019       2,168  
Big Lots, Inc.(a)
    12,727       408  
CarMax, Inc.(a)
    40,300       802  
Carnival Corp.
    79,250       2,397  
CBS Corp. Class B
    126,503       1,636  
Coach, Inc.
    57,528       2,103  
Comcast Corp. Class A
    513,748       8,924  
D.R. Horton, Inc.
    52,876       520  
Darden Restaurants, Inc.
    24,588       955  
DeVry, Inc.
    10,400       546  
Direct TV. Class A(a)
    165,777       5,623  
Discovery Communications, Inc. Class A(a)
    50,000       1,786  
Eastman Kodak Co.(a)
    54,482       236  
eBay, Inc.(a)
    205,503       4,030  
Expedia, Inc.
    38,815       729  
Family Dollar Stores, Inc.
    25,558       963  
Ford Motor Co.(a)
    610,598       6,155  
Fortune Brands, Inc.
    27,245       1,067  
GameStop Corp. Class A(a)
    26,800       504  
Gannett Co., Inc.
    42,074       566  
Gap, Inc.
    87,498       1,703  
Genuine Parts Co.
    29,509       1,164  
Goodyear Tire & Rubber Co.(a)
    42,357       421  
H&R Block, Inc.
    60,415       948  
Harley-Davidson, Inc.
    42,501       945  
Harman International Industries, Inc.(a)
    12,621       377  
Hasbro, Inc.
    24,525       1,008  
Home Depot, Inc.
    307,812       8,640  
Host Hotels & Resorts, Inc.
    122,521       1,652  
International Game Technology
    53,619       842  
Interpublic Group of Cos., Inc.(a)
    83,894       598  
JC Penney Co., Inc.
    40,010       859  
Johnson Controls, Inc.
    122,386       3,289  
Kohl’s Corp.(a)
    55,933       2,657  
Lennar Corp. Class A
    25,931       361  
Limited Brands
    45,467       1,003  
Lowe’s Cos., Inc.
    260,762       5,325  
Macy’s, Inc.
    72,423       1,296  
Marriot International, Inc. Class A
    45,350       1,358  
Mattel, Inc.
    67,276       1,424  
McDonald’s Corp.
    194,625       12,820  
McGraw-Hill, Inc.
    55,266       1,555  
Meredith Corp.
    7,889       246  
New York Times Co. Class A(a)
    22,922       198  
Newell Rubbermaid, Inc.
    50,693       742  
News Corp. Class A
    409,009       4,892  
NIKE, Inc. Class B
    70,852       4,786  
Nordstrom, Inc.
    29,533       951  
O’Reilly Automotive, Inc.(a)
    24,600       1,170  
Office Depot, Inc.(a)
    51,256       207  
Omnicom Group, Inc.
    54,641       1,874  
Polo Ralph Lauren Corp.
    10,615       775  
Priceline.com, Inc.(a)
    8,890       1,569  
Pulte Homes, Inc.(a)
    54,705       453  
Radioshack Corp.
    20,103       392  
Ross Stores, Inc.
    22,300       1,188  
Scripps Networks Interactive, Inc. Class A
    17,135       691  
Sears Holdings Corp.(a)
    8,174       528  
Snap-On, Inc.
    9,212       377  
Stanley Black & Decker, Inc.
    30,007       1,516  
Staples, Inc.
    133,133       2,536  
Starbucks Corp.
    135,361       3,289  
Starwood Hotels & Resorts Worldwide, Inc.
    34,447       1,427  
Target Corp.
    136,316       6,703  
Tiffany & Co.
    22,880       867  
Time Warner Cable, Inc.
    64,271       3,347  
Time Warner, Inc.
    208,591       6,030  
TJX Cos., Inc.
    76,506       3,209  
Urban Outfitters, Inc.(a)
    23,900       822  
V.F. Corp.
    16,393       1,167  
Viacom, Inc. Class B
    110,622       3,470  
Walt Disney Co.
    355,645       11,203  
Washington Post Co. Class B
    960       394  
Whirlpool Corp.
    13,661       1,200  
Wyndham Worldwide Corp.
    29,699       598  
Wynn Resorts, Ltd.
    12,300       938  
Yum! Brands, Inc.
    85,492       3,338  
 
             
 
            176,777  
 
             
Consumer Staples — 11.2%
               
Altria Group, Inc.
    377,099       7,557  
Archer-Daniels-Midland Co.
    117,224       3,027  
Avon Products, Inc.
    78,360       2,077  
Brown-Forman Corp. Class B
    18,655       1,068  
Campbell Soup Co.
    34,065       1,221  
Clorox Co.
    24,143       1,501  
Coca-Cola Co.
    416,411       20,870  
Coca-Cola Enterprises, Inc.
    56,701       1,466  
Colgate-Palmolive Co.
    89,501       7,049  
ConAgra Foods, Inc.
    82,675       1,928  
Constellation Brands, Inc. Class A(a)
    37,426       585  
Costco Wholesale Corp.
    79,889       4,380  
CVS Caremark Corp.
    251,932       7,387  
Dean Foods Co.(a)
    33,458       337  
Dr Pepper Snapple Group, Inc.
    46,800       1,750  
Estee Lauder Cos., Inc. Class A
    20,952       1,168  
General Mills, Inc.
    119,864       4,258  
H.J. Heinz Co.
    55,669       2,406  
Hormel Foods Corp.
    13,400       542  
Kellogg Co.
    44,835       2,255  
Kimberly-Clark Corp.
    75,700       4,590  
Kraft Foods, Inc. Class A
    314,409       8,803  
Kroger Co.
    118,976       2,343  
Lorillard, Inc.
    28,361       2,041  
McCormick & Co., Inc.
    23,953       909  
Molson Coors Brewing Co., Class B
    28,262       1,197  
PepsiCo, Inc.
    292,454       17,825  
Philip Morris International, Inc.
    335,999       15,402  
Procter & Gamble Co.
    521,519       31,281  
Reynolds American, Inc.
    31,187       1,625  
Safeway, Inc.
    71,864       1,413  
Sara Lee Corp.
    116,034       1,636  
See Notes to Financial Statements.

26


 

State Street Equity 500 Index Portfolio
Portfolio of Investments — (continued)
June 30, 2010 (Unaudited)
                 
            Market  
            Value  
    Shares     (000)  
COMMON STOCKS — (continued)
               
Consumer Staples — (continued)
               
SuperValu, Inc.
    34,848     $ 378  
Sysco Corp.
    108,009       3,086  
The Hershey Company
    30,782       1,475  
The J.M. Smucker Co.
    20,260       1,220  
Tyson Foods, Inc., Class A
    51,235       840  
Wal-Mart Stores, Inc.
    376,602       18,103  
Walgreen Co.
    178,918       4,777  
Whole Foods Market, Inc.(a)
    31,633       1,139  
 
             
 
            192,915  
 
             
Energy — 10.5%
               
Anadarko Petroleum Corp.
    89,626       3,235  
Apache Corp.
    61,025       5,138  
Baker Hughes, Inc.
    78,273       3,254  
Cabot Oil & Gas Corp.
    17,300       542  
Cameron International Corp.(a)
    45,100       1,467  
Chesapeake Energy Corp.
    114,482       2,398  
Chevron Corp.(b)
    362,746       24,616  
ConocoPhillips
    268,830       13,197  
Consol Energy, Inc.
    38,973       1,316  
Denbury Resources, Inc.(a)
    69,800       1,022  
Devon Energy Corp.
    81,151       4,944  
Diamond Offshore Drilling, Inc.
    11,300       703  
El Paso Corp.
    131,592       1,462  
EOG Resources, Inc.
    45,917       4,517  
EQT Corp.
    26,800       968  
ExxonMobil Corp.(b)
    927,447       52,929  
FMC Technologies, Inc.(a)
    20,800       1,095  
Halliburton Co.
    164,634       4,042  
Helmerich & Payne, Inc.
    18,600       679  
Hess Corp.
    53,201       2,678  
Marathon Oil Corp.
    128,777       4,004  
Massey Energy Co.
    20,400       558  
Murphy Oil Corp.
    33,441       1,657  
Nabors Industries, Ltd.(a)
    48,204       849  
National Oilwell Varco, Inc.
    76,457       2,528  
Noble Energy, Inc.
    30,510       1,841  
Occidental Petroleum Corp.
    146,844       11,329  
Peabody Energy Corp.
    47,024       1,840  
Pioneer Natural Resources Co.
    21,400       1,272  
Questar Corp.
    32,768       1,491  
Range Resources Corp.
    28,700       1,152  
Rowan Cos., Inc.(a)
    19,620       430  
Schlumberger, Ltd.
    216,375       11,974  
Smith International, Inc.
    44,334       1,669  
Southwestern Energy Co.(a)
    63,200       2,442  
Spectra Energy Corp.
    113,998       2,288  
Sunoco, Inc.
    20,384       709  
Tesoro Corp.
    26,365       308  
Valero Energy Corp.
    98,009       1,762  
Williams Cos., Inc.
    102,568       1,875  
 
             
 
            182,180  
 
             
Financials — 16.5%
               
AFLAC, Inc.
    85,390       3,644  
Allstate Corp.
    98,006       2,816  
American Express Co.
    216,764       8,605  
American International Group, Inc.(a)
    24,133       831  
Ameriprise Financial, Inc.
    47,007       1,698  
AON Corp.
    49,047       1,821  
Apartment Investment & Management Co. Class A
    21,052       408  
Assurant, Inc.
    20,831       723  
AvalonBay Communities, Inc.
    14,398       1,344  
Bank of America Corp.
    1,811,671       26,034  
Bank of New York Mellon Corp.
    219,285       5,414  
BB&T Corp.
    125,770       3,309  
Berkshire Hathaway, Inc. Class B(a)
    299,003       23,828  
Boston Properties, Inc.
    25,467       1,817  
Capital One Financial Corp.
    82,963       3,343  
CB Richard Ellis Group, Inc. Class A(a)
    47,275       643  
Charles Schwab Corp.
    178,593       2,532  
Chubb Corp.
    59,975       2,999  
Cincinnati Financial Corp.
    27,114       701  
Citigroup, Inc.(a)(b)
    4,100,502       15,418  
CME Group, Inc.
    12,091       3,404  
Comerica, Inc.
    33,344       1,228  
Developers Diversified Realty Corp.
    1,532       15  
Discover Financial Services
    100,705       1,408  
E*Trade Financial Corp.(a)
    30,531       361  
Equity Residential
    51,657       2,151  
Federated Investors, Inc. Class B
    14,870       308  
Fifth Third Bancorp
    137,816       1,694  
First Horizon National Corp.(a)
    44,500       509  
Franklin Resources, Inc.
    27,180       2,343  
Genworth Financial, Inc. Class A(a)
    83,951       1,097  
Goldman Sachs Group, Inc.
    93,434       12,265  
Hartford Financial Services Group, Inc.
    78,297       1,733  
HCP, Inc.
    50,600       1,632  
Health Care REIT, Inc.
    20,800       876  
Hudson City Bancorp, Inc.
    84,392       1,033  
Huntington Bancshares, Inc.
    118,556       657  
IntercontinentalExchange, Inc.(a)
    13,780       1,558  
Invesco Ltd.
    84,800       1,427  
J.P. Morgan Chase & Co.
    717,515       26,268  
Janus Capital Group, Inc.
    36,007       320  
KeyCorp
    155,975       1,199  
Kimco Realty Corp.
    71,369       959  
Legg Mason, Inc.
    27,042       758  
Leucadia National Corp.(a)
    35,436       691  
Lincoln National Corp.
    51,992       1,263  
Loews Corp.
    62,531       2,083  
M & T Bank Corp.
    14,137       1,201  
Marsh & McLennan Cos., Inc.
    100,253       2,261  
Marshall & Ilsley Corp.
    86,593       622  
Mastercard, Inc. Class A
    17,600       3,512  
MetLife, Inc.
    148,596       5,611  
Moody’s Corp.
    34,766       693  
Morgan Stanley
    253,530       5,884  
NASDAQ OMX Group, Inc.(a)
    28,600       508  
Northern Trust Corp.
    42,506       1,985  
NYSE Euronext
    47,300       1,307  
Paychex, Inc.
    55,738       1,447  
People’s United Financial, Inc.
    69,500       938  
PNC Financial Services Group, Inc.
    93,817       5,301  
Principal Financial Group, Inc.
    58,991       1,383  
See Notes to Financial Statements.

27


 

State Street Equity 500 Index Portfolio
Portfolio of Investments — (continued)
June 30, 2010 (Unaudited)
                 
            Market  
            Value  
    Shares     (000)  
COMMON STOCKS — (continued)
               
Financials — (continued)
               
Progressive Corp.
    117,301     $ 2,196  
ProLogis
    88,691       898  
Prudential Financial, Inc.
    84,439       4,531  
Public Storage, Inc.
    25,187       2,214  
Regions Financial Corp.
    206,189       1,357  
Simon Property Group, Inc.
    52,715       4,257  
SLM Corp.(a)
    92,354       960  
State Street Corp.(c)
    90,325       3,055  
SunTrust Banks, Inc.
    87,618       2,041  
T. Rowe Price Group, Inc.
    45,275       2,010  
Torchmark Corp.
    15,021       744  
Total System Services, Inc.
    37,775       514  
Travelers Cos., Inc.
    90,604       4,462  
U.S. Bancorp
    346,652       7,748  
Unum Group
    60,129       1,305  
Ventas, Inc.
    26,700       1,254  
Visa, Inc.
    81,000       5,731  
Vornado Realty Trust
    28,914       2,109  
Wells Fargo Co.
    943,949       24,165  
Western Union Co.
    125,385       1,869  
XL Capital, Ltd. Class A
    58,768       941  
Zions Bancorp
    25,453       549  
 
             
 
            284,731  
 
             
Health Care — 11.6%
               
Abbott Laboratories
    280,806       13,136  
Aetna, Inc.
    78,950       2,083  
Allergan, Inc.
    56,092       3,268  
AmerisourceBergen Corp.
    49,686       1,577  
Amgen, Inc.(a)
    174,136       9,160  
Baxter International, Inc.
    109,561       4,453  
Becton, Dickinson & Co.
    42,997       2,907  
Biogen Idec, Inc.(a)
    49,431       2,345  
Boston Scientific Corp.(a)
    265,834       1,542  
Bristol-Myers Squibb Co.
    310,616       7,747  
C.R. Bard, Inc.
    16,497       1,279  
Cardinal Health, Inc.
    63,757       2,143  
CareFusion Corp.(a)
    31,178       708  
Celgene Corp.(a)
    83,618       4,249  
Cephalon, Inc.(a)
    13,300       755  
Cerner Corp.(a)
    11,700       888  
CIGNA Corp.
    51,596       1,603  
Coventry Health Care, Inc.(a)
    26,203       463  
DaVita, Inc.(a)
    18,200       1,136  
Dentsply International, Inc.
    26,700       799  
Eli Lilly & Co.
    184,075       6,166  
Express Scripts, Inc.(a)
    99,998       4,702  
Forest Laboratories, Inc.(a)
    52,202       1,432  
Genzyme Corp.(a)
    48,692       2,472  
Gilead Sciences, Inc.(a)
    163,999       5,622  
Hospira, Inc.(a)
    29,203       1,678  
Humana, Inc.(a)
    29,307       1,338  
Intuitive Surgical, Inc.(a)
    7,100       2,241  
Johnson & Johnson
    499,549       29,503  
King Pharmaceuticals, Inc.(a)
    48,592       369  
Laboratory Corp. of America Holdings(a)
    18,422       1,388  
Life Technologies Corp.(a)
    33,287       1,573  
McKesson Corp.
    49,855       3,348  
Mead Johnson Nutrition Co.
    35,818       1,795  
Medco Health Solutions, Inc.(a)
    84,268       4,641  
Medtronic, Inc.
    200,178       7,260  
Merck & Co., Inc.
    562,870       19,684  
Millipore Corp.(a)
    9,335       996  
Mylan, Inc.(a)
    54,109       922  
Patterson Cos., Inc.
    18,294       522  
Pfizer, Inc.
    1,457,911       20,790  
Quest Diagnostics, Inc.
    27,100       1,349  
St. Jude Medical, Inc.(a)
    59,626       2,152  
Stryker Corp.
    51,689       2,588  
Tenet Healthcare Corp.(a)
    73,370       318  
UnitedHealth Group, Inc.
    209,896       5,961  
Varian Medical Systems, Inc.(a)
    23,060       1,206  
Watson Pharmaceuticals, Inc.(a)
    17,746       720  
Wellpoint, Inc.(a)
    78,238       3,828  
Zimmer Holdings, Inc.(a)
    37,152       2,008  
 
             
 
            200,813  
 
             
Industrials — 10.4%
               
3M Co.
    128,872       10,180  
Amphenol Corp. Class A
    31,200       1,226  
Avery Dennison Corp.
    21,188       681  
Boeing Co.
    137,088       8,602  
Caterpillar, Inc.
    113,279       6,805  
CH Robinson Worldwide, Inc.
    29,061       1,618  
Cintas Corp.
    25,088       601  
CSX Corp.
    71,038       3,526  
Cummins, Inc.
    35,158       2,290  
Danaher Corp.
    95,372       3,540  
Deere & Co.
    77,137       4,295  
Dover Corp.
    34,395       1,437  
Eaton Corp.
    30,995       2,028  
Emerson Electric Co.
    136,448       5,961  
Equifax, Inc.
    22,083       620  
Expeditors International Washington, Inc.
    39,220       1,353  
Fastenal Co.
    22,500       1,129  
FedEx Corp.
    56,900       3,989  
First Solar, Inc.(a)
    8,670       987  
Flir Systems, Inc.(a)
    28,900       841  
Flowserve Corp.
    10,500       890  
Fluor Corp.
    32,260       1,371  
General Dynamics Corp.
    70,161       4,109  
General Electric Co.(b)
    1,926,733       27,783  
Goodrich Co.
    22,445       1,487  
Honeywell International, Inc.
    138,781       5,417  
Illinois Tool Works, Inc.
    70,571       2,913  
Iron Mountain, Inc.
    32,200       723  
ITT Industries, Inc.
    31,592       1,419  
Jacobs Engineering Group, Inc.(a)
    22,300       813  
L-3 Communications Holdings, Inc.
    20,303       1,438  
Leggett & Platt, Inc.
    27,098       544  
Lockheed Martin Corp.
    57,352       4,273  
Masco Corp.
    64,323       692  
Monster Worldwide, Inc.(a)
    22,609       263  
Norfolk Southern Corp.
    67,255       3,568  
Northrop Grumman Corp.
    55,211       3,006  
PACCAR, Inc.
    66,474       2,650  
See Notes to Financial Statements.

28


 

State Street Equity 500 Index Portfolio
Portfolio of Investments — (continued)
June 30, 2010 (Unaudited)
                 
            Market  
            Value  
    Shares     (000)  
COMMON STOCKS — (continued)
               
Industrials — (continued)
               
Pall Corp.
    21,509     $ 739  
Parker-Hannifin Corp.
    29,603       1,642  
Pitney Bowes, Inc.
    34,927       767  
Precision Castparts Corp.
    25,907       2,666  
Quanta Services, Inc.(a)
    39,500       816  
R.R. Donnelley & Sons Co.
    36,109       591  
Raytheon Co.
    69,082       3,343  
Republic Services, Inc.
    60,403       1,796  
Robert Half International, Inc.
    26,540       625  
Rockwell Automation, Inc.
    24,305       1,193  
Rockwell Collins, Inc.
    28,931       1,537  
Roper Industries, Inc.
    17,000       951  
Ryder Systems, Inc.
    7,921       319  
Southwest Airlines Co.
    136,986       1,522  
Stericycle, Inc.(a)
    14,800       971  
Textron, Inc.
    49,939       847  
Thermo Fisher Scientific, Inc.(a)
    74,524       3,655  
Union Pacific Corp.
    91,668       6,372  
United Parcel Service, Inc. Class B
    179,646       10,220  
United Technologies Corp.
    169,378       10,994  
W.W. Grainger, Inc.
    11,469       1,141  
Waste Management, Inc.
    88,539       2,770  
 
             
 
            180,545  
 
             
Information Technology — 17.2%
               
Adobe Systems, Inc.(a)
    95,657       2,528  
Advanced Micro Devices, Inc.(a)
    99,186       726  
Agilent Technologies, Inc.(a)
    60,468       1,719  
Akamai Technologies, Inc.(a)
    30,124       1,222  
Altera Corp.
    52,854       1,311  
Analog Devices, Inc.
    53,269       1,484  
AOL, Inc.(a)(d)
    1        
Apple, Inc.(a)
    164,684       41,423  
Applied Materials, Inc.
    245,007       2,945  
Autodesk, Inc.(a)
    41,576       1,013  
Automatic Data Processing, Inc.
    91,917       3,701  
BMC Software, Inc.(a)
    31,221       1,081  
Broadcom Corp. Class A
    75,759       2,498  
CA, Inc.
    67,099       1,235  
Cisco Systems, Inc.(a)
    1,034,219       22,039  
Citrix Systems, Inc.(a)
    33,967       1,434  
Cognizant Technology Solutions Corp. Class A(a)
    54,384       2,722  
Computer Sciences Corp.
    27,744       1,255  
Compuware Corp.(a)
    37,450       299  
Corning, Inc.
    283,076       4,572  
Dell, Inc.(a)
    313,150       3,777  
Dun & Bradstreet Corp.
    9,400       631  
Electronic Arts, Inc.(a)
    60,100       865  
EMC Corp.(a)
    372,184       6,811  
Fidelity National Information Services, Inc.
    58,077       1,558  
Fiserv, Inc.(a)
    26,452       1,208  
Google, Inc. Class A(a)
    43,690       19,440  
Harris Corp.
    23,700       987  
Hewlett-Packard Co.
    425,316       18,408  
Intel Corp.
    1,008,456       19,614  
International Business Machines Corp.
    232,242       28,677  
Intuit, Inc.(a)
    57,563       2,001  
Jabil Circuit, Inc.
    31,651       421  
Juniper Networks, Inc.(a)
    92,593       2,113  
KLA-Tencor Corp.
    30,605       853  
Lexmark International Group, Inc. Class A(a)
    12,642       418  
Linear Technology Corp.
    39,863       1,109  
LSI Corp.(a)
    114,762       528  
McAfee, Inc.(a)
    28,200       866  
MEMC Electronic Materials, Inc.(a)
    36,378       359  
Microchip Technology, Inc.
    32,489       901  
Micron Technology, Inc.(a)
    157,162       1,334  
Microsoft Corp.(b)
    1,377,635       31,699  
Molex, Inc.
    23,305       425  
Motorola, Inc.(a)
    422,265       2,753  
National Semiconductor Corp.
    42,096       567  
NetApp, Inc.(a)
    63,057       2,353  
Novell, Inc.(a)
    68,720       390  
Novellus Systems, Inc.(a)
    15,230       386  
NVIDIA Corp.(a)
    103,156       1,053  
Oracle Corp.
    706,562       15,163  
PerkinElmer, Inc.
    21,118       437  
QLogic Corp.(a)
    17,922       298  
QUALCOMM, Inc.
    298,111       9,790  
Red Hat, Inc.(a)
    33,300       964  
SAIC, Inc.(a)
    54,800       917  
Salesforce.com, Inc.(a)
    19,700       1,691  
SanDisk Corp.(a)
    40,667       1,711  
Symantec Corp.(a)
    147,863       2,052  
Tellabs, Inc.
    73,830       472  
Teradata Corp.(a)
    28,920       882  
Teradyne, Inc.(a)
    28,149       274  
Texas Instruments, Inc.
    225,399       5,247  
VeriSign, Inc.(a)
    32,421       861  
Waters Corp.(a)
    17,365       1,124  
Western Digital Corp.(a)
    43,000       1,297  
Xerox Corp.
    247,701       1,992  
Xilinx, Inc.
    51,302       1,296  
Yahoo!, Inc.(a)
    217,019       3,001  
 
             
 
            297,181  
 
             
Materials — 3.4%
               
Air Products & Chemicals, Inc.
    38,809       2,515  
Airgas, Inc.
    14,300       889  
AK Steel Holding Corp.
    20,000       238  
Alcoa, Inc.
    187,149       1,883  
Allegheny Technologies, Inc.
    17,228       761  
Ball Corp.
    17,262       912  
Bemis Co., Inc.
    21,162       571  
CF Industries Holdings, Inc.
    12,650       803  
Cliffs Natural Resources, Inc.
    23,400       1,104  
Dow Chemical Co.
    208,828       4,953  
E.I. Du Pont de Nemours & Co.
    164,012       5,673  
Eastman Chemical Co.
    12,204       651  
Ecolab, Inc.
    40,966       1,840  
FMC Corp.
    12,600       724  
Freeport-McMoRan Copper & Gold, Inc. Class B
    85,352       5,047  
See Notes to Financial Statements.

29


 

State Street Equity 500 Index Portfolio
Portfolio of Investments — (continued)
June 30, 2010 (Unaudited)
                 
            Market  
            Value  
    Shares     (000)  
COMMON STOCKS — (continued)
               
Materials — (continued)
               
International Flavors & Fragrances, Inc.
    13,031     $ 553  
International Paper Co.
    75,811       1,716  
MeadWestvaco Corp.
    30,320       673  
Monsanto Co.
    99,155       4,583  
Newmont Mining Corp.
    89,206       5,508  
Nucor Corp.
    57,654       2,207  
Owens-Illinois, Inc.(a)
    30,400       804  
Pactiv Corp.(a)
    22,615       630  
Plum Creek Timber Co., Inc.
    29,311       1,012  
PPG Industries, Inc.
    28,971       1,750  
Praxair, Inc.
    55,711       4,233  
Sealed Air Corp.
    29,692       586  
Sherwin-Williams Co.
    17,096       1,183  
Sigma-Aldrich Corp.
    20,934       1,043  
Titanium Metals Corp.(a)
    16,600       292  
United States Steel Corp.
    26,678       1,028  
Vulcan Materials Co.
    22,561       989  
Weyerhaeuser Co.
    36,537       1,286  
 
             
 
            58,640  
 
             
Telecommunication Services — 2.9%
               
American Tower Corp. Class A(a)
    73,400       3,266  
AT&T, Inc.
    1,065,950       25,785  
CenturyTel, Inc.
    52,073       1,735  
Frontier Communications Corp.
    60,384       429  
JDS Uniphase Corp.(a)
    42,723       420  
MetroPCS Communications, Inc.(a)
    51,700       423  
Qwest Communications International, Inc.
    275,190       1,445  
Sprint Nextel Corp.(a)
    520,165       2,206  
Verizon Communications, Inc.
    512,666       14,365  
Windstream Corp.
    90,413       955  
 
             
 
            51,029  
 
             
Utilities — 3.5%
               
AES Corp.(a)
    115,195       1,064  
Allegheny Energy, Inc.
    28,359       587  
Ameren Corp.
    40,160       955  
American Electric Power Co., Inc.
    87,352       2,822  
CenterPoint Energy, Inc.
    77,511       1,020  
CMS Energy Corp.
    37,956       556  
Consolidated Edison, Inc.
    52,152       2,248  
Constellation Energy Group, Inc.
    34,214       1,103  
Dominion Resources, Inc.
    109,162       4,229  
DTE Energy Co.
    29,884       1,363  
Duke Energy Corp.
    238,420       3,815  
Edison International
    57,119       1,812  
Entergy Corp.
    34,598       2,478  
Exelon Corp.
    119,921       4,553  
FirstEnergy Corp.
    53,707       1,892  
Integrys Energy Group, Inc.
    14,716       644  
NextEra Energy, Inc.
    75,221       3,668  
Nicor, Inc.
    9,400       381  
NiSource, Inc.
    48,582       704  
Northeast Utilities
    32,000       815  
NRG Energy, Inc.(a)
    47,200       1,001  
Oneok, Inc.
    18,600       804  
Pepco Holdings, Inc.
    41,700       654  
PG&E Corp.
    67,826       2,788  
Pinnacle West Capital Corp.
    20,360       740  
PPL Corp.
    82,375       2,055  
Progress Energy, Inc.
    52,281       2,050  
Public Service Enterprise Group, Inc.
    92,324       2,893  
SCANA Corp.
    18,300       654  
Sempra Energy
    43,386       2,030  
Southern Co.
    149,043       4,960  
TECO Energy, Inc.
    34,951       527  
Wisconsin Energy Corp.
    20,100       1,020  
Xcel Energy, Inc.
    79,151       1,631  
 
             
 
            60,516  
 
             
TOTAL COMMON STOCKS
(Cost $1,329,377)
            1,685,327  
 
             
                 
    Par          
    Amount          
    (000)          
U.S. GOVERNMENT SECURITIES — 0.4%
               
United States Treasury Bill(b)(e)(f)
0.08% due 10/14/10
  $ 3,715       3,714  
United States Treasury Bill(b)(e)(f)
0.13% due 09/16/10
    3,000       2,999  
 
             
TOTAL U.S. GOVERNMENT SECURITIES
(Cost $6,713)
            6,713  
 
             
                 
    Shares          
    (000)          
MONEY MARKET FUNDS — 2.1%
               
AIM Short Term Investment Prime Portfolio
    35,549       35,549  
Federated Money Market Obligations Trust
    576       576  
 
             
TOTAL MONEY MARKET FUNDS
(Cost $36,125)
            36,125  
 
             
TOTAL INVESTMENTS(g)† — 99.9%
(Identified Cost $1,372,215)
            1,728,165  
 
               
Other Assets in Excess of Liabilities — 0.1%
            1,807  
 
             
NET ASSETS — 100.0%
          $ 1,729,972  
 
             
 
(a)   Non-income producing security.
 
(b)   All or part of this security has been designated as collateral for futures contracts.
 
(c)   Affiliated issuer. See table that follows for more information.
 
(d)   Amount is less than $1,000.
 
(e)   Rate represents annualized yield at date of purchase.
See Notes to Financial Statements.

30


 

State Street Equity 500 Index Portfolio
Portfolio of Investments — (continued)
June 30, 2010 (Unaudited)
 
(f)   Value determined based on Level 2 inputs established by provisions surrounding Fair Value Measurements and Disclosures. (Note 2)
 
(g)   Unless otherwise indicated, the values of the Securities of the Portfolio are determined based on Level 1 inputs established by provisions surrounding Fair Value Measurements and Disclosures. (Note 2)
 
  See Note 2 of the Notes to Financial Statements.
                 
            Unrealized  
    Number of     Depreciation  
    Contracts     (000)  
Schedule of Futures Contracts S&P 500 Financial Futures Contracts (long) Expiration Date 09/2010
    894     $ (2,753 )
 
             
 
               
Total unrealized depreciation on open futures contracts purchased
          $ (2,753 )
 
             
Affiliate Table
Certain investments made by the Portfolio were made in securities affiliated with State Street and SSgA FM. Investments in State Street Corp., the holding company of State Street, were made according to its representative portion of the S&P 500® Index. The market value of this investment at June 30, 2010 is listed in the Portfolio of Investments.
                                                         
                                            Income earned    
            Shares purchased   Shares sold for           Value at   for the six months   Realized loss
Security   Number of shares   for the six months   the six months   Number of shares   06/30/10   ended 06/30/10   on shares sold
Description   held at 12/31/09   ended 06/30/10   ended 06/30/10   held at 06/30/10   (000)   (000)   (000)
State Street Corp.
    90,925       6,300       6,900       90,325     $ 3,055     $ 2     $ (163 )
See Notes to Financial Statements.

31


 

State Street Equity 500 Index Portfolio
Statement of Assets and Liabilities
June 30, 2010 (Unaudited)
(Amounts in thousands)
         
Assets
       
Investments in unaffiliated issuers at market value (identified cost $1,368,940)
  $ 1,725,110  
Investments in non-controlled affiliates at market value (identified cost $3,275) (Note 4)
    3,055  
 
     
Total investments at market value (identified cost $1,372,215)
    1,728,165  
Dividends and interest
    2,261  
 
     
Total assets
    1,730,426  
Liabilities
       
Daily variation margin on futures contracts
    389  
Management fees (Note 4)
    65  
 
     
Total liabilities
    454  
 
     
Net Assets
  $ 1,729,972  
 
     
See Notes to Financial Statements.

32


 

State Street Equity 500 Index Portfolio
Statement of Operations
Six Months Ended June 30, 2010 (Unaudited)
(Amounts in thousands)
         
Investment Income
       
Interest
  $ 35  
Dividend income — unaffiliated issuers
    17,606  
Dividend income — non-controlled affiliated issuer
    2  
 
     
Total investment income
    17,643  
 
     
 
       
Expenses
       
Management fees (Note 4)
    415  
 
     
Total expenses
    415  
 
     
Net Investment Income
  $ 17,228  
 
     
 
       
Realized and Unrealized Gain (Loss)
       
Net realized gain (loss) on:
       
Investments — unaffiliated issuers
  $ 16,015  
Investments — non-controlled affiliated issuer
    (163 )
Futures contracts
    (236 )
 
     
 
    15,616  
 
       
Net change in net unrealized appreciation (depreciation) on:
       
Investments
    (152,753 )
Futures contracts
    (3,300 )
 
     
 
    (156,053 )
 
     
Net realized and unrealized loss
    (140,437 )
 
     
Net Decrease in Net Assets Resulting from Operations
  $ (123,209 )
 
     
See Notes to Financial Statements.

33


 

State Street Equity 500 Index Portfolio
Statements of Changes in Net Assets
(Amounts in thousands)
                 
    For The        
    Six Months Ended     For The  
    June 30, 2010     Year Ended  
    (Unaudited)     December 31, 2009  
Increase (Decrease) in Net Assets From Operations:
               
Net investment income
  $ 17,228     $ 38,199  
Net realized gain (loss) on investments and futures contracts
    15,616       (88,220 )
Net change in net unrealized appreciation (depreciation) on investments and futures contracts
    (156,053 )     473,395  
 
           
 
               
Net increase (decrease) in net assets resulting from operations
    (123,209 )     423,374  
 
           
 
               
Capital Transactions:
               
Contributions
    171,603       267,641  
Withdrawals
    (211,808 )     (319,837 )
 
           
Net decrease in net assets from capital transactions
    (40,205 )     (52,196 )
 
           
Net Increase (Decrease) in Net Assets
    (163,414 )     371,178  
Net Assets
               
Beginning of period
    1,893,386       1,522,208  
 
           
End of period
  $ 1,729,972     $ 1,893,386  
 
           
See Notes to Financial Statements.

34


 

State Street Equity 500 Index Portfolio
Financial Highlights
The following table includes selected supplemental data and ratios to average net assets:
                                                 
    Six Months                    
    Ended                    
    06/30/10   Year Ended   Year Ended   Year Ended   Year Ended   Year Ended
    (Unaudited)   12/31/09   12/31/08   12/31/07   12/31/06   12/31/05
Supplemental Data and Ratios:
                                               
Net assets, end of period (in thousands)
  $ 1,729,972     $ 1,893,386     $ 1,522,208     $ 2,422,377     $ 2,766,696     $ 2,453,109  
Ratios to average net assets:
                                               
Operating expenses
    0.045 %*     0.045 %     0.045 %     0.045 %     0.045 %     0.045 %
Net investment income
    1.87 %*     2.28 %     2.30 %     1.96 %     1.94 %     1.84 %
Portfolio turnover rate(a)
    10 %**     19 %     14 %     12 %     10 %     8 %
Total return(b)
    (6.62 )%**     26.50 %     (37.02 )%     5.49 %     15.75 %     4.87 %
 
(a)   The portfolio turnover rate excludes in-kind security transactions.
 
(b)   Results represent past performance and are not indicative of future results.
 
*   Annualized.
 
**   Not annualized.
See Notes to Financial Statements.

35


 

State Street Equity 500 Index Portfolio
Notes to Financial Statements
June 30, 2010 (Unaudited)
1. Organization
State Street Master Funds (the “Trust”) is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company, and was organized as a business trust under the laws of the Commonwealth of Massachusetts on July 27, 1999. The Trust comprises eleven investment portfolios: the State Street Equity 500 Index Portfolio, the State Street Equity 400 Index Portfolio, the State Street Equity 2000 Index Portfolio, the State Street Aggregate Bond Index Portfolio, the State Street Money Market Portfolio, the State Street Tax Free Money Market Portfolio, the State Street Short-Term Tax Exempt Bond Portfolio, the State Street Limited Duration Bond Portfolio, the State Street Treasury Money Market Portfolio, the State Street Treasury Plus Money Market Portfolio and the State Street U.S. Government Money Market Portfolio. Information presented in these financial statements pertains only to the State Street Equity 500 Index Portfolio (the “Portfolio”). At June 30, 2010, the following Portfolios were in operation: the Portfolio, the State Street Money Market Portfolio, the State Street Tax Free Money Market Portfolio, the State Street Short-Term Tax Exempt Bond Portfolio, the State Street Treasury Money Market Portfolio, the State Street Treasury Plus Money Market Portfolio and the State Street U.S. Government Money Market Portfolio. The Portfolio is authorized to issue an unlimited number of non-transferable beneficial interests.
The Portfolio’s investment objective is to replicate, as closely as possible, before expenses, the performance of the Standard & Poor’s 500 Index (the “S&P 500® Index”). The Portfolio uses a passive management strategy designed to track the performance of the S&P 500® Index. The S&P 500® Index is a well-known, unmanaged, stock index that includes common stocks of 500 companies from several industrial sectors representing a significant portion of the market value of all stocks publicly traded in the United States. There is no assurance that the Portfolio will achieve its objective.
2. Significant Accounting Policies
The following is a summary of the significant accounting policies consistently followed by the Portfolio in the preparation of its financial statements.
Security valuation – The Portfolio’s investments are valued each business day by independent pricing services. Equity securities for which market quotations are available are valued at the last sale price or official closing price (closing bid price if no sale has occurred) on the primary market or exchange on which they trade. Investments in other mutual funds are valued at the net asset value per share. Fixed-income securities and options are valued on the basis of the closing bid price. Futures contracts are valued on the basis of the last sale price. Money market instruments maturing within 60 days of the valuation date are valued at amortized cost, a method by which each money market instrument is initially valued at cost, and thereafter a constant accretion or amortization of any discount or premium is recorded until maturity of the security. The Portfolio may value securities for which market quotations are not readily available at “fair value,” as determined in good faith pursuant to procedures established by the Board of Trustees.
The Portfolio adopted provisions surrounding Fair Value Measurements and Disclosures that defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This applies to fair value measurements that are already required or permitted by other accounting standards and is intended to increase consistency of those measurements and applies broadly to securities and other types of assets and liabilities. In accordance with these provisions, fair value is defined as the price that the portfolio would receive upon selling an investment in a timely transaction to an independent buyer in the principal or most

36


 

State Street Equity 500 Index Portfolio
Notes to Financial Statements (continued)
June 30, 2010 (Unaudited)
advantageous market of the investment. Various inputs are used in determining the value of the Portfolio’s investments.
The three tier hierarchy of inputs is summarized below:
    Level 1 — quoted prices in active markets for identical securities
 
    Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)
 
    Level 3 — significant unobservable inputs (including the Portfolio’s own assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used, as of June 30, 2010, in valuing the Portfolio’s assets carried at fair value (amounts in thousands):
                                 
    Quoted Prices in                    
    Active Markets for     Significant Other     Significant        
    Identical Assets     Observable Inputs     Unobservable Inputs        
Description   (Level 1)     (Level 2)     (Level 3)     Total  
INVESTMENTS:
                               
Common Stocks
  $ 1,685,327     $     $     $ 1,685,327  
U.S. Government Securities
          6,713             6,713  
Money Market Funds
    36,125                   36,125  
OTHER LIABILITIES:
                               
Futures contracts
    (2,753 )                 (2,753 )
 
                       
TOTAL ASSETS AND LIABILITIES
  $ 1,718,699     $ 6,713     $     $ 1,725,412  
 
                       
The type of inputs used to value each security under the provisions surrounding Fair Value Measurement and Disclosures is identified in the Portfolio of Investments, which also includes a breakdown of the Portfolio’s investments by category.
The Portfolio adopted updated provisions surrounding Fair Value Measurements and Disclosures effective March 31, 2010. This update applies to the Portfolio’s disclosures about transfers in and out of Level 1 and Level 2 of the fair value hierarchy and the reasons for the transfers as well as disclosures about the valuation techniques and inputs used to measure fair value for investments that fall in either Level 2 or Level 3 fair value hierarchy.
As of the period ended June 30, 2010, there were no securities transferred from Level 1 to Level 2 and no securities transferred from Level 2 to Level 1.
Securities transactions, investment income and expenses – Securities transactions are recorded on a trade date basis for financial statement purposes. Dividend income is recorded on the ex-dividend date. Interest income is recorded daily on the accrual basis and includes amortization of premium and

37


 

State Street Equity 500 Index Portfolio
Notes to Financial Statements (continued)
June 30, 2010 (Unaudited)
accretion of discount on investments. Realized gains and losses from securities transactions are recorded on the basis of identified cost. Expenses are accrued daily based on average daily net assets.
All of the net investment income and realized and unrealized gains and losses from the security transactions of the Portfolio are allocated pro rata among the partners in the Portfolio based on each partner’s daily ownership percentage.
Federal income taxes: The Portfolio is not required to pay federal income taxes on its net investment income and net capital gains because it is treated as a partnership for federal income tax purposes. All interest, dividends, gains and losses of the Portfolio are deemed to have been “passed through” to the Portfolio’s partners in proportion to their holdings in the Portfolio, regardless of whether such items have been distributed by the Portfolio. Each partner is responsible for tax liability based on its distributive share; therefore, no provision has been made for federal income taxes.
The Portfolio has reviewed the tax positions for open years as of and during the year ended December 31, 2009, and determined it did not have a liability for any unrecognized tax expenses. The Portfolio recognizes interest and penalties, if any, related to tax liabilities as income tax expense in the Statement of Operations. As of June 30, 2010, tax years 2006 through 2009 remain subject to examination by the Portfolio’s major tax jurisdictions, which include the United States of America and the Commonwealth of Massachusetts.
At June 30, 2010, the book cost of investments was $1,372,215 which approximates cost computed on a federal tax basis. The aggregate gross unrealized appreciation and gross unrealized depreciation was $488,044 and $132,094, respectively, resulting in net appreciation of $355,950 for all securities as computed on a federal income tax basis.
Futures: The Portfolio may enter into financial futures contracts as part of its strategy to track the performance of the S&P 500® Index. Upon entering into a futures contract, the Portfolio is required to deposit with the broker cash or securities in an amount equal to a certain percentage of the contract amount. Variation margin payments are made or received by the Portfolio each day, depending on the daily fluctuations in the value of the underlying security or index, and are recorded for financial statement purposes as unrealized gains or losses by the Portfolio. The Portfolio recognizes a realized gain or loss when the contract is closed. The Portfolio voluntarily segregates securities in an amount equal to the outstanding value of the open futures contracts in accordance with Securities and Exchange Commission requirements.
The primary risks associated with the use of futures contracts are an imperfect correlation between the change in market value of the securities held by the Portfolio and the prices of futures contracts and the possibility of an illiquid market.
The Portfolio adopted provisions surrounding Derivatives and Hedging which requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. The following table, grouped into appropriate risk

38


 

State Street Equity 500 Index Portfolio
Notes to Financial Statements (continued)
June 30, 2010 (Unaudited)
categories, discloses the amounts related to the Portfolio’s use of derivative instruments and hedging activities at June 30, 2010:
Liability Derivatives(1) (amounts in thousands)
                                                         
            Foreign                    
    Interest Rate   Exchange   Credit   Equity   Commodity   Other    
    Contracts Risk   Contracts Risk   Contracts Risk   Contracts Risk   Contracts Risk   Contracts Risk   Total
Futures Contracts
  $     $     $     $ (2,753 )   $     $     $ (2,753 )
 
(1)   Portfolio of Investments: Unrealized depreciation of futures contracts.
Transactions in derivative instruments during the six months ended June 30, 2010, were as follows:
Realized Gain (Loss)(1) (amounts in thousands)
                                                         
            Foreign                    
    Interest Rate   Exchange   Credit   Equity   Commodity   Other    
    Contracts Risk   Contracts Risk   Contracts Risk   Contracts Risk   Contracts Risk   Contracts Risk   Total
Futures Contracts
  $     $     $     $ (236 )   $     $     $ (236 )
Change in Appreciation (Depreciation)(2) (amounts in thousands)
                                                         
            Foreign                    
    Interest Rate   Exchange   Credit   Equity   Commodity   Other    
    Contracts Risk   Contracts Risk   Contracts Risk   Contracts Risk   Contracts Risk   Contracts Risk   Total
Futures Contracts
  $     $     $     $ (3,300 )   $     $     $ (3,300 )
 
(1)   Statement of Operations location: Net realized gain (loss) on: Futures contracts
 
(2)   Statement of Operations location: Net change in unrealized appreciation (depreciation) on: Futures contracts
Use of estimates: The Portfolio’s financial statements are prepared in accordance with U.S. generally accepted accounting principles, which require the use of management estimates. Actual results could differ from those estimates.
3. Securities Transactions
For the period ended June 30, 2010, purchases and sales of investment securities, excluding short-term investments, futures contracts, contributions in-kind and fair value of withdrawals, aggregated to $169,814 and $190,169, respectively.
4. Related Party Fees and Transactions
The Portfolio has entered into an investment advisory agreement with SSgA Funds Management, Inc. (“SSgA FM” or the “Adviser”), a subsidiary of State Street Corporation and an affiliate of State Street Bank and Trust Company (“State Street”), under which SSgA FM directs the investments of the Portfolio in accordance with its investment objective, policies, and limitations. The Trust has contracted with State Street to provide custody, administration and transfer agent services to the Portfolio. In compensation for SSgA FM’s services as investment adviser and for State Street’s services as administrator, custodian and transfer agent (and for assuming ordinary operating expenses of the Portfolio, including ordinary legal, audit and trustees expense), State Street receives a unitary fee, calculated daily, at the annual rate of 0.045% of the Portfolio’s average daily net assets. For the period ended June 30, 2010, these fees amounted to $415.
Certain investments made by the Portfolio were made in securities affiliated with State Street and SSgA FM. Investments in State Street Corporation, the holding company of State Street, were made according

39


 

State Street Equity 500 Index Portfolio
Notes to Financial Statements (continued)
June 30, 2010 (Unaudited)
to its representative portion of the S&P 500® Index. The market value of this investment at June 30, 2010 is listed in the Portfolio of Investments.
5. Trustees’ Fees
Pursuant to certain agreements with State Street and its affiliates, each Independent Trustee receives for his or her services a $30,000 retainer in addition to $2,500 for each in-person meeting and $500 for each telephonic meeting from State Street or its affiliates. These fees are paid through a unitary fee.
6. Indemnifications
The Trust’s organizational documents provide that its officers and trustees are indemnified against certain liabilities arising out of the performance of their duties to the Trust. In addition, both in some of its principal service contracts and in the normal course of its business, the Trust enters into contracts that provide indemnifications to other parties for certain types of losses or liabilities. The Trust’s maximum exposure under these arrangements is unknown as this could involve future claims against the Trust. Management does not expect any significant claims.
7. Subsequent Events
In accordance with provisions surrounding Subsequent Events adopted by the Portfolio, management has evaluated the possibility of subsequent events existing in the Portfolio’s financial statements. Management has determined that there are no material events that would require disclosure in the Portfolio’s financial statements.

40


 

State Street Equity 500 Index Portfolio
General Information
June 30, 2010 (Unaudited)
Proxy Voting Policies and Procedures and Record
The Trust has adopted proxy voting procedures relating to portfolio securities held by the Portfolio. A description of the policies and procedures are available (i) without charge, upon request, by calling (877) 521-4083 or (ii) on the website of the Securities and Exchange Commission (the “SEC”) at www.sec.gov. Information on how the Portfolio voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available by August 31 (i) without charge, upon request, by calling (877) 521-4083 or (ii) on the SEC’s website at www.sec.gov.
Quarterly Portfolio Schedule
The Trust files a complete schedule of portfolio holdings with the SEC for the first and third quarters of its fiscal year (as of March and September of each year) on Form N-Q. The Trust’s Forms N-Q are available on the SEC’s website at www.sec.gov. The Trust’s Forms N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The most recent Form N-Q is available without charge, upon request, by calling (877) 521-4083.

41


 

Schedule of Investments June 30, 2010 (Unaudited)
Master Small Cap Index Series
(Percentages shown are based on Net Assets)
                 
Common Stocks   Shares     Value  
 
Advertising Agencies — 0.9%
               
Arbitron, Inc.
    8,013     $ 205,373  
Constant Contact, Inc. (a)(b)
    8,610       183,651  
DG FastChannel, Inc. (a)
    7,510       244,676  
Dex One Corp. (a)
    15,000       285,000  
Harte-Hanks, Inc.
    11,633       121,565  
InterDigital, Inc. (a)(b)
    13,144       324,525  
National CineMedia, Inc.
    13,123       218,629  
QuinStreet, Inc. (a)
    3,136       36,095  
SuperMedia, Inc. (a)
    3,894       71,221  
Valassis Communications, Inc. (a)
    14,966       474,722  
ValueClick, Inc. (a)
    24,393       260,761  
Viad Corp.
    6,376       112,537  
 
             
 
            2,538,755  
Aerospace — 1.4%
               
AAR Corp. (a)
    11,639       194,837  
AeroVironment, Inc. (a)
    4,967       107,933  
Applied Energetics, Inc. (a)
    24,385       25,117  
Argon ST, Inc. (a)
    4,031       138,223  
Astronics Corp. (a)
    2,930       47,935  
Ceradyne, Inc. (a)
    7,587       162,134  
Cubic Corp.
    4,676       170,113  
Curtiss-Wright Corp.
    13,509       392,301  
Ducommun, Inc.
    3,300       56,430  
Esterline Technologies Corp. (a)
    8,871       420,929  
GenCorp, Inc. (a)
    17,546       76,851  
Heico Corp.
    8,748       314,228  
Herley Industries, Inc. (a)
    4,257       60,705  
Kaman Corp., Class A
    7,809       172,735  
Kratos Defense & Security Solutions, Inc. (a)
    4,949       51,965  
LMI Aerospace, Inc. (a)
    2,724       42,957  
Ladish Co., Inc. (a)
    4,734       107,556  
Moog, Inc., Class A (a)
    13,539       436,362  
Orbital Sciences Corp. (a)
    17,124       270,046  
Teledyne Technologies, Inc. (a)
    10,752       414,812  
Triumph Group, Inc.
    4,955       330,152  
 
             
 
            3,994,321  
Agriculture, Fishing & Ranching — 0.5%
               
The Andersons, Inc.
    5,575       181,689  
Cadiz, Inc. (a)
    4,204       50,742  
Cal-Maine Foods, Inc.
    4,243       135,479  
Calavo Growers, Inc.
    3,536       63,507  
Fresh Del Monte Produce, Inc. (a)
    11,876       240,370  
Limoneira Co.
    2,434       52,964  
Pilgrims Pride Corp. (a)
    15,377       101,027  
Sanderson Farms, Inc.
    6,786       344,322  
Seaboard Corp.
    96       144,960  
 
             
 
            1,315,060  
Air Transport — 1.0%
               
Air Transport Services Group, Inc. (a)
    16,200       77,112  
AirTran Holdings, Inc. (a)
    40,304       195,475  
Alaska Air Group, Inc. (a)
    10,698       480,875  
Allegiant Travel Co. (b)
    4,560       194,666  
Atlas Air Worldwide Holdings, Inc. (a)
    7,760       368,600  
Bristow Group, Inc. (a)
    10,773       316,726  
Hawaiian Holdings, Inc. (a)
    15,735       81,350  
JetBlue Airways Corp. (a)
    73,190       401,813  
PHI, Inc. (a)
    4,223       59,502  
Pinnacle Airlines Corp. (a)
    6,116       33,271  
Republic Airways Holdings, Inc. (a)
    10,400       63,544  
SkyWest, Inc.
    16,732       204,465  
US Airways Group, Inc. (a)(b)
    48,454       417,189  
 
             
 
            2,894,588  
Alternative Energy — 0.3%
               
Clean Energy Fuels Corp. (a)(b)
    12,215       182,492  
Comverge, Inc. (a)
    7,823       70,094  
EnerNOC, Inc. (a)(b)
    5,961       187,414  
Green Plains Renewable Energy (a)
    4,980       50,896  
Rex American Resources Corp. (a)
    2,365       37,840  
Syntroleum Corp. (a)
    22,130       36,293  
USEC, Inc. (a)
    34,150       162,554  
 
             
 
            727,583  
Aluminum — 0.1%
               
Century Aluminum Co. (a)
    19,199       169,527  
Kaiser Aluminum Corp.
    4,605       159,656  
 
             
 
            329,183  
Asset Management & Custodian — 0.9%
               
American Capital Ltd. (a)(b)
    101,892       491,120  
Apollo Investment Corp.
    58,849       549,061  
Artio Global Investors, Inc.
    8,318       130,925  
Calamos Asset Management, Inc., Class A
    5,840       54,195  
Capital Southwest Corp.
    869       76,394  
Cohen & Steers, Inc. (b)
    5,134       106,479  
Cowen Group, Inc., Class A (a)
    11,221       46,006  
Diamond Hill Investments Group
    728       41,270  
Epoch Holding Corp.
    4,127       50,638  
Fifth Street Finance Corp.
    13,513       149,048  
Financial Engines, Inc. (a)
    4,059       55,203  
GAMCO Investors, Inc., Class A
    2,066       76,855  
Golub Capital BDC, Inc.
    2,265       32,661  
Harris & Harris Group, Inc. (a)
    9,712       39,722  
JMP Group, Inc.
    4,706       29,130  
MCG Capital Corp.
    23,131       111,723  
MVC Capital, Inc.
    7,347       94,923  
NGP Capital Resources Co.
    6,861       49,193  
National Financial Partners Corp. (a)
    12,618       123,278  
Oppenheimer Holdings, Inc.
    3,009       72,066  
Solar Capital Ltd.
    1,659       31,952  
THL Credit, Inc. (a)
    2,766       31,809  
TICC Capital Corp.
    8,304       69,754  
Virtus Investment Partners, Inc. (a)
    1,648       30,851  
Westwood Holdings Group, Inc.
    1,758       61,794  
 
             
 
            2,606,050  
Auto Parts — 0.7%
               
ATC Technology Corp. (a)
    5,990       96,559  
American Axle & Manufacturing Holdings, Inc. (a)
    16,952       124,258  
Amerigon, Inc. (a)
    6,500       47,970  
ArvinMeritor, Inc. (a)
    28,139       368,621  
Dana Holding Corp. (a)
    42,025       420,250  
Dorman Products, Inc. (a)
    3,377       68,654  
Exide Technologies (a)
    22,951       119,345  
Fuel Systems Solutions, Inc. (a)(b)
    4,251       110,313  
Standard Motor Products, Inc.
    5,982       48,275  
Stoneridge, Inc. (a)
    4,767       36,182  
Superior Industries International, Inc.
    6,929       93,126  
Tenneco, Inc. (a)
    17,879       376,532  
U.S. Auto Parts Network, Inc. (a)
    4,321       25,926  
 
             
 
            1,936,011  
See Notes to Financial Statements.
             
42   MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010    

 


 

     
Schedule of Investments (continued)
  Master Small Cap Index Series
 
  (Percentages shown are based on Net Assets)
                 
Common Stocks   Shares     Value  
 
Auto Services — 0.1%
               
Cooper Tire & Rubber Co. (b)
    18,228     $ 355,446  
Back Office Support, HR, & Consulting — 1.4%
               
APAC Customer Services, Inc. (a)
    10,021       57,120  
Administaff, Inc.
    6,459       156,049  
The Advisory Board Co. (a)
    4,685       201,268  
Barrett Business Services, Inc.
    2,631       32,624  
CBIZ, Inc. (a)
    13,553       86,197  
CDI Corp.
    4,021       62,446  
CRA International, Inc. (a)
    3,485       65,623  
Compass Diversified Holdings
    10,042       134,663  
Corporate Executive Board Co.
    10,242       269,057  
CoStar Group, Inc. (a)
    6,194       240,327  
Diamond Management & Technology Consultants, Inc.
    7,358       75,861  
Dice Holdings, Inc. (a)
    5,025       34,773  
ExlService Holdings, Inc. (a)
    4,738       81,351  
Forrester Research, Inc. (a)
    4,445       134,506  
GP Strategies Corp. (a)
    4,600       33,396  
Heidrick & Struggles International, Inc.
    5,334       121,722  
Hudson Highland Group, Inc. (a)
    10,272       45,197  
Huron Consulting Group, Inc. (a)
    6,670       129,465  
ICF International, Inc. (a)
    5,280       126,350  
Kelly Services, Inc., Class A (a)
    8,245       122,603  
Kforce, Inc. (a)
    9,379       119,582  
Korn/Ferry International (a)
    13,821       192,112  
LECG Corp. (a)
    9,818       25,527  
Liquidity Services, Inc. (a)
    4,300       55,728  
LoopNet, Inc. (a)
    6,083       75,003  
MAXIMUS, Inc.
    5,236       303,007  
Manpower, Inc.
          17  
Navigant Consulting, Inc. (a)
    15,244       158,233  
On Assignment, Inc. (a)
    11,551       58,102  
Resources Connection, Inc. (a)
    13,972       190,019  
SFN Group, Inc. (a)
    16,030       87,524  
SYKES Enterprises, Inc. (a)
    12,455       177,235  
TeleTech Holdings, Inc. (a)
    9,140       117,815  
TrueBlue, Inc. (a)
    13,277       148,570  
Volt Information Sciences, Inc. (a)
    4,837       40,631  
 
             
 
            3,959,703  
Banks: Diversified — 6.2%
               
1st Source Corp.
    4,666       78,949  
1st United BanCorp., Inc. (a)
    6,966       51,270  
Alliance Financial Corp.
    1,610       44,758  
American National Bankshares, Inc.
    2,097       44,855  
Ameris Bancorp
    7,382       71,310  
Ames National Corp.
    2,595       50,706  
Arrow Financial Corp.
    2,945       68,029  
Bancfirst Corp.
    2,089       76,228  
Banco Latinoamericana De Comercio Exterior SA
    8,601       107,426  
The Bancorp, Inc. (a)
    7,101       55,601  
Bancorp Rhode Island, Inc.
    1,320       34,584  
Bank of Marin Bancorp
    1,727       55,143  
Bank of the Ozarks, Inc.
    3,914       138,830  
Boston Private Financial Holdings, Inc.
    21,013       135,114  
Bridge Bancorp, Inc.
    2,116       51,376  
Bryn Mawr Bank Corp.
    2,799       46,967  
CNB Financial Corporation
    3,069       33,698  
CVB Financial Corp. (b)
    26,827       254,856  
Camden National Corp.
    2,404       66,038  
Capital City Bank Group, Inc. (b)
    3,783       46,834  
Cardinal Financial Corp.
    8,913       82,356  
Cathay General Bancorp
    23,631       244,108  
Center Financial Corp. (a)
    11,027       56,789  
Centerstate Banks, Inc.
    6,845       69,066  
Chemical Financial Corp.
    7,349       160,061  
Citizens & Northern Corp.
    3,947       42,233  
Citizens Banking Corp. (a)
    119,962       101,968  
City Holding Co.
    4,704       131,148  
CoBiz Financial, Inc.
    10,294       67,837  
Columbia Banking System, Inc.
    11,788       215,249  
Community Bank System, Inc.
    9,923       218,604  
Community Trust Bancorp, Inc.
    4,181       104,943  
Danvers Bancorp, Inc.
    5,866       84,764  
Eagle Bancorp, Inc. (a)
    5,134       60,479  
Enterprise Financial Services Corp.
    4,884       47,082  
F.N.B. Corp.
    34,235       274,907  
Financial Institutions, Inc.
    3,303       58,661  
First Bancorp, Inc.
    2,937       38,563  
First Bancorp, North Carolina
    4,594       66,567  
First Busey Corp. (b)
    16,534       74,899  
First Commonwealth Financial Corp.
    26,125       137,156  
First Community Bancshares, Inc.
    4,913       72,172  
First Financial Bancorp
    17,309       258,770  
First Financial Bankshares, Inc.
    6,139       295,225  
First Financial Corp.
    3,422       88,322  
First Merchants Corp.
    8,112       68,790  
First Midwest Bancorp, Inc.
    22,176       269,660  
The First of Long Island Corp.
    1,918       49,312  
First South Bancorp, Inc.
    2,851       30,249  
FirstMerit Corp.
    32,081       549,548  
German American Bancorp, Inc.
    3,588       54,896  
Glacier Bancorp, Inc.
    21,509       315,537  
Greene County Bancshares, Inc. (a)
    3,759       48,002  
Hancock Holding Co.
    8,558       285,495  
Heartland Financial USA, Inc. (b)
    4,086       70,606  
Home Bancshares, Inc.
    6,655       151,801  
Hudson Valley Holding Corp.
    3,608       83,417  
IBERIABANK Corp.
    7,945       409,009  
International Bancshares Corp.
    15,758       263,001  
Investors Bancorp, Inc. (a)
    14,211       186,448  
Lakeland Bancorp, Inc.
    6,523       55,576  
Lakeland Financial Corp.
    4,970       99,301  
MA Independent Bank Corp.
    6,415       158,322  
MB Financial, Inc.
    15,893       292,272  
MT First Interstate Bancsystem, Inc.
    3,928       61,787  
MainSource Financial Group, Inc.
    6,605       47,358  
Merchants Bancshares, Inc.
    1,733       38,507  
Meridian Interstate Bancorp, Inc. (a)
    3,105       33,845  
Metro Bancorp, Inc. (a)
    4,251       52,457  
Midsouth Bancorp, Inc.
    2,564       32,742  
NBT Bancorp, Inc.
    10,316       210,653  
Nara Bancorp, Inc. (a)
    11,626       98,007  
National Bankshares, Inc.
    2,223       53,863  
National Penn Bancshares, Inc.
    38,212       229,654  
Old National Bancorp
    25,936       268,697  
Oriental Financial Group
    9,855       124,764  
Orrstown Financial Service, Inc.
    2,100       46,473  
Pacific Continental Corp.
    5,880       55,684  
PacWest Bancorp
    9,298       170,246  
Park National Corp. (b)
    3,678       239,217  
Peapack-Gladstone Financial Corp.
    2,883       33,731  
Penns Woods Bancorp, Inc.
    1,395       42,436  
Peoples Bancorp, Inc.
    3,253       47,169  
Pinnacle Financial Partners, Inc. (a)
    10,234       131,507  
See Notes to Financial Statements.
             
    MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010   43

 


 

     
Schedule of Investments (continued)
  Master Small Cap Index Series
 
  (Percentages shown are based on Net Assets)
                 
Common Stocks   Shares     Value  
 
Banks: Diversified (concluded)
               
PrivateBancorp, Inc.
    15,651     $ 173,413  
Prosperity Bancshares, Inc.
    13,829       480,558  
Provident Financial Services, Inc.
    17,989       210,291  
Renasant Corp.
    6,616       94,940  
Republic Bancorp, Inc., Class A
    2,989       66,954  
Rockville Financial, Inc.
    2,684       31,966  
Roma Financial Corp.
    2,733       29,680  
S&T Bancorp, Inc. (b)
    7,470       147,607  
SCBT Financial Corp.
    3,877       136,548  
SVB Financial Group (a)
    12,436       512,736  
SY Bancorp, Inc.
    3,648       83,831  
Sandy Spring Bancorp, Inc.
    7,344       102,889  
Sierra Bancorp
    3,072       35,328  
Signature Bank (a)
    12,173       462,696  
Simmons First National Corp., Class A
    5,178       135,974  
Southside Bancshares, Inc.
    4,953       97,277  
Southwest Bancorp, Inc.
    5,806       77,162  
State Bancorp, Inc.
    5,431       51,595  
StellarOne Corp.
    7,122       90,948  
Sterling Bancorp
    8,268       74,412  
Sterling Bancshares, Inc.
    27,802       130,947  
Suffolk Bancorp
    2,985       92,356  
Susquehanna Bancshares, Inc.
    38,936       324,337  
Taylor Capital Group, Inc. (a)
    3,084       39,907  
Texas Capital Bancshares, Inc. (a)
    10,935       179,334  
Tompkins Trustco, Inc.
    2,401       90,638  
Tower Bancorp, Inc.
    1,863       40,781  
Towne Bank (b)
    7,182       104,283  
Trico Bancshares
    4,347       73,595  
TrustCo Bank Corp. NY
    23,237       130,127  
Trustmark Corp.
    18,948       394,497  
UMB Financial Corp.
    9,330       331,775  
Umpqua Holdings Corp.
    34,358       394,430  
Union First Market Bankshares Corp.
    5,521       67,687  
United Bankshares, Inc. (b)
    11,591       277,489  
United Community Banks, Inc. (a)
    28,666       113,231  
Univest Corp. of Pennsylvania
    5,148       89,163  
Virginia Commerce Bancorp (a)
    6,485       40,531  
Washington Banking Co.
    4,760       60,880  
Washington Trust Bancorp, Inc.
    4,461       76,015  
Webster Financial Corp.
    19,554       350,799  
WesBanco, Inc.
    7,031       118,472  
West Bancorp., Inc. (a)
    5,064       34,486  
West Coast Bancorp (a)
    28,990       73,924  
Westamerica Bancorp. (b)
    8,584       450,832  
Western Alliance Bancorp (a)
    17,825       127,805  
Whitney Holding Corp.
    28,802       266,418  
Wilshire Bancorp, Inc.
    6,088       53,270  
Wintrust Financial Corp.
    9,271       309,095  
 
             
 
            17,958,449  
Banks: Savings, Thrift & Mortgage Lending — 1.1%
               
Abington Bancorp, Inc.
    6,673       58,189  
Astoria Financial Corp.
    25,494       350,797  
Bank Mutual Corp.
    14,337       81,434  
BankFinancial Corp.
    6,200       51,522  
Beneficial Mutual Bancorp, Inc. (a)
    10,346       102,219  
Berkshire Hills Bancorp, Inc.
    4,386       85,439  
BofI Holding, Inc. (a)
    2,218       31,318  
Brookline Bancorp, Inc.
    17,740       157,531  
Dime Community Bancshares, Inc.
    8,192       101,007  
ESB Financial Corp.
    2,997       39,111  
ESSA Bancorp, Inc.
    4,914       60,491  
First Financial Holdings, Inc.
    5,188       59,403  
Flagstar BanCorp., Inc. (a)
    14,476       45,455  
Flushing Financial Corp.
    9,466       115,769  
Great Southern Bancorp, Inc.
    3,095       62,860  
Heritage Financial Corp. (a)
    2,942       44,042  
Home Bancorp, Inc. (a)
    2,774       35,812  
Home Federal Bancorp, Inc.
    5,300       66,939  
Kearny Financial Corp.
    4,644       42,539  
NewAlliance Bancshares, Inc.
    31,305       350,929  
Northfield Bancorp, Inc.
    5,502       71,416  
Northwest Bancshares, Inc.
    32,849       376,778  
OceanFirst Financial Corp.
    4,601       55,534  
Ocwen Financial Corp. (a)
    22,274       226,972  
OmniAmerican Bancorp, Inc. (a)
    3,994       45,092  
Oritani Financial Corp.
    16,846       168,460  
Provident New York Bancorp
    11,920       105,492  
Territorial BanCorp., Inc.
    3,793       71,877  
United Financial Bancorp, Inc.
    5,370       73,301  
ViewPoint Financial Group
    3,233       44,777  
WSFS Financial Corp.
    1,549       55,656  
Westfield Financial, Inc.
    9,012       75,070  
 
             
 
            3,313,231  
Beverage: Brewers & Distillers — 0.1%
               
Boston Beer Co., Inc., Class A (a)
    2,675       180,429  
Beverage: Soft Drinks — 0.1%
               
Coca-Cola Bottling Co. Consolidated
    1,333       63,877  
Farmer Bros. Co.
    2,387       36,020  
Heckmann Corp. (a)(b)
    27,229       126,342  
National Beverage Corp.
    3,470       42,612  
Peet’s Coffee & Tea, Inc. (a)
    3,552       139,487  
 
             
 
            408,338  
Biotechnology — 3.1%
               
AMAG Pharmaceuticals, Inc. (a)
    6,316       216,955  
AVI BioPharma, Inc. (a)
    34,178       55,027  
Accelrys, Inc. (a)
    8,858       57,134  
Acorda Therapeutics, Inc. (a)
    11,626       361,685  
Affymax, Inc. (a)
    6,383       38,170  
Albany Molecular Research, Inc. (a)
    7,440       38,465  
Allos Therapeutics, Inc. (a)
    23,763       145,667  
Alnylam Pharmaceuticals, Inc. (a)
    10,998       165,190  
Arena Pharmaceuticals, Inc. (a)(b)
    30,910       94,894  
Ariad Pharmaceuticals, Inc. (a)
    33,664       94,932  
Arqule, Inc. (a)
    12,752       54,834  
Array Biopharma, Inc. (a)
    16,502       50,331  
BioMimetic Therapeutics, Inc. (a)
    4,824       53,643  
Biosante Pharmaceuticals, Inc. (a)
    20,480       36,045  
Biotime, Inc. (a)
    6,680       41,149  
Celera Corp. (a)
    24,703       161,805  
Celldex Therapeutics, Inc. (a)
    9,844       44,889  
Cepheid, Inc. (a)
    17,847       285,909  
Chelsea Therapeutics International, Inc. (a)
    10,081       29,537  
Clinical Data, Inc. (a)
    3,345       41,612  
Combinatorx, Inc. (a)
    21,729       31,507  
Cubist Pharmaceuticals, Inc. (a)
    17,260       355,556  
Curis, Inc. (a)
    23,604       32,810  
Cypress Bioscience, Inc. (a)
    12,166       27,982  
Cytokinetics, Inc. (a)
    14,961       35,458  
Cytori Therapeutics, Inc. (a)
    12,791       44,513  
See Notes to Financial Statements.
             
44   MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010    

 


 

     
Schedule of Investments (continued)
  Master Small Cap Index Series
 
  (Percentages shown are based on Net Assets)
                 
Common Stocks   Shares     Value  
 
Biotechnology (concluded)
               
CytRx Corp. (a)
    37,640     $ 28,983  
Dyax Corp. (a)
    30,092       68,309  
Dynavax Technologies Corp. (a)
    22,519       41,885  
Emergent Biosolutions, Inc. (a)
    5,657       92,435  
Enzo Biochem, Inc. (a)
    10,424       42,426  
Enzon Pharmaceuticals, Inc. (a)(b)
    14,968       159,409  
Exact Sciences Corp. (a)
    11,168       49,139  
Exelixis, Inc. (a)
    32,821       113,889  
Furiex Pharmaceuticals, Inc. (a)
    2,637       26,792  
Genomic Health, Inc. (a)(b)
    4,272       55,237  
Geron Corp. (a)(b)
    29,274       146,955  
Halozyme Therapeutics, Inc. (a)
    21,725       152,944  
Idenix Pharmaceuticals, Inc. (a)
    11,092       55,460  
ImmunoGen, Inc. (a)
    20,445       189,525  
Immunomedics, Inc. (a)(b)
    19,500       60,255  
Incyte Corp. (a)
    26,476       293,089  
Inhibitex, Inc. (a)
    15,621       39,833  
Inovio Pharmaceuticals, Inc. (a)
    26,434       26,963  
InterMune, Inc. (a)
    13,725       128,329  
Kensey Nash Corp. (a)
    2,432       57,663  
Keryx Biopharmaceuticals, Inc. (a)
    15,456       56,569  
Lexicon Genetics, Inc. (a)
    60,374       77,279  
Ligand Pharmaceuticals, Inc., Class B (a)
    37,409       54,617  
MannKind Corp. (a)(b)
    18,741       119,755  
Martek Biosciences Corp. (a)
    9,923       235,274  
Maxygen, Inc. (a)
    9,719       53,746  
Medivation, Inc. (a)(b)
    10,272       90,804  
Metabolix, Inc. (a)
    8,165       116,841  
Micromet, Inc. (a)
    24,448       152,555  
Momenta Pharmaceuticals, Inc. (a)
    12,111       148,481  
NPS Pharmaceuticals, Inc. (a)
    17,999       115,914  
Nabi Biopharmaceuticals (a)
    13,970       75,997  
Nektar Therapeutics (a)
    28,384       343,446  
Neuralstem, Inc. (a)
    13,499       33,747  
Neurocrine Biosciences, Inc. (a)
    14,916       83,530  
Neurogesx, Inc. (a)
    3,644       24,160  
Novavax, Inc. (a)(b)
    25,850       56,094  
Omeros Corp. (a)
    6,077       45,091  
Onyx Pharmaceuticals, Inc. (a)
    18,755       404,920  
Opko Health, Inc. (a)
    27,628       62,439  
Orexigen Therapeutics, Inc. (a)
    10,000       42,000  
Osiris Therapeutics, Inc. (a)
    5,369       31,194  
PDL BioPharma, Inc.
    35,489       199,448  
Peregrine Pharmaceuticals, Inc. (a)
    16,080       34,572  
Pharmasset, Inc. (a)
    8,933       244,228  
Progenics Pharmaceuticals, Inc. (a)
    8,908       48,816  
Pure Bioscience (a)
    11,689       27,937  
RTI Biologics, Inc. (a)
    17,025       49,883  
Rigel Pharmaceuticals, Inc. (a)
    16,005       115,236  
Sangamo Biosciences, Inc. (a)
    14,038       52,081  
Savient Pharmaceuticals, Inc. (a)
    20,161       254,029  
Seattle Genetics, Inc. (a)
    25,137       301,393  
Sequenom, Inc. (a)
    18,740       110,753  
StemCells, Inc. (a)(b)
    39,100       36,754  
Targacept, Inc. (a)
    7,207       139,311  
Theravance, Inc. (a)
    18,828       236,668  
Vanda Pharmaceuticals, Inc. (a)
    8,575       56,681  
ViroPharma, Inc. (a)
    23,299       261,182  
ZIOPHARM Oncology, Inc. (a)
    15,216       48,387  
ZymoGenetics, Inc. (a)
    16,266       68,642  
 
             
 
            9,135,673  
Building Materials — 0.9%
               
Acuity Brands, Inc.
    12,990       472,576  
Ameron International Corp.
    2,766       166,873  
Builders FirstSource, Inc. (a)
    14,690       35,256  
Gibraltar Industries, Inc. (a)
    9,304       93,970  
Griffon Corp. (a)
    13,307       147,175  
Headwaters, Inc. (a)
    18,810       53,420  
LSI Industries, Inc.
    6,524       31,837  
Louisiana-Pacific Corp. (a)
    37,659       251,939  
NCI Building Systems, Inc. (a)
    5,660       47,374  
Quanex Building Products Corp.
    11,482       198,524  
Simpson Manufacturing Co., Inc.
    11,690       286,990  
Texas Industries, Inc.
    6,233       184,123  
Trex Co., Inc. (a)
    4,741       95,247  
Watsco, Inc.
    8,294       480,388  
 
             
 
            2,545,692  
Building: Climate Control — 0.1%
               
Aaon, Inc.
    3,785       88,228  
Comfort Systems USA, Inc.
    11,590       111,960  
Interline Brands, Inc. (a)
    9,882       170,860  
 
             
 
            371,048  
Building: Roofing, Wallboard & Plumbing — 0.1%
               
Beacon Roofing Supply, Inc. (a)
    13,733       247,469  
Cable Television Services — 0.1%
               
Knology, Inc. (a)
    9,458       103,376  
Mediacom Communications Corp., Class A (a)
    12,803       86,036  
 
             
 
            189,412  
Casinos & Gambling — 0.3%
               
Ameristar Casinos, Inc.
    8,272       124,576  
Boyd Gaming Corp. (a)
    16,324       138,591  
Isle of Capri Casinos, Inc. (a)
    5,003       46,328  
Monarch Casino & Resort, Inc. (a)
    3,071       31,109  
Multimedia Games, Inc. (a)
    8,949       40,271  
Pinnacle Entertainment, Inc. (a)
    18,409       174,149  
Scientific Games Corp., Class A (a)
    19,554       179,897  
Shuffle Master, Inc. (a)
    16,308       130,627  
 
             
 
            865,548  
Chemicals: Diversified — 1.3%
               
A Schulman, Inc.
    9,477       179,684  
Aceto Corp.
    8,177       46,854  
American Vanguard Corp.
    6,310       50,038  
Arch Chemicals, Inc.
    6,774       208,233  
Georgia Gulf Corp. (a)
    10,107       134,827  
Hawkins, Inc. (b)
    2,718       65,449  
Innophos Holdings, Inc.
    6,469       168,712  
KMG Chemicals, Inc.
    1,950       28,002  
LSB Industries, Inc. (a)
    5,200       69,212  
Landec Corp. (a)
    8,333       49,081  
OM Group, Inc. (a)
    9,242       220,514  
Olin Corp.
    23,480       424,753  
Omnova Solutions, Inc. (a)
    13,628       106,435  
PolyOne Corp. (a)
    27,896       234,884  
Rockwood Holdings, Inc. (a)
    15,642       354,917  
Sensient Technologies Corp.
    14,793       383,583  
Solutia, Inc. (a)
    36,205       474,286  
TPC Group, Inc. (a)
    2,517       41,782  
W.R. Grace & Co. (a)
    21,780       458,251  
Westlake Chemical Corp.
    5,884       109,266  
 
             
 
            3,808,763  
See Notes to Financial Statements.
             
    MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010   45

 


 

     
Schedule of Investments (continued)
  Master Small Cap Index Series
 
  (Percentages shown are based on Net Assets)
                 
Common Stocks   Shares     Value  
 
Chemicals: Specialty — 0.5%
               
Balchem Corp.
    8,523     $ 213,075  
Calgon Carbon Corp. (a)
    16,780       222,167  
Kraton Performance Polymers, Inc. (a)
    3,420       64,262  
NewMarket Corp.
    3,072       268,247  
Polypore International, Inc. (a)
    6,608       150,266  
Quaker Chemical Corp.
    3,395       91,970  
Senomyx, Inc. (a)
    12,066       45,730  
Stepan Co.
    2,341       160,195  
Zep, Inc.
    6,589       114,912  
 
             
 
            1,330,824  
Coal — 0.3%
               
Cloud Peak Energy, Inc. (a)
    9,460       125,439  
International Coal Group, Inc. (a)
    39,462       151,929  
James River Coal Co. (a)
    8,287       131,929  
L&L Energy, Inc. (a)
    5,132       44,135  
Patriot Coal Corp. (a)
    23,433       275,338  
 
             
 
            728,770  
Commercial Finance & Mortgage Companies — 0.1%
               
Asta Funding, Inc.
    3,837       37,871  
Federal Agricultural Mortgage Corp., Class B
    3,005       42,160  
Medallion Financial Corp.
    5,845       38,577  
NewStar Financial, Inc. (a)
    8,659       55,072  
 
             
 
            173,680  
Commercial Services: Rental & Leasing — 0.5%
               
Aircastle Ltd.
    15,396       120,859  
CAI International, Inc. (a)
    3,206       38,151  
Electro Rent Corp.
    5,153       65,907  
H&E Equipment Services, Inc. (a)
    8,621       64,571  
Marlin Business Services, Inc. (a)
    2,802       33,876  
McGrath RentCorp
    7,260       165,383  
Mobile Mini, Inc. (a)
    10,970       178,592  
PHH Corp. (a)(b)
    16,627       316,578  
RSC Holdings, Inc. (a)
    14,971       92,371  
TAL International Group, Inc.
    5,066       113,833  
United Rentals, Inc. (a)
    18,078       168,487  
 
             
 
            1,358,608  
Commercial Vehicles & Parts — 0.2%
               
Commercial Vehicle Group, Inc. (a)
    7,476       76,330  
Force Protection, Inc. (a)
    21,241       87,088  
Miller Industries, Inc.
    3,090       41,622  
Modine Manufacturing Co. (a)
    13,946       107,105  
Rush Enterprises, Inc., Class A (a)
    9,793       130,835  
Spartan Motors, Inc.
    10,027       42,113  
Wabash National Corp. (a)
    17,718       125,975  
 
             
 
            611,068  
Communications Technology — 2.6%
               
AboveNet, Inc. (a)
    6,735       317,757  
Acme Packet, Inc. (a)
    13,167       353,929  
Adtran, Inc.
    18,543       505,668  
Anaren, Inc. (a)
    4,568       68,246  
Anixter International, Inc. (a)
    8,399       357,797  
Aruba Networks, Inc. (a)(b)
    22,033       313,750  
Aviat Networks, Inc. (a)
    18,591       67,485  
Bel Fuse, Inc.
    3,259       53,806  
BigBand Networks, Inc. (a)
    15,609       47,139  
Black Box Corp.
    5,322       148,431  
Comtech Telecommunications Corp. (a)
    8,487       254,016  
Digi International, Inc. (a)
    7,738       63,993  
DigitalGlobe, Inc. (a)
    8,155       214,477  
EMS Technologies, Inc. (a)
    4,700       70,594  
Echelon Corp. (a)(b)
    10,208       74,825  
Emulex Corp. (a)
    24,180       221,972  
Extreme Networks, Inc. (a)
    27,499       74,247  
Finisar Corp. (a)
    22,658       337,604  
GSI Technology, Inc. (a)
    6,262       35,819  
GeoEye, Inc. (a)
    6,798       211,690  
Globecomm Systems, Inc. (a)
    6,819       56,257  
Harmonic, Inc. (a)
    29,307       159,430  
Hughes Communications, Inc. (a)
    3,025       73,598  
Infinera Corp. (a)
    26,645       171,327  
Ixia (a)
    9,981       85,737  
KVH Industries, Inc. (a)
    4,559       56,623  
Loral Space & Communications Ltd. (a)
    3,371       144,009  
NETGEAR, Inc. (a)
    10,573       188,622  
Network Equipment Technologies, Inc. (a)
    9,849       34,373  
Novatel Wireless, Inc. (a)
    9,400       53,956  
Oclaro, Inc. (a)
    14,947       165,762  
Oplink Communications, Inc. (a)
    6,474       92,773  
PC-Tel, Inc. (a)
    6,452       32,518  
Plantronics, Inc.
    14,449       413,241  
Riverbed Technology, Inc. (a)
    18,918       522,515  
SeaChange International, Inc. (a)
    8,651       71,198  
Shoretel, Inc. (a)
    13,690       63,522  
Sonus Networks, Inc. (a)
    62,969       170,646  
Sycamore Networks, Inc.
    6,039       100,368  
Syniverse Holdings, Inc. (a)
    20,692       423,152  
Tekelec (a)
    20,484       271,208  
Viasat, Inc. (a)
    9,945       323,809  
 
             
 
            7,467,889  
Computer Services Software & Systems — 6.2%
               
3PAR, Inc. (a)
    11,779       109,662  
ACI Worldwide, Inc. (a)(c)
    10,249       199,548  
Actuate Corp. (a)
    13,953       62,091  
Acxiom Corp. (a)
    20,521       301,453  
American Reprographics Co. (a)
    11,289       98,553  
American Software, Class A
    7,446       34,401  
ArcSight, Inc. (a)
    7,433       166,425  
Ariba, Inc. (a)
    27,012       430,301  
Art Technology Group, Inc. (a)
    47,601       162,795  
Aspen Technology, Inc. (a)
    18,777       204,482  
Avid Technology, Inc. (a)
    8,943       113,844  
Bell Microproducts, Inc. (a)
    10,049       70,142  
Blackbaud, Inc.
    13,479       293,438  
Blackboard, Inc. (a)
    10,236       382,110  
Blue Coat Systems, Inc. (a)
    12,500       255,375  
Bottomline Technologies, Inc. (a)
    8,343       108,709  
CACI International, Inc., Class A (a)
    9,034       383,764  
CDC Corp., Class A (a)
    30,340       63,107  
CSG Systems International, Inc. (a)
    10,267       188,194  
Ciber, Inc. (a)
    19,702       54,575  
CommVault Systems, Inc. (a)
    13,005       292,612  
Compellent Technologies, Inc. (a)
    7,042       85,349  
Computer Task Group, Inc. (a)
    4,822       31,150  
ComScore, Inc. (a)
    6,814       112,227  
Concur Technologies, Inc. (a)
    12,059       514,678  
DealerTrack Holdings, Inc. (a)
    12,132       199,571  
Delrek, Inc. (a)
    6,015       50,165  
DemandTec, Inc. (a)
    5,800       39,150  
See Notes to Financial Statements.
             
46   MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010    

 


 

     
Schedule of Investments (continued)
  Master Small Cap Index Series
 
  (Percentages shown are based on Net Assets)
                 
Common Stocks   Shares     Value  
 
Computer Services Software & Systems (continued)
               
Digimarc Corp. (a)
    2,239     $ 41,981  
Digital River, Inc. (a)
    11,836       282,999  
DivX, Inc. (a)
    10,141       77,680  
Double-Take Software, Inc. (a)
    6,507       68,258  
DynaVox, Inc., Class A (a)
    2,910       46,589  
EPIQ Systems, Inc. (a)
    9,930       128,395  
EarthLink, Inc.
    32,160       255,994  
Ebix, Inc. (a)(b)
    8,146       127,729  
Epicor Software Corp. (a)
    14,572       116,430  
Fortinet, Inc. (a)
    11,935       196,211  
Hypercom Corp. (a)
    14,288       66,296  
iGate Corp.
    7,274       93,253  
infoGROUP, Inc. (a)
    11,948       95,345  
Infospace, Inc. (a)
    11,014       82,825  
Integral Systems, Inc. (a)
    5,614       35,649  
Interactive Intelligence, Inc. (a)
    4,034       66,279  
Internap Network Services Corp. (a)
    16,205       67,575  
Internet Brands, Inc., Class A (a)
    8,900       91,937  
Internet Capital Group, Inc. (a)
    11,289       85,796  
JDA Software Group, Inc. (a)
    12,520       275,190  
KIT Digital, Inc. (a)
    6,183       54,534  
Kenexa Corp. (a)
    7,014       84,168  
Keynote Systems, Inc.
    4,271       38,524  
Lawson Software, Inc. (a)
    41,384       302,103  
Limelight Networks, Inc. (a)
    12,872       56,508  
Lionbridge Technologies, Inc. (a)
    18,434       84,243  
LivePerson, Inc. (a)
    13,488       92,528  
Local.com Corp. (a)
    5,102       34,898  
LogMeIn, Inc. (a)
    4,574       119,976  
Magma Design Automation, Inc. (a)
    16,266       46,195  
Manhattan Associates, Inc. (a)
    6,837       188,359  
Mantech International Corp., Class A (a)
    6,640       282,665  
Mentor Graphics Corp. (a)
    32,123       284,289  
Mercury Computer Systems, Inc. (a)
    7,342       86,122  
MicroStrategy, Inc., Class A (a)
    2,698       202,593  
Moduslink Global Solutions, Inc. (a)
    13,831       83,401  
Monotype Imaging Holdings, Inc. (a)
    6,966       62,764  
NCI, Inc., Class A (a)
    2,092       47,237  
NIC, Inc.
    16,995       108,938  
NetScout Systems, Inc. (a)
    9,278       131,933  
NetSuite, Inc. (a)
    5,486       69,343  
OpenTable, Inc. (a)
    4,796       198,890  
Openwave Systems, Inc. (a)
    26,129       53,042  
Opnet Technologies, Inc.
    4,149       60,949  
PDF Solutions, Inc. (a)
    7,469       35,851  
PROS Holdings, Inc. (a)
    6,019       39,124  
Parametric Technology Corp. (a)
    34,742       544,407  
Pegasystems, Inc.
    4,869       156,344  
Perficient, Inc. (a)
    7,167       63,858  
Progress Software Corp. (a)
    12,626       379,159  
Quest Software, Inc. (a)
    17,902       322,952  
Rackspace Hosting, Inc. (a)(b)
    29,055       532,869  
Radiant Systems, Inc. (a)
    8,787       127,060  
RealNetworks, Inc. (a)
    25,832       85,246  
RightNow Technologies, Inc. (a)
    6,671       104,668  
SAVVIS, Inc. (a)
    11,422       168,475  
SRA International, Inc., Class A (a)
    12,853       252,819  
SS&C Technologies Holdings, Inc. (a)
    3,743       60,000  
SYNNEX Corp. (a)
    6,747       172,858  
Saba Software, Inc. (a)
    9,072       46,721  
Sapient Corp.
    30,916       313,488  
Smith Micro Software, Inc. (a)
    9,251       87,977  
SolarWinds, Inc. (a)
    10,495       168,340  
Sonic Solutions, Inc. (a)
    7,856       65,598  
SonicWALL, Inc. (a)
    16,684       196,037  
Sourcefire, Inc. (a)
    8,313       157,947  
Stanley, Inc. (a)
    4,219       157,706  
SuccessFactors, Inc. (a)
    18,971       394,407  
Support.com, Inc. (a)
    14,780       61,485  
Synchronoss Technologies, Inc. (a)
    6,195       117,519  
Syntel, Inc.
    3,960       134,442  
TIBCO Software, Inc. (a)
    49,698       599,358  
TNS, Inc. (a)
    7,901       137,793  
Taleo Corp., Class A (a)
    11,992       291,286  
TeleCommunication Systems, Inc., Class A (a)
    13,870       57,422  
Terremark Worldwide, Inc. (a)
    17,798       139,002  
Tier Technologies, Inc., Class B (a)
    4,796       29,160  
Tyler Technologies, Inc. (a)
    9,295       144,258  
Ultimate Software Group, Inc. (a)
    7,524       247,239  
Unica Corp. (a)
    5,343       51,186  
Unisys Corp. (a)
    12,776       236,228  
United Online, Inc.
    25,946       149,449  
VASCO Data Security International, Inc. (a)
    8,346       51,495  
VeriFone Systems, Inc. (a)
    25,654       485,630  
VirnetX Holding Corp.
    10,104       59,816  
Virtusa Corp. (a)
    4,485       41,845  
Wave Systems Corp., Class A (a)
    24,643       79,843  
Websense, Inc. (a)
    12,973       245,190  
Zix Corp. (a)
    18,399       41,582  
 
             
 
            18,119,623  
Computer Technology — 0.9%
               
ADPT Corp. (a)
    35,000       101,150  
Cray, Inc. (a)
    11,034       61,570  
Hutchinson Technology, Inc. (a)
    7,643       33,094  
Imation Corp. (a)
    9,203       84,576  
Immersion Corp. (a)
    9,000       45,540  
Insight Enterprises, Inc. (a)
    14,106       185,635  
Intermec, Inc. (a)
    14,702       150,695  
Isilon Systems, Inc. (a)
    8,122       104,286  
Netezza Corp. (a)
    15,362       210,152  
Network Engines, Inc. (a)
    11,600       31,436  
Palm, Inc. (a)
    49,394       281,052  
Quantum Corp. (a)
    63,826       119,993  
Radisys Corp. (a)
    7,569       72,057  
Rimage Corp. (a)
    3,020       47,807  
STEC, Inc. (a)(b)
    12,189       153,094  
Safeguard Scientifics, Inc. (a)
    6,233       65,820  
Silicon Graphics International Corp. (a)
    9,459       66,970  
Stratasys, Inc. (a)
    6,210       152,518  
Super Micro Computer, Inc. (a)
    7,404       99,954  
Synaptics, Inc. (a)(b)
    10,123       278,382  
Xyratex Ltd. (a)
    9,124       129,105  
 
             
 
            2,474,886  
Construction — 0.5%
               
EMCOR Group, Inc. (a)
    19,827       459,392  
Granite Construction, Inc.
    10,376       244,666  
Great Lakes Dredge & Dock Corp.
    18,018       108,108  
Insituform Technologies, Inc., Class A (a)
    11,784       241,336  
Orion Marine Group, Inc. (a)
    8,146       115,673  
Primoris Services Corp.
    6,696       42,185  
See Notes to Financial Statements.
             
    MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010   47

 


 

     
Schedule of Investments (continued)
  Master Small Cap Index Series
 
  (Percentages shown are based on Net Assets)
                 
Common Stocks   Shares     Value  
 
Construction (concluded)
               
Sterling Construction Co., Inc. (a)
    4,995     $ 64,635  
Tutor Perini Corp. (a)
    8,000       131,840  
 
             
 
            1,407,835  
Consumer Electronics — 0.1%
               
Audiovox Corp., Class A (a)
    5,923       43,534  
TiVo, Inc. (a)
    34,999       258,293  
Universal Electronics, Inc. (a)
    4,299       71,492  
 
             
 
            373,319  
Consumer Lending — 0.8%
               
Advance America, Cash Advance Centers, Inc.
    16,921       69,884  
Cash America International, Inc.
    8,877       304,215  
Credit Acceptance Corp. (a)
    1,932       94,224  
Dollar Financial Corp. (a)
    7,443       147,297  
Encore Capital Group, Inc. (a)
    4,290       88,417  
Ezcorp, Inc. (a)
    13,929       258,383  
First Cash Financial Services, Inc. (a)
    9,146       199,383  
The First Marblehead Corp. (a)
    17,700       41,595  
MGIC Investment Corp. (a)
    60,244       415,081  
MoneyGram International, Inc. (a)
    25,981       63,653  
Nelnet, Inc., Class A
    8,025       154,722  
Portfolio Recovery Associates, Inc. (a)
    5,109       341,179  
Student Loan Corp.
    1,317       31,713  
World Acceptance Corp. (a)
    4,939       189,213  
 
             
 
            2,398,959  
Consumer Services: Miscellaneous — 0.6%
               
Ancestry.com, Inc. (a)
    5,738       101,104  
Coinstar, Inc. (a)
    9,487       407,656  
Core-Mark Holdings Co., Inc. (a)
    3,341       91,543  
The Knot, Inc. (a)
    9,100       70,798  
Move, Inc. (a)
    47,666       97,715  
Nutrisystem, Inc. (b)
    9,439       216,531  
Pre-Paid Legal Services, Inc. (a)
    2,270       103,262  
Sotheby’s Holdings, Inc., Class A
    20,069       458,978  
Steiner Leisure Ltd. (a)
    4,470       171,827  
 
             
 
            1,719,414  
Containers & Packaging — 0.5%
               
AEP Industries, Inc. (a)
    1,480       35,342  
Graham Packaging Co., Inc. (a)
    5,205       62,304  
Graphic Packaging Holding Co. (a)
    33,561       105,717  
Myers Industries, Inc.
    10,815       87,493  
Rock-Tenn Co., Class A
    11,573       574,831  
Silgan Holdings, Inc.
    16,046       455,386  
 
             
 
            1,321,073  
Cosmetics — 0.1%
               
Elizabeth Arden, Inc. (a)
    7,466       108,406  
Inter Parfums, Inc.
    4,595       65,387  
Revlon, Inc., Class A (a)
    3,396       37,900  
 
             
 
            211,693  
Diversified Financial Services — 0.4%
               
American Physicians Service Group, Inc.
    2,250       55,013  
Duff & Phelps Corp.
    8,332       105,233  
Evercore Partners, Inc., Class A
    4,668       108,998  
FBR Capital Markets Corp. (a)
    16,015       53,330  
Gleacher & Co, Inc. (a)
    23,338       59,512  
Main Street Capital Corp.
    3,852       57,510  
MidwestOne Financial Group, Inc.
    2,364       36,595  
Piper Jaffray Cos. (a)
    5,140       165,611  
Sanders Morris Harris Group, Inc.
    6,664       36,985  
Stifel Financial Corp. (a)
    9,178       398,233  
Thomas Weisel Partners Group, Inc. (a)
    6,946       40,912  
Triangle Capital Corp.
    3,700       52,614  
 
             
 
            1,170,546  
Diversified Manufacturing Operations — 0.3%
               
A.M. Castle & Co. (a)
    5,157       71,631  
Barnes Group, Inc.
    14,488       237,458  
Federal Signal Corp.
    18,741       113,195  
Lydall, Inc. (a)
    5,349       40,866  
OSI Systems, Inc. (a)
    4,879       135,490  
Raven Industries, Inc.
    4,907       165,415  
Standex International Corp.
    3,822       96,888  
Trimas Corp. (a)
    4,741       53,621  
 
             
 
            914,564  
Diversified Materials & Processing — 0.8%
               
Belden, Inc.
    14,079       309,738  
Cabot Microelectronics Corp. (a)
    7,105       245,762  
Clarcor, Inc.
    15,016       533,368  
Encore Wire Corp.
    5,683       103,374  
Hexcel Corp. (a)
    28,858       447,588  
Insteel Industries, Inc.
    5,495       63,852  
Koppers Holdings, Inc.
    6,232       140,095  
Rogers Corp. (a)
    4,777       132,657  
Symyx Technologies, Inc. (a)
    10,942       54,820  
Tredegar Corp.
    7,422       121,127  
Uranium Energy Corp. (a)(b)
    18,951       44,724  
 
             
 
            2,197,105  
Diversified Media — 0.1%
               
Belo Corp., Class A (a)
    27,870       158,580  
EW Scripps Co. (a)
    10,108       75,103  
Playboy Enterprises, Inc., Class B (a)
    7,607       31,949  
 
             
 
            265,632  
Diversified Retail — 0.7%
               
99 Cents Only Stores (a)
    13,806       204,329  
The Bon-Ton Stores, Inc. (a)
    3,747       36,533  
Dillard’s, Inc., Class A
    13,767       295,991  
Fred’s, Inc.
    12,008       132,809  
GSI Commerce, Inc. (a)
    18,639       536,803  
Gaiam, Inc.
    5,289       32,104  
HSN, Inc. (a)
    11,723       281,352  
Overstock.com, Inc. (a)(b)
    4,521       81,694  
PriceSmart, Inc.
    4,889       113,572  
Saks, Inc. (a)(b)
    40,531       307,630  
Tuesday Morning Corp. (a)
    9,188       36,660  
 
             
 
            2,059,477  
Drug & Grocery Store Chains — 0.7%
               
Arden Group, Inc., Class A
    421       36,993  
Casey’s General Stores, Inc.
    15,298       533,900  
drugstore.com, Inc. (a)
    28,687       88,356  
The Great Atlantic & Pacific Tea Co., Inc. (a)(b)
    9,827       38,325  
Ingles Markets, Inc., Class A
    4,469       67,259  
Nash Finch Co.
    3,900       133,224  
The Pantry, Inc. (a)
    7,116       100,407  
PetMed Express, Inc. (b)
    6,993       124,475  
Rite Aid Corp. (a)
    168,748       165,373  
Ruddick Corp.
    13,161       407,859  
Spartan Stores, Inc.
    7,079       97,124  
Village Super Market, Inc., Class A
    2,149       56,411  
See Notes to Financial Statements.
             
48   MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010    

 


 

     
Schedule of Investments (continued)   Master Small Cap Index Series
(Percentages shown are based on Net Assets)
                 
Common Stocks   Shares     Value  
 
Drug & Grocery Store Chains (concluded)
               
Weis Markets, Inc.
    3,461     $ 113,902  
Winn-Dixie Stores, Inc. (a)
    16,954       163,437  
 
             
 
            2,127,045  
Education Services — 0.7%
               
Ambassadors Group, Inc.
    5,800       65,482  
American Public Education, Inc. (a)
    5,551       242,579  
Archipelago Learning, Inc. (a)
    3,702       42,314  
Bridgepoint Education, Inc. (a)
    5,887       93,073  
Capella Education Co. (a)
    5,034       409,516  
Corinthian Colleges, Inc. (a)(b)
    26,265       258,710  
Franklin Covey Co. (a)
    4,416       28,704  
Grand Canyon Education, Inc. (a)
    9,362       219,352  
K12, Inc. (a)
    7,606       168,701  
Lincoln Educational Services Corp. (a)
    4,957       102,064  
Renaissance Learning, Inc.
    4,064       59,700  
Rosetta Stone, Inc. (a)
    3,179       72,990  
School Specialty, Inc. (a)
    5,795       104,716  
Universal Technical Institute, Inc. (a)
    6,341       149,901  
 
             
 
            2,017,802  
Electronic Components — 0.6%
               
3D Systems Corp. (a)
    5,663       71,071  
Acacia Research — Acacia Technologies (a)
    10,280       146,284  
Checkpoint Systems, Inc. (a)
    11,829       205,351  
Cogent, Inc. (a)
    15,757       141,970  
DDi Corp.
    4,341       32,688  
Methode Electronics, Inc.
    11,486       111,874  
Microvision, Inc. (a)(b)
    27,143       80,343  
Multi-Fineline Electronix, Inc. (a)
    3,172       79,173  
NVE Corp. (a)
    1,453       63,249  
Park Electrochemical Corp.
    6,214       151,684  
ScanSource, Inc. (a)
    8,100       201,933  
Smart Modular Technologies WWH, Inc. (a)
    16,041       93,840  
TTM Technologies, Inc. (a)
    24,204       229,938  
Technitrol, Inc.
    12,261       38,745  
Universal Display Corp. (a)(b)
    9,161       164,715  
 
             
 
            1,812,858  
Electronic Entertainment — 0.2%
               
DTS, Inc. (a)
    5,248       172,502  
THQ, Inc. (a)
    20,568       88,854  
Take-Two Interactive Software, Inc. (a)
    21,193       190,737  
 
             
 
            452,093  
Electronics — 0.5%
               
Agilysys, Inc.
    5,739       38,394  
American Science & Engineering, Inc.
    2,708       206,377  
CPI International, Inc. (a)
    2,382       37,135  
Coherent, Inc. (a)
    7,599       260,646  
Daktronics, Inc. (b)
    10,489       78,667  
II-VI, Inc. (a)
    7,540       223,410  
IPG Photonics Corp. (a)
    7,892       120,195  
iRobot Corp. (a)(b)
    6,403       120,312  
Newport Corp. (a)
    11,302       102,396  
Richardson Electronics Ltd.
    4,678       42,102  
Rofin-Sinar Technologies, Inc. (a)
    9,613       200,143  
SRS Labs Inc. (a)
    3,970       36,326  
Spectrum Control, Inc. (a)
    4,019       56,186  
 
             
 
            1,522,289  
Energy Equipment — 0.2%
               
Capstone Turbine Corp. (a)
    74,225       72,740  
Energy Conversion Devices, Inc. (a)(b)
    14,124       57,908  
Evergreen Solar, Inc. (a)(b)
    60,516       41,272  
FuelCell Energy, Inc. (a)(b)
    22,326       26,345  
GT Solar International, Inc. (a)(b)
    18,825       105,420  
PowerSecure International, Inc. (a)
    5,733       52,113  
STR Holdings, Inc. (a)
    8,537       160,496  
 
             
 
            516,294  
Engineering & Contracting Services — 0.4%
               
Dycom Industries, Inc. (a)
    11,783       100,745  
Exponent, Inc. (a)
    4,270       139,714  
Furmamite Corp. (a)
    11,632       46,179  
Hill International, Inc. (a)
    8,249       33,491  
Layne Christensen Co. (a)
    5,980       145,135  
MYR Group, Inc. (a)
    6,129       102,293  
Michael Baker Corp. (a)
    2,424       84,598  
Mistras Group, Inc. (a)
    4,545       48,722  
Tetra Tech, Inc. (a)
    18,448       361,765  
VSE Corp.
    1,300       41,366  
 
             
 
            1,104,008  
Entertainment — 0.5%
               
Ascent Media Corp., Class A (a)
    4,785       120,869  
CKx, Inc. (a)
    16,600       82,834  
Cinemark Holdings, Inc.
    17,250       226,838  
Lions Gate Entertainment Corp. (a)
    20,771       144,982  
Live Nation, Inc. (a)
    42,373       442,798  
LodgeNet Interactive Corp. (a)
    8,242       30,578  
Rentrak Corp. (a)
    3,003       73,063  
Warner Music Group Corp. (a)
    13,884       67,476  
World Wrestling Entertainment, Inc.
    7,483       116,435  
 
             
 
            1,305,873  
Environmental, Maintenance & Security Service — 0.7%
               
ABM Industries, Inc.
    15,588       326,569  
The Brink’s Co.
    14,185       269,940  
Cornell Cos., Inc. (a)
    3,463       93,051  
DynCorp. International, Inc. (a)
    4,664       81,713  
G&K Services, Inc., Class A
    5,760       118,944  
The Geo Group, Inc. (a)
    14,737       305,793  
Healthcare Services Group, Inc.
    13,283       251,713  
Mac-Gray Corp.
    3,825       42,610  
Rollins, Inc.
    12,756       263,922  
Standard Parking Corp. (a)
    4,894       77,472  
Unifirst Corp.
    4,225       185,984  
 
             
 
            2,017,711  
Fertilizers — 0.0%
               
Rentech, Inc. (a)
    67,534       66,859  
Financial Data & Systems — 1.0%
               
Advent Software, Inc. (a)
    4,735       222,356  
Cardtronics, Inc. (a)
    8,306       107,646  
Cass Information Systems, Inc.
    2,650       90,762  
CyberSource Corp. (a)
    21,275       543,151  
Euronet Worldwide, Inc. (a)
    14,840       189,804  
Fair Isaac Corp.
    13,693       298,370  
Global Cash Access, Inc. (a)
    15,346       110,645  
Heartland Payment Systems, Inc.
    11,416       169,413  
Jack Henry & Associates, Inc.
    25,493       608,773  
Online Resources Corp. (a)
    8,641       35,860  
S1 Corp. (a)
    15,922       95,691  
Wright Express Corp. (a)
    11,591       344,253  
 
             
 
            2,816,724  
See Notes to Financial Statements.
             
    MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010   49

 


 

     
Schedule of Investments (continued)   Master Small Cap Index Series
(Percentages shown are based on Net Assets)
                 
Common Stocks   Shares     Value  
 
Foods — 1.2%
               
American Italian Pasta Co., Class A (a)
    6,546     $ 346,087  
B&G Foods, Inc., Class A
    14,604       157,431  
Chiquita Brands International, Inc. (a)
    13,431       163,187  
Diamond Foods, Inc.
    6,537       268,671  
Dole Food Co.,Inc. (a)
    10,938       114,083  
Hain Celestial Group, Inc. (a)
    12,323       248,555  
J&J Snack Foods Corp.
    4,273       179,893  
John B. Sanfilippo & Son, Inc. (a)
    2,787       40,328  
Lancaster Colony Corp.
    5,760       307,354  
Lance, Inc.
    7,862       129,644  
Medifast, Inc. (a)(b)
    4,013       103,977  
Natures Sunshine Prods, Inc. (a)
    2,607       21,821  
Nutraceutical International Corp. (a)
    3,224       49,198  
Seneca Foods Corp. (a)
    2,425       78,231  
Smart Balance, Inc. (a)
    19,404       79,362  
Synutra International, Inc. (a)(b)
    5,506       89,032  
Tootsie Roll Industries, Inc. (b)
    7,110       168,151  
TreeHouse Foods, Inc. (a)
    10,391       474,453  
United Natural Foods, Inc. (a)
    12,933       386,438  
 
             
 
            3,405,896  
Forest Products — 0.1%
               
Deltic Timber Corp.
    3,216       134,429  
Universal Forest Products, Inc.
    5,783       175,283  
 
             
 
            309,712  
Forms & Bulk Printing Services — 0.3%
               
Bowne & Co., Inc.
    12,199       136,873  
Consolidated Graphics, Inc. (a)
    2,846       123,061  
Deluxe Corp.
    15,460       289,875  
Ennis, Inc.
    7,966       119,570  
Innerworkings, Inc. (a)
    7,589       51,833  
M&F Worldwide Corp. (a)
    3,238       87,750  
Multi-Color Corp.
    3,634       37,212  
Schawk, Inc.
    3,513       52,519  
 
             
 
            898,693  
Fruit & Grain Processing — 0.0%
               
MGP Ingredients, Inc. (a)
    4,055       26,885  
Funeral Parlors & Cemeteries — 0.1%
               
Matthews International Corp., Class A
    8,962       262,407  
Stewart Enterprises, Inc., Class A (b)
    24,407       132,042  
 
             
 
            394,449  
Gas Pipeline — 0.0%
               
Crosstex Energy, Inc. (a)
    12,816       82,151  
Glass — 0.0%
               
Apogee Enterprises, Inc.
    8,400       90,972  
Gold — 0.5%
               
Allied Nevada Gold Corp. (a)
    19,087       375,632  
Capital Gold Corp. (a)
    15,345       61,380  
Coeur d’Alene Mines Corp. (a)(b)
    26,326       415,424  
Golden Star Resources Ltd. (a)
    77,301       338,579  
Jaguar Mining, Inc. (a)
    25,288       223,293  
US Gold Corp. (a)
    27,610       138,326  
 
             
 
            1,552,634  
Health Care Facilities — 0.8%
               
Amsurg Corp. (a)
    9,174       163,481  
Assisted Living Concepts, Inc. (a)
    2,996       88,652  
Capital Senior Living Corp. (a)
    8,668       43,080  
Emeritus Corp. (a)(b)
    6,088       99,295  
The Ensign Group, Inc.
    4,340       71,697  
Five Star Quality Care, Inc. (a)
    10,222       30,870  
Hanger Orthopedic Group, Inc. (a)
    7,743       139,064  
HealthSouth Corp. (a)
    28,473       532,730  
Kindred Healthcare, Inc. (a)
    11,821       151,782  
LCA-Vision, Inc. (a)
    5,807       32,171  
MedCath Corp. (a)
    6,451       50,705  
National Healthcare Corp.
    2,638       90,905  
Psychiatric Solutions, Inc. (a)
    16,999       556,207  
Select Medical Holdings Corp. (a)
    14,941       101,300  
Skilled Healthcare Group, Inc., Class A (a)
    6,500       44,135  
Sun Healthcare Group, Inc. (a)
    13,255       107,100  
Sunrise Senior Living, Inc. (a)
    17,074       47,466  
US Physical Therapy, Inc. (a)
    3,141       53,020  
 
             
 
            2,403,660  
Health Care Management Services — 1.0%
               
AMERIGROUP Corp. (a)
    15,391       499,900  
American Dental Partners, Inc. (a)
    5,087       61,603  
Bioscript, Inc. (a)
    11,949       62,613  
Catalyst Health Solutions, Inc. (a)
    11,325       390,712  
Centene Corp. (a)
    14,664       315,276  
Computer Programs & Systems, Inc.
    2,981       121,982  
Contiucare Corp. (a)
    8,500       28,475  
HealthSpring, Inc. (a)
    17,298       268,292  
Magellan Health Services, Inc. (a)
    9,855       357,934  
MedQuist, Inc.
    3,866       30,580  
Metropolitan Health Networks, Inc. (a)
    12,257       45,719  
Molina Healthcare, Inc. (a)
    3,927       113,098  
Transcend Services, Inc. (a)
    2,879       38,866  
Triple-S Management Corp. (a)
    6,174       114,528  
Universal American Financial Corp. (a)
    9,529       137,218  
WellCare Health Plans, Inc. (a)
    12,671       300,809  
 
             
 
            2,887,605  
Health Care Services — 1.6%
               
AMN Healthcare Services, Inc. (a)
    10,290       76,969  
Accretive Health, Inc. (a)
    3,486       46,120  
Air Methods Corp. (a)
    3,356       99,841  
Alliance Healthcare Services, Inc. (a)
    8,390       33,896  
Allied Healthcare International, Inc. (a)
    14,629       33,939  
Almost Family, Inc. (a)
    2,400       83,832  
Amedisys, Inc. (a)(b)
    8,510       374,185  
athenahealth, Inc. (a)(b)
    9,983       260,856  
CardioNet, Inc. (a)
    7,300       40,004  
Chemed Corp.
    6,776       370,241  
Chindex International, Inc. (a)
    4,073       51,035  
Corvel Corp. (a)
    2,199       74,304  
Cross Country Healthcare, Inc. (a)
    9,676       86,987  
Eclipsys Corp. (a)
    17,250       307,740  
Gentiva Health Services, Inc. (a)
    8,459       228,478  
HMS Holdings Corp. (a)
    8,155       442,164  
Health Grades, Inc. (a)
    8,104       48,624  
Healthways, Inc. (a)
    10,253       122,216  
IPC The Hospitalist Co., Inc. (a)
    4,889       122,714  
LHC Group, Inc. (a)
    4,589       127,345  
MWI Veterinary Supply, Inc. (a)
    3,775       189,732  
Medidata Solutions, Inc. (a)
    5,772       89,408  
Odyssey HealthCare, Inc. (a)
    10,070       269,070  
Omnicell, Inc. (a)
    9,899       115,719  
PharMerica Corp. (a)
    9,253       135,649  
Phase Forward, Inc. (a)
    12,036       200,760  
Quality Systems, Inc. (b)
    5,646       327,412  
See Notes to Financial Statements.
             
50   MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010    

 


 

     
Schedule of Investments (continued)   Master Small Cap Index Series
(Percentages shown are based on Net Assets)
                 
Common Stocks   Shares     Value  
 
Health Care Services (concluded)
               
RehabCare Group, Inc. (a)
    7,397     $ 161,107  
Res-Care, Inc. (a)
    7,749       74,855  
Rural/Metro Corp. (a)
    5,908       48,091  
Team Health Holdings, Inc. (a)
    4,721       60,995  
Virtual Radiologic Corp. (a)
    2,290       39,296  
 
             
 
            4,743,584  
Health Care: Miscellaneous — 0.1%
               
MedAssets, Inc. (a)
    12,966       299,255  
The Providence Service Corp. (a)
    4,019       56,266  
 
             
 
            355,521  
Home Building — 0.2%
               
Beazer Homes USA, Inc. (a)(b)
    22,635       82,165  
Hovnanian Enterprises, Inc., Class A (a)(b)
    14,514       53,412  
M/I Homes, Inc. (a)
    5,786       55,777  
Meritage Homes Corp. (a)
    9,663       157,314  
Ryland Group, Inc.
    13,220       209,140  
Standard-Pacific Corp. (a)
    32,431       107,995  
 
             
 
            665,803  
Hotel/Motel — 0.2%
               
Gaylord Entertainment Co. (a)(b)
    10,488       231,680  
Marcus Corp.
    6,605       62,483  
Morgans Hotel Group Co. (a)
    7,160       44,106  
Orient Express Hotels Ltd., Class A (a)
    27,486       203,396  
 
             
 
            541,665  
Household Appliances — 0.0%
               
National Presto Industries, Inc.
    1,455       135,111  
Household Equipment & Products — 0.3%
               
American Greetings Corp., Class A
    11,990       224,932  
Blyth, Inc.
    1,806       61,530  
CSS Industries, Inc.
    2,367       39,056  
Central Garden & Pet Co., Class A (a)
    17,383       155,926  
Helen of Troy Ltd. (a)
    9,354       206,349  
Libbey, Inc. (a)
    5,086       66,016  
 
             
 
            753,809  
Household Furnishings — 0.3%
               
American Woodmark Corp.
    2,887       49,368  
Ethan Allen Interiors, Inc.
    7,504       104,981  
Furniture Brands International, Inc. (a)
    13,457       70,245  
Hooker Furniture Corp.
    3,663       39,048  
Kid Brands, Inc. (a)
    4,135       29,069  
Kirkland’s, Inc. (a)
    5,125       86,484  
La-Z-Boy, Inc. (a)
    15,619       116,049  
Lifetime Brands, Inc. (a)
    3,048       44,562  
Sealy Corp. (a)(b)
    15,196       40,573  
Select Comfort Corp. (a)
    16,524       144,585  
 
             
 
            724,964  
Insurance: Life — 0.5%
               
American Equity Investment Life Holding Co.
    17,240       177,917  
CNO Financial Group, Inc. (a)
    66,420       328,779  
Citizens, Inc. (a)
    10,851       72,268  
Delphi Financial Group, Inc., Class A
    14,074       343,546  
FBL Financial Group, Inc., Class A
    3,994       83,874  
Kansas City Life Insurance Co.
    1,294       38,264  
Life Partners Holdings, Inc. (b)
    2,400       49,104  
National Western Life Insurance Co., Class A
    651       99,447  
The Phoenix Cos., Inc. (a)
    35,095       74,050  
Presidential Life Corp.
    6,294       57,275  
Primerica, Inc. (a)
    7,450       159,728  
 
             
 
            1,484,252  
Insurance: Multi-Line — 0.6%
               
AMBAC Financial Group, Inc. (a)(b)
    66,900       44,823  
Alterra Capital Holdings Ltd.
    28,798       540,826  
Crawford & Co., Class B (a)
    8,394       26,525  
eHealth, Inc. (a)
    7,297       82,967  
Flagstone Reinsurance Holdings SA
    15,888       171,908  
Horace Mann Educators Corp.
    11,797       180,494  
Maiden Holdings Ltd.
    15,714       103,241  
Pico Holdings, Inc. (a)
    6,784       203,317  
Platinum Underwriters Holdings Ltd.
    13,382       485,633  
 
             
 
            1,839,734  
Insurance: Property-Casualty — 1.9%
               
American Physicians Capital, Inc.
    2,471       76,230  
American Safety Insurance Holdings Ltd. (a)
    3,415       53,684  
Amerisafe, Inc. (a)
    5,800       101,790  
AmTrust Financial Services, Inc.
    6,892       82,980  
Argo Group International Holdings Ltd.
    9,379       286,904  
Baldwin & Lyons, Inc., Class B
    2,803       58,891  
CNA Surety Corp. (a)
    5,410       86,939  
Donegal Group, Inc., Class A
    3,797       46,665  
EMC Insurance Group, Inc.
    1,697       37,215  
Employers Holdings, Inc.
    10,980       161,735  
Enstar Group Ltd. (a)
    2,112       140,321  
FPIC Insurance Group, Inc. (a)
    3,100       79,515  
First American Financial Corp.
    31,155       395,045  
First Mercury Financial Corp.
    4,747       50,223  
Greenlight Capital Re Ltd. (a)
    8,600       216,634  
Hallmark Financial Services, Inc. (a)
    3,700       36,815  
Harleysville Group, Inc.
    3,591       111,429  
Hilltop Holdings, Inc. (a)
    12,333       123,453  
Infinity Property & Casualty Corp.
    4,082       188,507  
Meadowbrook Insurance Group, Inc.
    16,552       142,844  
Montpelier Re Holdings Ltd.
    21,267       317,516  
NYMAGIC, Inc.
    1,680       32,407  
National Interstate Corp.
    2,137       42,355  
Navigators Group, Inc. (a)
    3,703       152,304  
PMA Capital Corp., Class A (a)
    10,332       67,675  
The PMI Group, Inc. (a)
    43,187       124,811  
ProAssurance Corp. (a)
    9,685       549,721  
RLI Corp.
    5,474       287,440  
Radian Group, Inc.
    40,010       289,672  
Safety Insurance Group, Inc.
    3,961       146,636  
SeaBright Holdings, Inc.
    7,100       67,308  
Selective Insurance Group, Inc.
    16,192       240,613  
State Auto Financial Corp.
    4,512       69,981  
Stewart Information Services Corp.
    5,580       50,332  
Tower Group, Inc.
    13,359       287,619  
United America Indemnity, Ltd. (a)
    8,747       64,378  
United Fire & Casualty Co.
    6,919       137,135  
 
             
 
            5,405,722  
International Trade & Diversified Logistics — 0.0%
               
Global Sources Ltd. (a)
    7,205       56,487  
Leisure Time — 0.6%
               
Callaway Golf Co.
    19,553       118,100  
Churchill Downs, Inc.
    3,502       114,866  
Interval Leisure Group, Inc. (a)
    12,097       150,608  
Life Time Fitness, Inc. (a)(b)
    12,512       397,756  
See Notes to Financial Statements.
             
    MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010   51

 


 

     
Schedule of Investments (continued)   Master Small Cap Index Series
(Percentages shown are based on Net Assets)
                 
Common Stocks   Shares     Value  
 
Leisure Time (concluded)
               
Pool Corp.
    14,922     $ 327,090  
Smith & Wesson Holding Corp. (a)(b)
    18,518       75,739  
Speedway Motorsports, Inc.
    3,755       50,918  
Sport Supply Group, Inc.
    2,550       34,323  
Steinway Musical Instruments, Inc. (a)
    1,929       34,317  
Sturm Ruger & Co., Inc. (b)
    5,800       83,114  
Vail Resorts, Inc. (a)
    10,873       379,576  
West Marine, Inc. (a)
    4,708       51,223  
 
             
 
            1,817,630  
Luxury Items — 0.0%
               
Movado Group, Inc. (a)
    4,878       52,097  
Machinery: Agricultural — 0.1%
               
Alamo Group, Inc.
    2,049       44,463  
Lindsay Manufacturing Co. (b)
    3,742       118,584  
Titan International, Inc. (b)
    10,664       106,320  
Titan Machinery, Inc. (a)
    4,129       54,214  
 
             
 
            323,581  
Machinery: Construction & Handling — 0.1%
               
Astec Industries, Inc. (a)
    5,964       165,382  
Douglas Dynamics, Inc. (a)
    3,610       41,515  
NACCO Industries, Inc., Class A
    1,761       156,306  
 
             
 
            363,203  
Machinery: Engines — 0.1%
               
Briggs & Stratton Corp. (b)
    14,974       254,857  
Machinery: Industrial — 1.2%
               
Actuant Corp., Class A
    20,308       382,400  
Altra Holdings, Inc. (a)
    8,247       107,376  
Applied Industrial Technologies, Inc.
    12,673       320,880  
Chart Industries, Inc. (a)
    8,674       135,141  
Colfax Corp. (a)
    7,314       76,139  
Columbus McKinnon Corp. (a)
    5,910       82,563  
DXP Enterprises, Inc. (a)
    2,655       41,551  
EnPro Industries, Inc. (a)
    6,208       174,755  
Flow International Corp. (a)
    15,069       35,563  
Gerber Scientific, Inc. (a)
    7,928       42,415  
Graham Corp.
    2,900       43,471  
John Bean Technologies Corp.
    8,539       130,220  
Kadant, Inc. (a)
    3,870       67,415  
MTS Systems Corp.
    4,986       144,594  
Middleby Corp. (a)
    4,990       265,418  
Nordson Corp.
    10,210       572,577  
Sauer-Danfoss, Inc. (a)
    3,667       44,811  
Tecumseh Products Co., Class A (a)
    5,904       65,652  
Tennant Co.
    5,701       192,808  
Twin Disc, Inc.
    2,812       31,944  
Woodward Governor Co.
    18,276       466,586  
 
             
 
            3,424,279  
Machinery: Specialty — 0.1%
               
Albany International Corp., Class A
    8,262       133,762  
Cascade Corp.
    2,762       98,355  
Presstek, Inc. (a)
    8,791       31,032  
Xerium Technologies, Inc. (a)
    2,278       32,165  
 
             
 
            295,314  
Machinery: Tools — 0.0%
               
Thermadyne Holdings Corp. (a)
    2,827       30,560  
Manufactured Housing — 0.0%
               
Cavco Industries, Inc. (a)
    2,065       72,646  
Skyline Corp.
    2,279       41,045  
 
             
 
            113,691  
Medical & Dental Instruments & Supplies — 2.9%
               
ATS Medical, Inc. (a)
    15,932       63,250  
AGA Medical Holdings, Inc. (a)
    4,172       52,943  
Abiomed, Inc. (a)
    9,579       92,725  
Align Technology, Inc. (a)(b)
    17,751       263,957  
Alphatec Holdings, Inc. (a)
    15,557       72,184  
American Medical Systems Holdings, Inc. (a)
    22,526       498,275  
AngioDynamics, Inc. (a)
    7,482       110,359  
Antares Pharma, Inc. (a)
    22,592       39,762  
Atrion Corp.
    485       65,499  
CONMED Corp. (a)
    8,746       162,938  
Cantel Medical Corp.
    3,900       65,130  
Cerus Corp. (a)
    12,661       40,009  
Conceptus, Inc. (a)(b)
    9,391       146,312  
CryoLife, Inc. (a)
    8,828       47,583  
Cutera, Inc. (a)
    4,309       39,686  
Delcath Systems, Inc. (a)(b)
    11,310       71,705  
Endologix, Inc. (a)
    15,024       68,059  
ev3, Inc. (a)
    24,904       558,099  
Exactech, Inc. (a)
    2,570       43,896  
Hansen Medical, Inc. (a)
    13,638       29,049  
Heartware International, Inc. (a)
    2,834       198,578  
ICU Medical, Inc. (a)
    3,474       111,759  
Immucor, Inc. (a)
    20,828       396,773  
Insulet Corp. (a)
    11,536       173,617  
Integra LifeSciences Holdings Corp. (a)
    6,252       231,324  
Invacare Corp.
    8,673       179,878  
Landauer, Inc.
    2,845       173,204  
MAKO Surgical Corp. (a)(b)
    7,835       97,546  
Medical Action Industries, Inc. (a)
    4,374       52,444  
Meridian Bioscience, Inc.
    12,175       206,975  
Merit Medical Systems, Inc. (a)
    8,461       135,968  
Micrus Endovascular Corp. (a)
    4,944       102,786  
Neogen Corp. (a)
    6,965       181,438  
NuVasive, Inc. (a)
    11,730       415,946  
OraSure Technologies, Inc. (a)
    14,175       65,630  
Orthofix International NV (a)
    5,308       170,121  
Orthovita, Inc. (a)
    20,673       41,966  
Owens & Minor, Inc.
    18,720       531,274  
PSS World Medical, Inc. (a)
    16,998       359,508  
Quidel Corp. (a)
    6,522       82,764  
Rochester Medical Corp. (a)
    3,485       32,933  
SenoRx, Inc. (a)
    5,168       56,745  
Staar Surgical Co. (a)
    10,846       62,039  
Steris Corp.
    17,603       547,101  
SurModics, Inc. (a)
    5,222       85,693  
Symmetry Medical, Inc. (a)
    10,772       113,537  
Synovis Life Technologies, Inc. (a)
    3,504       53,541  
Unilife Corp. (a)
    14,688       85,484  
Vascular Solutions, Inc. (a)
    5,200       65,000  
Volcano Corp. (a)
    15,089       329,242  
West Pharmaceutical Services, Inc.
    9,818       358,259  
Wright Medical Group, Inc. (a)
    11,613       192,892  
Young Innovations, Inc.
    1,731       48,728  
 
             
 
            8,472,113  
See Notes to Financial Statements.
             
52   MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010    

 


 

     
Schedule of Investments (continued)   Master Small Cap Index Series
(Percentages shown are based on Net Assets)
                 
Common Stocks   Shares     Value  
 
Medical Equipment — 1.6%
               
Abaxis, Inc. (a)
    6,631     $ 142,102  
Accuray, Inc. (a)
    15,482       102,646  
Affymetrix, Inc. (a)
    21,334       125,871  
Analogic Corp.
    3,861       175,714  
ArthroCare Corp. (a)
    8,102       248,326  
Bruker BioSciences Corp. (a)
    21,672       263,532  
Caliper Life Sciences, Inc. (a)
    13,968       59,643  
Cyberonics, Inc. (a)
    8,390       198,675  
Cynosure, Inc., Class A (a)
    3,189       34,346  
DexCom, Inc. (a)
    17,475       202,011  
Dionex Corp. (a)
    5,274       392,702  
Greatbatch, Inc. (a)
    6,925       154,497  
Haemonetics Corp. (a)
    7,398       395,941  
HealthTronics, Inc. (a)
    13,977       67,509  
IRIS International, Inc. (a)
    4,995       50,649  
Luminex Corp. (a)
    11,218       181,956  
MELA Sciences, Inc. (a)(b)
    7,100       52,824  
Masimo Corp.
    15,550       370,246  
Merge Healthcare, Inc. (a)
    16,158       47,343  
Natus Medical, Inc. (a)
    8,590       139,931  
NxStage Medical, Inc. (a)
    7,596       112,725  
Palomar Medical Technologies, Inc. (a)
    5,600       62,664  
Sirona Dental Systems, Inc. (a)
    9,985       347,877  
Solta Medical, Inc. (a)
    18,695       35,521  
Somanetics Corp. (a)
    3,627       90,494  
SonoSite, Inc. (a)
    4,385       118,877  
Spectranetic Corp. (a)
    10,358       53,654  
Stereotaxis, Inc. (a)
    8,900       29,459  
Syneron Medical Ltd. (a)
    10,712       110,119  
Tomotherapy, Inc. (a)
    15,541       49,420  
Vital Images, Inc. (a)
    4,496       57,324  
Zoll Medical Corp. (a)
    6,423       174,063  
 
             
 
            4,648,661  
Medical Services — 0.4%
               
America Service Group, Inc.
    2,800       48,160  
Bio-Reference Labs, Inc. (a)
    7,170       158,959  
Clarient, Inc. (a)
    17,140       52,791  
eResearch Technology, Inc. (a)
    14,897       117,388  
Genoptix, Inc. (a)
    5,261       90,489  
inVentiv Health, Inc. (a)
    10,224       261,735  
Kendle International, Inc. (a)
    4,663       53,718  
Parexel International Corp. (a)
    17,543       380,332  
 
             
 
            1,163,572  
Metal Fabricating — 0.6%
               
Ampco-Pittsburgh Corp.
    2,674       55,699  
Dynamic Materials Corp.
    3,900       62,556  
Hawk Corp., Class A (a)
    1,630       41,484  
Haynes International, Inc.
    3,740       115,304  
Kaydon Corp.
    9,968       327,548  
L.B. Foster Co., Class A (a)
    3,143       81,467  
Metals USA Holdings Corp. (a)
    3,533       52,818  
Mueller Industries, Inc.
    11,310       278,226  
Mueller Water Products, Inc., Series A
    46,750       173,443  
Northwest Pipe Co. (a)
    2,800       53,200  
RBC Bearings, Inc. (a)
    6,554       190,000  
RTI International Metals, Inc. (a)
    9,016       217,376  
Worthington Industries, Inc.
    18,003       231,519  
 
             
 
            1,880,640  
Metals & Minerals: Diversified — 0.6%
               
AMCOL International Corp.
    7,154       168,119  
Brush Engineered Materials, Inc. (a)
    6,133       122,537  
General Moly, Inc. (a)(b)
    19,739       60,796  
Globe Specialty Metals, Inc. (a)
    18,516       191,270  
Hecla Mining Co. (a)(b)
    72,210       376,936  
Minerals Technologies, Inc.
    5,611       266,747  
Oil-Dri Corp. of America
    1,989       45,648  
Thompson Creek Metals Co., Inc. (a)
    41,886       363,570  
US Energy Corp. Wyoming (a)
    8,622       40,955  
United States Lime & Minerals Inc. (a)
    857       33,012  
 
             
 
            1,669,590  
Miscellaneous Consumer Staples — 0.0%
               
Spectrum Brands Holdings, Inc. (a)
    5,543       140,404  
Office Supplies & Equipment — 0.6%
               
ACCO Brands Corp. (a)
    16,844       84,052  
Electronics for Imaging, Inc. (a)
    13,775       134,306  
HNI Corp.
    13,606       375,390  
Herman Miller, Inc.
    17,189       324,356  
Kimball International, Inc., Class B
    10,241       56,633  
Knoll, Inc.
    14,243       189,289  
Steelcase, Inc., Class A
    23,284       180,451  
United Stationers, Inc. (a)
    7,232       393,927  
 
             
 
            1,738,404  
Offshore Drilling & Other Services — 0.0%
               
Hercules Offshore, Inc. (a)
    35,312       85,808  
Vantage Drilling Co. (a)
    39,120       52,812  
 
             
 
            138,620  
Oil Well Equipment & Services — 1.6%
               
Basic Energy Services, Inc. (a)
    7,333       56,464  
Boots & Coots, Inc. (a)
    25,145       74,178  
CARBO Ceramics, Inc.
    5,699       411,411  
Cal Dive International, Inc. (a)
    28,504       166,748  
Complete Production Services, Inc. (a)
    23,432       335,078  
Dawson Geophysical Co. (a)
    2,509       53,366  
Dril-Quip, Inc. (a)
    10,159       447,199  
Global Industries Ltd. (a)
    30,427       136,617  
Golar LNG Ltd.
    11,218       110,722  
Gulf Island Fabrication, Inc.
    4,470       69,374  
Helix Energy Solutions Group, Inc. (a)
    31,339       337,521  
Hornbeck Offshore Services, Inc. (a)
    6,996       102,142  
ION Geophysical Corp. (a)
    38,400       133,632  
Key Energy Services, Inc. (a)
    37,690       345,994  
Lufkin Industries, Inc.
    8,999       350,871  
Matrix Service Co. (a)
    8,128       75,672  
Natural Gas Services Group (a)
    3,800       57,494  
Newpark Resources, Inc. (a)
    26,969       163,162  
OYO Geospace Corp. (a)
    1,276       61,861  
Parker Drilling Co. (a)
    35,339       139,589  
Pioneer Drilling Co. (a)
    16,506       93,589  
RPC, Inc.
    8,751       119,451  
Seahawk Drilling, Inc. (a)
    3,601       35,002  
Superior Well Services, Inc. (a)
    6,970       116,538  
T-3 Energy Services, Inc. (a)
    4,033       112,521  
Tesco Corp. (a)
    9,221       113,234  
Tetra Technologies, Inc. (a)
    22,703       206,143  
Union Drilling, Inc. (a)
    5,000       27,550  
Willbros Group, Inc. (a)
    11,910       88,134  
 
             
 
            4,541,257  
See Notes to Financial Statements.
             
    MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010   53

 


 

     
Schedule of Investments (continued)   Master Small Cap Index Series
(Percentages shown are based on Net Assets)
                 
Common Stocks   Shares     Value  
 
Oil: Crude Producers — 2.3%
               
ATP Oil & Gas Corp. (a)(b)
    13,437     $ 142,298  
American Oil & Gas, Inc. (a)
    15,434       96,926  
Apco Oil and Gas International, Inc.
    2,877       67,638  
Approach Resources, Inc. (a)
    4,519       31,091  
Arena Resources, Inc. (a)
    11,820       377,058  
BPZ Resources, Inc. (a)(b)
    29,584       122,774  
Berry Petroleum Co., Class A
    15,372       395,368  
Bill Barrett Corp. (a)
    13,762       423,457  
Brigham Exploration Co. (a)
    35,026       538,700  
CAMAC Energy, Inc. (a)
    14,747       55,006  
Callon Petroleum Co. (a)
    8,829       55,623  
Carrizo Oil & Gas, Inc. (a)
    9,485       147,302  
Cheniere Energy, Inc. (a)
    17,934       50,574  
Clayton Williams Energy, Inc. (a)
    1,839       77,459  
Contango Oil & Gas Co. (a)
    3,578       160,115  
Delta Petroleum Corp. (a)(b)
    57,892       49,787  
Endeavour International Corp. (a)(b)
    44,941       47,637  
Energy Partners Ltd. (a)
    8,941       109,170  
Energy XXI Bermuda Ltd. (a)
    15,311       241,608  
FX Energy, Inc. (a)(b)
    14,142       51,194  
GMX Resources, Inc. (a)
    9,519       61,778  
Gastar Exploration Ltd. (a)
    13,813       49,865  
GeoResources, Inc. (a)
    4,137       57,628  
Goodrich Petroleum Corp. (a)
    7,467       89,604  
Gulfport Energy Corp. (a)
    8,340       98,912  
Harvest Natural Resources, Inc. (a)
    10,327       76,110  
Houston American Energy Corp.
    5,613       55,344  
Kodiak Oil & Gas Corp. (a)
    36,268       115,695  
Magnum Hunter Resources Corp. (a)
    15,097       65,823  
McMoRan Exploration Co. (a)
    25,059       278,405  
Miller Petroleum, Inc. (a)
    5,648       32,532  
Northern Oil And Gas, Inc. (a)
    13,419       172,300  
Panhandle Oil & Gas, Inc.
    2,313       61,133  
Penn Virginia Corp.
    13,727       276,050  
Petroleum Development Corp. (a)
    5,920       151,670  
Petroquest Energy, Inc. (a)(b)
    16,789       113,494  
Ram Energy Resources, Inc. (a)
    18,416       38,121  
Resolute Energy Corp. (a)
    11,653       142,633  
Rex Energy Corp. (a)
    9,908       100,071  
Rosetta Resources, Inc. (a)
    15,956       316,088  
Stone Energy Corp. (a)
    13,032       145,437  
Swift Energy Co. (a)
    11,381       306,263  
TransAtlantic Petroleum Ltd. (a)
    44,169       140,016  
Vaalco Energy, Inc.
    15,700       87,920  
Venoco, Inc. (a)
    6,120       100,796  
W&T Offshore, Inc.
    10,772       101,903  
Warren Resources, Inc. (a)
    22,405       64,974  
 
             
 
            6,541,350  
Oil: Refining & Marketing — 0.2%
               
CVR Energy, Inc. (a)
    9,594       72,147  
Delek US Holdings, Inc.
    5,108       37,289  
Western Refining, Inc. (a)(b)
    16,102       80,993  
World Fuel Services Corp.
    18,046       468,113  
 
             
 
            658,542  
Paints & Coatings — 0.2%
               
Ferro Corp. (a)
    25,925       191,067  
H.B. Fuller Co.
    14,573       276,742  
 
             
 
            467,809  
Paper — 0.4%
               
Boise, Inc. (a)
    21,076       115,707  
Buckeye Technologies, Inc. (a)
    11,828       117,688  
Clearwater Paper Corp. (a)
    3,430       187,827  
Kapstone Paper and Packaging Corp. (a)
    11,493       128,032  
Neenah Paper, Inc.
    4,400       80,520  
P.H. Glatfelter Co.
    13,748       149,166  
Schweitzer-Mauduit International, Inc.
    5,451       275,003  
Wausau Paper Corp. (a)
    14,696       99,492  
 
             
 
            1,153,435  
Personal Care — 0.1%
               
Female Health Co.
    5,798       30,092  
USANA Health Sciences, Inc. (a)
    1,919       70,101  
WD-40 Co.
    5,183       173,112  
 
             
 
            273,305  
Pharmaceuticals — 1.7%
               
Akorn, Inc. (a)
    17,640       52,391  
Alexza Pharmaceuticals, Inc. (a)
    13,346       36,301  
Alkermes, Inc. (a)
    28,381       353,343  
Ardea Biosciences, Inc. (a)
    4,203       86,414  
Auxilium Pharmaceuticals, Inc. (a)
    12,631       296,828  
Avanir Pharmaceuticals, Inc. (a)
    22,165       56,964  
BMP Sunstone Corp. (a)
    8,800       45,320  
BioCryst Pharmaceuticals, Inc. (a)(b)
    8,850       52,304  
Biospecifics Technologies (a)
    1,320       26,242  
Cadence Pharmaceuticals, Inc. (a)(b)
    8,030       56,290  
Cambrex Corp. (a)
    10,201       32,133  
Corcept Therapeutics Inc. (a)
    8,329       25,986  
Depomed, Inc. (a)
    16,956       47,477  
Durect Corp. (a)
    27,553       66,954  
Eurand NV (a)
    5,745       55,669  
Hi-Tech Pharmacal Co., Inc. (a)
    3,015       69,074  
Impax Laboratories, Inc. (a)
    18,877       359,796  
Inspire Pharmaceuticals, Inc. (a)
    17,600       87,824  
Ironwood Pharmaceuticals, Inc. (a)
    6,167       73,511  
Isis Pharmaceuticals, Inc. (a)
    28,287       270,707  
Jazz Pharmaceuticals, Inc. (a)
    4,786       37,474  
MAP Pharmaceuticals, Inc. (a)
    4,360       57,203  
Medicines Co. (a)
    16,314       124,150  
Medicis Pharmaceutical Corp., Class A
    18,068       395,328  
Obagi Medical Products, Inc. (a)
    5,300       62,646  
Optimer Pharmaceuticals, Inc. (a)(b)
    10,234       94,869  
Pain Therapeutics, Inc. (a)
    11,625       64,635  
Par Pharmaceutical Cos., Inc. (a)
    10,572       274,449  
Pharmacyclics, Inc. (a)
    11,687       77,835  
Pozen, Inc. (a)(b)
    8,114       56,879  
Prestige Brands Holdings, Inc. (a)
    13,149       93,095  
Questcor Pharmaceuticals, Inc. (a)
    16,801       171,538  
SIGA Technologies, Inc. (a)(b)
    9,971       76,777  
Salix Pharmaceuticals Ltd. (a)
    17,151       669,404  
Santarus, Inc. (a)
    16,300       40,424  
Sciclone Pharmaceuticals, Inc. (a)
    11,500       30,590  
Somaxon Pharmaceuticals, Inc. (a)
    8,867       31,921  
Spectrum Pharmaceuticals, Inc. (a)
    15,332       60,101  
SuperGen, Inc. (a)
    16,900       34,138  
Vical, Inc. (a)
    17,525       54,327  
Vivus, Inc. (a)(b)
    24,475       234,960  
Xenoport, Inc. (a)
    8,568       84,052  
 
             
 
            4,978,323  
See Notes to Financial Statements.
             
54   MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010    

 


 

     
Schedule of Investments (continued)   Master Small Cap Index Series
(Percentages shown are based on Net Assets)
                 
Common Stocks   Shares     Value  
 
Photography — 0.1%
               
CPI Corp.
    1,600     $ 35,872  
Eastman Kodak Co. (a)(b)
    80,402       348,945  
 
             
 
            384,817  
Plastics — 0.0%
               
Spartech Corp. (a)
    9,426       96,616  
Power Transmission Equipment — 0.2%
               
Advanced Energy Industries, Inc. (a)
    11,090       136,296  
Generac Holdings, Inc. (a)
    5,901       82,673  
Maxwell Technologies, Inc. (a)
    8,097       92,306  
Powell Industries, Inc. (a)
    2,733       74,720  
Power-One, Inc. (a)(b)
    22,841       154,177  
Vicor Corp. (a)
    6,060       75,689  
 
             
 
            615,861  
Precious Metals & Minerals — 0.1%
               
Horsehead Holding Corp. (a)
    13,263       100,268  
Stillwater Mining Co. (a)
    13,339       154,999  
 
             
 
            255,267  
Printing & Copying Services — 0.0%
               
Casella Waste Systems, Inc. (a)
    9,023       34,468  
Cenveo, Inc. (a)
    16,859       92,387  
 
             
 
            126,855  
Producer Durables: Miscellaneous — 0.1%
               
Blount International, Inc. (a)
    14,435       148,248  
Park-Ohio Holdings Corp. (a)
    2,524       36,320  
 
             
 
            184,568  
Production Technology Equipment — 1.1%
               
ATMI, Inc. (a)(c)
    9,522       139,402  
Axcelis Technologies, Inc. (a)
    32,969       51,102  
Brooks Automation, Inc. (a)
    19,825       153,247  
Cognex Corp.
    11,951       210,099  
Cohu, Inc.
    7,308       88,646  
Cymer, Inc. (a)
    9,022       271,021  
Electro Scientific Industries, Inc. (a)
    8,534       114,014  
Entegris, Inc. (a)
    39,461       156,660  
FEI Co. (a)
    11,372       224,142  
FSI International, Inc. (a)
    10,061       42,156  
Intevac, Inc. (a)
    6,819       72,759  
Kulicke & Soffa Industries, Inc. (a)
    21,206       148,866  
LTX-Credence Corp. (a)
    44,577       126,153  
MKS Instruments, Inc. (a)
    15,106       282,784  
Mattson Technology, Inc. (a)
    15,683       59,439  
Nanometrics, Inc. (a)
    5,562       56,121  
Photronics, Inc. (a)
    16,527       74,702  
Rudolph Technologies, Inc. (a)
    9,702       73,250  
Tessera Technologies, Inc. (a)
    15,063       241,761  
Ultra Clean Holdings, Inc. (a)
    6,803       57,961  
Ultratech, Inc. (a)
    7,331       119,275  
Veeco Instruments, Inc. (a)
    12,175       417,359  
 
             
 
            3,180,919  
Publishing — 0.2%
               
AH Belo Corp. (a)
    5,951       39,515  
Courier Corp.
    3,552       43,370  
The Dolan Co. (a)
    9,334       103,794  
Journal Communications, Inc., Class A (a)
    13,481       53,519  
Lee Enterprises, Inc. (a)
    14,445       37,124  
Martha Stewart Living Omnimedia, Inc., Class A (a)(b)
    8,182       40,255  
McClatchy Co., Class A (a)
    18,295       66,594  
Media General, Inc., Class A (a)
    6,979       68,115  
Scholastic Corp.
    9,233       222,700  
 
             
 
            674,986  
Radio & TV Broadcasters — 0.1%
               
Entercom Communications Corp. (a)
    7,520       66,326  
Entravision Communications Corp., Class A (a)
    16,361       34,522  
Fisher Communications, Inc. (a)
    2,214       37,284  
Gray Television, Inc. (a)
    15,494       37,340  
Lin TV Corp., Class A (a)
    9,380       50,746  
Sinclair Broadcast Group, Inc., Class A (a)
    14,285       83,282  
 
             
 
            309,500  
Railroad Equipment — 0.1%
               
American Railcar Industries, Inc. (a)
    3,077       37,170  
Freightcar America, Inc.
    3,739       84,576  
Greenbrier Cos., Inc. (a)
    5,876       65,812  
 
             
 
            187,558  
Railroads — 0.2%
               
Genesee & Wyoming, Inc., Class A (a)
    11,625       433,729  
Railamerica, Inc. (a)
    7,311       72,525  
 
             
 
            506,254  
Real Estate — 0.2%
               
Avatar Holdings, Inc. (a)
    2,784       53,397  
Consolidated-Tomoka Land Co.
    1,783       50,815  
Forestar Group, Inc. (a)
    10,878       195,369  
HFF, Inc., Class A (a)
    6,093       43,078  
Kennedy-Wilson Holdings, Inc. (a)
    6,551       66,165  
Tejon Ranch Co. (a)
    4,022       92,828  
Thomas Properties Group, Inc.
    11,507       38,088  
 
             
 
            539,740  
Real Estate Investment Trusts (REITs) — 7.0%
               
Acadia Realty Trust
    12,118       203,825  
Agree Realty Corp.
    2,837       66,159  
Alexander’s, Inc.
    605       183,267  
American Campus Communities, Inc.
    15,684       428,016  
American Capital Agency Corp.
    9,830       259,709  
Anworth Mortgage Asset Corp.
    33,944       241,681  
Apollo Commercial Real Estate Finance, Inc.
    3,545       58,351  
Ashford Hospitality Trust, Inc. (a)
    12,616       92,475  
Associated Estates Realty Corp.
    9,883       127,985  
BioMed Realty Trust, Inc.
    33,767       543,311  
CBL & Associates Properties, Inc.
    41,396       514,966  
CapLease, Inc.
    18,138       83,616  
Capstead Mortgage Corp.
    20,701       228,953  
Cedar Shopping Centers, Inc.
    16,867       101,539  
Chatham Lodging Trust (a)
    2,902       51,859  
Chesapeake Lodging Trust (a)
    2,700       42,714  
Cogdell Spencer, Inc.
    13,672       92,423  
Colonial Properties Trust
    21,062       306,031  
Colony Financial, Inc.
    4,607       77,858  
Cousins Properties, Inc.
    27,130       182,859  
CreXus Investment Corp.
    4,299       53,437  
Cypress Sharpridge Investments, Inc.
    4,963       62,832  
DCT Industrial Trust, Inc.
    63,486       286,957  
DiamondRock Hospitality Co.
    46,060       378,613  
Dupont Fabros Technology, Inc.
    12,285       301,720  
Dynex Capital Corp.
    5,596       51,651  
Eastgroup Properties, Inc.
    8,039       286,028  
Education Realty Trust, Inc.
    17,657       106,472  
See Notes to Financial Statements.
         
    MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010   55

 


 

     
Schedule of Investments (continued)   Master Small Cap Index Series
(Percentages shown are based on Net Assets)
                 
Common Stocks   Shares     Value  
 
Real Estate Investment Trusts (REITs) (continued)
               
Entertainment Properties Trust
    13,874     $ 528,183  
Equity Lifestyle Properties, Inc.
    7,728       372,721  
Equity One, Inc.
    10,835       169,026  
Excel Trust, Inc. (a)
    4,950       59,400  
Extra Space Storage, Inc.
    26,139       363,332  
FelCor Lodging Trust, Inc. (a)
    20,109       100,344  
First Industrial Realty Trust, Inc. (a)
    19,395       93,484  
First Potomac Realty Trust
    11,385       163,602  
Franklin Street Properties Corp.
    20,734       244,869  
Getty Realty Corp.
    6,400       143,424  
Gladstone Commercial Corp.
    3,396       55,491  
Glimcher Realty Trust
    20,874       124,826  
Government Properties Income Trust
    6,359       162,282  
Hatteras Financial Corp.
    10,659       296,533  
Healthcare Realty Trust, Inc.
    18,534       407,192  
Hersha Hospitality Trust
    33,705       152,347  
Highwoods Properties, Inc.
    20,100       557,976  
Home Properties, Inc.
    11,685       526,643  
Inland Real Estate Corp.
    22,534       178,469  
InvesCo. Mortgage Capital, Inc.
    7,613       152,336  
Investors Real Estate Trust
    23,381       206,454  
iStar Financial, Inc. (a)
    28,545       127,311  
Kilroy Realty Corp.
    16,092       478,415  
Kite Realty Group Trust
    17,141       71,649  
LTC Properties, Inc.
    7,137       173,215  
LaSalle Hotel Properties
    20,868       429,255  
Lexington Corporate Properties Trust
    29,743       178,755  
MFA Financial, Inc.
    82,515       610,611  
MPG Office Trust, Inc. (a)
    15,205       44,551  
Medical Properties Trust, Inc.
    33,299       314,343  
Mid-America Apartment Communities, Inc.
    9,145       470,693  
Mission West Properties, Inc.
    7,564       51,586  
Monmouth Real Estate Investment Corp., Class A
    9,554       70,604  
National Health Investors, Inc.
    7,270       280,331  
National Retail Properties, Inc.
    24,593       527,274  
Newcastle Investment Corp.
    19,170       51,376  
NorthStar Realty Finance Corp. (b)
    23,873       63,741  
Omega Healthcare Investors, Inc.
    27,488       547,836  
One Liberty Properties, Inc.
    2,710       40,406  
PS Business Parks, Inc.
    5,439       303,387  
Parkway Properties, Inc.
    6,821       99,382  
Pebblebrook Hotel Trust (a)
    5,757       108,519  
Pennsylvania Real Estate Investment Trust (b)
    16,753       204,722  
PennyMac Mortgage Investment Trust (a)(d)
    5,384       85,606  
Post Properties, Inc.
    14,536       330,403  
Potlatch Corp.
    11,795       421,435  
RAIT Investment Trust (a)
    24,762       46,305  
Ramco-Gershenson Properties Trust
    11,649       117,655  
Redwood Trust, Inc.
    23,454       343,367  
Resource Capital Corp.
    13,458       76,441  
Retail Opportunity Investments Corp.
    12,776       123,288  
Saul Centers, Inc.
    1,974       80,204  
Sovran Self Storage, Inc.
    8,221       283,049  
Starwood Property Trust, Inc.
    14,314       242,622  
Strategic Hotel Capital, Inc. (a)
    42,484       186,505  
Sun Communities, Inc.
    5,893       152,982  
Sunstone Hotel Investors, Inc. (a)
    29,684       294,762  
Tanger Factory Outlet Centers, Inc.
    11,965       495,112  
Terreno Realty Corp. (a)
    3,018       53,449  
Two Harbors Investment Corp.
    8,082       66,676  
UMH Properties, Inc.
    4,073       41,015  
U-Store-It Trust
    22,165       165,351  
Universal Health Realty Income Trust
    3,555       114,222  
Urstadt Biddle Properties, Inc., Class A
    5,100       82,263  
Walter Investment Management Corp.
    7,872       128,707  
Washington Real Estate Investment Trust
    18,064       498,386  
Winthrop Realty Trust
    5,921       75,848  
 
             
 
            20,227,856  
Recreational Vehicles & Boats — 0.4%
               
Arctic Cat, Inc. (a)
    3,895       35,483  
Brunswick Corp.
    26,633       331,048  
Drew Industries, Inc. (a)
    5,705       115,241  
Polaris Industries, Inc.
    9,304       508,185  
Winnebago Industries, Inc. (a)
    8,686       86,339  
 
             
 
            1,076,296  
Rental & Leasing Services: Consumer — 0.4%
               
Amerco, Inc. (a)
    2,575       141,754  
Avis Budget Group, Inc. (a)
    30,824       302,692  
Dollar Thrifty Automotive Group, Inc. (a)
    8,589       365,977  
Rent-A-Center, Inc. (a)
    19,678       398,676  
 
             
 
            1,209,099  
Restaurants — 1.4%
               
AFC Enterprises, Inc. (a)
    8,088       73,601  
BJ’s Restaurants, Inc. (a)
    6,887       162,533  
Biglari Holdings, Inc. (a)
    441       126,523  
Bob Evans Farms, Inc.
    9,261       228,006  
Buffalo Wild Wings, Inc. (a)
    5,479       200,422  
CEC Entertainment, Inc. (a)
    6,628       233,703  
CKE Restaurants, Inc.
    16,631       208,386  
California Pizza Kitchen, Inc. (a)
    5,971       90,461  
The Cheesecake Factory, Inc. (a)
    18,127       403,507  
Cracker Barrel Old Country Store, Inc.
    7,197       335,092  
Denny’s Corp. (a)
    30,612       79,591  
DineEquity, Inc. (a)
    5,438       151,829  
Domino’s Pizza, Inc. (a)
    10,973       123,995  
Jack in the Box, Inc. (a)
    16,539       321,684  
Jamba, Inc. (a)
    19,330       41,173  
Krispy Kreme Doughnuts, Inc. (a)
    18,203       61,344  
Landry’s Restaurants, Inc. (a)
    2,270       55,524  
McCormick & Schmick’s Seafood Restaurants, Inc. (a)
    4,974       37,106  
O’Charleys, Inc. (a)
    6,066       32,150  
P.F. Chang’s China Bistro, Inc.
    6,964       276,123  
Papa John’s International, Inc. (a)
    6,392       147,783  
Red Robin Gourmet Burgers, Inc. (a)
    4,820       82,711  
Ruby Tuesday, Inc. (a)
    19,506       165,801  
Ruth’s Hospitality Group, Inc. (a)
    9,465       39,564  
Sonic Corp. (a)
    18,590       144,072  
Texas Roadhouse, Inc., Class A (a)
    17,371       219,222  
 
             
 
            4,041,906  
Scientific Instruments: Control & Filter — 0.6%
               
Brady Corp.
    14,581       363,358  
CIRCOR International, Inc.
    5,175       132,376  
ESCO Technologies, Inc.
    7,939       204,429  
Energy Recovery, Inc. (a)
    12,672       50,688  
The Gorman-Rupp Co.
    3,731       93,462  
ICx Technologies, Inc. (a)
    3,998       29,185  
L-1 Identity Solutions, Inc. (a)
    22,957       188,018  
Mine Safety Appliances Co.
    7,819       193,755  
PMFG, Inc. (a)
    4,578       69,357  
Robbins & Myers, Inc.
    8,062       175,268  
See Notes to Financial Statements.
             
56   MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010    

 


 

     
Schedule of Investments (continued)   Master Small Cap Index Series
(Percentages shown are based on Net Assets)
                 
Common Stocks   Shares     Value  
 
Scientific Instruments: Control & Filter (concluded)
               
Sun Hydraulics, Inc.
    3,823     $ 89,688  
Watts Water Technologies, Inc., Class A
    8,759       251,033  
X-Rite, Inc. (a)
    10,766       39,726  
 
             
 
            1,880,343  
Scientific Instruments: Electrical — 1.1%
               
A123 Systems, Inc. (a)
    21,936       206,856  
AZZ, Inc.
    3,766       138,476  
A.O. Smith Corp.
    7,230       348,414  
Advanced Battery Technologies, Inc. (a)
    18,142       59,506  
American Superconductor Corp. (a)(b)
    13,477       359,701  
Baldor Electric Co.
    14,038       506,491  
Ballantyne Strong, Inc. (a)
    4,590       33,232  
Broadwind Energy, Inc. (a)
    28,531       79,887  
Ener1, Inc. (a)(b)
    18,847       63,703  
EnerSys (a)
    14,439       308,561  
Franklin Electric Co., Inc.
    7,026       202,489  
GrafTech International Ltd. (a)
    36,049       527,036  
Houston Wire & Cable Co.
    5,400       58,590  
Littelfuse, Inc. (a)
    6,609       208,911  
SatCon Technology Corp. (a)
    22,564       64,533  
Taser International, Inc. (a)
    18,100       70,590  
UQM Technologies, Inc. (a)
    11,357       38,500  
 
             
 
            3,275,476  
Scientific Instruments: Gauges & Meters — 0.1%
               
Badger Meter, Inc.
    4,487       173,602  
Faro Technologies, Inc. (a)
    4,949       92,596  
Keithley Instruments, Inc.
    3,591       31,708  
Measurement Specialties, Inc. (a)
    4,531       62,075  
Zygo Corp. (a)
    5,298       42,967  
 
             
 
            402,948  
Scientific Instruments: Pollution Control — 0.4%
               
Clean Harbors, Inc. (a)
    6,874       456,502  
Darling International, Inc. (a)
    24,857       186,676  
EnergySolutions, Inc.
    26,650       135,648  
Fuel Tech, Inc. (a)
    5,653       35,727  
Met-Pro Corp.
    4,810       51,756  
Metalico, Inc. (a)
    11,625       46,268  
Team, Inc. (a)
    5,856       76,421  
US Ecology, Inc.
    5,707       83,151  
Waste Services, Inc. (a)
    8,326       97,081  
 
             
 
            1,169,230  
Securities Brokerage & Services — 0.6%
               
BGC Partners, Inc.
    17,354       88,679  
GFI Group, Inc.
    19,718       110,026  
Gladstone Investment Corp.
    7,282       42,454  
International Assets Holding Corp., Inc. (a)
    3,930       62,880  
Investment Technology Group, Inc. (a)
    12,834       206,114  
KBW, Inc. (a)
    10,582       226,878  
Knight Capital Group, Inc., Class A (a)
    27,794       383,279  
LaBranche & Co., Inc. (a)
    11,366       48,646  
Ladenburg Thalmann Financial Services, Inc. (a)
    28,230       35,288  
MF Global Holdings Ltd. (a)
    25,761       147,095  
MarketAxess Holdings, Inc.
    8,261       113,919  
optionsXpress Holdings, Inc. (a)
    12,382       194,893  
Penson Worldwide, Inc. (a)(b)
    6,251       35,256  
SWS Group, Inc.
    8,390       79,705  
TradeStation Group, Inc. (a)
    12,177       82,195  
 
             
 
            1,857,307  
Semiconductors & Components — 2.4%
               
AXT, Inc. (a)
    9,878       44,550  
Actel Corp. (a)
    6,718       86,125  
Advanced Analogic Technologies, Inc. (a)
    13,817       44,076  
Amkor Technology, Inc. (a)
    31,661       174,452  
Anadigics, Inc. (a)
    20,070       87,505  
Applied Micro Circuits Corp. (a)
    19,783       207,326  
Cavium Networks, Inc. (a)
    13,373       350,239  
Ceva, Inc. (a)
    6,500       81,900  
Cirrus Logic, Inc. (a)
    19,670       310,983  
Conexant Systems, Inc. (a)
    24,961       55,913  
DSP Group, Inc. (a)
    7,375       47,126  
Diodes, Inc. (a)
    10,251       162,683  
Entropic Communications, Inc. (a)
    17,163       108,813  
Exar Corp. (a)
    11,472       79,501  
Formfactor, Inc. (a)
    15,202       164,182  
Hittite Microwave Corp. (a)
    8,196       366,689  
IXYS Corp. (a)
    7,474       66,070  
Integrated Device Technology, Inc. (a)
    49,076       242,926  
Integrated Silicon Solutions, Inc. (a)
    7,952       59,958  
Kopin Corp. (a)
    20,596       69,820  
Lattice Semiconductor Corp. (a)
    35,243       152,955  
MIPS Technologies, Inc. (a)
    14,100       72,051  
MaxLinear, Inc., Class A (a)
    2,353       32,895  
Micrel, Inc.
    15,328       156,039  
Microsemi Corp. (a)
    24,917       364,536  
Microtune, Inc. (a)
    17,666       37,628  
Monolithic Power Systems, Inc. (a)
    9,767       174,439  
MoSys, Inc. (a)
    8,948       39,550  
Netlogic Microsystems, Inc. (a)
    18,814       511,741  
Omnivision Technologies, Inc. (a)
    15,518       332,706  
PLX Technology, Inc. (a)
    11,831       49,572  
Pericom Semiconductor Corp. (a)
    7,865       75,504  
Power Integrations, Inc.
    7,415       238,726  
RF Micro Devices, Inc. (a)
    80,737       315,682  
Rubicon Technology, Inc. (a)(b)
    4,338       129,229  
Semtech Corp. (a)
    18,583       304,204  
Sigma Designs, Inc. (a)(b)
    9,481       94,905  
Silicon Image, Inc. (a)
    23,791       83,506  
Spansion, Inc., Class A (a)
    3,931       64,115  
Standard Microsystems Corp. (a)
    6,829       158,979  
Supertex, Inc. (a)
    3,024       74,572  
Trident Microsystems, Inc. (a)
    22,663       32,181  
TriQuint Semiconductor, Inc. (a)
    46,225       282,435  
Virage Logic Corp. (a)
    7,132       84,799  
Volterra Semiconductor Corp. (a)
    7,492       172,765  
Zoran Corp. (a)
    15,589       148,719  
 
             
 
            6,995,270  
Shipping — 0.7%
               
American Commercial Lines, Inc. (a)
    2,846       64,063  
Baltic Trading Ltd. (a)
    5,148       58,533  
DHT Holdings, Inc.
    15,389       59,248  
Eagle Bulk Shipping, Inc. (a)(b)
    18,931       79,889  
Excel Maritime Carriers Ltd. (a)
    12,211       62,520  
Genco Shipping & Trading Ltd. (a)
    7,618       114,194  
General Maritime Corp.
    15,769       95,245  
Gulfmark Offshore, Inc., Class A (a)
    7,019       183,898  
Horizon Lines, Inc., Class A
    9,959       42,127  
International Shipholding Corp.
    1,916       42,401  
Knightsbridge Tankers Ltd.
    5,294       93,121  
Nordic American Tanker Shipping Ltd.
    14,029       394,075  
Overseas Shipholding Group, Inc.
    7,646       283,208  
Scorpio Tankers, Inc. (a)
    4,234       48,479  
See Notes to Financial Statements.
             
    MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010   57

 


 

     
Schedule of Investments (continued)   Master Small Cap Index Series
(Percentages shown are based on Net Assets)
                 
Common Stocks   Shares     Value  
 
Shipping (concluded)
               
Ship Finance International Ltd.
    13,466     $ 240,772  
Teekay Tankers Ltd., Class A
    8,271       92,056  
Ultrapetrol Bahamas Ltd. (a)
    7,658       33,312  
 
             
 
            1,987,141  
Specialty Retail — 3.4%
               
America’s Car Mart, Inc. (a)
    3,000       67,890  
AnnTaylor Stores Corp. (a)
    17,652       287,198  
Asbury Automotive Group, Inc. (a)
    8,791       92,657  
Barnes & Noble, Inc.
    11,497       148,311  
bebe Stores, Inc.
    10,082       64,525  
Big 5 Sporting Goods Corp.
    6,701       88,051  
Blue Nile, Inc. (a)
    3,806       179,186  
Brown Shoe Co., Inc.
    13,121       199,177  
The Buckle, Inc. (b)
    7,821       253,557  
Build-A-Bear Workshop, Inc. (a)
    5,470       37,087  
Cabela’s, Inc., Class A (a)(b)
    11,905       168,337  
Casual Male Retail Group, Inc. (a)
    13,313       45,530  
The Cato Corp., Class A
    8,465       186,399  
Charming Shoppes, Inc. (a)
    35,216       132,060  
The Children’s Place Retail Stores, Inc. (a)
    8,320       366,246  
Christopher & Banks Corp.
    11,093       68,666  
Citi Trends, Inc. (a)
    4,526       149,086  
Coldwater Creek, Inc. (a)
    18,604       62,509  
Collective Brands, Inc. (a)
    19,436       307,089  
DSW, Inc., Class A (a)
    4,292       96,398  
Destination Maternity Corp. (a)
    1,643       41,568  
Dress Barn, Inc. (a)
    17,826       424,437  
Express, Inc. (a)
    4,836       79,165  
The Finish Line, Inc., Class A
    15,349       213,812  
Genesco, Inc. (a)
    7,254       190,853  
Group 1 Automotive, Inc. (a)
    7,380       173,651  
Gymboree Corp. (a)
    8,878       379,179  
Haverty Furniture Cos., Inc.
    5,638       69,291  
hhgregg, Inc. (a)
    3,990       93,047  
Hibbett Sports, Inc. (a)
    8,580       205,577  
Hot Topic, Inc.
    13,641       69,296  
Jo-Ann Stores, Inc. (a)
    8,170       306,457  
Jos. A. Bank Clothiers, Inc. (a)
    5,515       297,755  
Lithia Motors, Inc., Class A
    6,400       39,552  
Lumber Liquidators Holdings, Inc. (a)
    6,723       156,848  
MarineMax, Inc. (a)
    6,986       48,483  
Men’s Wearhouse, Inc.
    15,812       290,308  
Midas, Inc. (a)
    4,370       33,518  
Monro Muffler, Inc.
    5,964       235,757  
Nu Skin Enterprises, Inc., Class A
    14,804       369,064  
OfficeMax, Inc. (a)
    25,445       332,312  
Pacific Sunwear of California, Inc. (a)
    20,563       65,802  
Penske Auto Group, Inc. (a)
    13,303       151,122  
The Pep Boys — Manny, Moe & Jack
    15,933       141,166  
Pier 1 Imports, Inc. (a)
    31,433       201,486  
Regis Corp.
    17,181       267,508  
Retail Ventures, Inc. (a)
    7,100       55,522  
Rue21, Inc. (a)
    4,466       135,498  
Sally Beauty Co., Inc. (a)
    28,075       230,215  
Shoe Carnival, Inc. (a)
    2,891       59,294  
Shutterfly, Inc. (a)
    8,116       194,459  
Sonic Automotive, Inc. (a)
    12,135       103,876  
Stage Stores, Inc.
    11,784       125,853  
Stamps.com, Inc. (a)
    3,303       33,856  
Stein Mart, Inc. (a)
    8,438       52,569  
Systemax, Inc.
    3,350       50,485  
The Talbots, Inc. (a)
    21,066       217,190  
Ulta Salon Cosmetics & Fragrance, Inc. (a)
    9,462       223,871  
Vitacost.com, Inc. (a)
    4,529       40,716  
Vitamin Shoppe, Inc. (a)
    4,838       124,095  
The Wet Seal, Inc., Class A (a)
    30,611       111,730  
Zumiez, Inc. (a)
    6,297       101,445  
 
             
 
            9,737,647  
Steel — 0.0%
               
Olympic Steel, Inc.
    2,846       65,372  
Universal Stainless & Alloy Products, Inc. (a)
    2,234       35,722  
 
             
 
            101,094  
Sugar — 0.0%
               
Imperial Sugar Co., New Shares
    3,800       38,380  
Synthetic Fibers & Chemicals — 0.0%
               
Zoltek Cos., Inc. (a)
    8,614       72,961  
Technology: Miscellaneous — 0.4%
               
Benchmark Electronics, Inc. (a)
    18,912       299,755  
CTS Corp.
    10,392       96,022  
LaBarge, Inc. (a)
    4,029       45,971  
Plexus Corp. (a)
    12,110       323,822  
Sanmina-SCI Corp. (a)
    23,931       325,701  
Vocus, Inc. (a)
    5,183       79,196  
 
             
 
            1,170,467  
Telecommunications Equipment — 0.4%
               
ADC Telecommunications, Inc. (a)
    29,267       216,868  
Applied Signal Technology, Inc.
    4,140       81,351  
Arris Group, Inc. (a)
    38,030       387,526  
Brightpoint, Inc. (a)
    21,306       149,142  
Mastec, Inc. (a)
    15,770       148,238  
Powerwave Technologies, Inc. (a)
    39,877       61,411  
Symmetricom, Inc. (a)
    13,696       69,713  
UTStarcom, Inc. (a)
    35,961       66,168  
 
             
 
            1,180,417  
Textile Products — 0.1%
               
Culp, Inc. (a)
    2,850       31,236  
Interface, Inc., Class A
    15,334       164,687  
Unifi, Inc. (a)
    13,182       50,355  
 
             
 
            246,278  
Textiles, Apparel & Shoes — 1.9%
               
Carter’s, Inc. (a)
    17,755       466,069  
Cherokee, Inc.
    2,567       43,896  
Columbia Sportswear Co. (b)
    3,398       158,585  
Crocs, Inc. (a)
    25,808       273,049  
Deckers Outdoor Corp. (a)
    3,859       551,335  
G-III Apparel Group, Ltd. (a)
    4,704       107,675  
Iconix Brand Group, Inc. (a)
    21,561       309,832  
Joe’s Jeans, Inc. (a)
    13,665       27,057  
Jones Apparel Group, Inc.
    26,051       412,908  
K-Swiss, Inc., Class A (a)
    8,063       90,547  
Kenneth Cole Productions, Inc., Class A (a)
    2,624       28,890  
Lacrosse Footwear, Inc.
    1,607       27,062  
Liz Claiborne, Inc. (a)(b)
    28,565       120,544  
Maidenform Brands, Inc. (a)
    6,913       140,749  
Oxford Industries, Inc.
    4,306       90,125  
Perry Ellis International, Inc. (a)
    3,121       63,044  
Quiksilver, Inc. (a)
    39,110       144,707  
R.G. Barry Corp.
    2,908       32,075  
Skechers U.S.A., Inc., Class A (a)
    10,354       378,128  
See Notes to Financial Statements.
             
58   MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010    

 


 

     
Schedule of Investments (continued)   Master Small Cap Index Series
(Percentages shown are based on Net Assets)
                 
Common Stocks   Shares     Value  
 
Textiles, Apparel & Shoes (concluded)
               
Steven Madden Ltd. (a)
    7,373     $ 232,397  
Timberland Co., Class A (a)
    12,400       200,260  
True Religion Apparel, Inc. (a)
    7,649       168,813  
Under Armour, Inc., Class A (a)(b)
    10,509       348,163  
Volcom, Inc. (a)
    5,857       108,764  
The Warnaco Group, Inc. (a)
    13,248       478,783  
Weyco Group, Inc.
    2,232       50,845  
Wolverine World Wide, Inc.
    14,752       372,045  
 
             
 
            5,426,347  
Tobacco — 0.2%
               
Alliance One International, Inc. (a)
    26,971       96,017  
Star Scientific, Inc. (a)(b)
    29,459       48,313  
Universal Corp.
    7,179       284,862  
Vector Group Ltd.
    12,751       214,472  
 
             
 
            643,664  
Toys — 0.1%
               
Jakks Pacific, Inc. (a)
    8,650       124,387  
Leapfrog Enterprises, Inc. (a)
    10,508       42,242  
RC2 Corp. (a)
    6,624       106,713  
 
             
 
            273,342  
Transportation: Miscellaneous — 0.2%
               
Dynamex, Inc. (a)
    3,319       40,492  
Echo Global Logistics, Inc. (a)
    3,489       42,601  
HUB Group, Inc., Class A (a)
    11,232       337,072  
Pacer International, Inc. (a)
    10,918       76,317  
Textainer Group Holdings Ltd.
    2,909       70,223  
 
             
 
            566,705  
Truckers — 0.7%
               
Arkansas Best Corp.
    7,685       159,464  
Celadon Group, Inc. (a)
    6,181       87,399  
Forward Air Corp.
    8,768       238,928  
Heartland Express, Inc.
    14,967       217,321  
Knight Transportation, Inc.
    17,681       357,863  
Marten Transport Ltd. (a)
    4,731       98,310  
Old Dominion Freight Line, Inc. (a)
    8,354       293,560  
Patriot Transportation Holding, Inc. (a)
    486       39,322  
Roadrunner Transportation Systems, Inc. (a)
    3,336       47,405  
Saia, Inc. (a)
    5,023       75,345  
USA Truck, Inc. (a)
    2,610       42,073  
Werner Enterprises, Inc.
    12,793       280,039  
 
             
 
            1,937,029  
Utilities: Electrical — 1.7%
               
Allete, Inc.
    9,300       318,432  
Avista Corp.
    16,513       322,499  
Black Hills Corp.
    11,807       336,145  
CH Energy Group, Inc.
    4,892       191,962  
Central Vermont Public Service Corp.
    4,000       78,960  
Cleco Corp.
    17,888       472,422  
Dynegy, Inc. (a)
    30,896       118,950  
El Paso Electric Co. (a)
    13,121       253,891  
The Empire District Electric Co.
    12,245       229,839  
IDACORP, Inc.
    14,314       476,227  
MGE Energy, Inc.
    6,993       252,028  
NorthWestern Corp.
    10,842       284,060  
Otter Tail Corp.
    10,878       210,272  
PNM Resources, Inc.
    26,237       293,330  
Pike Electric Corp. (a)
    5,114       48,174  
Portland General Electric Co.
    22,494       412,315  
UIL Holdings Corp.
    9,175       229,650  
Unisource Energy Corp.
    10,771       325,069  
Unitil Corp.
    3,917       81,904  
 
             
 
            4,936,129  
Utilities: Gas Distributors — 1.2%
               
Chesapeake Utilities Corp.
    3,004       94,326  
The Laclede Group, Inc.
    6,857       227,172  
New Jersey Resources Corp.
    12,243       430,954  
Nicor, Inc. (c)
    13,339       540,229  
Northwest Natural Gas Co.
    7,884       343,506  
Piedmont Natural Gas Co.
    21,252       537,675  
South Jersey Industries, Inc.
    8,845       379,981  
Southwest Gas Corp.
    13,534       399,253  
WGL Holdings, Inc.
    14,991       510,144  
 
             
 
            3,463,240  
Utilities: Telecommunications — 0.9%
               
Alaska Communications Systems Group, Inc.
    13,857       117,646  
Atlantic Tele-Network, Inc.
    2,830       116,879  
Cbeyond Communications, Inc. (a)
    8,142       101,775  
Cincinnati Bell, Inc. (a)
    60,401       181,807  
Cogent Communications Group, Inc. (a)
    13,732       104,088  
Consolidated Communications Holdings, Inc.
    7,815       132,933  
FiberTower Corp. (a)
    14,458       68,242  
General Communication, Inc., Class A (a)
    14,734       111,831  
Global Crossing Ltd. (a)
    9,389       99,242  
Globalstar, Inc. (a)
    23,452       36,116  
ICO Global Communications Holdings Ltd. (a)
    28,778       46,332  
IDT Corp., Class B (a)
    4,600       58,650  
Iridium Communications, Inc. (a)
    10,375       104,165  
j2 Global Communications, Inc. (a)
    13,482       294,447  
NTELOS Holdings Corp.
    8,950       153,940  
Neutral Tandem, Inc. (a)
    9,922       111,622  
PAETEC Holding Corp. (a)
    37,848       129,062  
Premiere Global Services, Inc. (a)
    18,173       115,217  
RCN Corp. (a)
    10,738       159,030  
Shenandoah Telecom Co.
    7,233       128,313  
USA Mobility, Inc.
    6,780       87,598  
Vonage Holdings Corp. (a)
    32,033       73,676  
 
             
 
            2,532,611  
Utilities: Water — 0.3%
               
American States Water Co.
    5,607       185,816  
Artesian Resources Corp., Class A
    2,560       47,258  
California Water Service Group
    5,853       208,952  
Connecticut Water Service, Inc.
    2,957       62,156  
Consolidated Water Co., Inc.
    4,715       53,657  
Middlesex Water Co.
    4,598       72,878  
SJW Corp.
    4,025       94,346  
Southwest Water Co.
    8,584       89,960  
York Water Co.
    4,423       62,807  
 
             
 
            877,830  
 
Total Common Stocks — 96.5%
            280,035,773  
 
See Notes to Financial Statements.
             
    MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010   59

 


 

     
Schedule of Investments (continued)   Master Small Cap Index Series
(Percentages shown are based on Net Assets)
                 
Investment Companies   Shares   Value
 
BlackRock Kelso Capital Corp. (d)
    17,107     $ 168,846  
Gladstone Capital Corp.
    6,400       69,184  
Hercules Technology Growth Capital, Inc.
    11,650       101,771  
Kayne Anderson Energy Development Co.
    3,254       49,363  
Pennantpark Investment Corp.
    9,717       92,797  
Prospect Capital Corp.
    19,928       192,305  
 
Total Investment Companies — 0.2%
            674,266  
 
 
               
Warrants (e)
               
 
 
Alternative Energy — 0.0%
               
GreenHunter Energy, Inc. (Expires 8/27/11) (b)(f)
    180        
 
Communications Technology — 0.0%
               
Lantronix, Inc. (Expires 2/09/11)
    138        
 
Total Warrants — 0.0%
             
 
Total Long-Term Investments
(Cost — $265,134,275) — 96.8%
            280,710,039  
 
 
Short-Term Securities   Shares     Value  
 
BlackRock Liquidity Funds, TempFund, Institutional Class, 0.16% (d)(g)
    10,162,728     $ 10,162,728  
 
                 
    Beneficial          
    Interest          
    (000)          
 
BlackRock Liquidity Series, LLC
Money Market Series, 0.27% (d)(g)(h)
  $ 14,418       14,418,243  
 
Total Short-Term Securities
(Cost — $24,580,971) — 8.5%
            24,580,971  
 
Total Investments (Cost — $289,715,246*) — 105.2%
            305,291,010  
Liabilities in Excess of Other Assets — (5.2)%
            (15,218,865 )
 
             
Net Assets — 100.0%
          $ 290,072,145  
 
             
 
*   The cost and unrealized appreciation (depreciation) of investments as of June 30, 2010, as computed for federal income tax purposes were as follows:
         
Aggregate cost
  $ 302,295,372  
 
     
Gross unrealized appreciation
  $ 33,709,686  
Gross unrealized depreciation
    (30,714,048 )
 
     
Net unrealized appreciation
  $ 2,995,638  
 
     
 
(a)   Non-income producing security.
 
(b)   Security, or a portion of security, is on loan.
 
(c)   All or a portion of security has been pledged as collateral in connection with open financial futures contracts.
 
(d)   Investments in companies considered to be an affiliate of the Series during the period, for purposes of Section 2(a)(3) of the Investment Company Act of 1940, as amended, were as follows:
                                                 
    Shares/                   Shares/        
    Beneficial   Shares/   Shares/   Beneficial        
    Interest Held   Beneficial   Beneficial   Interest Held   Value    
    at December 31,   Interest   Interest   at June 30,   at June 30,    
Affiliate   2009   Purchased   Sold   2010   2010   Income
 
BlackRock Kelso Capital Corp.
    3,100       14,007             17,107     $ 168,846     $ 2,144  
BlackRock Liquidity Funds, TempFund, Institutional Class
    9,452,117       710,611 1           10,162,728     $ 10,162,728     $ 5,223  
BlackRock Liquidity Series, LLC Money Market Series
  $ 17,386,620           $ (2,968,377 )2   $ 14,418,243     $ 14,418,243     $ 93,053  
PennyMac Mortgage Investment Trust
    3,500       1,884             5,384     $ 85,606        
 
 
1   Represents net shares sold.
 
2   Represents net shares purchased.
See Notes to Financial Statements.
             
60   MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010    

 


 

     
Schedule of Investments (concluded)   Master Small Cap Index Series
 
(e)   Warrants entitle the Series to purchase a predetermined number of shares of common stock and are non-income producing. The purchase price and number of shares are subject to adjustment under certain conditions until the expiration date.
 
(f)   Restricted security as to resale, representing 0.0% of net assets was as follows:
                         
    Acquisition        
Issue   Date   Cost   Value
 
GreenHunter Energy, Inc.
    06/27/08              
 
(g)   Represents the current yield as of report date.
 
(h)   Security was purchased with the cash collateral from loaned securities.
  Financial futures contacts purchased as of June 30,2010 were as follows:
                                 
            Expiration   Notional   Unrealized
Contracts   Issue   Date   Value   Depreciation
 
153
  Russell 2000 MINI   September 2010   $ 9,615,472     $ (316,132 )
  For Series compliance purposes,the Series’industry classifications refer to any one or more of the industry sub-classifications used by one or more widely recognized market indexes or rating group indexes, and/or as defined by Series management. This definition may not apply for purposes of this report, which may combine such industry sub-classifications for reporting ease.
 
  Fair Value Measurements — Various inputs are used in determining the fair value of investments and derivatives, which are as follows:
    Level 1 — price quotations in active markets/exchanges for identical assets and liabilities
 
    Level 2 — other observable inputs (including,but not limited to: quoted prices for similar assets or liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market-corroborated inputs)
 
    Level 3 — unobservable inputs based on the best information available in the circumstances, to the extent observable inputs are not available (including the Series’ own assumptions used in determining the fair value of investments and derivatives)
The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. For information about the Series’ policy regarding valuation of investments and other significant accounting policies, please refer to Note 1 of the Notes to Financial Statements.
The following tables summarize the inputs used as of June 30, 2010 in determining the fair valuation of the Series’ investments and derivatives:
                                 
Valuation Inputs   Level 1   Level 2   Level 3   Total
 
Assets:
                               
Investments in Securities:
                               
Long-Term Investments1
  $ 280,710,039                 $ 280,710,039  
Short-Term Securities
    10,162,728     $ 14,418,243             24,580,971  
     
Total
  $ 290,872,767     $ 14,418,243           $ 305,291,010  
     
 
1   See above Schedule of Investments for values in each industry.
                                 
    Derivative Financial Instruments2
 
Valuation Inputs   Level 1   Level 2   Level 3   Total
 
Liabilities:
                               
Equity contracts
  $ (316,132 )               $ (316,132 )
     
 
2   Derivative financial instruments are financial futures contacts which are shown at the unrealized appreciation/depreciation on the instrument.
See Notes to Financial Statements.
             
    MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010   61

 


 

     
Statement of Assets and Liabilities   Master Small Cap Index Series
June 30, 2010 (Unaudited)
         
Assets
       
 
Investments at value — unaffiliated (including securities loaned of $13,644,499) (cost — $264,865,912)
  $ 280,455,587  
Investments at value — affiliated (cost — $24,849,334)
    24,835,423  
Cash collateral for financial futures contracts
    517,000  
Investments sold receivable
    1,494,370  
Dividends receivable
    307,245  
Securities lending income receivable — affiliated
    33,194  
Prepaid expenses
    54,144  
 
     
Total assets
    307,696,963  
 
     
 
       
Liabilities
       
 
       
Collateral on securities loaned, at value
    14,418,243  
Investments purchased payable
    2,988,212  
Withdrawals payable to investors
    91,487  
Margin variation payable
    85,529  
Investment advisory fees payable
    1,997  
Other affiliates payable
    1,107  
Directors’ fees payable
    482  
Other accrued expenses payable
    37,761  
 
     
Total liabilities
    17,624,818  
 
     
Net Assets
  $ 290,072,145  
 
     
 
       
Net Assets Consist of
       
 
       
Investors’ capital
  $ 274,812,513  
Net unrealized appreciation/depreciation
    15,259,632  
 
     
Net Assets
  $ 290,072,145  
 
     
See Notes to Financial Statements.
             
62   MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010    

 


 

     
Statement of Operations   Master Small Cap Index Series
Six Months Ended June 30, 2010 (Unaudited)
         
Investment Income
       
 
Dividends — unaffiliated
  $ 1,168,923  
Foreign taxes withheld
    (3,021 )
Security lending — affiliated
    93,053  
Dividends — affiliated
    7,367  
 
     
Total income
    1,266,322  
 
     
 
       
Expenses
       
 
       
Professional
    41,536  
Accounting services
    32,325  
Custodian
    23,564  
Investment advisory
    13,082  
Directors
    4,052  
Printing
    698  
Other
    5,223  
 
     
Total expenses
    120,480  
Less fees waived by advisor
    (21,608 )
 
     
Total expenses after fees waived
    98,872  
 
     
Net investment income
    1,167,450  
 
     
 
       
Realized and Unrealized Gain (Loss)
       
 
       
Net realized gain (loss) from:
       
Investments
    1,959,978  
Financial futures contracts
    (774,407 )
 
     
 
    1,185,571  
 
     
 
       
Net change in unrealized appreciation/depreciation on:
       
Investments
    (18,638,780 )
Financial futures contracts
    (404,705 )
 
     
 
    (19,043,485 )
 
     
Total realized and unrealized loss
    (17,857,914 )
 
     
Net Decrease in Net Assets Resulting from Operations
  $ (16,690,464 )
 
     
See Notes to Financial Statements.
             
    MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010   63

 


 

     
Statements of Changes in Net Assets   Master Small Cap Index Series
                 
    Six Months    
    Ended    
    June 30,   Year Ended
    2010   December 31,
Increase (Decrease) in Net Assets:   (Unaudited)   2009
 
Operations
               
 
Net investment income
  $ 1,167,450     $ 4,243,420  
Net realized gain (loss)
    1,185,571       (30,867,280 )
Net change in unrealized appreciation/depreciation
    (19,043,485 )     124,588,792  
     
Net increase (decrease) in net assets resulting from operations
    (16,690,464 )     97,964,932  
     
 
               
Capital Transactions
               
 
               
Proceeds from contributions
    133,107,328       171,416,855  
Value of withdrawals
    (55,981,415 )     (384,465,211 )
     
Net increase (decrease) in net assets derived from capital transactions
    77,125,913       (213,048,356 )
     
 
               
Net Assets
               
 
               
Total increase (decrease) in net assets
    60,435,449       (115,083,424 )
Beginning of period
    229,636,696       344,720,120  
     
End of period
  $ 290,072,145     $ 229,636,696  
     
     
Financial Highlights   Master Small Cap Index Series
                                                 
    Six Months    
    Ended    
    June 30,    
    2010   Year Ended December 31,
    (Unaudited)   2009   2008   2007   2006   2005
 
Total Investment Return
                                               
 
Total investment return
    (1.84 )%1     27.37 %     (33.57 )%     (1.46 )%     18.13 %     4.63 %
     
 
                                               
Ratios to Average Net Assets
                                               
 
Total expenses
    0.09 %2     0.09 %     0.08 %     0.06 %     0.07 %     0.08 %
     
Total expenses after fees waived and paid indirectly
    0.08 %2     0.07 %     0.07 %     0.06 %     0.07 %     0.07 %
     
Net investment income
    0.89 %2     1.27 %     1.60 %     1.69 %     1.55 %     1.17 %
     
 
                                               
Supplemental Data
                                               
 
Net assets, end of period (000)
  $ 290,072     $ 229,637     $ 344,720     $ 630,394     $ 561,373     $ 370,145  
     
Portfolio turnover
    16 %     43 %     42 %     26 %     40 %     37 %
     
 
1   Aggregate total investment return.
 
2   Annualized.
See Notes to Financial Statements.
             
64   MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010    

 


 

     
Notes to Financial Statements (Unaudited)   Master Small Cap Index Series
1. Organization and Significant Accounting Policies:
Master Small Cap Index Series (the “Series”), a non-diversified, open-end management investment company, is a series of Quantitative Master Series LLC (the “Master LLC”). The Master LLC is registered as an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), and is organized as a Delaware limited liability company. The Master LLC’s Limited Liability Company Agreement permits the Board of Directors of the Master LLC (the “Board”) to issue non-transferable interests, subject to certain limitations. The Series’ financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which may require management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
The following is a summary of significant accounting policies followed by the Master LLC:
Valuation: The Series’ policy is to fair value its financial instruments at market value using independent dealers or pricing services selected under the supervision of the Board. Equity investments traded on a recognized securities exchange or the NASDAQ Global Market System are valued at the last reported sale price that day or the NASDAQ official closing price, if applicable. For equity investments traded on more than one exchange, the last reported sale price on the exchange where the stock is primarily traded is used. Equity investments traded on a recognized exchange for which there were no sales on that day are valued at the last available bid price. If no bid price is available, the prior day’s price will be used, unless it is determined that such prior day’s price no longer reflects the fair value of the security. Financial futures contracts traded on exchanges are valued at their last sale price. Investments in open-end investment companies are valued at net asset value each business day. Short-term securities with remaining maturities of 60 days or less may be valued at amortized cost, which approximates fair value.
The Series values its investment in BlackRock Liquidity Series, LLC Money Market Series (the “Money Market Series”) at fair value, which is ordinarily based upon its pro rata ownership in the net assets of the underlying fund. The Money Market Series seeks current income consistent with maintaining liquidity and preserving capital. Although the Money Market Series is not registered under the 1940 Act, its investments will follow the parameters of investments by a money market fund that is subject to Rule 2a-7 promulgated by the Securities and Exchange Commission (the “SEC”) under the 1940 Act. The Series may withdraw up to 25% of its investment daily, although the manager of the Money Market Series, in its sole discretion, may permit an investor to withdraw more than 25% on any one day.
In the event that application of these methods of valuation results in a price for an investment which is deemed not to be representative of the market value of such investment or is not available, the investment will be valued in accordance with a policy approved by the Board as reflecting fair value (“Fair Value Assets”). When determining the price for Fair Value Assets, the investment advisor and/or the sub-advisor seeks to determine the price that the Series might reasonably expect to receive from the current sale of that asset in an arm’s-length transaction. Fair value determinations shall be based upon all available factors that the investment advisor and/or sub-advisor deems relevant. The pricing of all Fair Value Assets is subsequently reported to the Board or a committee thereof.
Segregation and Collateralization: In cases in which the 1940 Act and the interpretive positions of the SEC require that the Series either delivers collateral or segregates assets in connection with certain investments (e.g., financial futures contracts), the Series will, consistent with SEC rules and/or certain interpretive letters issued by the SEC, segregate collateral or designate on its books and records cash or other liquid securities having a market value at least equal to the amount that would otherwise be required to be physically segregated. Furthermore, based on requirements and agreements with certain exchanges and third party broker-dealers, each party has requirements to deliver/deposit securities as collateral for certain investments.
Investment Transactions and Investment Income: For financial reporting purposes, investment transactions are recorded on the dates the transactions are entered into (the trade dates). Realized gains and losses on investment transactions are determined on the identified cost basis. Dividend income is recorded on the ex-dividend dates. Upon notification from issuers, some of the dividend income received from a real estate investment trust may be redesignated as a reduction of cost of the related investment and/or realized gain. Interest income, including amortization of premium and accretion of discount on debt securities, is recognized on the accrual basis.
Securities Lending: The Series may lend securities to financial institutions that provide cash as collateral, which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. The market value of the loaned securities is determined at the close of business of the Series and any additional required collateral is delivered to the Series on the next business day. Securities lending income, as disclosed in the Statement of Operations, represents the income earned from the investment of the cash collateral, net of rebates paid to, or fees paid by, borrowers and less the fees paid to the securities lending agent. 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. In the event that the borrower defaults on its obligation to return borrowed securities because of insolvency or for any other reason, the Series could experience delays and costs in gaining access to the collateral. The Series also could suffer a loss if the value of an investment purchased with cash collateral falls below the market value of loaned securities or if the value of an investment purchased with cash collateral falls below the value of the original cash collateral received.
             
    MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010   65

 


 

     
Notes to Financial Statements (continued)   Master Small Cap Index Series
Income Taxes: The Series is classified as a partnership for federal income tax purposes. As such, each investor in the Series is treated as owner of its proportionate share of the net assets, income, expenses and realized and unrealized gains and losses of the Master LLC. Therefore, no federal income tax provision is required. It is intended that the Series assets will be managed so an investor in the Series can satisfy the requirements of Subchapter M of the Internal Revenue Code of 1986, as amended.
The Series files US federal and various state and local tax returns. No income tax returns are currently under examination. The statute of limitations on the Series’ US federal tax returns remains open for each of the four years ended December 31, 2009. The statutes of limitations on the Series’ state and local tax returns may remain open for an additional year depending upon the jurisdiction.
2. Derivative Financial Instruments:
The Series engages in various portfolio investment strategies using derivative contracts both to increase the returns of the Series and to economically hedge, or protect, its exposure to certain risks such as equity risk. These contracts may be transacted on an exchange. Losses may arise if the value of the contract decreases due to an unfavorable change in the market rates or values of the underlying instrument or if the counter-party does not perform under the contract. Counterparty risk related to exchange traded financial futures contracts is minimal because of the protection against defaults provided by the exchange on which they trade.
Financial Futures Contracts: The Series purchases or sells financial futures contracts and options on financial futures contracts to gain exposure to, or economically hedge against, changes in the value of equity securities (equity risk). Financial futures contracts are contracts for delayed delivery of securities or currencies at a specific future date and at a specific price or yield. Pursuant to the contract, the Series agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as margin variation and are recognized by the Series as unrealized gains or losses. When the contract is closed, the Series records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. The use of financial futures transactions involves the risk of an imperfect correlation in the movements in the price of financial futures contracts, interest rates and the underlying assets.
Derivative Instruments Categorized by Risk Exposure:
Fair Value of Derivative Instruments as of June 30, 2010
                 
    Liability Derivatives
    Statement of    
    Assets and    
    Liabilities    
    Location   Value
 
Equity contracts
  Net unrealized appreciation/depreciation*   $ 316,132  
 
*   Includes cumulative appreciation/depreciation of financial futures contracts as reported in the Schedule of Investments. Only current day’s margin variation is reported within the Statement of Assets and Liabilities.
The Effect of Derivative Instruments on the Statement of Operations
Six Months Ended June 30, 2010
         
    Net Realized Loss from  
    Financial Futures Contracts  
Equity contracts
  $ (774,407 )
         
    Net Change in Unrealized  
    Appreciation/Depreciation on  
    Financial Futures Contracts  
Equity contracts
  $ (404,705 )
For the six months ended June 30, 2010, the average quarterly balance of outstanding derivative financial instruments was as follows:
         
Financial futures contracts:
       
Average number of contracts purchased
    120  
Average notional value of contracts purchased
  $ 7,727,206  
3. Investment Advisory Agreement and Other Transactions with Affiliates:
The PNC Financial Services Group, Inc. (“PNC”), Bank of America Corporation (“BAC”) and Barclays Bank PLC (“Barclays”) are the largest stockholders of BlackRock, Inc. (“BlackRock”). Due to the ownership structure, PNC is an affiliate of the Series for 1940 Act purposes, but BAC and Barclays are not.
The Master LLC, on behalf of the Series, entered into an Investment Advisory Agreement with BlackRock Advisors, LLC (the “Manager”), the Series’ investment advisor, an indirect, wholly owned subsidiary of BlackRock, to provide investment advisory and administration services. The Manager is responsible for the management of the Series’ portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Series. For such services, the Series pays the Manager a monthly fee at an annual rate 0.01% of the Series’ average daily net assets.
The Manager contractually agreed to waive and/or reimburse fees and/or expenses to ensure that the management fee of the Series, when
             
66   MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010    

 


 

     
Notes to Financial Statements (continued)   Master Small Cap Index Series
combined with the administration fee of BlackRock Small Cap Index Fund of BlackRock Index Funds, Inc., will not exceed 0.30%. No fees are currently being waived for the Series.
The Manager entered into a contractual arrangement with the Master LLC with respect to the Series under which the Manager will waive and/or reimburse its fees and/or expenses so that the total annual operating expenses incurred by the Series (excluding interest expense, acquired fund fees and certain other Series’ expenses) will not exceed 0.08% of the average daily value of the Series’ net assets. For the six months ended June 30, 2010, the Manager waived $18,703, which is included in fees waived by advisor in the Statement of Operations.
The Manager has agreed not to reduce or discontinue these contractual waivers or reimbursements before May 1, 2011 unless approved by the Board, including a majority of the non-interested trustees.
The Manager voluntarily agreed to waive its advisory fees by the amount of investment advisory fees the Series pays to the Manager indirectly through its investment in affiliated money market funds; however, the Manager does not waive its advisory fees by the amount of investment advisory fees paid through its investment in other affiliated investment companies, if any. For the six months ended June 30, 2010, the manager waived advisory fees in the amount of $2,905, which is included in fees waived by advisor in the Statement of Operations.
The Manager entered into a sub-advisory agreement with BlackRock Investment Management, LLC (“BIM”), an affiliate of the Manager.The Manager pays BIM for services it provides, a monthly fee that is a percentage of the investment advisory fees paid by the Series to the Manager.
For the six months ended June 30, 2010, the Series reimbursed the Manager $4,186 for certain accounting services, which is included in accounting services in the Statement of Operations.
The Master LLC, on behalf of the Series, received an exemptive order from the SEC permitting, among other things, to pay an affiliated securities lending agent a fee based on a share of the income derived from the securities lending activities and has retained BIM as the securities lending agent. BIM may, on behalf of the Master LLC and the Series, invest cash collateral received by the Series for such loans, among other things, in a private investment company managed by the Manager or in registered money market funds advised by the Manager or its affiliates. The market value of securities on loan and the value of the related collateral are shown in the Statement of Assets and Liabilities as securities loaned and collateral on securities loaned, at value, respectively. The cash collateral invested by BIM is disclosed in the Schedule of Investments. The share of income earned by the Series on such investments is shown as securities lending — affiliated in the Statement of Operations. For the six months ended June 30, 2010, BIM received $23,627 in securities lending agent fees related to securities lending activities for the Series.
Certain officers and/or directors of the Master LLC are officers and/or directors of BlackRock or its affiliates.
4. Investments:
Purchases and sales of investments, excluding short-term securities for the six months ended June 30, 2010, were $115,391,532 and $42,064,540, respectively.
5. Borrowings:
The Master LLC, on behalf of the Series, 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 expires in November 2010.The Series may borrow under the credit agreement to fund shareholder redemptions.The Series paid its pro rata share of a 0.02% upfront fee on the aggregate commitment amount which was allocated to the Series based on its net assets as of October 31, 2009, a commitment fee of 0.10% per annum based on the Series’ pro rata share of the unused portion of the credit agreement, which is included in miscellaneous in the Statement of Operations, and interest at a rate equal to the higher of (a) the one-month LIBOR plus 1.25% per annum and (b) the Fed Funds rate plus 1.25% per annum on amounts borrowed.The Series did not borrow under the credit agreement during the six months ended June 30, 2010.
6. Concentration, Market and Credit Risk:
In the normal course of business, the Series invests in securities and enters into transactions where risks exist due to fluctuations in the market (market risk) or failure of the issuer of a security to meet all its obligations (issuer credit risk). The value of securities held by the Series may decline in response to certain events, including those directly involving the issuers whose securities are owned by the Series; conditions affecting the general economy; overall market changes; local, regional or global political, social or economic instability; and currency and interest rate and price fluctuations. Similar to issuer credit risk, the Series may be exposed to counterparty credit risk, or the risk that an entity with which the Series has unsettled or open transactions may fail to or be unable to perform its commitments. The Series manages counterparty credit risk by entering into transactions only with counterparties that it believes have the financial resources to honor their obligations and by monitoring the financial stability of those counterparties. Financial assets, which potentially expose the Series to market, issuer and counterparty credit risks, consist principally of financial instruments and receivables due from counterparties. The extent of the Series’ exposure to market, issuer and counterparty credit risks with respect to these financial assets is generally approximated by their value recorded in the Series’ Statement of Assets and Liabilities, less any collateral held by the Series.
The Series invests a significant portion of its assets in securities in the financial services sector. Changes in economic conditions affecting the sector would have a greater impact on the Series and could affect the value, income and/or liquidity of positions in such securities.
             
    MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010   67

 


 

     
Notes to Financial Statements (concluded)   Master Small Cap Index Series
7. Subsequent Events:
Management has evaluated the impact of all subsequent events on the Series through the date the financial statements were issued and has determined that there were no subsequent events requiring adjustment or additional disclosure in the financial statements.
             
68   MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010    

 


 

Disclosure of Investment Advisory Agreement and Sub-Advisory Agreement
The Board of Directors (the “Board,” and the members of which are referred to as “Board Members”) of Quantitative Master Series LLC (the “Master LLC”) met on April 20, 2010 and May 18 – 19, 2010 to consider the approval of the Master LLC’s investment advisory agreement (the “Advisory Agreement”) with BlackRock Advisors, LLC (the “Manager”), the Master LLC’s investment advisor, on behalf of Master Small Cap Index Series (the “Portfolio”), a series of the Master LLC. The Board also considered the approval of the sub-advisory agreement (the “Sub-Advisory Agreement”) between the Manager and BlackRock Investment Management, LLC (the “Sub-Advisor”), with respect to the Portfolio. The Manager and the Sub-Advisor are referred to herein as “BlackRock.” The Advisory Agreement and the Sub-Advisory Agreement are referred to herein as the “Agreements.”
Activities and Composition of the Board
The Board consists of thirteen individuals, eleven of whom are not “interested persons” of the Master LLC as defined in the Investment Company Act of 1940, as amended (the “1940 Act”) (the “Independent Board Members”). The Board Members are responsible for the oversight of the operations of the Master LLC and perform the various duties imposed on the directors of investment companies by the 1940 Act. The Independent Board Members have retained independent legal counsel to assist them in connection with their duties. The Co-Chairs of the Board are each Independent Board Members. The Board has established five standing committees: an Audit Committee, a Governance and Nominating Committee, a Compliance Committee, a Performance Oversight and Contract Committee and an Executive Committee, each of which is composed of Independent Board Members (except for the Executive Committee, which also has one interested Board Member) and is chaired by Independent Board Members. The Board also has one ad hoc committee, the Joint Product Pricing Committee, which consists of Independent Board Members and directors/trustees of the boards of certain other BlackRock-managed funds, who are not “interested persons” of their respective funds.
The Agreements
Pursuant to the 1940 Act, the Board is required to consider the continuation of the Agreements on an annual basis. In connection with this process, the Board assessed, among other things, the nature, scope and quality of the services provided to the Portfolio by the personnel of BlackRock and its affiliates, including investment management, administrative and shareholder services, oversight of fund accounting and custody, marketing services and assistance in meeting applicable legal and regulatory requirements.
From time to time throughout the year, the Board, acting directly and through its committees, considers at each of its meetings factors that are relevant to its annual consideration of the renewal of the Agreements, including the services and support provided by BlackRock to the Portfolio and its shareholders. Among the matters the Board considered were: (a) investment performance of an affiliated feeder fund that invests all of its investable assets in the Portfolio (the “representative feeder fund”) for one-, three- and five-year periods, as applicable, against its peer funds, and applicable benchmarks, if any, as well as senior management’s and portfolio managers’ analysis of the reasons for any over performance or underperformance against its peers and/or benchmarks, as applicable; (b) fees, including advisory, administration, if applicable, and other amounts paid to BlackRock and its affiliates by the Portfolio, such as marketing and distribution and fund accounting; (c) the Portfolio’s operating expenses; (d) the resources devoted to and compliance reports relating to the Portfolio’s investment objective, policies and restrictions; (e) the Master LLC’s compliance with its Code of Ethics and compliance policies and procedures; (f) the nature, cost and character of non-investment management services provided by BlackRock and its affiliates; (g) BlackRock’s and other service providers’ internal controls; (h) BlackRock’s implementation of the proxy voting policies approved by the Board; (i) the use of brokerage commissions and execution quality of portfolio transactions; (j) BlackRock’s implementation of the Master LLC’s valuation and liquidity procedures; (k) an analysis of contractual and actual management fees for products with similar investment objectives across the open-end fund, closed-end fund and institutional account product channels; and (l) periodic updates on BlackRock’s business.
Board Considerations in Approving the Agreements
The Approval Process: Prior to the April 20, 2010 meeting, the Board requested and received materials specifically relating to the Agreements. The Board is engaged in a process with BlackRock to periodically review the nature and scope of the information provided to better assist its deliberations. The materials provided in connection with the April meeting included: (a) information independently compiled and prepared by Lipper, Inc. (“Lipper”) on fees and expenses of the Portfolio and the representative feeder fund, as applicable, and the investment performance of the representative feeder fund as compared with a peer group of funds as determined by Lipper (collectively, “Peers”); (b) information on the profitability of the Agreements to BlackRock and a discussion of fall-out benefits to BlackRock and its affiliates and significant shareholders; (c) a general analysis provided by BlackRock concerning investment advisory fees charged to other clients, such as institutional clients and closed-end funds, under similar investment mandates, as well as the performance of such other clients, as applicable; (d) the impact of economies of scale; (e) a summary of aggregate amounts paid by the Portfolio to BlackRock; and (f) if applicable, a comparison of management fees to similar BlackRock open-end funds, as classified by Lipper.
At an in-person meeting held on April 20, 2010, the Board reviewed materials relating to its consideration of the Agreements. As a result of the discussions that occurred during the April 20, 2010 meeting, the Board presented BlackRock with questions and requests for additional information and BlackRock responded to these requests with additional written information in advance of the May 18 – 19, 2010 Board meeting.
             
    MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010   69

 


 

Disclosure of Investment Advisory Agreement and Sub-Advisory Agreement (continued)
At an in-person meeting held on May 18 – 19, 2010, the Board, including the Independent Board Members, unanimously approved the continuation of the Advisory Agreement between the Manager and the Master LLC with respect to the Portfolio and the Sub-Advisory Agreement between the Manager and the Sub-Advisor with respect to the Portfolio, each for a one-year term ending June 30, 2011. In approving the continuation of the Agreements, the Board considered: (a) the nature, extent and quality of the services provided by BlackRock; (b) the investment performance of the Portfolio and BlackRock; (c) the advisory fee and the cost of the services and profits to be realized by BlackRock and its affiliates from their relationship with the Portfolio; (d) economies of scale; and (e) other factors deemed relevant by the Board Members.
The Board also considered other matters it deemed important to the approval process, such as payments made to BlackRock or its affiliates relating to the distribution of Portfolio shares, services related to the valuation and pricing of portfolio holdings of the Portfolio, direct and indirect benefits to BlackRock and its affiliates and significant shareholders from their relationship with the Portfolio and advice from independent legal counsel with respect to the review process and materials submitted for the Board’s review. The Board noted the willingness of BlackRock personnel to engage in open, candid discussions with the Board. The Board did not identify any particular information as controlling, and each Board Member may have attributed different weights to the various items considered.
A. Nature, Extent and Quality of the Services Provided by BlackRock: The Board, including the Independent Board Members, reviewed the nature, extent and quality of services provided by BlackRock, including the investment advisory services and the resulting performance of the Portfolio. The Board received information regarding the investment performance of the representative feeder fund. The Board met with BlackRock’s senior management personnel responsible for investment operations, including the senior investment officers. The Board also reviewed the materials provided by the portfolio management team discussing performance of the representative feeder fund and the Portfolio’s investment objective, strategies and outlook.
The Board considered, among other factors, the number, education and experience of BlackRock’s investment personnel generally and the Portfolio’s portfolio management team, investments by portfolio managers in the funds they manage, BlackRock’s portfolio trading capabilities, BlackRock’s use of technology, BlackRock’s commitment to compliance and BlackRock’s approach to training and retaining portfolio managers and other research, advisory and management personnel. The Board also reviewed a general description of BlackRock’s compensation structure with respect to the Portfolio’s portfolio management team and BlackRock’s ability to attract and retain high-quality talent.
In addition to advisory services, the Board considered the quality of the administrative and non-investment advisory services provided to the Portfolio. BlackRock and its affiliates and significant shareholders provide the Portfolio with certain administrative, shareholder and other services (in addition to any such services provided to the Portfolio by third parties) and officers and other personnel as are necessary for the operations of the Portfolio. In addition to investment advisory services, BlackRock and its affiliates provide the Portfolio with other services, including: (i) preparing disclosure documents, such as the prospectus, the statement of additional information and periodic shareholder reports; (ii) assisting with daily accounting and pricing; (iii) overseeing and coordinating the activities of other service providers; (iv) organizing Board meetings and preparing the materials for such Board meetings; (v) providing legal and compliance support; and (vi) performing other administrative functions necessary for the operation of the Portfolio, such as tax reporting and fulfilling regulatory filing requirements. The Board reviewed the structure and duties of BlackRock’s fund administration, accounting, legal and compliance departments and considered BlackRock’s policies and procedures for assuring compliance with applicable laws and regulations.
B. The Investment Performance of the Portfolio and BlackRock: The Board, including the Independent Board Members, also reviewed and considered the performance history of the Portfolio. The Board noted that the Portfolio’s investment results correspond directly to the investment results of the representative feeder fund. In preparation for the April 20, 2010 meeting, the Board was provided with reports, independently prepared by Lipper, which included a comprehensive analysis of the representative feeder fund’s performance. The Board also reviewed a narrative and statistical analysis of the Lipper data that was prepared by BlackRock, which analyzed various factors that affect Lipper’s rankings. In connection with its review, the Board received and reviewed information regarding the investment performance of the representative feeder fund as compared to a representative group of similar funds as determined by Lipper and to all funds in the representative feeder fund’s applicable Lipper category. The Board was provided with a description of the methodology used by Lipper to select peer funds. The Board regularly reviews the performance of the Portfolio and the representative feeder fund, as applicable, throughout the year. The Board attaches more importance to performance over relatively long periods of time, typically three to five years.
The Board noted that the representative feeder fund performed below the median of its Lipper Performance Universe in each of the one-, three- and five-year periods reported. The Board and BlackRock reviewed the reasons for the representative feeder fund’s underperformance during these periods compared with its Peers. The Board was informed that, among other things, over the one-, three- and five-year periods, the representative feeder fund met its objective of matching the risk and return of the Russell 2000 Index prior to fees and expenses.
             
70   MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010    

 


 

Disclosure of Investment Advisory Agreement and Sub-Advisory Agreement (continued)
The Board and BlackRock discussed BlackRock’s strategy for improving the Portfolio’s performance and BlackRock’s commitment to providing the resources necessary to assist the Portfolio’s portfolio managers and to improve the Portfolio’s performance.
C. Consideration of the Advisory Fees and the Cost of the Services and Profits to be Realized by BlackRock and its Affiliates from their Relationship with the Portfolio: The Board, including the Independent Board Members, reviewed the information provided by Lipper regarding the Portfolio’s contractual advisory fee rate. The Board considered the services provided and the fees charged by BlackRock to other types of clients with similar investment mandates, including separately managed institutional accounts.
The Board received and reviewed statements relating to BlackRock’s financial condition and profitability with respect to the services it provided the Portfolio. The Board was also provided with a profitability analysis that detailed the revenues earned and the expenses incurred by BlackRock for services provided to the Portfolio. The Board reviewed BlackRock’s profitability with respect to the Portfolio and other funds the Board currently oversees for the year ended December 31, 2009 compared to available aggregate profitability data provided for the year ended December 31, 2008. The Board reviewed BlackRock’s profitability with respect to other fund complexes managed by the Manager and/or its affiliates. The Board reviewed BlackRock’s assumptions and methodology of allocating expenses in the profitability analysis, noting the inherent limitations in allocating costs among various advisory products. The Board recognized that profitability may be affected by numerous factors including, among other things, fee waivers and expense reimbursements by the Manager, the types of funds managed, expense allocations and business mix, and the difficulty of comparing profitability as a result of those factors.
The Board noted that, in general, individual fund or product line profitability of other advisors is not publicly available. Nevertheless, to the extent such information was available, the Board considered BlackRock’s operating margin, in general, compared to the operating margin for leading investment management firms whose operations include advising open-end funds, among other product types. That data indicates that operating margins for BlackRock with respect to its registered funds are generally consistent with margins earned by similarly situated publicly traded competitors. In addition, the Board considered, among other things, certain third party data comparing BlackRock’s operating margin with that of other publicly traded asset management firms. That third party data indicates that larger asset bases do not, in themselves, translate to higher profit margins.
In addition, the Board considered the cost of the services provided to the Portfolio by BlackRock, and BlackRock’s and its affiliates’ profits relating to the management and distribution of the Portfolio and the other funds advised by BlackRock and its affiliates. As part of its analysis, the Board reviewed BlackRock’s methodology in allocating its costs to the management of the Portfolio. The Board also considered whether BlackRock has the financial resources necessary to attract and retain high-quality investment management personnel to perform its obligations under the Agreements and to continue to provide the high quality of services that is expected by the Board.
The Board noted that the Portfolio’s contractual advisory fee rate was lower than or equal to the median contractual advisory fee rate paid by comparable funds, in each case before taking into account any expense reimbursements or fee waivers. The Board also noted that BlackRock has contractually agreed to waive fees and/or reimburse expenses so that the advisory fee of the Portfolio, when combined with the administration fee of the representative feeder fund, will not exceed a specified amount. Additionally, the Board noted that BlackRock has contractually agreed to waive fees and/or reimburse expenses in order to limit, to a specified amount, the Portfolio’s total operating expenses as a percentage of the Portfolio’s average daily net assets.
D. Economies of Scale: The Board, including the Independent Board Members, considered the extent to which economies of scale might be realized as the assets of the Portfolio increase. The Board also considered the extent to which the Portfolio benefits from such economies and whether there should be changes in the advisory fee rate or structure in order to enable the Portfolio to participate in these economies of scale, for example through the use of breakpoints in the advisory fee based upon the asset level of the Portfolio.
E. Other Factors Deemed Relevant by the Board Members: The Board, including the Independent Board Members, also took into account other ancillary or “fall-out” benefits that BlackRock or its affiliates and significant shareholders may derive from their respective relationships with the Portfolio, both tangible and intangible, such as BlackRock’s ability to leverage its investment professionals who manage other portfolios, an increase in BlackRock’s profile in the investment advisory community, and the engagement of BlackRock’s affiliates and significant shareholders as service providers to the Portfolio, including for administrative and distribution services. The Board also considered BlackRock’s overall operations and its efforts to expand the scale of, and improve the quality of, its operations. The Board also noted that BlackRock may use and benefit from third party research obtained by soft dollars generated by certain mutual fund transactions to assist in managing all or a number of its other client accounts. The Board further noted that BlackRock completed the acquisition of a complex of exchange-traded funds (“ETFs”) on December 1, 2009, and that BlackRock’s funds may invest in such ETFs without any offset against the management fees payable by the funds to BlackRock.
             
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Disclosure of Investment Advisory Agreement and Sub-Advisory Agreement (concluded)
In connection with its consideration of the Agreements, the Board also received information regarding BlackRock’s brokerage and soft dollar practices. The Board received reports from BlackRock which included information on brokerage commissions and trade execution practices throughout the year.
The Board noted the competitive nature of the open-end fund marketplace, and that the shareholders of a fund are able to redeem their shares if they believe that the fund’s fees and expenses are too high or if they are dissatisfied with the performance of the fund.
Conclusion
The Board, including the Independent Board Members, unanimously approved the continuation of the Advisory Agreement between the Manager and the Master LLC, with respect to the Portfolio, for a one-year term ending June 30, 2011 and the Sub-Advisory Agreement between the Manager and the Sub-Advisor, with respect to the Portfolio, for a one-year term ending June 30, 2011. As part of its approval, the Board considered the detailed review of BlackRock’s fee structure, as it applies to the Master LLC, being conducted by the ad hoc Joint Product Pricing Committee. Based upon its evaluation of all of the aforementioned factors in their totality, the Board, including the Independent Board Members, was satisfied that the terms of the Agreements were fair and reasonable and in the best interest of the Portfolio and its shareholders. In arriving at a decision to approve the Agreements, the Board did not identify any single factor or group of factors as all-important or controlling, but considered all factors together, and different Board Members may have attributed different weights to the various factors considered. The Independent Board Members were also assisted by the advice of independent legal counsel in making this determination. The contractual fee arrangements for the Portfolio reflect the results of several years of review by the Board Members and predecessor Board Members, and discussions between such Board Members (and predecessor Board Members) and BlackRock. Certain aspects of the arrangements may be the subject of more attention in some years than in others, and the Board Members’ conclusions may be based in part on their consideration of these arrangements in prior years.
             
72   MASTER SMALL CAP INDEX SERIES   JUNE 30, 2010    

 


 

     
Schedule of Investments June 30, 2010 (Unaudited)  
Master International Index Series
(Percentages shown are based on Net Assets)
                 
Common Stocks   Shares     Value  
 
Australia — 7.8%
               
AGL Energy Ltd.
    36,440     $ 448,184  
AMP Ltd.
    166,653       723,284  
AXA Asia Pacific Holdings Ltd.
    83,908       383,876  
Alumina Ltd.
    197,274       249,665  
Amcor Ltd.
    99,510       530,348  
Aristocrat Leisure Ltd.
    34,664       105,642  
Arrow Energy Ltd. (a)
    34,672       140,336  
Asciano Group (a)
    237,702       319,208  
Australia & New Zealand Banking Group Ltd.
    208,100       3,737,768  
Australian Stock Exchange Ltd.
    13,995       341,398  
BGP Holdings Plc (a)
    783,183       10  
BHP Billiton Ltd.
    275,602       8,573,865  
Bendigo and Adelaide Bank Ltd.
    28,068       191,308  
Billabong International Ltd.
    16,993       123,405  
BlueScope Steel Ltd. (a)
    146,506       254,696  
Boral Ltd.
    47,943       192,043  
Brambles Ltd.
    114,949       523,487  
CFS Retail Property Trust
    141,553       223,745  
CSL Ltd.
    46,112       1,259,018  
CSR Ltd.
    121,841       170,635  
Caltex Australia Ltd.
    11,968       93,904  
Coca-Cola Amatil Ltd.
    45,808       458,668  
Cochlear Ltd.
    4,588       285,781  
Commonwealth Bank of Australia Ltd.
    126,022       5,094,762  
Computershare Ltd.
    36,181       319,974  
Crown Ltd.
    36,450       236,300  
DB RREEF Trust
    385,315       247,249  
Energy Resources of Australia Ltd.
    5,323       58,782  
Fairfax Media Ltd.
    171,024       186,871  
Fortescue Metals Group Ltd. (a)
    100,703       341,527  
Foster’s Group Ltd.
    156,998       743,627  
General Property Trust
    143,224       334,407  
Goodman Fielder Ltd.
    116,560       131,405  
Goodman Group
    498,305       263,559  
Harvey Norman Holdings Ltd.
    47,603       131,491  
Incitec Pivot Ltd.
    132,340       299,297  
Insurance Australia Group Ltd.
    168,879       480,392  
Intoll Group
    183,728       160,086  
Leighton Holdings Ltd.
    10,946       263,263  
Lend Lease Group
    43,397       264,274  
MacArthur Coal Ltd.
    11,154       111,466  
Macquarie Group Ltd.
    27,250       837,571  
Map Group
    53,883       120,761  
Metcash Ltd.
    61,185       215,049  
Mirvac Group
    240,043       262,151  
National Australia Bank Ltd.
    174,283       3,369,633  
Newcrest Mining Ltd.
    40,143       1,171,235  
OZ Mineral Ltd.
    250,020       198,013  
OneSteel Ltd.
    107,501       265,975  
Orica Ltd.
    29,385       618,127  
Origin Energy Ltd.
    71,512       892,165  
Paladin Resources Ltd. (a)
    54,836       163,283  
QBE Insurance Group Ltd.
    84,889       1,288,113  
Qantas Airways Ltd.
    88,991       163,134  
Rio Tinto Ltd.
    35,845       1,971,276  
SP AusNet
    126,344       81,121  
Santos Ltd.
    68,292       713,687  
Sims Metal Management Ltd.
    13,095       186,065  
Sonic Healthcare Ltd.
    29,853       259,776  
Stockland
    193,769       601,385  
Suncorp-Metway Ltd.
    103,451       692,106  
Tabcorp Holdings Ltd.
    49,044       259,922  
Tatts Group Ltd.
    102,272       191,761  
Telstra Corp. Ltd.
    354,286       965,695  
Toll Holdings Ltd.
    53,675       244,437  
Transurban Group
    103,581       367,679  
Wesfarmers Ltd., Ordinary Shares
    82,761       1,978,106  
Wesfarmers Ltd., Partially Protected Shares
    12,351       296,165  
Westfield Group
    180,671       1,835,938  
Westpac Banking Corp.
    244,496       4,309,605  
Woodside Petroleum Ltd.
    45,015       1,564,692  
Woolworths Ltd.
    101,932       2,307,232  
WorleyParsons Ltd.
    15,599       287,002  
 
             
 
            57,677,866  
Austria — 0.3%
               
Erste Bank der Oesterreichischen Sparkassen AG
    15,415       489,092  
IMMOFINANZ Immobilien Anlagen AG
    79,517       204,170  
Immoeast AG NPV (a)
    30,710        
OMV AG
    12,154       364,992  
Raiffeisen International Bank Holding AG (a)
    4,520       171,674  
Telekom Austria AG
    26,876       298,856  
Verbund — Oesterreichische Elektrizitaetswirtschafts AG
    6,175       188,945  
Vienna Insurance Group
    3,349       139,017  
Voestalpine AG
    8,818       240,156  
 
             
 
            2,096,902  
Belgium — 0.9%
               
Anheuser-Busch InBev NV
    59,406       2,856,322  
Anheuser-Busch InBev NV VVPR Strip (a)
    24,368       89  
Belgacom SA
    12,337       387,898  
Colruyt SA
    1,220       286,994  
Delhaize Group
    8,189       594,241  
Dexia NV (a)
    44,011       153,579  
Fortis
    180,870       402,494  
Groupe Bruxelles Lambert SA
    6,548       454,053  
KBC Bancassurance Holding
    13,157       504,312  
Mobistar SA
    2,338       124,223  
Nationale A Portefeuille
    2,247       95,591  
Solvay SA
    4,823       411,850  
UCB SA
    8,119       254,970  
Umicore SA
    9,158       264,220  
 
             
 
            6,790,836  
 
Portfolio Abbreviation
ADR     American Depositary Receipts
See Notes to Financial Statements.
             
73   MASTER INTERNATIONAL INDEX SERIES   JUNE 30, 2010    

 


 

     
Schedule of Investments (continued)   Master International Index Series
(Percentages shown are based on Net Assets)
                 
Common Stocks   Shares     Value  
 
Bermuda — 0.1%
               
Mongolia Energy Co. Ltd. (a)
    277,140     $ 96,418  
SeaDrill Ltd.
    22,705       409,552  
Yue Yuen Industrial Holdings Ltd.
    59,285       184,012  
 
             
 
            689,982  
Cayman Islands — 0.1%
               
Foxconn International Holdings Ltd. (a)
    179,313       116,086  
Lifestyle International Holdings Ltd.
    52,466       101,513  
Sands China Ltd. (a)
    161,800       239,137  
 
             
 
            456,736  
Denmark — 1.0%
               
A.P. Moller — Maersk A/S, Class A
    45       342,244  
A.P. Moller — Maersk A/S, Class B
    110       866,340  
Carlsberg A/S
    8,668       660,580  
Coloplast A/S, Class B
    1,866       185,218  
DSV A/S
    16,787       241,692  
Danske Bank A/S
    36,966       711,315  
Novo-Nordisk A/S, Class B
    35,870       2,898,036  
Novozymes A/S, Class B
    3,735       398,543  
TrygVesta A/S
    2,275       119,858  
Vestas Wind Systems A/S (a)
    17,032       708,806  
William Demant Holding (a)
    1,985       145,187  
 
             
 
            7,277,819  
Finland — 1.0%
               
Elisa Corp.
    10,661       184,394  
Fortum Oyj
    37,127       814,965  
Kesko Oyj, Class B
    5,511       178,261  
Kone Oyj, Class B
    12,504       497,852  
Metso Oyj
    10,339       331,330  
Neste Oil Oyj
    10,756       156,063  
Nokia Oyj
    308,437       2,514,016  
Nokian Renkaat Oyj
    8,578       209,932  
OKO Bank
    11,663       118,429  
Orion Oyj
    7,586       141,879  
Outokumpu Oyj
    10,321       155,079  
Rautaruukki Oyj
    7,372       107,446  
Sampo Oyj
    35,153       741,155  
Sanoma Oyj
    6,877       118,737  
Stora Enso Oyj, Class R
    47,152       340,709  
UPM-Kymmene Oyj
    42,226       559,044  
Wartsila Oyj
    6,344       288,474  
 
             
 
            7,457,765  
France — 9.1%
               
AXA SA
    141,175       2,156,749  
Accor SA (a)
    11,870       549,527  
Aeroports de Paris
    2,495       160,063  
Air France-KLM (a)
    11,270       133,993  
Air Liquide
    23,206       2,343,499  
Alcatel SA (a)
    187,830       478,335  
Alstom
    17,179       777,821  
Atos Origin SA (a)
    3,692       148,245  
BNP Paribas SA
    77,895       4,190,822  
BioMerieux
    1,006       103,285  
Bouygues
    18,708       722,158  
Bureau Veritas SA
    3,936       213,178  
CNP Assurances
    3,007       204,576  
Cap Gemini SA
    11,846       520,628  
Carrefour SA
    49,319       1,956,366  
Casino Guichard Perrachon SA
    4,470       339,206  
Christian Dior SA
    5,175       496,708  
Cie de Saint-Gobain SA
    31,903       1,188,853  
Cie Générale d’Optique Essilor International SA
    17,047       1,013,018  
Compagnie Générale de Géophysique SA (a)
    11,558       205,616  
Compagnie Générale des Etablissements Michelin
    12,310       857,667  
Credit Agricole SA
    75,615       784,518  
Dassault Systèmes SA
    4,756       288,117  
EDP Renovaveis SA (a)
    19,120       112,605  
Eiffage
    3,323       144,257  
Electricité de France SA
    21,594       821,581  
Eramet
    468       115,673  
Eurazeo
    2,412       138,366  
European Aeronautic Defense and Space Co.
    33,122       675,949  
Eutelsat Communications
    8,009       268,123  
Foncière Des Regions
    1,951       160,831  
France Telecom SA
    152,565       2,646,233  
GDF Suez
    102,235       2,908,653  
Gecina SA
    1,623       146,618  
Groupe Danone
    47,859       2,565,736  
Groupe Eurotunnel SA
    38,326       259,017  
Hermes International
    4,286       568,179  
ICADE
    1,913       161,458  
Iliad SA
    1,458       113,220  
Imerys SA
    3,106       158,049  
Ipsen
    2,637       80,286  
JCDecaux SA
    5,627       131,107  
Klepierre
    7,292       201,471  
L’Oreal SA
    19,743       1,933,044  
LVMH Moet Hennessy Louis Vuitton SA
    20,162       2,194,495  
Lafarge SA
    16,693       910,233  
Lagardere SCA
    9,607       299,636  
Legrand Promesses
    10,662       316,034  
M6-Metropole Television SA
    5,646       114,168  
Natixis
    71,265       309,465  
Neopost SA
    2,501       181,106  
PagesJaunes Groupe SA
    10,867       112,008  
Pernod-Ricard SA
    16,382       1,270,675  
Peugeot SA
    12,342       313,707  
Pinault-Printemps-Redoute
    6,164       765,713  
Publicis Groupe
    10,373       413,778  
Renault SA
    15,615       578,809  
Safran SA
    13,513       376,950  
Sanofi-Aventis
    86,641       5,218,165  
Schneider Electric SA
    19,464       1,965,868  
Scor SE
    13,345       254,881  
Société BIC SA
    2,183       155,042  
Société Générale SA
    51,770       2,130,284  
Société Télévision Française 1
    9,864       128,518  
Sodexho Alliance SA
    7,631       423,498  
Suez Environnement SA
    21,811       359,933  
Technip SA
    8,006       459,192  
Thales SA
    7,174       231,607  
Total SA
    173,574       7,748,155  
Unibail — Rodamco
    7,568       1,233,452  
Vallourec SA
    4,425       762,926  
Veolia Environnement SA
    28,051       659,003  
Vinci SA
    35,960       1,493,122  
Vivendi SA
    101,112       2,054,812  
 
             
 
            67,578,639  
See Notes to Financial Statements.
             
    MASTER INTERNATIONAL INDEX SERIES   JUNE 30, 2010   74

 


 

     
Schedule of Investments (continued)   Master International Index Series
(Percentages shown are based on Net Assets)
                 
Common Stocks   Shares     Value  
 
Germany — 7.6%
               
Adidas-Salomon AG
    17,002     $ 823,152  
Allianz AG, Registered Shares
    37,292       3,690,923  
BASF SE
    75,455       4,122,897  
Bayer AG
    67,939       3,796,536  
Bayerische Motoren Werke AG
    27,425       1,332,215  
Bayerische Motoren Werke AG, Preference Shares
    4,252       148,760  
Beiersdorf AG
    8,190       452,335  
Celesio AG
    6,290       137,157  
Commerzbank AG
    57,991       404,821  
Continental AG
    4,014       208,365  
DaimlerChrysler AG
    74,104       3,748,596  
Deutsche Bank AG, Registered Shares
    51,020       2,865,760  
Deutsche Boerse AG
    16,243       986,822  
Deutsche Lufthansa AG
    18,393       254,275  
Deutsche Post AG
    70,456       1,027,260  
Deutsche Postbank AG
    7,057       204,551  
Deutsche Telekom AG
    233,276       2,753,961  
E.ON AG
    147,947       3,978,039  
Fraport AG
    3,203       136,220  
Fresenius AG
    2,292       151,941  
Fresenius AG, Preference Shares
    6,530       431,322  
Fresenius Medical Care AG
    15,859       854,181  
GEA Group AG
    13,334       265,386  
Hannover Rueckversicherung AG, Registered Shares
    4,935       211,492  
HeidelbergCement AG
    11,420       539,718  
Henkel KGaA
    10,535       431,177  
Henkel KGaA, Preference Shares
    14,483       707,218  
Hochtief AG
    3,665       218,821  
Infineon Technologies AG (a)
    88,113       510,828  
K+S AG
    11,649       535,347  
Linde AG
    13,939       1,465,686  
MAN SE
    8,859       730,355  
Merck KGaA
    5,239       384,327  
Metro AG
    10,518       536,646  
Muenchener Rueckversicherungs AG, Registered Shares
    16,264       2,042,159  
Porsche Automobil Holding SE, Preference Shares
    7,038       300,894  
Puma AG Rudolf Dassler Sport
    420       111,628  
Qiagen NV (a)
    18,812       365,987  
RWE AG
    34,419       2,252,243  
RWE AG, Preference Shares
    3,102       186,759  
SAP AG
    70,522       3,135,925  
Salzgitter AG
    3,386       201,784  
Siemens AG
    67,578       6,044,171  
Suedzucker AG
    5,874       106,128  
TUI AG
    12,274       107,858  
ThyssenKrupp AG
    27,156       669,211  
United Internet AG
    10,588       115,941  
Volkswagen AG
    2,425       205,728  
Volkswagen AG, Preference Shares
    14,101       1,237,374  
Wacker Chemie AG
    1,309       189,613  
 
             
 
            56,320,493  
Greece — 0.3%
               
Alpha Bank AE
    40,797       199,393  
Bank of Cyprus Public Co. Ltd.
    46,058       184,455  
Coca-Cola Hellenic Bottling Co. SA
    14,798       317,138  
EFG Eurobank Ergasias SA
    27,241       120,971  
Hellenic Telecommunications Organization SA (a)
    21,160       159,070  
National Bank of Greece SA
    49,385       531,754  
OPAP SA
    17,926       223,038  
Piraeus Bank SA
    29,254       123,473  
Public Power Corp. (a)
    9,559       137,060  
 
             
 
            1,996,352  
Hong Kong — 2.4%
               
ASM Pacific Technology Ltd.
    16,504       128,215  
BOC Hong Kong Holdings Ltd.
    301,400       686,428  
Bank of East Asia Ltd.
    123,532       445,653  
CLP Holdings Ltd.
    159,687       1,155,829  
Cathay Pacific Airways Ltd.
    93,263       184,449  
Cheung Kong Holdings Ltd.
    114,835       1,333,147  
Cheung Kong Infrastructure Holdings Ltd.
    37,500       139,417  
Esprit Holdings Ltd.
    93,187       500,541  
Hang Lung Group Ltd.
    65,000       350,296  
Hang Lung Properties Ltd.
    168,000       642,591  
Hang Seng Bank Ltd.
    62,253       832,342  
Henderson Land Development Co., Ltd.
    87,491       512,440  
The Hong Kong & China Gas Ltd.
    350,319       866,253  
Hong Kong Exchanges and Clearing Ltd.
    83,427       1,301,167  
HongKong Electric Holdings Ltd.
    112,500       670,083  
Hopewell Holdings Ltd.
    46,849       132,314  
Hutchison Whampoa Ltd.
    177,176       1,098,974  
Hysan Development Co. Ltd.
    55,791       157,714  
Kerry Properties Ltd.
    58,000       250,615  
Li & Fung Ltd.
    189,990       850,011  
The Link Real Estate Investment Trust
    178,414       444,494  
MTR Corp.
    116,000       395,586  
NWS Holdings Ltd.
    73,000       131,943  
New World Development Ltd.
    205,484       333,593  
Orient Overseas International Ltd.
    18,057       129,078  
PCCW Ltd.
    321,000       93,643  
Shangri-La Asia Ltd.
    106,990       197,473  
Sino Land Co.
    136,421       243,802  
Sun Hung Kai Properties Ltd.
    116,324       1,590,844  
Swire Pacific Ltd., Class A
    62,577       710,327  
Television Broadcasts Ltd.
    24,000       111,291  
Wharf Holdings Ltd.
    111,870       548,080  
Wheelock and Co., Ltd.
    76,000       214,253  
Wing Hang Bank Ltd.
    14,500       141,569  
Wynn Macau Ltd. (a)
    124,000       202,211  
 
             
 
            17,726,666  
Ireland — 0.3%
               
Anglo Irish Bank Corp. Plc (a)
    62,641       1  
Bank of Ireland (a)
    276,647       224,886  
CRH Plc
    57,903       1,201,097  
Elan Corp. Plc (a)
    40,603       184,303  
James Hardie Industries SE, Chess Depository Interest (a)
    34,963       181,050  
Kerry Group Plc
    11,352       317,061  
Ryanair Holdings Plc (a)
    29,444       129,184  
 
             
 
            2,237,582  
Israel — 0.8%
               
Bank Hapoalim Ltd. (a)
    80,458       289,793  
Bank Leumi Le-Israel BM
    95,850       341,546  
Bezeq Israeli Telecommunication Corp. Ltd.
    139,036       303,919  
Cellcom Israel Ltd.
    4,310       107,342  
Delek Group Ltd.
    304       63,002  
Discount Investment Corp.
    2,157       34,119  
Elbit Systems Ltd.
    2,059       104,513  
Israel Chemicals Ltd.
    35,906       374,057  
The Israel Corp. Ltd. (a)
    197       122,165  
See Notes to Financial Statements.
             
75   MASTER INTERNATIONAL INDEX SERIES   JUNE 30, 2010    

 


 

     
Schedule of Investments (continued)   Master International Index Series
(Percentages shown are based on Net Assets)
                 
Common Stocks   Shares     Value  
 
Israel (concluded)
               
Israel Discount Bank Ltd. (a)
    50,455     $ 85,316  
Makhteshim-Agan Industries Ltd.
    18,550       61,901  
Nice Systems Ltd. (a)
    5,144       130,545  
Ormat Industries
    5,090       37,657  
Partner Communications Co. Ltd.
    7,239       111,114  
Teva Pharmaceutical Industries Ltd.
    76,289       3,985,892  
United Mizrahi Bank Ltd. (a)
    11,429       83,170  
 
             
 
            6,236,051  
Italy — 2.7%
               
A2A SpA
    94,579       129,115  
Assicurazioni Generali SpA
    96,220       1,677,816  
Autogrill SpA (a)
    9,990       119,445  
Autostrade SpA
    19,461       344,904  
Banca Carige SpA
    49,397       96,496  
Banca Monte dei Paschi di Siena SpA
    180,685       204,445  
Banca Popolare di Milano Scarl
    32,797       135,019  
Banco Popolare SpA
    51,827       284,141  
Enel SpA
    541,027       2,290,802  
Eni SpA
    213,884       3,926,078  
Exor SpA
    5,439       91,442  
Fiat SpA
    62,194       638,834  
Finmeccanica SpA
    32,777       339,782  
Intesa Sanpaolo SpA
    636,143       1,675,411  
Intesa Sanpaolo SpA, Non-Convertible Savings Shares
    76,292       151,957  
Luxottica Group SpA
    9,379       227,084  
Mediaset SpA
    57,153       325,009  
Mediobanca SpA
    38,112       283,894  
Mediolanum SpA
    18,571       72,548  
Parmalat SpA
    139,556       324,374  
Pirelli & C. SpA
    223,531       123,098  
Prysmian SpA
    14,478       207,790  
Saipem SpA
    21,532       655,828  
Snam Rete Gas SpA
    116,299       464,126  
Telecom Italia SpA
    781,910       863,506  
Telecom Italia SpA, Non-Convertible Savings Shares
    488,602       446,320  
Terna SpA
    105,319       379,071  
Unicredit SpA
    1,267,087       2,802,849  
Unione Di Banche Italiane ScpA
    49,558       426,703  
 
             
 
            19,707,887  
Japan — 22.6%
               
The 77 Bank Ltd.
    29,000       155,772  
ABC-Mart, Inc.
    2,200       86,303  
Acom Co., Ltd.
    3,370       43,547  
Advantest Corp.
    12,900       269,581  
Aeon Co., Ltd.
    48,700       515,311  
Aeon Credit Service Co., Ltd.
    6,100       54,327  
Aeon Mall Co. Ltd.
    6,900       136,693  
Air Water Inc.
    12,000       131,019  
Aisin Seiki Co., Ltd.
    15,500       417,300  
Ajinomoto Co., Inc.
    54,000       488,549  
Alfresa Holdings Corp.
    3,200       154,660  
All Nippon Airways Co., Ltd. (a)
    68,000       215,548  
Amada Co., Ltd.
    29,000       190,624  
Aozora Bank Ltd.
    46,000       59,572  
Asahi Breweries Ltd.
    31,400       531,949  
Asahi Glass Co., Ltd.
    82,100       770,905  
Asahi Kasei Corp.
    102,000       532,884  
Asics Corp.
    13,000       119,027  
Astellas Pharma, Inc.
    37,500       1,256,464  
The Bank of Kyoto Ltd.
    26,000       214,041  
The Bank of Yokohama Ltd.
    99,000       452,872  
Benesse Holdings, Inc.
    5,600       254,928  
Bridgestone Corp.
    54,300       858,601  
Brother Industries Ltd.
    19,100       198,282  
Canon, Inc.
    93,100       3,469,786  
Canon Marketing Japan Inc.
    5,700       80,223  
Casio Computer Co., Ltd.
    20,100       120,725  
Central Japan Railway Co.
    123       1,015,592  
The Chiba Bank Ltd.
    62,000       374,301  
Chiyoda Corp.
    13,000       94,406  
Chubu Electric Power Co., Inc.
    54,800       1,359,938  
Chugai Pharmaceutical Co., Ltd.
    18,200       323,954  
The Chugoku Bank Ltd.
    14,000       164,967  
Chugoku Electric Power Co.
    24,100       496,376  
Chuo Mitsui Trust Holdings, Inc.
    81,000       285,643  
Citizens Holding Co., Ltd.
    19,500       119,124  
Coca-Cola West Holdings Co., Ltd.
    5,300       87,575  
Cosmo Oil Co., Ltd.
    50,000       119,390  
Credit Saison Co., Ltd.
    12,900       135,011  
Dai Nippon Printing Co., Ltd.
    46,000       530,901  
Dai-ichi Life Insurance Co.
    668       926,277  
Daicel Chemical Industries Ltd.
    22,000       148,425  
Daido Steel Co., Ltd.
    25,000       106,911  
Daihatsu Motor Co., Ltd.
    16,000       148,917  
Daiichi Sankyo Co., Ltd.
    56,100       1,002,276  
Daikin Industries Ltd.
    19,000       579,316  
Dainippon Pharma Co., Ltd.
    13,400       102,603  
Daito Trust Construction Co., Ltd.
    6,300       356,761  
Daiwa House Industry Co., Ltd.
    39,000       350,850  
Daiwa Securities Group, Inc.
    135,000       569,964  
Dena Co. Ltd.
    6,500       171,628  
Denki Kagaku Kogyo Kabushiki Kaisha
    38,000       176,874  
Denso Corp.
    40,400       1,116,612  
Dentsu, Inc.
    13,513       356,885  
Diamond Lease Co., Ltd.
    4,690       158,205  
Dowa Mining Co., Ltd.
    21,350       102,289  
East Japan Railway Co.
    28,049       1,867,659  
Eisai Co., Ltd.
    20,500       680,208  
Electric Power Development Co.
    9,400       298,154  
Elpida Memory, Inc. (a)
    14,300       219,698  
FamilyMart Co., Ltd.
    5,200       171,719  
Fanuc Ltd.
    15,800       1,784,177  
Fast Retailing Co., Ltd.
    4,300       650,652  
Fuji Electric Holdings Co., Ltd.
    48,800       140,512  
Fuji Heavy Industries Ltd. (a)
    48,000       257,140  
Fuji Media Holdings, Inc.
    44       63,170  
Fuji Photo Film Co., Ltd.
    38,400       1,109,740  
Fujitsu Ltd.
    152,000       950,125  
Fukuoka Financial Group, Inc.
    62,000       258,083  
Furukawa Electric Co., Ltd.
    51,000       222,507  
GS Yuasa Corp.
    30,000       196,313  
The Gunma Bank Ltd.
    32,000       169,693  
The Hachijuni Bank Ltd.
    35,000       196,481  
Hakuhodo DY Holdings, Inc.
    2,070       103,706  
Hankyu Hanshin Holdings, Inc.
    93,000       410,400  
Hino Motors Ltd.
    23,000       113,403  
Hirose Electric Co., Ltd.
    2,600       238,117  
The Hiroshima Bank Ltd.
    41,000       163,871  
Hisamitsu Pharmaceutical Co., Ltd.
    5,300       210,228  
Hitachi Chemical Co., Ltd.
    8,500       157,914  
Hitachi Construction Machinery Co., Ltd.
    7,800       143,608  
See Notes to Financial Statements.
             
    MASTER INTERNATIONAL INDEX SERIES   JUNE 30, 2010   76

 


 

     
Schedule of Investments (continued)   Master International Index Series
(Percentages shown are based on Net Assets)
                 
Common Stocks   Shares     Value  
 
Japan (continued)
               
Hitachi High-Technologies Corp.
    5,900     $ 108,388  
Hitachi Ltd. (a)
    374,000       1,358,483  
Hitachi Metals Ltd.
    14,000       141,736  
Hokkaido Electric Power Co., Inc.
    14,800       318,820  
Hokuhoku Financial Group, Inc.
    104,100       191,232  
Hokuriku Electric Power
    14,300       313,591  
Honda Motor Co., Ltd.
    135,700       3,985,895  
Hoya Corp.
    36,400       774,507  
IHI Corp.
    106,000       168,680  
Ibiden Co., Ltd.
    10,400       280,161  
Idemitsu Kosan Co., Ltd.
    1,800       135,529  
Inpex Corp.
    68       377,163  
Isetan Mitsukoshi Holdings Ltd.
    30,205       294,456  
Isuzu Motors Ltd.
    96,000       288,480  
Ito En, Ltd.
    4,300       65,771  
Itochu Corp.
    125,300       979,528  
Itochu Techno-Science Corp.
    2,600       95,012  
The Iyo Bank Ltd.
    20,000       185,989  
J Front Retailing Co. Ltd.
    38,600       185,773  
JFE Holdings, Inc.
    38,200       1,181,793  
JGC Corp.
    17,000       257,962  
JS Group Corp.
    20,300       387,483  
JSR Corp.
    14,400       241,888  
JTEKT Corp.
    15,900       147,046  
JX Holdings, Inc. (a)
    187,160       925,057  
Jafco Co., Ltd.
    2,500       55,303  
Japan Petroleum Explora
    2,400       97,917  
Japan Prime Realty Investment Corp.
    58       122,176  
Japan Real Estate Investment Corp.
    40       325,824  
Japan Retail Fund Investment Corp.
    133       161,984  
The Japan Steel Works, Ltd.
    25,000       219,748  
Japan Tobacco, Inc.
    374       1,163,550  
The Joyo Bank Ltd.
    53,000       210,138  
Jupiter Telecommunications Co., Ltd.
    196       187,651  
KDDI Corp.
    243       1,158,305  
Kajima Corp.
    69,800       158,244  
Kamigumi Co., Ltd.
    21,000       161,138  
Kaneka Corp.
    25,000       145,031  
The Kansai Electric Power Co., Inc.
    62,600       1,526,703  
Kansai Paint Co., Ltd.
    18,000       154,510  
Kao Corp.
    44,000       1,035,269  
Kawasaki Heavy Industries Ltd.
    115,000       278,828  
Kawasaki Kisen Kaisha Ltd. (a)
    55,000       223,648  
Keihin Electric Express Railway Co., Ltd.
    38,000       335,843  
Keio Electric Railway Co., Ltd.
    47,000       303,452  
Keisei Electric Railway Co., Ltd.
    24,000       134,183  
Keyence Corp.
    3,420       790,849  
Kikkoman Corp.
    14,000       146,167  
Kinden Corp.
    12,000       102,185  
Kintetsu Corp.
    132,000       402,783  
Kirin Holdings Co., Ltd.
    68,000       856,092  
Kobe Steel Ltd.
    202,000       384,779  
Koito Manufacturing Co., Ltd.
    8,000       117,807  
Komatsu Ltd.
    78,500       1,413,481  
Konami Corp.
    7,400       114,128  
Konica Minolta Holdings, Inc.
    39,000       375,191  
Kubota Corp.
    94,000       721,009  
Kuraray Co., Ltd.
    28,000       328,484  
Kurita Water Industries Ltd.
    9,100       248,666  
Kyocera Corp.
    13,500       1,092,911  
Kyowa Hakko Kirin Co. Ltd.
    21,000       199,159  
Kyushu Electric Power Co., Inc.
    30,800       690,772  
Lawson, Inc.
    4,900       214,315  
Mabuchi Motor Co., Ltd.
    2,300       105,015  
Makita Corp.
    9,000       240,840  
Marubeni Corp.
    134,000       686,938  
Marui Group Co. Ltd.
    18,800       126,636  
Maruichi Steel Tube Ltd.
    3,700       70,773  
Matsui Securities Co., Ltd.
    9,400       57,395  
Mazda Motor Corp.
    122,400       286,030  
McDonald’s Holdings Co. Japan Ltd.
    5,500       123,156  
Medipal Holdings Corp.
    12,200       144,902  
Meiji Holdings Co LTD
    5,493       224,735  
Minebea Co., Ltd.
    28,000       155,110  
Mitsubishi Chemical Holdings Corp.
    98,000       447,315  
Mitsubishi Corp.
    111,600       2,308,830  
Mitsubishi Electric Corp.
    160,000       1,248,787  
Mitsubishi Estate Co., Ltd.
    98,000       1,364,324  
Mitsubishi Gas Chemical Co., Inc.
    32,000       155,161  
Mitsubishi Heavy Industries Ltd.
    247,200       852,776  
Mitsubishi Logistics Corp.
    9,000       100,300  
Mitsubishi Materials Corp. (a)
    90,000       239,222  
Mitsubishi Motors Corp. (a)
    315,000       398,468  
Mitsubishi Tanabe Pharma Corp.
    18,000       274,250  
Mitsubishi UFJ Financial Group, Inc.
    1,045,974       4,749,462  
Mitsui & Co., Ltd.
    143,300       1,671,707  
Mitsui Chemicals, Inc.
    71,000       198,426  
Mitsui Engineering & Shipbuilding Co., Ltd.
    59,000       119,168  
Mitsui Fudosan Co., Ltd.
    70,000       974,293  
Mitsui Mining & Smelting Co., Ltd.
    47,000       124,035  
Mitsui OSK Lines Ltd.
    93,000       614,885  
Mitsui Sumitomo Insurance Group Holdings, Inc.
    44,970       962,508  
Mitsumi Electric Co., Ltd.
    6,800       115,357  
Mizuho Financial Group, Inc.
    1,139,040       1,868,949  
Murata Manufacturing Co., Ltd.
    16,500       786,853  
NEC Corp.
    212,000       550,324  
NGK Insulators Ltd.
    21,000       327,076  
NGK Spark Plug Co., Ltd.
    13,000       161,392  
NHK Spring Co., Ltd.
    12,000       109,764  
NKSJ Holdings, Inc. (a)
    115,100       688,660  
NOK Corp.
    8,400       133,391  
NSK Ltd.
    35,000       243,080  
NTN Corp.
    41,000       167,841  
NTT Data Corp.
    102       376,502  
NTT DoCoMo, Inc.
    1,267       1,918,605  
NTT Urban Development Co.
    89       70,705  
Namco Bandai Holdings, Inc.
    15,200       133,658  
Nidec Corp.
    9,100       761,826  
Nikon Corp.
    26,000       448,079  
Nintendo Co., Ltd.
    8,200       2,407,596  
Nippon Building Fund, Inc.
    42       333,250  
Nippon Electric Glass Co.
    28,500       326,454  
Nippon Express Co., Ltd.
    69,000       310,919  
Nippon Meat Packers, Inc.
    15,000       185,156  
Nippon Paper Group, Inc.
    7,894       218,500  
Nippon Sanso Corp.
    22,000       174,702  
Nippon Sheet Glass Co., Ltd.
    53,000       129,660  
Nippon Steel Corp.
    422,000       1,394,896  
Nippon Telegraph & Telephone Corp.
    42,876       1,746,592  
Nippon Yusen Kabushiki Kaisha
    124,000       451,890  
The Nishi-Nippon City Bank Ltd.
    56,000       160,378  
Nissan Chemical Industries Ltd.
    11,000       122,925  
Nissan Motor Co., Ltd. (a)
    205,600       1,432,719  
See Notes to Financial Statements.
             
77   MASTER INTERNATIONAL INDEX SERIES   JUNE 30, 2010    

 


 

     
Schedule of Investments (continued)   Master International Index Series
(Percentages shown are based on Net Assets)
                 
Common Stocks   Shares     Value  
 
Japan (continued)
               
Nissha Printing Co. Ltd.
    2,300     $ 61,451  
Nisshin Seifun Group, Inc.
    15,500       175,015  
Nisshin Steel Co., Ltd.
    62,000       98,579  
Nisshinbo Industries, Inc.
    12,000       115,026  
Nissin Foods Holdings Co., Ltd.
    5,400       198,223  
Nitori Co., Ltd.
    3,000       258,597  
Nitto Denko Corp.
    13,410       439,893  
Nomura Holdings, Inc.
    291,700       1,593,698  
Nomura Real Estate Holdings, Inc.
    8,300       103,876  
Nomura Real Estate Office Fund, Inc.
    24       119,480  
Nomura Research Institute Ltd.
    8,100       171,960  
OJI Paper Co., Ltd.
    69,000       338,303  
ORIX Corp.
    8,490       615,056  
Obayashi Corp.
    53,000       210,118  
Obic Co., Ltd.
    600       115,816  
Odakyu Electric Railway Co., Ltd.
    51,000       437,797  
Olympus Corp.
    17,600       416,926  
Omron Corp.
    16,500       359,690  
Ono Pharmaceutical Co., Ltd.
    6,800       276,423  
Oracle Corp. Japan
    3,200       157,249  
Oriental Land Co., Ltd.
    4,100       342,648  
Osaka Gas Co., Ltd.
    158,000       569,900  
Otsuka Shokai Co., Ltd.
    1,300       82,851  
Panasonic Corp.
    161,500       2,016,627  
Panasonic Electric Works Ltd.
    30,873       303,463  
Rakuten, Inc.
    586       423,405  
Resona Holdings, Inc.
    49,256       601,120  
Ricoh Co., Ltd.
    55,000       701,334  
Rinnai Corp.
    3,000       153,989  
Rohm Co., Ltd.
    7,900       474,388  
SBI Holdings, Inc.
    1,367       169,823  
SMC Corp.
    4,400       588,596  
Sankyo Co., Ltd. (Gunma)
    4,500       203,407  
Santen Pharmaceutical Co., Ltd.
    5,900       210,922  
Sanyo Electric Co., Ltd. (a)
    148,000       190,424  
Sapporo Hokuyo Holdings, Inc.
    28,289       124,781  
Sapporo Holdings Ltd.
    23,000       98,870  
Secom Co., Ltd.
    17,100       759,344  
Sega Sammy Holdings, Inc.
    16,232       233,167  
Seiko Epson Corp.
    10,600       136,997  
Sekisui Chemical Co., Ltd.
    35,000       218,324  
Sekisui House Ltd.
    47,000       401,968  
Senshu Ikeda Holdings, Inc.
    49,470       72,038  
Seven & I Holdings Co., Ltd.
    63,700       1,459,449  
Seven Bank Ltd.
    56       101,640  
Sharp Corp.
    83,000       875,537  
Shikoku Electric Power Co., Inc.
    14,500       414,697  
Shimadzu Corp.
    20,000       150,756  
Shimamura Co., Ltd.
    1,900       171,793  
Shimano, Inc.
    5,300       227,405  
Shimizu Corp.
    48,000       164,046  
Shin-Etsu Chemical Co., Ltd.
    33,900       1,576,187  
Shinko Electric Industries
    6,200       80,571  
Shinko Securities Co., Ltd.
    48,300       107,686  
Shinsei Bank Ltd.
    81,000       68,476  
Shionogi & Co., Ltd.
    24,200       501,708  
Shiseido Co., Ltd.
    28,300       623,769  
The Shizuoka Bank Ltd.
    49,000       427,038  
Showa Denko KK
    116,000       209,503  
Showa Shell Sekiyu KK
    15,100       104,115  
Softbank Corp.
    66,900       1,774,406  
Sojitz Corp.
    102,000       159,409  
Sony Corp.
    82,600       2,203,191  
Sony Financial Holdings, Inc.
    71       236,839  
Square Enix Holdings Co., Ltd.
    5,300       97,625  
Stanley Electric Co., Ltd.
    11,900       197,068  
Sumco Corp. (a)
    9,400       155,796  
Sumitomo Chemical Co., Ltd.
    128,000       495,383  
Sumitomo Corp.
    93,800       936,781  
Sumitomo Electric Industries Ltd.
    61,200       713,221  
Sumitomo Heavy Industries Ltd.
    44,000       258,172  
Sumitomo Metal Industries Ltd.
    273,000       617,264  
Sumitomo Metal Mining Co., Ltd.
    44,000       548,902  
Sumitomo Mitsui Financial Group, Inc.
    110,550       3,128,826  
Sumitomo Realty & Development Co., Ltd.
    29,000       492,766  
Sumitomo Rubber Industries, Ltd.
    14,400       127,007  
The Sumitomo Trust & Banking Co., Ltd.
    116,000       590,575  
Suruga Bank Ltd.
    17,000       154,290  
Suzuken Co., Ltd.
    5,200       174,058  
Suzuki Motor Corp.
    26,500       520,073  
Sysmex Corp.
    2,800       159,023  
T&D Holdings, Inc.
    22,100       472,551  
TDK Corp.
    10,000       547,222  
THK Co., Ltd.
    9,700       200,683  
Taiheiyo Cement Corp. (a)
    75,000       94,703  
Taisei Corp.
    83,000       166,002  
Taisho Pharmaceutical Co., Ltd.
    11,000       216,997  
Takashimaya Co., Ltd.
    22,000       175,367  
Takeda Pharmaceutical Co., Ltd.
    61,800       2,654,474  
Teijin Ltd.
    77,000       228,610  
Terumo Corp.
    13,700       656,088  
Tobu Railway Co., Ltd.
    66,000       355,490  
Toho Co., Ltd.
    8,600       142,576  
Toho Gas Co., Ltd.
    35,000       186,695  
Tohoku Electric Power Co., Inc.
    34,700       744,956  
Tokio Marine Holdings, Inc.
    59,800       1,572,133  
Tokuyama Corp.
    25,000       110,038  
The Tokyo Electric Power Co., Inc.
    100,200       2,725,785  
Tokyo Electron Ltd.
    14,300       770,301  
Tokyo Gas Co., Ltd.
    209,000       954,115  
Tokyo Steel Manufacturing Co., Ltd.
    9,200       106,355  
Tokyo Tatemono Co., Ltd.
    32,000       98,615  
Tokyu Corp.
    92,000       374,458  
Tokyu Land Corp.
    38,000       132,835  
TonenGeneral Sekiyu KK
    23,000       199,001  
Toppan Printing Co., Ltd.
    45,000       355,841  
Toray Industries, Inc.
    116,700       559,352  
Toshiba Corp. (a)
    333,000       1,649,540  
Tosoh Corp.
    45,000       116,490  
Toto Ltd.
    24,000       159,420  
Toyo Seikan Kaisha Ltd.
    12,200       178,025  
Toyo Suisan Kaisha, Ltd.
    8,000       190,941  
Toyoda Gosei Co., Ltd.
    5,700       141,363  
Toyota Boshoku Corp.
    5,100       74,464  
Toyota Industries Corp.
    14,500       367,953  
Toyota Motor Corp.
    226,500       7,782,235  
Toyota Tsusho Corp.
    17,100       243,737  
Trend Micro, Inc.
    7,900       213,495  
Tsumura & Co.
    5,000       153,091  
UNY Co., Ltd.
    16,100       122,339  
USS Co., Ltd.
    1,940       138,583  
Ube Industries Ltd.
    79,000       186,791  
Uni-Charm Corp.
    3,400       383,405  
See Notes to Financial Statements.
             
    MASTER INTERNATIONAL INDEX SERIES   JUNE 30, 2010   78

 


 

     
Schedule of Investments (continued)   Master International Index Series
(Percentages shown are based on Net Assets)
                 
Common Stocks   Shares     Value  
 
Japan (concluded)
               
Ushio, Inc.
    8,700     $ 134,029  
West Japan Railway Co.
    138       504,648  
Yahoo! Japan Corp.
    1,176       468,724  
Yakult Honsha Co., Ltd.
    8,000       217,623  
Yamada Denki Co., Ltd.
    6,670       435,816  
Yamaguchi Financial Group, Inc.
    17,000       162,470  
Yamaha Corp.
    13,300       135,807  
Yamaha Motor Co., Ltd. (a)
    20,800       274,980  
Yamato Kogyo Co. Ltd.
    3,800       94,717  
Yamato Transport Co., Ltd.
    32,300       427,507  
Yamazaki Baking Co., Ltd.
    10,000       134,862  
Yaskawa Electric Corp.
    19,000       140,948  
The Yasuda Trust & Banking Co., Ltd. (a)
    136,000       116,949  
Yokogawa Electric Corp.
    17,700       109,561  
 
             
 
            167,678,903  
Kazakhstan — 0.0%
               
Eurasian Natural Resources Corp.
    20,964       266,764  
Luxembourg — 0.4%
               
ArcelorMittal
    70,598       1,893,569  
SES Global
    24,336       506,105  
Tenaris SA
    38,378       661,937  
 
             
 
            3,061,611  
Netherlands — 2.6%
               
ASML Holding NV
    35,884       987,525  
Aegon NV (a)
    126,902       674,083  
Akzo Nobel NV
    19,290       1,002,599  
Corio NV
    4,679       227,217  
Delta Lloyd NV
    6,510       109,714  
Fugro NV
    5,592       258,337  
Heineken Holding NV
    8,948       326,891  
Heineken NV
    20,454       866,991  
ING Groep NV CVA (a)
    314,834       2,329,939  
Koninklijke Ahold NV
    98,855       1,222,828  
Koninklijke Boskalis Westminster NV
    5,548       215,563  
Koninklijke DSM NV
    12,579       500,041  
Koninklijke KPN NV
    134,438       1,713,620  
Koninklijke Philips Electronics NV
    79,926       2,386,761  
Koninklijke Vopak NV
    5,668       207,708  
Randstad Holdings NV
    8,980       352,872  
Reed Elsevier NV
    55,984       619,757  
SBM Offshore NV
    13,278       189,958  
STMicroelectronics NV
    51,718       410,769  
TNT NV
    30,204       760,753  
Unilever NV
    133,837       3,654,991  
Wolters Kluwer NV
    23,838       457,142  
 
             
 
            19,476,059  
New Zealand — 0.1%
               
Auckland International Airport Ltd.
    81,425       104,099  
Contact Energy Ltd.
    26,924       104,732  
Fletcher Building Ltd.
    48,182       257,840  
Sky City Ltd.
    51,491       100,323  
Telecom Corp. of New Zealand Ltd.
    156,365       201,363  
 
             
 
            768,357  
Norway — 0.6%
               
Aker Solutions ASA
    13,242       151,406  
DnB NOR ASA
    79,785       767,388  
Norsk Hydro ASA
    55,513       250,688  
Orkla ASA
    62,744       401,257  
Renewable Energy Corp. ASA (a)
    39,887       94,313  
Statoil ASA
    91,994       1,772,248  
Telenor ASA
    63,310       797,536  
Telenor ASA — ADR
    1,431       53,849  
Yara International ASA
    15,383       432,409  
 
             
 
            4,721,094  
Portugal — 0.2%
               
Banco Comercial Portugues SA, Registered Shares
    228,344       171,463  
Banco Espirito Santo SA, Registered Shares
    44,077       173,919  
Brisa-Auto Estradas de Portugal SA, Private Shares
    15,277       92,457  
Cimpor Cimentos de Portugal SA
    16,593       93,239  
Energias de Portugal SA
    141,304       420,527  
Galp Energia SGPS SA
    18,556       277,173  
Jeronimo Martins SGPS SA
    18,779       172,058  
Portugal Telecom SGPS SA, Registered Shares
    47,138       471,143  
 
             
 
            1,871,979  
Singapore — 1.6%
               
Ascendas Real Estate Investment Trust
    126,962       163,962  
CapitaLand Ltd.
    206,749       527,198  
CapitaMall Trust
    179,700       234,279  
CapitaMalls Asia Ltd.
    110,000       164,464  
City Developments Ltd.
    44,535       350,556  
ComfortDelgro Corp. Ltd.
    153,816       159,519  
Cosco Corp. Ltd.
    79,002       83,105  
DBS Group Holdings Ltd.
    141,407       1,372,339  
Fraser and Neave Ltd.
    79,096       289,233  
Genting Singapore Plc (a)
    491,227       406,298  
Golden Agri-Resources Ltd.
    540,251       202,535  
Jardine Cycle & Carriage Ltd.
    8,721       185,587  
K-Green Trust (a)
    20,723       15,550  
Keppel Corp. Ltd.
    103,616       625,588  
Keppel Land Ltd.
    59,000       162,808  
Neptune Orient Lines Ltd.
    73,350       103,603  
Noble Group Ltd.
    241,839       292,308  
Olam International Ltd.
    102,900       188,869  
Oversea-Chinese Banking Corp.
    201,914       1,271,476  
Sembcorp Industries Ltd.
    78,590       227,271  
Sembcorp Marine Ltd.
    69,197       189,096  
Singapore Airlines Ltd.
    43,009       445,966  
Singapore Exchange Ltd.
    69,000       361,852  
Singapore Press Holdings Ltd.
    112,316       302,335  
Singapore Technologies Engineering Ltd.
    135,213       316,093  
Singapore Telecommunications Ltd.
    659,132       1,424,987  
StarHub Ltd.
    52,157       83,856  
UOL Group Ltd.
    41,457       111,659  
United Overseas Bank Ltd.
    99,572       1,385,233  
Wilmar International Ltd.
    103,670       424,171  
Yangzijiang Shipbuilding Holdings Ltd.
    126,183       120,355  
 
             
 
            12,192,151  
Spain — 3.4%
               
ACS Actividades de Construccion y Servicios SA
    11,465       421,330  
Abertis Infraestructuras SA
    24,957       358,729  
Acciona SA
    2,167       164,921  
Acerinox SA
    7,858       122,108  
Banco Bilbao Vizcaya Argentaria SA
    293,119       3,019,991  
Banco de Sabadell SA
    78,231       354,256  
Banco de Valencia SA
    16,846       74,986  
Banco Popular Espanol SA
    70,609       357,877  
Banco Santander SA
    675,975       7,088,416  
Bankinter SA
    24,950       152,010  
Corp. Mapfre SA
    60,921       165,659  
See Notes to Financial Statements.
             
79   MASTER INTERNATIONAL INDEX SERIES   JUNE 30, 2010    

 


 

     
Schedule of Investments (continued)   Master International Index Series
(Percentages shown are based on Net Assets)
                 
Common Stocks   Shares     Value  
 
Spain (concluded)
               
Criteria Caixacorp. SA
    67,746     $ 277,043  
Enagas
    14,444       217,574  
Ferrovial SA
    35,567       230,044  
Fomento de Construcciones y Contratas SA
    3,049       65,271  
Gamesa Corp. Tecnologica SA (a)
    16,197       139,084  
Gas Natural SDG SA
    18,479       267,042  
Gestevision Telecinco SA
    7,629       67,798  
Grifols SA
    11,816       120,777  
Iberdrola Renovables
    69,262       217,367  
Iberdrola SA
    324,167       1,822,004  
Iberia Lineas Aereas de Espana
    42,454       119,848  
Inditex SA
    18,140       1,034,370  
Indra Sistemas SA
    7,647       122,263  
Mapfre SA (a)
    1,777       4,881  
Red Electrica de Espana
    8,746       313,151  
Repsol YPF SA
    60,680       1,224,530  
Telefonica SA
    337,361       6,249,522  
Zardoya Otis SA
    11,277       144,878  
 
             
 
            24,917,730  
Sweden — 2.8%
               
Alfa Laval AB
    27,457       356,566  
Assa Abloy AB, Series B
    25,366       507,014  
Atlas Copco AB, Class A
    54,621       798,596  
Atlas Copco AB, Class B
    31,722       418,777  
Boliden AB
    21,891       241,953  
Electrolux AB
    19,427       444,117  
Getinge AB, Class B
    16,221       313,924  
Hennes & Mauritz AB, B Shares
    84,043       2,309,701  
Holmen AB, Class B
    4,661       110,651  
Husqvarna AB
    33,227       199,808  
Investor AB
    37,047       599,282  
Kinnevik Investment AB
    17,606       281,874  
Millicom International Cellular SA — ADR
    6,165       500,237  
Modern Times Group AB
    4,005       219,247  
Nordea Bank AB
    265,984       2,193,348  
SKB AB
    31,677       568,513  
SSAB AB, Series A
    14,628       196,396  
SSAB AB, Series B
    6,561       78,754  
Ratos AB
    8,157       204,363  
Sandvik AB
    82,150       1,002,061  
Scania AB
    25,915       395,562  
Securitas AB
    25,233       228,724  
Skandinaviska Enskilda Banken AB, Class A
    115,413       611,519  
Skanska AB, Class B
    32,491       470,067  
Svenska Cellulosa AB
    46,497       546,867  
Svenska Handelsbanken, Class A
    39,933       976,916  
Swedbank AB, A Shares
    57,595       528,531  
Swedish Match AB
    19,381       423,520  
Tele2 AB
    25,290       377,846  
Telefonaktiebolaget LM Ericsson
    247,507       2,745,403  
TeliaSonera AB
    186,401       1,197,748  
Volvo AB, B Shares
    90,501       1,000,833  
 
             
 
            21,048,718  
Switzerland — 7.8%
               
ABB Ltd.
    181,362       3,157,622  
Actelion Ltd. (a)
    8,266       309,494  
Adecco SA, Registered Shares
    9,975       475,876  
Aryzta AG
    6,515       250,662  
Baloise Holding AG
    4,033       280,721  
Compagnie Financière Richemont SA
    43,111       1,505,103  
Crédit Suisse Group AG
    92,465       3,476,429  
GAM Holdings Ltd.
    16,634       179,756  
Geberit AG
    3,159       491,526  
Givaudan SA
    621       527,436  
Holcim Ltd.
    20,307       1,359,388  
Julius Baer Group Ltd.
    16,782       478,498  
Kuehne & Nagel International AG
    4,391       452,004  
Lindt & Spruengli AG
    72       156,222  
Lindt & Spruengli AG ‘R’
    9       220,551  
Logitech International SA (a)
    15,054       203,777  
Lonza Group AG, Registered Shares
    3,676       244,746  
Nestlé SA, Registered Shares
    284,724       13,729,059  
Nobel Biocare Holding AG
    9,935       171,025  
Novartis AG, Registered Shares
    173,289       8,398,127  
Pargesa Holding SA
    2,175       142,624  
Roche Holding AG
    57,698       7,941,652  
SGS SA
    445       600,595  
Schindler Holding AG
    3,942       332,257  
Schindler Holding AG, Registered Shares
    1,890       157,750  
Sika AG
    165       292,488  
Sonova Holding AG
    3,719       456,387  
Straumann Holding AG, Registered Shares
    656       141,875  
The Swatch Group Ltd., Bearer Shares
    2,504       706,191  
The Swatch Group Ltd., Registered Shares
    3,649       186,476  
Swiss Life Holding
    2,475       236,543  
Swiss Reinsurance Co., Registered Shares
    29,217       1,200,475  
Swisscom AG
    1,894       642,103  
Syngenta AG
    7,803       1,802,618  
Synthes, Inc.
    4,818       553,975  
UBS AG
    298,975       3,960,766  
Zurich Financial Services AG
    12,141       2,676,042  
 
             
 
            58,098,839  
United Kingdom — 20.4%
               
3i Group Plc
    79,229       312,488  
ARM Holdings Plc
    107,367       444,379  
Admiral Group Plc
    16,316       341,694  
Aggreko Plc
    21,214       445,341  
Amec Plc
    27,184       333,040  
Anglo American Plc (a)
    108,154       3,768,642  
Antofagasta Plc
    32,079       373,227  
Associated British Foods Plc
    29,005       420,041  
AstraZeneca Plc
    119,298       5,624,399  
Autonomy Corp PLC (a)
    17,661       481,410  
Aviva Plc
    229,956       1,068,648  
BAE Systems Plc
    292,544       1,361,562  
BG Group Plc
    277,302       4,124,264  
BHP Billiton Plc
    181,287       4,700,503  
BP Plc (a)
    1,541,463       7,379,232  
BT Group Plc
    643,847       1,242,814  
Balfour Beatty Plc
    55,595       197,733  
Barclays Plc
    931,125       3,716,586  
British Airways Plc (a)
    48,900       142,068  
British American Tobacco Plc
    164,009       5,204,953  
British Land Co. Plc
    70,762       457,082  
British Sky Broadcasting Plc
    93,044       971,544  
Bunzl Plc
    26,664       267,007  
Burberry Group Plc
    35,400       399,793  
Cable & Wireless Worldwide
    209,855       271,529  
Cairn Energy Plc (a)
    114,438       703,039  
Capita Group Plc
    50,872       560,468  
Capital Shopping Centers Group Plc
    38,691       178,747  
Carnival Plc
    13,602       440,587  
See Notes to Financial Statements.
             
    MASTER INTERNATIONAL INDEX SERIES   JUNE 30, 2010   80

 


 

     
Schedule of Investments (continued)   Master International Index Series
(Percentages shown are based on Net Assets)
                 
Common Stocks   Shares     Value  
 
United Kingdom (continued)
               
Centrica Plc
    423,524     $ 1,869,018  
Cobham Plc
    93,617       296,572  
Compass Group Plc
    155,104       1,179,950  
Diageo Plc
    205,863       3,233,674  
Experian Group Ltd.
    83,714       728,002  
Firstgroup Plc
    39,467       214,233  
Fresnillo Plc
    14,480       210,218  
GlaxoSmithKline Plc
    426,363       7,240,005  
Group 4 Securicor Plc
    115,171       456,624  
HSBC Holdings Plc
    1,430,625       13,069,751  
Hammerson Plc
    57,667       293,970  
Home Retail Group
    71,142       225,911  
ICAP Plc
    45,159       270,670  
ITV Plc (a)
    296,490       221,569  
Imperial Tobacco Group Plc
    83,792       2,341,203  
Inmarsat Plc
    35,578       377,235  
Intercontinental Hotels Group Plc
    21,038       331,561  
International Power Plc
    123,803       553,025  
Invensys Plc
    65,422       234,208  
Investec Plc
    38,219       257,177  
J Sainsbury Plc
    98,375       469,373  
Johnson Matthey Plc
    17,537       389,619  
Kazakhmys Plc
    17,543       257,513  
Kingfisher Plc
    192,285       602,344  
Land Securities Group Plc
    61,829       511,682  
Legal & General Group Plc
    477,395       556,423  
Lloyds TSB Group Plc (a)
    3,312,735       2,615,293  
London Stock Exchange Group Plc
    12,623       105,389  
Lonmin Plc (a)
    12,630       263,720  
Man Group Plc
    139,632       462,867  
Marks & Spencer Group Plc
    128,763       634,339  
National Grid Plc
    285,204       2,082,263  
Next Plc
    15,353       457,742  
Old Mutual Plc
    442,077       676,840  
Pearson Plc
    66,269       871,554  
Petrofac Ltd.
    21,216       373,252  
Prudential Plc
    209,151       1,577,542  
Rangold Resources Ltd.
    7,343       698,085  
Reckitt Benckiser Plc
    50,406       2,344,600  
Reed Elsevier Plc
    99,174       735,354  
Resolution Ltd.
    195,142       184,558  
Rexam Plc
    71,587       322,038  
Rio Tinto Plc, Registered Shares
    118,982       5,225,016  
Rolls-Royce Group Plc
    153,956       1,285,037  
Royal & Sun Alliance Insurance Group
    278,885       494,742  
Royal Bank of Scotland Group Plc (a)
    1,383,236       842,418  
Royal Dutch Shell Plc
    291,190       7,348,481  
Royal Dutch Shell Plc, Class B
    221,427       5,352,041  
SABMiller Plc
    78,065       2,188,980  
Sage Group Plc
    106,838       367,586  
Schroders Plc
    9,304       167,452  
Scottish & Southern Energy Plc
    76,711       1,277,543  
Sego Plc
    59,362       223,820  
Serco Group Plc
    40,080       350,018  
Severn Trent Plc
    19,368       355,468  
Shire Ltd.
    45,786       939,264  
Smith & Nephew Plc
    72,324       683,284  
Smiths Group Plc
    31,869       507,380  
Standard Chartered Plc
    166,384       4,051,515  
Standard Life Plc
    182,615       471,914  
TUI Travel Plc
    47,505       147,797  
Tesco Plc
    656,053       3,701,062  
Thomas Cook Group Plc
    68,661       181,737  
Tomkins Plc
    71,514       240,193  
Tullow Oil Plc
    72,385       1,076,748  
Unilever Plc
    105,699       2,825,545  
United Utilities Group Plc
    55,598       435,075  
Vedanta Resources Plc
    9,950       312,623  
Vodafone Group Plc
    4,321,070       8,903,520  
Whitbread Plc
    14,314       298,919  
William Morrison Supermarkets Plc
    172,764       682,683  
Wolseley Plc (a)
    23,222       460,954  
WPP Plc
    102,066       961,510  
Xstrata Plc
    169,099       2,214,291  
 
             
 
            151,304,402  
 
Total Common Stocks — 96.9%
            719,658,183  
 
 
               
Rights
               
 
               
France — 0.0%
               
Foncière Des Regions (Expires 7/13/10)
    1,775       8,074  
Norway — 0.0%
               
Norsk Hydro ASA (Expires 7/09/10)
    16,895       8,723  
Spain — 0.0%
               
Zardoya Otis SA (Expires 6/30/10)
    11,277       7,185  
 
Total Rights — 0.0%
            23,982  
 
 
               
Warrants (b)
               
 
               
Hong Kong — 0.0%
               
Henderson Land Development Co., Ltd.
(Expires 6/01/11)
    13,757       2,332  
 
Total Warrants — 0.0%
            2,332  
 
Total Long-Term Investments
(Cost — $816,151,101) — 96.9%
            719,684,497  
 
See Notes to Financial Statements.
             
81   MASTER INTERNATIONAL INDEX SERIES   JUNE 30, 2010    

 


 

     
Schedule of Investments (continued)   Master International Index Series
(Percentages shown are based on Net Assets)
                 
Short-Term Securities   Shares     Value  
 
BlackRock Liquidity Funds, TempCash, Institutional Class, 0.20% (c)(d)
    3,354,915     $ 3,354,915  
 
Total Short-Term Securities
(Cost — $3,354,915) — 0.4%
            3,354,915  
 
Total Investments (Cost — $819,506,016*) — 97.3%
            723,039,412  
Other Assets Less Liabilities — 2.7%
            19,823,217  
 
             
Net Assets — 100.0%
          $ 742,862,629  
 
             
 
*   The cost and unrealized appreciation (depreciation) of investments as of June 30, 2010, as computed for federal income tax purposes, were as follows:
         
Aggregate cost
  $ 851,961,122  
 
     
Gross unrealized appreciation
  $ 38,324,642  
Gross unrealized depreciation
    (167,246,352 )
 
     
Net unrealized depreciation
  $ (128,921,710 )
 
     
 
(a)   Non-income producing security.
 
(b)   Warrants entitle the Series to purchase a predetermined number of shares of common stock and are non-income producing. The purchase price and number of shares are subject to adjustment under certain conditions until the expiration date.
 
(c)   Investments in companies considered to be an affiliate of the Series, for purposes of Section 2(a)(3) of the Investment Company Act of 1940, as amended, were as follows:
                                 
    Shares           Shares    
    Held at           Held at    
    December 31,   Net   June 30,    
Affiliate   2009   Activity   2010   Income
 
BlackRock Liquidity Funds, TempCash, Institutional Class
    6,620,218       (3,265,303 )     3,354,915     $ 3,682  
 
(d)   Represents the current yield as of report date.
 
  Financial futures contracts purchased as of June 30, 2010 were as follows:
                                 
                Expiration   Notional     Unrealized  
Contracts     Issue   Exchange   Date   Value     Depreciation  
 
  98    
DJ Euro Stoxx 50
  Eurex   September 2010   $ 3,190,813     $ (113,333 )
  49    
Emini MSCI
  Chicago   September 2010   $ 3,224,319       (2,079 )
  30    
FTSE 100 Index Futures
  LIFFE   September 2010   $ 2,310,055       (122,471 )
  9    
SPI 200 Index Futures
  Sydney   September 2010   $ 849,618       (42,421 )
  21    
TOPIX Index Futures
  Tokyo   September 2010   $ 2,044,048       (52,474 )
 
Total  
 
                  $ (332,778 )
       
 
                     
  Fair Value Measurements — Various inputs are used in determining the fair value of investments and derivatives, which are as follows:
    Level 1 — price quotations in active markets/exchanges for identical assets and liabilities
 
    Level 2 — other observable inputs (including,but not limited to: quoted prices for similar assets or liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market-corroborated inputs)
 
    Level 3 — unobservable inputs based on the best information available in the circumstances, to the extent observable inputs are not available (including the Series’ own assumptions used in determining the fair value of investments and derivatives)
The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. For information about the Series’ policy regarding valuation of investments and other significant accounting policies, please refer to Note 1 of the Notes to Financial Statements.
The following table summarizes the inputs used as of June 30, 2010 in determining the fair valuation of the Series’ investments and derivatives:
                                 
Valuation Inputs   Level 1   Level 2   Level 3   Total
 
Assets:
                               
Investments in Securities:
                               
Long-Term Investments:
                               
Common Stocks:
                               
Australia
        $ 57,677,856     $ 10     $ 57,677,866  
Austria
          2,096,902             2,096,902  
Belgium
          6,790,836             6,790,836  
Bermuda
          689,982             689,982  
Cayman Islands
          456,736             456,736  
Denmark
          7,277,819             7,277,819  
Finland
          7,457,765             7,457,765  
France
          67,578,639             67,578,639  
Germany
  $ 836,662       55,483,831             56,320,493  
Greece
          1,996,352             1,996,352  
Hong Kong
    3,564,112       14,162,554             17,726,666  
Ireland
    317,061       1,920,521             2,237,582  
Israel
          6,236,051             6,236,051  
Italy
          19,707,887             19,707,887  
Japan
    6,525,889       161,153,014             167,678,903  
Kazakhstan
          266,764             266,764  
Luxembourg
          3,061,611             3,061,611  
Netherlands
          19,476,059             19,476,059  
New Zealand
          768,357             768,357  
Norway
    53,849       4,667,245             4,721,094  
Portugal
          1,871,979             1,871,979  
Singapore
    15,550       12,176,601             12,192,151  
Spain
    4,881       24,912,849             24,917,730  
Sweden
          21,048,718             21,048,718  
Switzerland
          58,098,839             58,098,839  
United Kingdom
    184,558       151,119,844             151,304,402  
Rights:
                               
France
          8,074             8,074  
Norway
          8,723             8,723  
Spain
    7,185                   7,185  
Warrants:
                               
Hong Kong
    2,332                   2,332  
Short-Term Securities
    3,354,915                   3,354,915  
 
Total
  $ 14,866,994     $ 708,172,408     $ 10     $ 723,039,412  
     
See Notes to Financial Statements.
             
    MASTER INTERNATIONAL INDEX SERIES   JUNE 30, 2010   82

 


 

     
Schedule of Investments (concluded)   Master International Index Series
The following table summarizes the inputs used as of June 30, 2010 in determining the fair valuation of the Series’ derivatives:
                                 
  Derivative Financial Instruments1
Valuation Inputs   Level 1   Level 2   Level 3   Total
 
Liabilities:
                               
Equity contracts
  $ (332,778 )               $ (332,778 )
 
1   Derivative financial instruments are financial futures contracts, which are shown at the unrealized appreciation/depreciation on the instrument.
The following table is a reconciliation of Level 3 investments for which significant unobservable inputs were used to determine fair value:
         
    Common Stocks  
 
Assets:
       
Balance, as of December 31, 2009
  $ 15  
Accrued discounts/premiums
     
Net realized gain (loss)
     
Net change in unrealized appreciation/depreciation2
    (5 )
Purchases
     
Sales
     
Transfers in3
     
Transfers out3
     
 
     
Balance, as of June 30, 2010
  $ 10  
 
     
 
2   Included in the related net change in unrealized appreciation/depreciation on the Statement of Operations. The change in unrealized appreciation/depreciation on securities still held at June 30, 2010 was $(5).
 
3   The Series’ policy is to recognize transfers in and transfers out as of the end of the period of the event or the change in circumstances that caused the transfer.
See Notes to Financial Statements.
             
83   MASTER INTERNATIONAL INDEX SERIES   JUNE 30, 2010    

 


 

     
Statement of Assets and Liabilities   Master International Index Series
         
June 30, 2010 (Unaudited)        
 
 
Assets
       
 
Investments at value — unaffiliated (cost — $816,151,101)
  $ 719,684,497  
Investments at value — affiliated (cost — $3,354,915)
    3,354,915  
Cash
    301,482  
Foreign currency at value (cost — $5,869,225)
    5,891,088  
Cash pledged for financial futures contracts
    1,077,000  
Contributions receivable from investors
    8,485,526  
Dividends receivable
    4,508,186  
Investments sold receivable
    18,017  
Investment advisory fees receivable
    702  
Prepaid expenses
    62,805  
Other assets
    11,026  
 
     
Total assets
    743,395,244  
 
     
 
       
Liabilities
       
 
Margin variation payable
    401,010  
Other affiliates payable
    3,387  
Directors’ fees payable
    625  
Other liabilities
    104  
Other accrued expenses payable
    127,489  
 
     
Total liabilities
    532,615  
 
     
Net Assets
  $ 742,862,629  
 
     
 
       
Net Assets Consist of
       
 
Investors’ capital
  $ 839,798,928  
Net unrealized appreciation/depreciation
    (96,936,299 )
 
     
Net Assets
  $ 742,862,629  
 
     
See Notes to Financial Statements.
             
    MASTER INTERNATIONAL INDEX SERIES   JUNE 30, 2010   84

 


 

     
Statement of Operations   Master International Index Series
         
Six Months Ended June 30, 2010 (Unaudited)        
 
 
Investment Income
       
 
Dividends
  $ 14,556,138  
Foreign taxes withheld
    (1,598,285 )
Dividends — affiliated
    3,682  
 
     
Total income
    12,961,535  
 
     
 
       
Expenses
       
 
Custodian
    178,712  
Accounting services
    86,789  
Professional
    50,815  
Investment advisory
    36,028  
Directors
    11,094  
Printing
    1,710  
Miscellaneous
    76,450  
 
     
Total expenses
    441,598  
Less fees waived by advisor
    (29,248 )
 
     
Total expenses after fees waived
    412,350  
 
     
Net investment income
    12,549,185  
 
     
 
       
Realized and Unrealized Loss
       
 
Net realized loss from:
       
Investments
    (11,048,510 )
Financial futures contracts
    (2,337,179 )
Foreign currency transactions
    (1,125,051 )
 
     
 
    (14,510,740 )
 
     
 
       
Net change in unrealized appreciation/depreciation on:
       
Investments
    (100,537,722 )
Financial futures contracts
    (839,552 )
Foreign currency transactions
    (93,423 )
 
     
 
    (101,470,697 )
 
     
Total realized and unrealized loss
    (115,981,437 )
 
     
Net Decrease in Net Assets Resulting from Operations
  $ (103,432,252 )
 
     
See Notes to Financial Statements.
             
85   MASTER INTERNATIONAL INDEX SERIES   JUNE 30, 2010    

 


 

     
Statements of Changes in Net Assets   Master International Index Series
                 
    Six Months    
    Ended    
    June 30,   Year Ended
    2010   December 31,
Increase (Decrease) in Net Assets:   (Unaudited)   2009
 
Operations
               
 
Net investment income
  $ 12,549,185     $ 22,305,320  
Net realized gain (loss)
    (14,510,740 )     520,540  
Net change in unrealized appreciation/depreciation
    (101,470,697 )     184,128,794  
     
Net increase (decrease) in net assets resulting from operations
    (103,432,252 )     206,954,654  
     
 
               
Capital Transactions
               
 
Proceeds from contributions
    195,115,034       359,210,927  
Value of withdrawals
    (98,100,069 )     (523,005,063 )
     
Net increase (decrease) in net assets derived from capital transactions
    97,014,965       (163,794,136 )
     
 
               
Net Assets
               
 
Total increase (decrease) in net assets
    (6,417,287 )     43,160,518  
Beginning of period
    749,279,916       706,119,398  
     
End of period
  $ 742,862,629     $ 749,279,916  
     
     
Financial Highlights   Master International Index Series
                                                 
    Six Months    
    Ended    
    June 30,    
    2010   Year Ended December 31,
    (Unaudited)   2009   2008   2007   2006   2005
 
Total Investment Return
                                               
 
Total investment return
    (13.98 )%1     28.99 %     (41.94 )%     10.80 %     26.61 %     13.64 %
     
 
                                               
Ratios to Average Net Assets
                                               
 
Total expenses
    0.12 %2     0.09 %     0.11 %     0.10 %     0.11 %     0.10 %
     
Total expenses after fees waived
    0.11 %2     0.09 %     0.10 %     0.09 %     0.10 %     0.10 %
     
Net investment income
    3.48 %2     2.98 %     3.54 %     2.86 %     2.70 %     2.53 %
     
 
                                               
Supplemental Data
                                               
 
Net assets, end of period (000)
  $ 742,863     $ 749,280     $ 706,119     $ 1,143,172     $ 829,986     $ 523,155  
     
Portfolio turnover
    4 %     30 %     30 %     30 %     23 %     11 %
     
 
1   Aggregate total investment return.
 
2   Annualized.
See Notes to Financial Statements.
             
    MASTER INTERNATIONAL INDEX SERIES   JUNE 30, 2010   86

 


 

     
Notes to Financial Statements (Unaudited)   Master International Index Series
1. Organization and Significant Accounting Policies:
Master International Index Series (the “Series”), a non-diversified open-end management investment company, is a series of Quantitative Master Series LLC (the “Master LLC”). The Master LLC is registered as an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”), and is organized as a Delaware limited liability company. The Master LLC’s Limited Liability Company Agreement permits the Board of Directors (the “Board”) to issue non-transferable interests, subject to certain limitations. The Series’ financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, which may require management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
The following is a summary of significant accounting policies followed by the Series:
Valuation: The Series’ policy is to fair value its financial instruments and derivatives at market value using independent dealers or pricing services selected under the supervision of the Board. Equity investments traded on a recognized securities exchange or the NASDAQ Global Market System are valued at the last reported sale price that day or the NASDAQ official closing price, if applicable. For equity investments traded on more than one exchange, the last reported sale price on the exchange where the stock is primarily traded is used. Equity investments traded on a recognized exchange for which there were no sales on that day are valued at the last available bid (long positions) or ask (short positions) price. If no bid or ask price is available, the prior day’s price will be used, unless it is determined that such prior day’s price no longer reflects the fair value of the security. Financial futures contracts traded on exchanges are valued at their last sale price. Investments in open-end investment companies are valued at net asset value each business day. Short-term securities with remaining maturities of 60 days or less may be valued at amortized cost, which approximates fair value.
Securities and other assets and liabilities denominated in foreign currencies are translated into US dollars using exchange rates determined as of the close of business on the New York Stock Exchange (“NYSE”). Foreign currency exchange contracts are valued at the mean between the bid and ask prices and are determined as of the close of business on the NYSE. Interpolated values are derived when the settlement date of the contract is an interim date for which quotations are not available.
In the event that application of these methods of valuation results in a price for an investment which is deemed not to be representative of the market value of such investment or is not available, the investment will be valued in accordance with a policy approved by the Board as reflecting fair value (“Fair Value Assets”). When determining the price for Fair Value Assets, the investment advisor and/or the sub-advisor seeks to determine the price that the Series might reasonably expect to receive from the current sale of that asset in an arm’s-length transaction. Fair value determinations shall be based upon all available factors that the investment advisor and/or sub-advisor deems relevant. The pricing of all Fair Value Assets is subsequently reported to the Board or a committee thereof.
Generally, trading in foreign instruments is substantially completed each day at various times prior to the close of business on the NYSE. Occasionally, events affecting the values of such instruments 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 Series’ net assets. If events (for example, a company announcement, market volatility or a natural disaster) occur during such periods that are expected to materially affect the value of such instruments, those instruments may be Fair Value Assets and be valued at their fair values, as determined in good faith by the investment advisor using a pricing service and/or policies approved by the Board. Each business day, the Series uses a pricing service to assist with the valuation of certain foreign exchange-traded equity securities and foreign exchange-traded and over-the-counter (“OTC”) options (the “Systematic Fair Value Price”). Using current market factors, the Systematic Fair Value Price is designed to value such foreign securities and foreign options at fair value as of the close of business on the NYSE, which follows the close of the local markets.
Foreign Currency Transactions: The Series’ books and records are maintained in US dollars. Purchases and sales of investment securities are recorded at the rates of exchange prevailing on the date the transactions are entered into. Generally, when the US dollar rises in value against foreign currency, the Series’ investments denominated in that currency will lose value because its currency is worth fewer US dollars; the opposite effect occurs if the US dollar falls in relative value.
The Series reports foreign currency related transactions as components of realized gain (loss) for financial reporting purposes, whereas such components are treated as ordinary income for federal income tax purposes.
Segregation and Collateralization: In cases in which the 1940 Act and the interpretive positions of the Securities and Exchange Commission (“SEC”) require that the Series either delivers collateral or segregates assets in connection with certain investments (e.g., financial futures contracts and foreign currency exchange contracts) the Series will, consistent with SEC rules and/or certain interpretive letters issued by the SEC, segregate collateral or designate on its books and records cash or other liquid securities having a market value at least equal to the amount that would otherwise be required to be physically segregated. Furthermore, based on requirements and agreements with certain exchanges and third-party broker-dealers, each party has requirements to deliver/deposit securities as collateral for certain investments.
             
87   MASTER INTERNATIONAL INDEX SERIES   JUNE 30, 2010    

 


 

     
Notes to Financial Statements (continued)   Master International Index Series
Investment Transactions and Investment Income: For financial reporting purposes, investment transactions are recorded on the dates the transactions are entered into (the trade dates). Realized gains and losses on investment transactions are determined on the identified cost basis. Dividend income is recorded on the ex-dividend dates. Dividends from foreign securities where the ex-dividend date may have passed are subsequently recorded when the Series has determined the ex-dividend date. Under the applicable foreign tax laws, a withholding tax at various rates may be imposed on capital gains, dividends and interest. Upon notification from issuers, some of the dividend income received from a real estate investment trust may be redesignated as a reduction of cost of the related investment and/or realized gain. Interest income is recognized on the accrual basis.
Income Taxes: The Master LLC is classified as a partnership for federal income tax purposes. As such, each investor in the Master LLC is treated as owner of its proportionate share of the net assets, income, expenses and realized and unrealized gains and losses of the Master LLC. Therefore, no federal income tax provision is required. It is intended that the Master LLC’s assets will be managed so an investor in the Master LLC can satisfy the requirements of Subchapter M of the Internal Revenue Code of 1986, as amended.
The Master LLC files US federal and various state and local tax returns. No income tax returns are currently under examination. The statute of limitations on the Master LLC’s US federal tax returns remains open for each of the four years ended December 31, 2009. The statutes of limitations on the Master LLC’s state and local tax returns may remain open for an additional year depending upon the jurisdiction. There are no uncertain tax positions that require recognition of a tax liability.
Other: Expenses directly related to the Series are charged to the Series. Other operating expenses shared by several funds are pro rated among those funds on the basis of relative net assets or other appropriate methods. The Series has an arrangement with the custodian whereby fees may be reduced by credits earned on uninvested cash balances, which if applicable are shown as fees paid indirectly in the Statement of Operations. The custodian imposes fees on overdrawn cash balances, which can be offset by accumulated credits earned or may result in additional custody charges.
2. Derivative Financial Instruments:
The Series engages in various portfolio investment strategies using derivative contracts both to increase the returns of the Series and to economically hedge, or protect, their exposure to certain risks such as equity risk and foreign currency exchange rate risk. These contracts may be transacted on an exchange or OTC. Losses may arise if the value of the contract decreases due to an unfavorable change in the market rates or values of the underlying instrument or if the counterparty does not perform under the contract. The Series’ maximum risk of loss from counterparty credit risk on OTC derivatives is generally the aggregate unrealized gain netted against any collateral pledged by/posted to the counterparty.
The Series may mitigate counterparty risk by procuring collateral and through netting provisions included within an International Swaps and Derivatives Association, Inc. (“ISDA”) Master Agreement implemented between a Fund and each of its respective counterparties. The ISDA Master Agreement allows the Fund to offset with each separate counterparty certain derivative financial instrument’s payables and/or receivables with collateral held. The amount of collateral moved to/from applicable counterparties is generally based upon minimum transfer amounts of up to $500,000. To the extent amounts due to the Series from its counterparties are not fully collateralized contractually or otherwise, the Series bears the risk of loss from counterparty non-performance. See Note 1 “Segregation and Collateralization” for information with respect to collateral practices. In addition, the Series manages counterparty risk by entering into agreements only with counterparties that it believes have the financial resources to honor their obligations and by monitoring the financial stability of those counterparties.
Certain ISDA Master Agreements allow counterparties of OTC derivatives to terminate derivative contracts prior to maturity in the event the Series’ net assets decline by a stated percentage or the Series fails to meet the terms of its ISDA Master Agreements, which would cause the Series to accelerate payment of any net liability owed to the counterparty.
Financial Futures Contracts: The Series purchases or sells financial futures contracts and options on financial futures contracts to gain exposure to, or economically hedge against, changes in foreign currencies (foreign currency exchange rate risk). Financial futures contracts are contracts for delayed delivery of securities or currencies at a specific future date and at a specific price or yield. Pursuant to the contract, the Series agrees to receive from or pay to the broker an amount of cash equal to the
             
    MASTER INTERNATIONAL INDEX SERIES   JUNE 30, 2010   88

 


 

Notes to Financial Statements (continued)   Master International Index Series
daily fluctuation in value of the contract. Such receipts or payments are known as margin variation and are recognized by the Series as unrealized gains or losses. When the contract is closed, the Series records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. The use of financial futures transactions involves the risk of an imperfect correlation in the movements in the price of financial futures contracts, interest rates and the underlying assets.
Foreign Currency Exchange Contracts: The Series enters into foreign currency exchange contracts as an economic hedge against either specific transactions or portfolio instruments or to gain exposure to foreign currencies (foreign currency exchange rate risk). A foreign currency exchange contract is an agreement between two parties to buy and sell a currency at a set exchange rate on a future date. Foreign currency exchange contracts, when used by the Series, help to manage the overall exposure to the currency backing some of the investments held by the Series. The contract is marked-to-market daily and the change in market value is recorded by the Series as an unrealized gain or loss. When the contract is closed, the Series records a realized gain or loss equal to the difference between the value at the time it was opened and the value at the time it was closed. The use of foreign currency exchange contracts involves the risk that the value of a foreign currency contract changes unfavorably due to movements in the value of the referenced foreign currencies and the risk that a counterparty to the contract does not perform it obligations under the agreement.
Derivative Instruments Categorized by Risk Exposure:
Fair Value of Derivative Instruments as of June 30, 2010
                 
    Liability Derivatives
    Statement of    
    Assets and    
    Liabilities    
    Location   Value
 
Equity contracts
  Net unrealized
appreciation/
depreciation*
  $ 332,778  
 
*   Includes cumulative appreciation/depreciation of financial futures contracts as reported in the Schedule of Investments. Only current day’s margin variation is reported within the Statement of Assets and Liabilities.
The Effect of Derivative Instruments on the Statement of Operations
Six Months Ended June 30, 2010
                 
    Net Realized Loss from
    Financial   Foreign
    Futures   Currency
    Contracts   Transactions
 
Foreign currency transactions
        $ (169,373 )
Equity contracts
  $ (2,337,179 )      
                 
    Net Change in Unrealized
    Appreciation/Depreciation on
    Financial   Foreign
    Futures   Currency
    Contracts   Transactions
 
Foreign currency transactions
        $ 147,613  
Equity contracts
  $ (839,552 )      
For the six months ended June 30, 2010, the average quarterly balance of outstanding derivative financial instruments was as follows:
         
Foreign currency exchange contracts:
       
Average number of contracts — US dollars purchased
    4  
Average number of contracts — US dollars sold
    4  
Average US dollar amounts purchased
  $ 697,357  
Average US dollar amounts sold
  $ 362,827  
Financial futures contracts:
       
Average number of contracts purchased
    290  
Average notional value of contracts purchased
  $ 16,377,099  
3. Investment Advisory Agreement and Other Transactions with Affiliates:
The PNC Financial Services Group, Inc. (“PNC”), Bank of America Corporation (“BAC”) and Barclays Bank PLC (“Barclays”) are the largest stockholders of BlackRock, Inc. (“BlackRock”). Due to the ownership structure, PNC is an affiliate of the Series for 1940 Act purposes, but BAC and Barclays are not.
The Master LLC, on behalf of the Series, entered into an Investment Advisory Agreement with BlackRock Advisors, LLC (the “Manager”), the Series’ investment advisor, an indirect, wholly owned subsidiary of BlackRock, to provide investment advisory and administration services. The Manager is responsible for the management of the Series’ portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Series. For such services, the Series pays the Manager a monthly fee at the annual rate of 0.01% of average daily value of the Series’ net assets.
The Manager entered into a contractual arrangement with the Master LLC with respect to the Series under which the Manager will waive and/or reimburse its fees and/or expenses so that the total annual operating
             
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Notes to Financial Statements (concluded)   Master International Index Series
expenses incurred by the Series (excluding interest expense, acquired fund fees and certain other Series’ expenses) will not exceed 0.12% of the average daily value of the Series’ net assets. The Manager has agreed not to reduce or discontinue this contractual waiver or reimbursement before May 1, 2011 unless approved by the Board, including a majority of the non-interested directors. For the six months ended June 30, 2010, The Series waived $27,145, which is included in fees waived by advisor in the Statement of Operations.
The Manager voluntarily agreed to waive its advisory fees by the amount of investment advisory fees the Series pays to the Manager indirectly through its investment in affiliated money market funds; however, the Manager does not waive its advisory fees by the amount of investment advisory fees paid through its investment in other affiliated investment companies, if any. For the six months ended June 30, 2010, the Series waived $2,103, which is included in fees waived by advisor in the Statement of Operations.
The Manager entered into a sub-advisory agreement with BlackRock Investment Management, LLC (“BIM”), an affiliate of the Manager. The Manager pays BIM for services it provides, a monthly fee that is a percentage of the investment advisory fees paid by the Series to the Manager.
For the six months ended June 30, 2010, the Series reimbursed the Manager $7,716 for certain accounting services, which is included in accounting services in the Statement of Operations.
Certain officers and/or directors of the Master LLC are officers and/or directors of BlackRock or its affiliates.
4. Investments:
Purchases and sales of investments, excluding short-term securities, for the six months ended June 30, 2010 were $855,474,651 and $28,273,521, respectively.
5. Borrowings:
The Master LLC, on behalf of the Series, 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 expires in November 2010. The Series may borrow under the credit agreement to fund shareholder redemptions. The Series paid its pro rata share of 0.02% upfront fee on the aggregate commitment amount which was allocated to the Series based on its net assets as of October 31, 2009, a commitment fee of 0.10% per annum based on the Series pro rata share of the unused portion of the credit agreement, which is included in miscellaneous in the Statement of Operations, and interest at a rate equal to the higher of (a) the one-month LIBOR plus 1.25% per annum and (b) the Fed Funds rate plus 1.25% per annum on amounts borrowed. The Series did not borrow under the credit agreement during the six months ended June 30, 2010.
6. Concentration, Market and Credit Risk:
In the normal course of business, the Series invests in securities and enters into transactions where risks exist due to fluctuations in the market (market risk) or failure of the issuer of a security to meet all its obligations (issuer credit risk). The value of securities held by the Series may decline in response to certain events, including those directly involving the issuers whose securities are owned by the Series; conditions affecting the general economy; overall market changes; local, regional or global political, social or economic instability; and currency and interest rate and price fluctuations. Similar to issuer credit risk, the Series may be exposed to counterparty credit risk, or the risk that an entity with which the Series has unsettled or open transactions may fail to or be unable to perform on its commitments. The Series manages counterparty credit risk by entering into transactions only with counterparties that it believes have the financial resources to honor their obligations and by monitoring the financial stability of those counterparties. Financial assets, which potentially expose the Series to market, issuer and counterparty credit risks, consist principally of financial instruments and receivables due from counterparties. The extent of the Series’ exposure to market, issuer and counterparty credit risks with respect to these financial assets is generally approximated by their value recorded in the Series’ Statement of Assets and Liabilities, less any collateral held by the Series.
The Series invests a substantial amount of its assets in issuers located in a single country or a limited number of countries. When the Series concentrates its investments in this manner, it assumes the risk that economic, political and social conditions in those countries may have a significant impact on their investment performance. Please see the Schedule of Investments for concentrations in specific countries.
As of June 30, 2010, the Series had the following industry classifications:
         
    Percent of
    Long-Term
Industry   Investments
 
Commercial Banks
    14 %
Pharmaceuticals
    8  
Oil, Gas & Consumable Fuels
    7  
Metals & Mining
    6  
Other*
    65  
 
*   All other industries held were each less than 5% of long-term investments.
7. Subsequent Events:
Management has evaluated the impact of all subsequent events on the Series through the date the financial statements were issued and has determined that there were no subsequent events requiring adjustment or additional disclosure in the financial statements.
             
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Disclosure of Investment Advisory Agreement and Sub-Advisory Agreement
The Board of Directors (the “Board,” and the members of which are referred to as “Board Members”) of Quantitative Master Series LLC (the “Master LLC”) met on April 20, 2010 and May 18 – 19, 2010 to consider the approval of the Master LLC’s investment advisory agreement (the “Advisory Agreement”) with BlackRock Advisors, LLC (the “Manager”), the Master LLC’s investment advisor, on behalf of Master International Index Series (the “Portfolio”), a series of the Master LLC. The Board also considered the approval of the sub-advisory agreement (the “Sub-Advisory Agreement”) between the Manager and BlackRock Investment Management, LLC (the “Sub-Advisor”), with respect to the Portfolio. The Manager and the Sub-Advisor are referred to herein as “BlackRock.” The Advisory Agreement and the Sub-Advisory Agreement are referred to herein as the “Agreements.”
Activities and Composition of the Board
The Board consists of thirteen individuals, eleven of whom are not “interested persons” of the Master LLC as defined in the Investment Company Act of 1940, as amended (the “1940 Act”) (the “Independent Board Members”). The Board Members are responsible for the oversight of the operations of the Master LLC and perform the various duties imposed on the directors of investment companies by the 1940 Act. The Independent Board Members have retained independent legal counsel to assist them in connection with their duties. The Co-Chairs of the Board are each Independent Board Members. The Board has established five standing committees: an Audit Committee, a Governance and Nominating Committee, a Compliance Committee, a Performance Oversight and Contract Committee and an Executive Committee, each of which is composed of Independent Board Members (except for the Executive Committee, which also has one interested Board Member) and is chaired by Independent Board Members. The Board also has one ad hoc committee, the Joint Product Pricing Committee, which consists of Independent Board Members and directors/trustees of the boards of certain other BlackRock-managed funds, who are not “interested persons” of their respective funds.
The Agreements
Pursuant to the 1940 Act, the Board is required to consider the continuation of the Agreements on an annual basis. In connection with this process, the Board assessed, among other things, the nature, scope and quality of the services provided to the Portfolio by the personnel of BlackRock and its affiliates, including investment management, administrative and shareholder services, oversight of fund accounting and custody, marketing services and assistance in meeting applicable legal and regulatory requirements.
From time to time throughout the year, the Board, acting directly and through its committees, considers at each of its meetings factors that are relevant to its annual consideration of the renewal of the Agreements, including the services and support provided by BlackRock to the Portfolio and its shareholders. Among the matters the Board considered were: (a) investment performance of an affiliated feeder fund that invests all of its investable assets in the Portfolio (the “representative feeder fund”) for one-, three- and five-year periods, as applicable, against its peer funds, and applicable benchmarks, if any, as well as senior management and portfolio managers’ analysis of the reasons for any over performance or underperformance against its peers and/or benchmarks, as applicable; (b) fees, including advisory, administration, if applicable, and other amounts paid to BlackRock and its affiliates by the Portfolio, such as marketing and distribution and fund accounting; (c) the Portfolio’s operating expenses; (d) the resources devoted to and compliance reports relating to the Portfolio’s investment objective, policies and restrictions; (e) the Master LLC’s compliance with its Code of Ethics and compliance policies and procedures; (f) the nature, cost and character of non-investment management services provided by BlackRock and its affiliates; (g) BlackRock’s and other service providers’ internal controls; (h) BlackRock’s implementation of the proxy voting policies approved by the Board; (i) the use of brokerage commissions and execution quality of portfolio transactions; (j) BlackRock’s implementation of the Master LLC’s valuation and liquidity procedures; (k) an analysis of contractual and actual management fees for products with similar investment objectives across the open-end fund, closed-end fund and institutional account product channels; and (l) periodic updates on BlackRock’s business.
Board Considerations in Approving the Agreements
The Approval Process: Prior to the April 20, 2010 meeting, the Board requested and received materials specifically relating to the Agreements. The Board is engaged in a process with BlackRock to periodically review the nature and scope of the information provided to better assist its deliberations. The materials provided in connection with the April meeting included: (a) information independently compiled and prepared by Lipper, Inc. (“Lipper”) on fees and expenses of the Portfolio and the representative feeder fund, as applicable, and the investment performance of the representative feeder fund as compared with a peer group of funds as determined by Lipper (collectively, “Peers”); (b) information on the profitability of the Agreements to BlackRock and a discussion of fall-out benefits to BlackRock and its affiliates and significant shareholders; (c) a general analysis provided by BlackRock concerning investment advisory fees charged to other clients, such as institutional clients and closed-end funds, under similar investment mandates, as well as the performance of such other clients, as applicable; (d) the impact of economies of scale; (e) a summary of aggregate amounts paid by the Portfolio to BlackRock; and (f) if applicable, a comparison of management fees to similar BlackRock open-end funds, as classified by Lipper.
At an in-person meeting held on April 20, 2010, the Board reviewed materials relating to its consideration of the Agreements. As a result of the discussions that occurred during the April 20, 2010 meeting, the Board presented BlackRock with questions and requests for additional information and BlackRock responded to these requests with additional written information in advance of the May 18 – 19, 2010 Board meeting.
             
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Disclosure of Investment Advisory Agreement and Sub-Advisory Agreement (continued)
At an in-person meeting held on May 18 – 19, 2010, the Board, including the Independent Board Members, unanimously approved the continuation of the Advisory Agreement between the Manager and the Master LLC with respect to the Portfolio and the Sub-Advisory Agreement between the Manager and the Sub-Advisor with respect to the Portfolio, each for a one-year term ending June 30, 2011. In approving the continuation of the Agreements, the Board considered: (a) the nature, extent and quality of the services provided by BlackRock; (b) the investment performance of the Portfolio and BlackRock; (c) the advisory fee and the cost of the services and profits to be realized by BlackRock and its affiliates from their relationship with the Portfolio; (d) economies of scale; and (e) other factors deemed relevant by the Board Members.
The Board also considered other matters it deemed important to the approval process, such as payments made to BlackRock or its affiliates relating to the distribution of Portfolio shares, services related to the valuation and pricing of portfolio holdings of the Portfolio, direct and indirect benefits to BlackRock and its affiliates and significant shareholders from their relationship with the Portfolio and advice from independent legal counsel with respect to the review process and materials submitted for the Board’s review.The Board noted the willingness of BlackRock personnel to engage in open, candid discussions with the Board. The Board did not identify any particular information as controlling, and each Board Member may have attributed different weights to the various items considered.
A. Nature, Extent and Quality of the Services Provided by BlackRock: The Board, including the Independent Board Members, reviewed the nature, extent and quality of services provided by BlackRock, including the investment advisory services and the resulting performance of the Portfolio. The Board received information regarding the investment performance of the representative feeder fund. The Board met with BlackRock’s senior management personnel responsible for investment operations, including the senior investment officers. The Board also reviewed the materials provided by the portfolio management team discussing performance of the representative feeder fund and the Portfolio’s investment objective, strategies and outlook.
The Board considered, among other factors, the number, education and experience of BlackRock’s investment personnel generally and the Portfolio’s portfolio management team, investments by portfolio managers in the funds they manage, BlackRock’s portfolio trading capabilities, BlackRock’s use of technology, BlackRock’s commitment to compliance and BlackRock’s approach to training and retaining portfolio managers and other research, advisory and management personnel. The Board also reviewed a general description of BlackRock’s compensation structure with respect to the Portfolio’s portfolio management team and BlackRock’s ability to attract and retain high-quality talent.
In addition to advisory services, the Board considered the quality of the administrative and non-investment advisory services provided to the Portfolio. BlackRock and its affiliates and significant shareholders provide the Portfolio with certain administrative, shareholder and other services (in addition to any such services provided to the Portfolio by third parties) and officers and other personnel as are necessary for the operations of the Portfolio. In addition to investment advisory services, BlackRock and its affiliates provide the Portfolio with other services, including: (i) preparing disclosure documents, such as the prospectus, the statement of additional information and periodic shareholder reports; (ii) assisting with daily accounting and pricing; (iii) overseeing and coordinating the activities of other service providers; (iv) organizing Board meetings and preparing the materials for such Board meetings; (v) providing legal and compliance support; and (vi) performing other administrative functions necessary for the operation of the Portfolio, such as tax reporting and fulfilling regulatory filing requirements. The Board reviewed the structure and duties of BlackRock’s fund administration, accounting, legal and compliance departments and considered BlackRock’s policies and procedures for assuring compliance with applicable laws and regulations.
B. The Investment Performance of the Portfolio and BlackRock: The Board, including the Independent Board Members, also reviewed and considered the performance history of the Portfolio. The Board noted that the Portfolio’s investment results correspond directly to the investment results of the representative feeder fund. In preparation for the April 20, 2010 meeting, the Board was provided with reports, independently prepared by Lipper, which included a comprehensive analysis of the representative feeder fund’s performance. The Board also reviewed a narrative and statistical analysis of the Lipper data that was prepared by BlackRock, which analyzed various factors that affect Lipper’s rankings. In connection with its review, the Board received and reviewed information regarding the investment performance of the representative feeder fund as compared to a representative group of similar funds as determined by Lipper and to all funds in the representative feeder fund’s applicable Lipper category.The Board was provided with a description of the methodology used by Lipper to select peer funds. The Board regularly reviews the performance of the Portfolio and the representative feeder fund, as applicable, throughout the year.The Board attaches more importance to performance over relatively long periods of time, typically three to five years.
The Board noted that the representative feeder fund performed below the median of its Lipper Performance Universe in each of the one-, three- and five-year periods reported. The Board and BlackRock reviewed the reasons for the representative feeder fund’s underperformance during these periods compared with its Peers. The Board was informed that, among other things, over the one-, three- and five-year periods, the representative feeder fund met its objective of matching the risk and return of the MSCI EAFE Index before fees and expenses.
The Board and BlackRock discussed BlackRock’s strategy for improving the Portfolio’s performance and BlackRock’s commitment to providing the resources necessary to assist the Portfolio’s portfolio managers and to improve the Portfolio’s performance.
             
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Disclosure of Investment Advisory Agreement and Sub-Advisory Agreement (continued)
C. Consideration of the Advisory Fees and the Cost of the Services and Profits to be Realized by BlackRock and its Affiliates from their Relationship with the Portfolio: The Board, including the Independent Board Members, reviewed the information provided by Lipper regarding the Portfolio’s contractual advisory fee rate. The Board considered the services provided and the fees charged by BlackRock to other types of clients with similar investment mandates, including separately managed institutional accounts.
The Board received and reviewed statements relating to BlackRock’s financial condition and profitability with respect to the services it provided the Portfolio. The Board was also provided with a profitability analysis that detailed the revenues earned and the expenses incurred by BlackRock for services provided to the Portfolio. The Board reviewed BlackRock’s profitability with respect to the Portfolio and other funds the Board currently oversees for the year ended December 31, 2009 compared to available aggregate profitability data provided for the year ended December 31, 2008. The Board reviewed BlackRock’s profitability with respect to other fund complexes managed by the Manager and/or its affiliates. The Board reviewed BlackRock’s assumptions and methodology of allocating expenses in the profitability analysis, noting the inherent limitations in allocating costs among various advisory products. The Board recognized that profitability may be affected by numerous factors including, among other things, fee waivers and expense reimbursements by the Manager, the types of funds managed, expense allocations and business mix, and the difficulty of comparing profitability as a result of those factors.
The Board noted that, in general, individual fund or product line profitability of other advisors is not publicly available. Nevertheless, to the extent such information was available, the Board considered BlackRock’s operating margin, in general, compared to the operating margin for leading investment management firms whose operations include advising open-end funds, among other product types. That data indicates that operating margins for BlackRock with respect to its registered funds are generally consistent with margins earned by similarly situated publicly traded competitors. In addition, the Board considered, among other things, certain third party data comparing BlackRock’s operating margin with that of other publicly traded asset management firms. That third party data indicates that larger asset bases do not, in themselves, translate to higher profit margins.
In addition, the Board considered the cost of the services provided to the Portfolio by BlackRock, and BlackRock’s and its affiliates’ profits relating to the management and distribution of the Portfolio and the other funds advised by BlackRock and its affiliates. As part of its analysis, the Board reviewed BlackRock’s methodology in allocating its costs to the management of the Portfolio. The Board also considered whether BlackRock has the financial resources necessary to attract and retain high-quality investment management personnel to perform its obligations under the Agreements and to continue to provide the high quality of services that is expected by the Board.
The Board noted that the Portfolio’s contractual advisory fee rate was lower than or equal to the median contractual advisory fee rate paid by comparable funds, in each case before taking into account any expense reimbursements or fee waivers. The Board also noted that BlackRock has contractually agreed to waive fees and/or reimburse expenses in order to limit, to a specified amount, the Portfolio’s total operating expenses as a percentage of the Portfolio’s average daily net assets.
D. Economies of Scale: The Board, including the Independent Board Members, considered the extent to which economies of scale might be realized as the assets of the Portfolio increase. The Board also considered the extent to which the Portfolio benefits from such economies and whether there should be changes in the advisory fee rate or structure in order to enable the Portfolio to participate in these economies of scale, for example through the use of breakpoints in the advisory fee based upon the asset level of the Portfolio.
E. Other Factors Deemed Relevant by the Board Members: The Board, including the Independent Board Members, also took into account other ancillary or “fall-out” benefits that BlackRock or its affiliates and significant shareholders may derive from their respective relationships with the Portfolio, both tangible and intangible, such as BlackRock’s ability to leverage its investment professionals who manage other portfolios, an increase in BlackRock’s profile in the investment advisory community, and the engagement of BlackRock’s affiliates and significant shareholders as service providers to the Portfolio, including for administrative and distribution services. The Board also considered BlackRock’s overall operations and its efforts to expand the scale of, and improve the quality of, its operations. The Board also noted that BlackRock may use and benefit from third party research obtained by soft dollars generated by certain mutual fund transactions to assist in managing all or a number of its other client accounts. The Board further noted that BlackRock completed the acquisition of a complex of exchange-traded funds (“ETFs”) on December 1, 2009, and that BlackRock’s funds may invest in such ETFs without any offset against the management fees payable by the funds to BlackRock.
In connection with its consideration of the Agreements, the Board also received information regarding BlackRock’s brokerage and soft dollar practices. The Board received reports from BlackRock which included information on brokerage commissions and trade execution practices throughout the year.
The Board noted the competitive nature of the open-end fund marketplace, and that the shareholders of a fund are able to redeem their shares if they believe that the fund’s fees and expenses are too high or if they are dissatisfied with the performance of the fund.
             
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Disclosure of Investment Advisory Agreement and Sub-Advisory Agreement (concluded)
Conclusion
The Board, including the Independent Board Members, unanimously approved the continuation of the Advisory Agreement between the Manager and the Master LLC, with respect to the Portfolio, for a one-year term ending June 30, 2011 and the Sub-Advisory Agreement between the Manager and the Sub-Advisor, with respect to the Portfolio, for a one-year term ending June 30, 2011. As part of its approval, the Board considered the detailed review of BlackRock’s fee structure, as it applies to the Master LLC, being conducted by the ad hoc Joint Product Pricing Committee. Based upon its evaluation of all of the aforementioned factors in their totality, the Board, including the Independent Board Members, was satisfied that the terms of the Agreements were fair and reasonable and in the best interest of the Portfolio and its shareholders. In arriving at a decision to approve the Agreements, the Board did not identify any single factor or group of factors as all-important or controlling, but considered all factors together, and different Board Members may have attributed different weights to the various factors considered. The Independent Board Members were also assisted by the advice of independent legal counsel in making this determination. The contractual fee arrangements for the Portfolio reflect the results of several years of review by the Board Members and predecessor Board Members, and discussions between such Board Members (and predecessor Board Members) and BlackRock. Certain aspects of the arrangements may be the subject of more attention in some years than in others, and the Board Members’ conclusions may be based in part on their consideration of these arrangements in prior years.
             
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(LOGO)
     
 
Delivery of Documents
To reduce expenses, your financial institution may mail only one copy of the Summary Prospectus, Annual Report and Semi-Annual Report to those addresses shared by two or more accounts. If you wish to receive individual copies of these documents, please contact your financial institution. Delivery of individual copies will commence thirty days after receiving your request.
If you invest in the Fund through a financial institution, you may be able to receive the Fund’s regulatory mailings, such as the Summary Prospectus, Annual Report and Semi-Annual Report, by e-mail. If you are interested in this option, please go to www.icsdelivery.com and search for your financial institution’s name or contact your financial institution directly.
To obtain more information about the Fund:
       
(LOGO)
    (LOGO)
 
     
By E-mail:
    On the Internet:
american_beacon.funds@ambeacon.com
    Visit our website at www.americanbeaconfunds.com
 
     
       
 
     
(LOGO)
    (LOGO)
 
     
By Telephone:
    By Mail:
 
     
Institutional and Investor Class
    American Beacon Funds
Call (800) 658-5811
    P.O. Box 219643
 
    Kansas City, MO 64121
 
     
       
 
     
Availability of Quarterly Portfolio Schedules
    Availability of Proxy Voting Policy and Records
In addition to the Schedule of Investments provided in each semi-annual and annual report, each Fund files a complete schedule of its portfolio holdings with the Securities and Exchange Commission (“SEC”) on Form N-Q as of the first and third fiscal quarters. The Fund’s Forms N-Q are available on the SEC’s website at www.sec.gov. The Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room, 450 Fifth Street, NW, Washington, DC 20549. Information regarding the operation of the SEC’s Public Reference Room may be obtained by calling 1-800-SEC-0330. A complete schedule of the Fund’s portfolio holdings is also available on the Funds’ website (www.americanbeaconfunds.com) approximately thirty days after the end of each fiscal quarter.
    A description of the policies and procedures that the Funds use to determine how to vote proxies relating to portfolio securities is available in each Fund’s Statement of Additional Information, which may be obtained free of charge by calling 1-800-967-9009 or by accessing the SEC’s website at www.sec.gov. Each Fund’s proxy voting record for the most recent year ended June 30 is filed annually with the SEC on Form N-PX. The Fund’s Forms N-PX are available on the SEC’s website at www.sec.gov. The Fund’s proxy voting record may also be obtained by calling 1-800-967-9009.
Fund Service Providers:
                 
 
  Custodian
State Street Bank and
Trust

Boston, Massachusetts
  Transfer Agent
Boston Financial Data
Services

Kansas City, Missouri
  Independent Registered
Public Accounting
Firm

Ernst & Young LLP

Dallas, Texas
  Distributor
Foreside Fund Services,
LLC

Portland, Maine
This report is prepared for shareholders of the American Beacon Funds and may be distributed to others only if preceded or accompanied by a current prospectus or summary prospectus.
 
American Beacon Funds, American Beacon Small Cap Index Fund, and American Beacon International Equity Index Fund are service marks of American Beacon Advisors, Inc.
SAR 6/10
00075744


 

(GRAPHIC)
Report Semi-Annual June 30, 2010 GLOBAL REAL ESTATE FUND

 


 

About American Beacon Advisors
     Since 1986, American Beacon Advisors has offered a variety of products and investment advisory services to numerous institutional and retail clients, including a variety of mutual funds, corporate cash management, and separate account management.
     Our clients include defined benefit plans, defined contribution plans, foundations, endowments, corporations, financial planners, and other institutional investors. With American Beacon Advisors, you can put the experience of a multi-billion dollar asset management firm to work for your company.
Contents
         
Message from American Beacon
    1  
    2  
    6  
Additional Information
  Back Cover  

Any opinions herein, including forecasts, reflect our judgment as of the end of the reporting period and are subject to change. Each advisor’s strategies and the Fund’s portfolio composition will change depending on economic and market conditions. This report is not a complete analysis of market conditions and therefore, should not be relied upon as investment advice. Although economic and market information has been compiled from reliable sources, American Beacon Advisors, Inc. makes no representation as to the completeness or accuracy of the statements contained herein.
There is no guarantee that the investment objectives will be met of the American Beacon Global Real Estate Fund. Investing in a global fund concentrating in real estate securities involves special risks, such as declines in the value of real estate as well as increased susceptibility to adverse economic, political, or regulatory developments affecting the industry. Investing in one economic sector, such as real estate, may result in greater price fluctuations than owning a portfolio of diversified investments. Changes in interest rates may also affect the value of the Fund’s investments in real estate securities. The real estate industry tends to be cyclical and therefore such cycles may adversely affect the value of the Fund’s portfolio. The Fund may invest in smaller and mid-size companies. Certain real estate securities have a relatively small market capitalization, which may tend to increase the volatility of the market price of their securities. Investing in the securities of small and mid-capitalization companies involves greater risk and the possibility of greater price volatility than investing in larger capitalization and more established companies. Investing in foreign equities entails additional risk not associated with domestic equities, such as currency fluctuations, economic and political instability, and differences in accounting standards. The risks of investing in foreign equities are heightened when investing in emerging markets. By itself, the Fund does not constitute a complete investment plan and should be considered a long term investment for investors who can afford to weather changes in the value of their investments. Some of the Fund’s investments may be considered speculative and are not appropriate for individuals who require safety of principal or stable income from their investments.
     
American Beacon Funds   June 30, 2010

 


 

(PHOTO)
Fellow Shareholders,
     Over the past six months, one universal investing theme seems to have emerged: while significant shifts may characterize recent market activity, it doesn’t mean investors can’t benefit. Opportunity abounds for those know how to capitalize on it.
     Our intent focus on finding opportunity regardless of market direction has long formed the investment philosophy at the heart of all American Beacon mutual funds:
With portfolios invested for the current economic reality—and conservatively managed for the longer term—investors are better positioned to ride out the inevitable economic storms, whenever and wherever they occur.
     For the six months ended June 30, 2010, the American Beacon Global Real Estate Fund (Y Class) generated a total return of -5.54%. This performance reflects the delicate nature of the global economic recovery and the recent operating environment for companies in the broader equity market, including real estate investment trusts.
     Given that shifting global markets often give rise to new opportunities, American Beacon continuously looks for new and innovative strategies for capitalizing on them over time. This year, that led to the addition of this Fund along with two other actively managed funds to our lineup: the American Beacon Zebra Small Cap Equity and American Beacon Zebra Large Cap Equity Funds. All were created to capitalize on longer-term growth opportunities.
     Such new additions are also a reflection of our commitment to you, a commitment we summarize as: Oversight 360. Ours is a continuous commitment to cast a watchful and analytical eye over all the factors that influence our fellow shareholders’ investments and the strategies that we feel will help them reach their long-term goals.
     As you review the enclosed market overview, portfolio listings, and detailed financial data, please know that we welcome the opportunity to serve your financial needs. To obtain further details about the American Beacon Funds family or to access your account information, please visit our website at americanbeaconfunds.com.
     Thank you for your continued investment in the American Beacon Funds, and know that we remain dedicated to offering you and your advisor the level of service and broad range of well-managed investment products you’ve come to expect from us.
Sincerely,
-s- Gene L. Needles
Gene L. Needles, Jr.
President
American Beacon Funds
Securities of these Funds may only be sold by offering each Funds’ Prospectus and Summary Prospectus. You should consider the investment objectives, risks, fees and expenses of any mutual fund carefully before investing. This and other information is available in each Funds’ Prospectus and Summary Prospectus which you may obtain at www.americanbeaconfunds.com or by calling 1-800-967-9009. Please read the Prospectus and Summary Prospectus carefully before investing.
There is no guarantee that the investment objective will be met of the American Beacon Zebra Large Cap Equity Fund. At times, certain securities may have limited marketability and may be difficult to sell.
There is no guarantee that the investment objectives will be met of the American Beacon Zebra Small Cap Equity Fund. Investing in the securities of small capitalization companies involves greater risk and the possibility of greater price volatility than investing in larger capitalization and more established companies. At times, certain securities may have limited marketability and may be difficult to sell.

1


 

Market Overview
June 30, 2010 (Unaudited)
     Market performance during the six-month period ended June 30, 2010 was driven largely by the realization that the global economic recovery has been quite fragile and is unlikely to complete the long-hoped for V-shaped upswing.
     Though real estate investment trusts (REITs) remain under pressure due to weak employment markets in the U.S., Europe and Japan, signs of stabilization have begun to emerge in nearly every property sector. Additionally, an increase in transactions involving prime assets in major markets offers some evidence of increased confidence in pricing. The improved health of the capital markets and the accompanying low level of interest rates also created an opportunity for portfolio companies to lower their capital costs. Global REITs were active issuers of both equity and debt, taking advantage of the increasingly lower cost of capital. Over the past 15 months, exchange-listed REITs have raised more than $70 billion of equity and more than $43 billion in debt.
     However, market performance remained caught in the crossfire between the influences of positive and negative factors.
Negative Global Factors:
Economic activity slowed during the period, most notably in the U.S. and China
The sovereign debt crisis in Europe increased uncertainty for a global economic recovery
Credit conditions remained restrictive for small businesses and consumers in the U.S.
Removal of U.S. government stimulus has not been met with an equal amount of private demand which has led to worries of a double dip recession
Austerity measures announced in Europe impacted the outlook for medium-term growth
Positive Global Factors:
Real estate transaction volumes continued to increase. For some secondary assets, prices are generally higher than the market had expected
Earnings results from property companies are trending better than expected.
Dividends of REITs are viewed to be safe with upside potential for increases over the next few years.
Low interest rates, which are predicted to last through 2011, are providing strong support for yield-oriented buyers of real estate income.
Market Outlook
     The continued lack of strong employment growth in the U.S., Europe and Japan translates into very lackluster net absorption demand for office space. Tenants that are seeking space are generally looking to upgrade the location’s quality of their premises. Therefore, superior quality buildings in prime locations are seeing a larger portion of demand and are able to maintain occupancy rates and rents.
     In terms of investment demand, a similar approach has been taken by investors who are seeking secure income in primary markets. The low interest rate environment makes the spread to property yields very attractive (more than 3.50% over long-term bond yields in most markets) which is also driving demand for prime assets with secure income. There has been a slight increase in activity for secondary assets in secondary locations, although the spread between the pricing of these assets and prime assets remains wide, and the amount of transactions has been very limited.

2


 

Performance Overview
American Beacon Global Real Estate Fund
SM
June 30, 2010 (Unaudited)
     The Y Class of the Global Real Estate Fund returned -5.54% for the six months ended June 30, 2010. The Fund underperformed the FTSE EPRA/NAREIT Developed Index (“Index”) return of - -4.23% and the Lipper Global Real Estate Funds Index return of -5.41% for the period.
                         
    Annualized Total Returns
    Periods Ended 6/30/10
                    Since
                    Inception
    6 Months*   1 Year   10/26/07
Y Class(1,4,5)
    -5.54 %     19.85 %     -16.47 %
Investor Class(1,4,5)
    -5.71 %     19.53 %     -16.75 %
A Class excluding load (1,2,4)
    -5.71 %     19.53 %     -16.75 %
A Class with load (1,2,4)
    -11.08 %     12.70 %     -18.57 %
FTSE EPRA/NAREIT Global Real Estate Index (3)
    -4.23 %     25.05 %     -16.64 %
Lipper Global Real Estate Index(3)
    -5.41 %     21.38 %     -16.79 %
 
*   Not annualized
 
1.   Performance shown is historical and may not be indicative of future returns. Investment returns and principal value will vary, and shares may be worth more or less at redemption than at original purchase. Performance shown is as of date indicated, and current performance may be lower or higher than the performance data quoted. To obtain performance as of the most recent month end, please visit www.americanbeaconfunds.com or call 1-800-967-9009. Fund performance in the table above does not reflect the deduction of taxes a shareholder would pay on distributions or the redemption of shares. Please note that the recent growth rate in the stock market helped to produce short-term returns that are not typical and may not continue in the future.
 
2.   Fund performance represents the total returns achieved by the Investor Class up to 5/17/10, the inception date of the A Class, and the returns of the A Class since its inception. Expenses of the A Class are higher than those of the Investor Class. As a result, total returns shown may be higher than they would have been had the A Class been in existence since inception. Maximum sales charge is the maximum front-end sales charge (load) imposed on purchases (as a % of the offering price). A Class has a maximum sales charge of 5.75%
 
3.   The FTSE EPRA/NAREIT Global Real Estate Index is a market-capitalization weighted index of approximately 330 stocks designed to track listed real estate companies in North America, Europe and Asia-Pacific that meet the size, liquidity and revenue minimums of the index. The Lipper Global Real Estate Index tracks the results of the 10 largest mutual funds in the Lipper Global Real Estate category. Lipper is an independent mutual fund research and ranking service. One cannot directly invest in an index.
 
4.   The total annual Fund operating expense ratio set forth in the most recent Fund prospectus for the Y, Investor, and A Class shares was 1.27%, 1.55%, and 1.67%, respectively. The expense ratios above may vary from the expense ratios presented in other sections of this report that are based on expenses incurred during the period covered by this report.
 
5.   A portion of the fees charged to the Y and Investor Classes of the Fund were waived from their inception to March 1, 2010. Performance prior to waiving fees was lower than the actual returns shown.
     The Fund underperformed the Index by 1.31% over the six-month period due to stock selection and country/regional allocation.
     From a country/regional perspective, overweighting the United Kingdom (down 19.9%) and underweighting the United States (up 4.9%) led to the Fund’s relative underperformance, despite positive contribution from underweighting Continental Europe (down 15.7%). Security selections in the United Kingdom (Land Securities Group PLC – down 1.9%, Great Portland Estates PLC – up 3.5% during the period the securities were held by the Fund) added value, while selections in Singapore (Capitaland Ltd. – down 11.5%, Yanlord Land Group Ltd. – down 19.0%) detracted for the period.
     The Fund is designed with a total return perspective. It is expected to provide ongoing income through the payment of dividends while seeking to generate long-term capital appreciation through the underlying properties held.

3


 

Performance Overview
American Beacon Global Real Estate Fund
SM
June 30, 2010 (Unaudited)
Top Ten Holdings
         
    % of
    Net Assets
Simon Property Group, Inc.
    5.1 %
Westfield Group
    4.9 %
Mitsubishi Estate Co. Ltd.
    3.6 %
Unibail-Rodamco
    3.4 %
Vornado Realty Trust
    3.4 %
CapitaLand Ltd.
    3.2 %
Sun Hung Kai Properties Ltd.
    3.1 %
Stockland
    2.9 %
Digital Realty Trust, Inc.
    2.6 %
Public Storage, Inc.
    2.5 %
Regional Allocation
(PIE CHART)
         
    % of
    Equities
North America
    42.7 %
Pacific Rim
    41.2 %
Europe
    15.0 %
South America
    1.1 %

4


 

Fund Expenses
American Beacon Global Real Estate Fund
SM
June 30, 2010 (Unaudited)
Fund Expense Example
     As a shareholder of the Fund, you incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees, administrative service fees, and other Fund expenses. The examples below are intended to help you understand the ongoing cost (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
     The examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period from January 1, 2010 through June 30, 2010.
Actual Expenses
     The “Actual” line of the table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
     The “Hypothetical” line of the table provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed 5% per year rate of return before expenses (not the Fund’s actual return). You may compare the ongoing costs of investing in the Fund with other funds by contrasting this 5% hypothetical example and the 5% hypothetical examples that appear in the shareholder reports of the other funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.
     You should also be aware that the expenses shown in the table highlight only your ongoing costs and do not reflect any transaction costs charged by the Fund. Similarly, the expense examples for other funds do not reflect any transaction costs charged by those funds, such as sales charges (loads), redemption fees or exchange fees. Therefore, the “Hypothetical” line of the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. If you were subject to any transaction costs during the period, your costs would have been higher.
                         
    Beginning   Ending    
    Account   Account   Expenses Paid
    Value   Value   During Period
    1/1/10   6/30/10   1/1/10-6/30/10
Y Class*
                       
Actual
  $ 1,000.00     $ 944.62     $ 6.65  
Hypothetical
  $ 1,000.00     $ 1,017.95     $ 6.90  
(5% return before expenses)
                       
 
                       
Investor Class*
                       
Actual
  $ 1,000.00     $ 942.90     $ 8.00  
Hypothetical
  $ 1,000.00     $ 1,016.56     $ 8.30  
(5% return before expenses)
                       
 
                       
A Class**
                       
Actual
  $ 1,000.00     $ 958.54     $ 1.83  
Hypothetical
  $ 1,000.00     $ 1,004.26     $ 1.91  
(5% return before expenses)
                       
 
*   Expenses are equal to the Fund’s annualized expense ratios for the six-month period of 1.38% and 1.66% for the Y and Investor Classes respectively, multiplied by the average account value over the period, multiplied by the number derived by dividing the number of days in the most recent fiscal half-year (181) by days in the year (365) to reflect the half year period.
 
**   Beginning account value for A Class is the inception date of 5/17/10. Expenses are equal to the Class annualized expense ratio for the period of 1.55% multiplied by the average account value over the period, multiplied by the number derived by dividing the number of days in the period (45) by the days in the year (365).

5


 

American Beacon Global Real Estate Fund
Schedule of Investments
June 30, 2010 (unaudited)
                 
    Shares     Value  
    (dollars in thousands)  
AUSTRALIA - 12.22%
               
COMMON STOCKS - 12.22%
               
CFS Retail Property Trust*
    106,000     $ 168  
Dexus Property Group*
    464,583       299  
ING Industrial Fund*
    400,000       125  
ING Office Fund
    577,854       280  
Stockland*
    188,327       585  
Westfield Group*
    94,856       966  
 
             
Total Australia
            2,423  
 
             
 
               
BRAZIL - 1.12%
               
COMMON STOCKS - 1.12%
               
Gafisa S.A., 2501
    18,357       222  
 
             
 
               
CANADA - 4.60%
               
COMMON STOCKS - 4.60%
               
Allied Properties Real Estate Investment Trust*
    9,986       184  
Boardwalk Real Estate Investment Trust*
    4,574       172  
Canadian Apartment Properties Real Estate Investment Trust*
    11,456       161  
Canadian Real Estate Investment Trust*
    31       1  
First Capital Realty Inc.
    11,870       152  
RioCan Real Estate Investment Trust*
    13,552       242  
 
             
Total Canada
            912  
 
             
 
               
FRANCE - 3.42%
               
COMMON STOCKS - 3.42%
               
Fonciere des Regions expires 12/31/10‡ §
    3       0  
Unibail-Rodamco*
    4,180       678  
 
             
Total France
            678  
 
             
 
               
HONG KONG/CHINA - 13.36%
               
COMMON STOCKS - 13.36%
               
China Resources Land Ltd.
    174,470       328  
Hang Lung Properties Ltd.§
    126,132       486  
Henderson Land Development Co. Ltd.
    49,192       287  
Kerry Properties Ltd.
    90,000       386  
Link Real Estate Investment Trust*
    127,214       315  
Longfor Properties
    149,690       148  
Sino-Ocean Land Holdings Ltd.
    111,027       79  
Sun Hung Kai Properties Ltd.
    45,641       620  
 
             
Total Hong Kong/China
            2,649  
 
             
 
               
ITALY - 0.00%
               
COMMON STOCKS - 0.00%
               
Beni Stabili S.p.A, 2500§ **
    552       0  
 
             
 
               
JAPAN - 7.05%
               
COMMON STOCKS - 7.05%
               
Frontier Real Estate Investment Corp.* §
    3       21  
Japan Excellent, Inc.*
    5       24  
Japan Prime Realty Investment Corporation*
    98       206  
Mitsubishi Estate Co. Ltd.
    51,698       717  
Mori Trust Sogo REIT, Inc. * §
    12       89  
NTT Urban Development Corp.
    279       220  
Tokoyo Tatemono Co., Ltd.§
    39,000       120  
 
             
Total Japan
            1,397  
 
             
 
               
NETHERLANDS - 2.83%
               
COMMON STOCKS - 2.83%
               
Corio NV* §
    5,054       246  
Eurocommercial Properties NV*
    5,943       190  
ProLogis European Properties§
    24,938       125  
 
             
Total Netherlands
            561  
 
             
 
               
NORWAY - 0.66%
               
COMMON STOCKS - 0.66%
               
Norwegian Property ASA, 2500§
    100,350       131  
 
             
 
               
SINGAPORE - 8.25%
               
COMMON STOCKS - 8.25%
               
Ascendas Real Estate Investment Trust*
    140,000       181  
CapitaCommercial Trust*
    194,372       168  
CapitaLand Ltd.
    247,161       630  
CapitaMall Trust*
    206,726       269  
CapitaMalls Asia Ltd.
    75,008       112  
Overseas Union Enterprise Ltd.§
    65,000       125  
Yanlord Land Group Ltd.
    122,895       150  
 
             
Total Singapore
            1,635  
 
             
 
               
SWEDEN - 0.85%
               
COMMON STOCKS - 0.85%
               
Wihlborgs Fastigheter AB, 2500
    8,900       169  
 
             
 
               
UNITED KINGDOM - 7.12%
               
COMMON STOCKS - 7.12%
               
Big Yellow Group Plc*
    27,773       121  
British Land Co. Plc*
    75,889       485  
Derwent London Plc*
    13,560       252  
Great Portland Estates Plc*
    39,200       168  
Helical Bar Plc
    40,057       164  
St. Modwen Properties Plc§
    80,667       222  
 
             
Total United Kingdom
            1,412  
 
             
 
               
UNITED STATES - 37.22%
               
COMMON STOCKS - 37.22%
               
Alexandria Real Estate Equities, Inc.*
    5,542       351  
American Campus Communities, Inc.*
    13,341       365  
AvalonBay Communities, Inc.
    3,706       346  
BioMed Realty Trust, Inc.*
    12,598       203  
BRE Properties, Inc.*
    5,961       220  
Brookdale Senior Living, Inc.§
    8,288       124  
Chesapeake Lodging Trust§
    5,050       80  
Digital Realty Trust, Inc.*
    8,884       512  
Douglas Emmett, Inc.*
    12,823       182  
Duke Realty Corp.*
    21,895       249  
Equity Lifestyle Properties, Inc.*
    4,555       220  
Federal Realty Investment Trust*
    3,400       239  
HCP, Inc.*
    13,888       447  
Health Care Real Estate Investment Trust, Inc.*
    9,377       395  
Hersha Hospitality Trust*
    42,414       192  
Kite Realty Group Trust*
    26,948       113  
LTC Properties, Inc.*
    1,922       47  
Marriott International, Inc.
    4,495       135  
Pebblebrook Hotel Trust§
    5,521       104  
Public Storage, Inc.*
    5,745       505  
Simon Property Group, Inc.*
    12,523       1,012  
Tanger Factory Outlet Centers, Inc.*
    4,126       171  
UDR, Inc.*
    17,320       331  
See accompanying notes

6


 

American Beacon Global Real Estate Fund
Schedule of Investments
June 30, 2010 (Unaudited)
                 
    Shares     Value  
    (dollars in thousands)  
U-Store-It Trust*
    22,171     $ 165  
Vornado Realty Trust*
    9,214       672  
 
             
Total United States
            7,380  
 
             
 
               
SHORT-TERM INVESTMENTS- 0.50%
               
JPMorgan U.S. Government Money Market Fund
    99,784       100  
 
             
 
               
TOTAL INVESTMENTS - 99.20% (Cost $17,613)
            19,669  
OTHER ASSETS, NET OF LIABILITIES - 0.80%
            158  
TOTAL NET ASSETS - 100.00%
          $ 19,827  
 
             
 
*   REIT
 
  ADR — American Depository Receipt
 
  Warrant
 
§   Non-income producing security.
 
**   Private Placement
     Percentages are stated as a percent of net assets.
Sector Diversification
         
    Percent of
    Net Assets
Diversified
    33.5 %
Retail
    21.4 %
Office
    13.1 %
Residential
    10.9 %
Not Classified
    5.4 %
Healthcare
    4.5 %
Self Storage
    4.1 %
Specialty
    2.6 %
Industrial
    2.2 %
Industrial/Office Mixed
    1.3 %
Lodging/Resorts
    1.0 %
See accompanying notes

7


 

American Beacon Global Real Estate Fund
Statement of Assets and Liabilities
June 30, 2010 (Unaudited) (in thousands, except share and per share amounts)
         
Assets:
       
Investments in securities, at value A
  $ 19,669  
Foreign currency, at value B
    142  
Receivable for investments sold
    56  
Dividends and interest receivable
    67  
Receivable for fund shares sold
    5  
Receivable for tax reclaims
    4  
Prepaid expenses
    13  
 
     
Total assets
    19,956  
 
     
Liabilities:
       
Payable for investments purchased
    45  
Payable for fund shares redeemed
    20  
Management and investment advisory fees payable (Note 2)
    35  
Administrative service and service fees payable
    8  
Professional fees payable
    4  
Other liabilities
    17  
 
     
Total liabilities
    129  
 
     
Net assets
  $ 19,827  
 
     
 
       
Analysis of Net Assets:
       
Paid-in-capital
    34,005  
Undistributed net investment income (loss)
    (202 )
Accumulated net realized loss
    (16,031 )
Unrealized appreciation of investments, futures contracts, and foreign currency
    2,055  
 
     
Net assets
  $ 19,827  
 
     
 
       
Shares outstanding (no par value):
       
Y Class
    3,231,204  
 
     
Investor Class
    187,969  
 
     
A Class
    166  
 
     
 
       
Net asset value, offering and redemption price per share:
       
Y Class
  $ 5.80  
 
     
Investor Class
  $ 5.78  
 
     
 
       
Net asset value and redemption price per share:
       
A Class
  $ 5.78  
 
     
 
       
Maximum offering price per share:
       
A Class
  $ 6.13  
 
     
 
       
 
       
A Cost of investments in securities
  $ 17,613  
B Cost of foreign currency
  $ 142  
     
See accompanying notes

8


 

American Beacon Global Real Estate Fund
Statement of Operations
For the Six Months ended June 30, 2010 (Unaudited) (in thousands)
         
Investment Income:
       
Dividend income (net of foreign taxes)*
  $ 471  
 
     
Total investment income
    471  
 
     
Expenses:
       
Management and investment advisory fees (Note 2)
    81  
Administrative service fees (Note 2):
       
Y Class
    45  
Investor Class
    2  
Transfer agent fees:
       
Investor Class
    2  
Y Class
    27  
Custody and fund accounting fees
    8  
Professional fees
    27  
Registration fees and expenses
    10  
Service fees:
       
Investor Class (Note 2)
    2  
Y Class (Note 2)
    7  
Prospectus and shareholder reports
    4  
Trustee fees
    8  
Other expenses
    39  
 
     
Total expenses
    262  
 
     
Net fees waived and expenses reimbursed by Manager (Note 2)
    (101 )
 
     
Net expenses
    161  
 
     
Net investment income
    310  
 
     
 
       
Realized and unrealized gain (loss) on investments:
       
Net realized gain (loss) from:
       
Investments
    943  
Foreign currency transactions
    (69 )
Change in net unrealized appreciation or depreciation of:
       
Investments
    (2,181 )
 
     
Net loss on investments
    (1,307 )
 
     
Net decrease in net assets resulting from operations
  $ (997 )
 
     
 
       
* Foreign taxes
  $ 14  
See accompanying notes

9


 

American Beacon Global Real Estate Fund
Statement of Changes in Net Assets
(in thousands)
                 
    Six Months        
    Ended     Year Ended  
    June 30,     December  
    2010     31, 2009  
    (unaudited)          
Increase (Decrease) in Net Assets:
               
Operations:
               
Net investment income
  $ 310     $ 517  
Net realized gain (loss) on investments, futures contracts, and foreign currency transactions
    874       (11,884 )
Change in net unrealized appreciation or (depreciation) of investments, futures contracts, and foreign currency translations
    (2,181 )     17,570  
 
           
Net increase (decrease) in net assets resulting from operations
    (997 )     6,203  
 
           
 
               
Distributions to Shareholders:
               
Net investment income:
               
Y Class
          (842 )
Investor Class
          (100 )
Net realized gain on investments:
               
 
           
Net distributions to shareholders
          (942 )
 
           
 
               
Capital Share Transactions:
               
Proceeds from sales of shares
    24,518       3,294  
Reinvestment of dividends and distributions
          364  
Cost of shares redeemed
    (31,191 )     (9,556 )
Redemption fees
    1       12  
 
           
Net (decrease) in net assets from capital share transactions
    (6,672 )     (5,886 )
 
           
Net (decrease) in net assets
    (7,669 )     (625 )
 
           
Net Assets:
               
Beginning of period
    27,496       28,121  
 
           
End of Period *
  $ 19,827     $ 27,496  
 
           
 
       
* Includes undistributed net investment (loss) of
  $ (202 )   $ (582 )
 
           
See accompanying notes

10


 

American Beacon Global Real Estate Fund
Notes to Financial Statements
June 30, 2010 (Unaudited)
1. Organization and Significant Accounting Policies
     American Beacon Funds (the “Trust”) is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940 (the “Act”), as amended, as a diversified, open-end management investment company. These financial statements and notes to the financial statements relate to the American Beacon Global Real Estate Fund (the “Fund”), a series of the Trust.
     American Beacon Advisors, Inc. (the “Manager”) is a wholly-owned subsidiary of Lighthouse Holdings, Inc. and was organized in 1986 to provide business management, advisory, administrative and asset management consulting services to the Trust and other investors.
  Reorganization
     The Fund is the accounting and performance successor to the CNL Global Real Estate Fund (the “Predecessor Fund”). On March 1, 2010, the Fund acquired all the net assets of the Predecessor Fund pursuant to a plan of reorganization, in exchange for Y and Investor Class shares of the Fund. The acquisition was accounted for as a tax-free exchange of 3,881,253 Y Class shares and 193,564 Investor Class shares of the Fund for the net assets of the Predecessor Fund, which amounted to $24,238,869 including $3,297,338 of unrealized appreciation, after the close of business on February 28, 2010. Accounting and performance history of the Institutional and A Shares of the Predecessor Fund were redesignated as that of the Y and Investor Class Shares of the Fund, respectively.
     For financial reporting purposes, assets received and shares issued by the Fund were recorded at fair value; however, the cost basis of the investments received from the Predecessor Fund was carried forward to align ongoing reporting of the Fund’s realized and unrealized gains and losses with amounts distributable to shareholders for tax purposes.
     The Predecessor Fund had a distribution plan pursuant to Rule 12b-1 for the Class A shares. Under this plan, the Fund collected 0.25% of the average daily net assets for distribution or service activity conducted on behalf of the Fund. Class A shares were converted to Investor Shares on March 1, and this distribution plan was terminated. Prior to the reorganization the distributor for the Fund received $0 in sales commissions from the sale of Class A shares.
  Class Disclosure
     May 17, 2010 is the inception date of the A Class.
     The Fund has multiple classes of shares designed to meet the needs of different groups of investors. The following table sets forth the differences amongst the classes:
     
Class:   Offered to:
Y Class
  Investors making an initial investment of $100,000
 
   
Investor Class
  General public and investors investing through an intermediary
 
   
A Class
  Investors investing through an intermediary with applicable front-end sales charges
     Administrative service fees, service fees and distribution fees vary amongst the classes as described more fully in footnote 2.
     Investment income, net capital gains (losses) and all expenses incurred by the Fund are allocated based on the relative net assets of each class, except for service fees and certain other fees and expenses related solely to one class of shares.

11


 

American Beacon Global Real Estate Fund
Notes to Financial Statements
June 30, 2010 (Unaudited)
  Security Valuation
     Investments are valued at the close of the New York Stock Exchange (the “Exchange”), normally 4 p.m. ET, each day that the Exchange is open for business. Equity securities for which market quotations are available are valued at the last sale price of official closing price (closing bid price or last evaluated quote if no sale has occurred) on the primary market or exchange on which they trade.
     Debt securities (other than short-term securities) normally are valued on the basis of prices provided by an independent pricing service and may take into account appropriate factors such as institution-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. The prices of debt securities may be determined using quotes obtained from brokers.
     Investments in mutual funds are valued at the closing net asset value per share of the mutual fund on the day of valuation. Investment grade short-term obligations with 60 days or less to maturity are valued using the amortized cost method, which approximates market value.
     Securities for which market prices are not readily available or are not reflective of the fair value of the security, as determined by the Manager, will be priced at fair value following procedures approved by the Board of Trustees (the “Board”).
     Most foreign markets close before the Exchange. Developments that could affect the values of securities that occur between the close of a foreign market and the close of the Exchange normally will not be reflected in security valuations. If such developments are so significant that they will in the judgment of the pricing committee of the Fund, clearly and materially affect the value of securities, the foreign market closing prices may be adjusted to reflect the fair value of the securities as of the close of the Exchange, as determined in good faith and pursuant to procedures approved by the Board. Adjustments to the closing prices to reflect fair value on affected foreign securities may be provided by an independent pricing service. Of the total investments at June 30, 2010, $11,055,571 or 55.8% was valued at fair value based on procedures established by the Board.
  Valuation Inputs
     Various inputs may be used to determine the value of the Fund’s investments. These inputs are summarized in three broad levels for financial statement purposes. The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
Level 1 — Quoted prices in active markets for identical securities.
Level 2 — Prices determined using other significant observable inputs. These may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, and others.
Level 3 — Prices determined using significant unobservable inputs. Unobservable inputs reflect the Fund’s own assumptions about the factors market participants would use in pricing an investment, and would be based on the best information available.
     The Fund’s investments are summarized by level based on the inputs used to determine their values. As of June 30, 2010, the Fund’s investments were classified as follows (in thousands):
                                 
    Level 1     Level 2     Level 3     Total  
Asset Description:
Common Stock
  $ 8,513     $ 11,056     $     $ 19,569  
Short-Term Investments
    100                   100  
 
                       
Total Investments
  $ 8,613     $ 11,056     $     $ 19,669  

12


 

American Beacon Global Real Estate Fund
Notes to Financial Statements
June 30, 2010 (Unaudited)
  Security Transactions and Investment Income
     Security transactions are recorded on the trade date of the security purchase or sale. The Fund may purchase securities with delivery or payment to occur at a later date. At the time the Fund enters into a commitment to purchase a security, the transaction is recorded, and the value of the security is reflected in the net asset value. The value of the security may vary with market fluctuations.
     Dividend income, net of foreign taxes, is recorded on the ex-dividend date except certain dividends from foreign securities which are recorded as soon as the information is available to the Fund. Interest income is earned from settlement date, recorded on the accrual basis, and adjusted, if necessary, for accretion of discounts and amortization of premiums. For financial and tax reporting purposes, realized gains and losses are determined on the basis of specific lot identification.
  Currency Translations
     All assets and liabilities initially expressed in foreign currency values are converted into U.S. dollar values at the mean of the bid and ask prices of such currencies against U.S. dollars as last quoted by a recognized dealer. Income, expenses and purchases and sales of investments are translated into U.S. dollars at the rate of exchange prevailing on the respective dates of such transactions. The effect of changes in foreign currency exchange rates on investments is separately identified from the fluctuations arising from changes in market values of securities held and is reported with all other foreign currency gains and losses in the Fund’s Statement of Operations.
  Forward Foreign Currency Exchange Contracts
     The Fund may enter into forward foreign currency contracts to hedge the exchange rate risk on investment transactions or to hedge the value of Fund securities denominated in foreign currencies. Forward foreign currency contracts are valued at the forward exchange rate prevailing on the day of valuation. The Fund bears the market risk that arises from changes in foreign exchange rates, and accordingly, the unrealized gain (loss) on these contracts is reflected in the accompanying financial statements. The Fund also bears the credit risk if the counterparty fails to perform under the contract.
  Dividends to Shareholders
     Dividends from net investment income of the Fund normally will be declared and paid at least quarterly. Distributions, if any, of net realized capital gains are generally paid at least annually and recorded on the ex-dividend date.
  Use of Estimates
     The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimated.
  Redemption Fees
     The Fund imposes a 2% redemption fee on shares held for less than 90 days. The fee is deducted from the redemption proceeds and is intended to offset the trading costs, market impact and other costs associated with short-term trading activities in the Fund. The “first-in, first-out” method is used to determine the holding period. The fee is allocated to all classes of the Fund pro-rata based on the respective net assets. Prior to March 1, 2010 the Fund had a redemption fee of 1% for shares redeemed within 75 days of purchase.

13


 

American Beacon Global Real Estate Fund
Notes to Financial Statements
June 30, 2010 (Unaudited)
  Other
     Under the Trust’s organizational documents, its officers and directors are indemnified against certain liability arising out of the performance of their duties to the Trust. In the normal course of business, the Trust enters into contracts that provide indemnification to the other party or parties against potential costs or liabilities. The Trust’s maximum exposure under these arrangements is dependent on claims that may be made in the future and, therefore, cannot be estimated. The Trust has had no prior claims or losses pursuant to any such agreement.
2. Transactions with Affiliates
  Management Agreement
     Prior to March 1, 2010, the manager of the Predecessor Fund received an annual rate of 1.00% of the average daily net assets. Since March 1, the Trust and the Manager are parties to a Management Agreement that obligates the Manager to provide or oversee the provision of all investment advisory and portfolio management services. As compensation for performing the duties required under the Management Agreement, the Manager receives from the Fund an annualized fee equal to 0.05% of the average daily net assets plus amounts paid by the Manager to the investment advisor hired by the Manager to direct investment activities of the Fund. Management fees paid including amounts paid by the Predecessor Fund during the six months ended June 30, 2010 were as follows: (in thousands)
                         
            Amounts paid to   Net Amounts Retained
Management Fee Rate   Management Fee   Investment Advisors   by Manager
0.35% - 1.00%
  $ 81     $ 77     $ 4  
  Administrative Services Agreement
     As of March 1, the Manager and the Trust entered into an Administrative Services Agreement which obligates the Manager to provide or oversee administrative services to the Fund. As compensation for performing the duties required under the Administrative Services Agreement, the Manager receives an annualized fee of 0.30% of the average daily net assets of the Y and Investor Classes and 0.40% of the average daily net assets of the A Class of the Fund.
  Distribution Plans
     The Fund, except for the A Class of the Fund, has adopted a “defensive” Distribution Plan (the “Plan”) in accordance with Rule 12b-1 under the Act, pursuant to which no fees may be charged to the Fund for distribution purposes. However, the Plan authorizes the management and administrative service fees received by the Manager and the investment advisors hired by the Manager to be used for distribution purposes. Under this Plan, the Fund does not intend to compensate the Manager or any other party, either directly or indirectly, for the distribution of Fund shares.
     A separate Distribution Plan (the “Distribution Plan”) has been adopted pursuant to Rule 12b-1 under the Act for the A Class of the Fund. Under the Distribution Plan, as compensation for distribution assistance, the Manager receives an annual fee of 0.25% of the average daily net assets of the A Class. The fee will be payable without regard to whether the amount of the fee is more or less than the actual expenses incurred in a particular month by the Manager for distribution assistance.
  Sales Commissions
     The Fund’s distributor, Foreside Fund Services, LLC (“Foreside”), may receive a portion of A Class sales charges from broker dealers and it may be used to offset expenses that the Manager pays to Foreside. Since

14


 

American Beacon Global Real Estate Fund
Notes to Financial Statements
June 30, 2010 (Unaudited)
May 17th (the inception date of the A Class) there has been $0 in sales commissions received by Foreside from the sale of Class A shares.
  Services Plan
     The Manager and the Trust entered into a Service Plan which obligates the Manager to oversee additional shareholder servicing of the Y, Investor, and A Classes of the Fund. As compensation for performing the duties required under the Service Plan, the Manager receives an annualized fee of 0.10% of the average daily net assets of the Y Class, 0.15% of the average daily net assets of the A Class and up to 0.375% of the average daily net assets of the Investor Class of the Fund.
  Investment in Affiliated Funds
     The Fund may invest in the American Beacon Money Market Select Fund and the American Beacon US Government Money Market Select Fund (collectively the “Select Funds”). The Fund and the Select Funds have the same investment advisor and, therefore, are considered to be affiliated. The Manager serves as investment advisor to the Select Funds and receives from the Select Funds an annualized fee equal to 0.09% of the Select Funds’ average daily net assets. During the six months ended June 30, 2010, the Fund did not invest in the Select Funds.
  Interfund Lending Program
     Pursuant to an exemptive order by the Securities Exchange Commission (the “SEC”), the Fund, along with other registered investment companies having management contracts with the Manager, may participate in an interfund lending program as a borrower. This program provides an alternative credit facility allowing the Fund to borrow from other participating Funds. For the six months ended June 30, 2010, the Fund borrowed from the USG Select Fund on average $788,854, for 3 days at 0.85% with interest charges of $54.
  Reimbursement of Expenses
     Prior to March 1, the Predecessor Fund contractually agreed to reimburse operating expenses to the extent that total annual fund expenses exceeded 1.80% for Class A (now Investor Class) and 1.55% for Institutional Class (now Class Y). At the time of reorganization the Predecessor Fund had reimbursed the Fund $5,332 and $95,230 for the A and Institutional Classes, respectively.
     After the reorganization the Manager agreed to reimburse operating expenses to the extent that total annual fund operating expenses exceed the Fund’s expense caps. For the period ended June 30, 2010, the Predecessor Fund and the Manager reimbursed the following:
                                 
                            Total reimbursed for
    Expense Cap   Reimbursed   Expense Cap   the period ended
Class:   1/1/10-2/28/10   prior to 3/1/10   3/1/10-6/30/10   6/30/10
Y
    1.55 %   $ 95,230       1.27 %   $ 95,230  
Investor
    1.80 %     5,332       1.55 %     5,417  
A
    N/A       N/A       1.55 %*      
 
*   From May 17th, the inception date of Class A.
     The Fund has adopted an Expense Reimbursement Plan whereby the Manager may seek repayment of fees waived or expenses reimbursed for a period of up to three years. However, reimbursement will occur only if the Class’s average net assets have grown or expenses have declined sufficiently to allow reimbursement without causing its expense ratio to exceed the previously agreed upon contractual expense limit. The Fund has not recorded a liability for potential reimbursements.

15


 

American Beacon Global Real Estate Fund
Notes to Financial Statements
June 30, 2010 (Unaudited)
3. Federal Income and Excise Taxes
     It is the policy of the Fund to comply with the requirements of Subchapter M of the Internal Revenue Code and to distribute substantially all net investment income as well as any net realized capital gains on the sale of investments. Therefore, no federal income or excise tax provision is required.
     The Fund does not have any unrecognized tax benefits in the accompanying financial statements. Each of the tax years in the four year period ended December 31, 2009, remains subject to examination by the Internal Revenue Service. If applicable, the Fund recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in “Other expenses” on the Statement of Operations.
     Dividends are categorized in accordance with income tax regulations which may treat certain transactions differently than U.S. generally accepted accounting principles. Accordingly, the character of distributions and composition of net assets for tax purposes may differ from those reflected in the accompanying financial statements.
     The Fund may be subject to taxes imposed by countries in which it invests. Such taxes are generally based on returns on income earned or gains realized or repatriated. Taxes are accrued and applied to net investment income, net realized capital gains and net unrealized appreciation, as applicable, as the income is earned or capital gains are recorded.
     The tax character of distributions paid during the six months ended June 30, 2010 and the fiscal year ended December 31, 2009 were as follows (in thousands):
                 
    Six Months        
    Ended     Year Ended  
    June 30,     December 31,  
    2010     2009  
    (Unaudited)          
Distributions paid from:
Ordinary income*
  $     $ 942  
Tax return of capital
           
 
           
Total taxable distributions
  $     $ 942  
 
           
 
*   For tax purposes, short-term capital gains distributions are considered ordinary income distributions.
     As of June 30, 2010, the components of distributable earnings on a tax basis were as follows (in thousands):
         
Cost basis of investments for federal income tax purposes
  $ 20,237  
 
Unrealized appreciation
    1,550  
Unrealized depreciation
    (2,118 )
 
     
 
       
Net unrealized appreciation/(depreciation)
    (568 )
 
       
Undistributed ordinary income
    459  
Undistributed long-term gain/(loss)
    (14,069 )
 
     
 
Distributable earnings
  $ (14,178 )
 
     
     Financial reporting records are adjusted for permanent book/tax differences to reflect tax character. Financial records are not adjusted for temporary differences. The temporary differences between financial reporting and tax-basis reporting of unrealized appreciation/(depreciation) are attributable primarily to the tax deferral of losses from wash.
     Due to inherent differences in the recognition of income, expenses and realized gains/(losses) under U.S. generally accepted accounting principles and federal income tax regulations, permanent differences between book and tax reporting have been identified and appropriately reclassified on the Statement of Assets and Liabilities.

16


 

American Beacon Global Real Estate Fund
Notes to Financial Statements
June 30, 2010 (Unaudited)
     Accordingly, the following amounts represent current year permanent differences derived from reclassifications of income from real estate. Investment securities, foreign currency, investments in passive foreign investment companies and partnership transactions that have been reclassified as of June 30, 2010 (in thousands):
         
Paid in capital
  $ (7 )
Undistributed net investment income
    70  
Accumulated net realized gain (loss)
    (64 )
Unrealized appreciation (depreciation) of investments and foreign currency
    1  
     At June 30, 2010, the capital loss carry forward positions for federal income tax purposes were $948 and $13,121 expiring in 2016 and 2017, respectively (in thousands). The Fund utilized $222 (in thousands) of net capital loss carryovers for the six months ended June 30, 2010.
4. Investment Transactions
     Purchases and proceeds from sales of investments for the six months ended June 30, 2010, excluding short-term investments, were $6,463,148 and $12,736,953, respectively.
5. Capital Share Transactions
     The tables below summarize the activity in capital shares (dollars and shares in thousands):
Six Months Ended June 30, 2010
                                                 
    Y Class     Investor Class     A Class  
    Shares     Amount     Shares     Amount     Shares     Amount  
Shares sold
    3,898     $ 23,195       222     $ 1,322           $ 1  
Reinvestment of dividends
                0       0              
Shares redeemed
    (4,595 )     (27,617 )*     (585 )     (3,573 )*            
 
                                   
Net increase (decrease) in shares outstanding
    (697 )   $ (4,422 )     (363 )   $ (2,251 )         $ 1  
 
                                   
Year Ended December 31, 2009
                                 
    Y Class     Investor Class  
    Shares     Amount     Shares     Amount  
Shares sold
    346     $ 1,482       376     $ 1,812  
Reinvestment of dividends
    49       266       17       98  
Shares redeemed
    (2,290 )     (8,941 )     (111 )     (603 )
 
                       
Net increase (decrease) in shares outstanding
    (1,896 )   $ (7,193 )     282     $ 1,307  
 
                       
 
*   Net of Redemption Fees
6. Subsequent Events
     Management has evaluated the possibility of subsequent events existing in the Fund’s financial statements. Management has determined that there are no material events that would require disclosure in the Fund’s financial statements.

17


 

American Beacon Global Real Estate Fund
Financial Highlights
(For a share outstanding throughout the period)
                                                                         
    Y ClassE     Investor ClassE     A Class  
    Six                             Six                              
    Months                     October     Months                     October        
    Ended     Year Ended     26 to     Ended     Year Ended     26 to     May 17 to  
    June 30,     December 31,     December     June 30,     December 31,     December     June 30,  
    2010     2009     2008     31, 2007     2010     2009     2008     31, 2007     2010  
    (unaudited)                             (unaudited)                             (unaudited)  
Net asset value, beginning of period
  $ 6.14     $ 4.62     $ 8.64     $ 10.00     $ 6.13     $ 4.61     $ 8.64     $ 10.00     $ 6 .03  
 
                                                     
Income from investment operations:
                                                                       
Net investment income (loss)
    0.05       0 .11 C     0 .13 C     0 .04 C     (0.14 )     0 .09 C     0 .10 C     0 .07 C     0 .01  
Net gains (losses) on securities (both realized and unrealized)
    (0.39 )     1.62       (4.06 )     (1.31 )     (0.21 )     1.63       (4.06 )     (1.35 )     (0 .26 )
 
                                                     
Total income (loss) from investment operations
    (0.34 )     1.73       (3.93 )     (1.27 )     (0.35 )     1.72       (3.96 )     (1.28 )     (0 .25 )
 
                                                     
Less distributions:
                                                                       
Dividends from net investment income
          (0.21 )     (0.09 )     (0.09 )           (0.20 )     (0.07 )     (0.08 )      
Distributions from net realized gains on securities
                                                     
Tax return of capital
                                                     
 
                                                     
Total distributions
          (0.21 )     (0.09 )     (0.09 )           (0.20 )     (0.07 )     (0.08 )      
 
                                                     
Net asset value, end of period
  $ 5.80     $ 6.14     $ 4.62     $ 8.64     $ 5.78     $ 6.13     $ 4.61     $ 8.64     $ 5 .78  
 
                                                     
Total return
    (5.54 )%A     38.03 %     (45.66 )%     (12.73 )%A     (5 .71 )%A     37.77 %     (45.91 )%     (12 .77 )%A     (4 .15 )%A
 
                                                     
Ratios and supplemental data:
                                                                       
Net assets, end of period (in thousands)
  $ 18,739     $ 24,119     $ 26,880     $ 4,517     $ 1,087     $ 3,378     $ 1,241     $ 61     $ 1  
Ratios to average net assets (annualized):
                                                                       
 
                                                                       
Expenses, after expense reimbursements (recoupments)
    1.38 %     1.55 %     1.55 %     1 .55 %B     1.66 %     1.80 %     1.80 %     1 .80 %B     1 .55 %B
 
                                                                       
Expenses, before expense reimbursements (recoupments)
    2.26 %     4.05 %     5.49 %     28 .94 %B     2.54 %     4.24 %     4.99 %     29 .19 %B     1 .62 %B
 
                                                                       
Net investment income, after expense reimbursements (recoupements)
    2.71 %     2.19 %     2.09 %     2 .45 %B     2.33 %     1.72 %     1.69 %     4 .30 %B     2 .02 %B
 
                                                                       
Net investment income (loss), before expense reimbursements (recoupments)
    1.83 %     (0.31 )%     (1.85 )%     (24 .94 )%B     1.44 %     (0.72 )%     (1.50 )%     (23 .09 )%B     1 .94 %B
 
Portfolio turnover rate
    28 % A     62 %     25 %     6 % A     28 % A     62 %     25 %     6 % A     28 % A,D
 
A   Not annualized.
 
B   Annualized.
 
C   Per share numbers have been calculated using average shares method.
 
D   Portfolio turnover rate is for the period from January 1, 2010 to June 30, 2010.
 
E   Prior to the reorganization on March 1, 2010 the Y Class was known as the Institutional Class and the Investor Class was known as the A Class.

18


 

Disclosure Regarding the Board of Trustees’ Approval of the Management Agreement and Investment Advisory Agreements of the Fund
(Unaudited)
     At the November 18, 2009 Board meeting, the Board of Trustees (“Board”) considered the approval of the Investment Management Agreement (“Management Agreement”) between American Beacon Advisors, Inc. (“Manager”) and American Beacon Funds (“Trust”) on behalf of the American Beacon Global Real Estate Fund (“Fund”), pending the reorganization of the CNL Global Real Estate Fund (“CNL Fund”) into a new series of the Trust (“Reorganization”). Prior to the meeting, the Board requested and reviewed information provided by the Manager in connection with its consideration of the Management Agreement and the Investment Committee of the Board met with representatives of the Manager. The Board considered, among other materials, responses by the Manager to inquiries requesting:
    a description of all material aspects of the Reorganization;
 
    a description of the advisory and related services proposed to be provided to the Fund;
 
    identification of the professional personnel to perform services for the Fund and their education, experience and responsibilities;
 
    a comparison of the performance of the CNL Fund with its industry peer group;
 
    an analysis of the proposed advisory fee, a comparison to the fees charged to other comparable clients and an explanation of any differences between the fee schedules; and
 
    any other information the Manager believed would be material to the Board’s consideration of the Agreement.
     The Board did not identify any particular information that was most relevant to its consideration to approve the Management Agreement, and each Trustee may have afforded different weight to the various factors. The Trustees posed questions to various management personnel of the Manager regarding certain key aspects of the materials submitted in support of the approval. Legal counsel to the independent Trustees provided the Board with a memorandum regarding its responsibilities pertaining to the approval of the Management Agreement. The memorandum explained the regulatory requirements surrounding the Trustees’ process for evaluating investment advisors and the terms of the contracts. Based on its evaluation, the Board unanimously concluded that the terms of the Management Agreement were reasonable and fair and that the approval of the Management Agreement was in the best interests of the Fund and its shareholders. Provided below is an overview of the primary factors the Trustees considered in approving the Management Agreement.
     Nature, extent and quality of the services to be provided by the Manager. The Board considered the background and experience of key investment personnel who will have primary responsibility for the day-to-day management of the Fund and the Manager’s representation that it was adequately staffed to service the Fund. In addition, the Board noted that the current sub-advisor of the CNL Fund, CB Richard Ellis Global Real Estate Securities, LLC (“CBRE”), will provide subadvisory services to the Fund after the Reorganization, ensuring continuity of management. The Board also considered the Manager’s disciplined investment approach and goal to provide consistent above average long-term performance at a low cost on behalf of the existing series of the Trust and the Manager’s record in building improved compliance, control and credit functions that reduce risks for all series of the Trust. Based on the foregoing information, the Board concluded that the nature, extent and quality of the management to be provided by the Manager were appropriate for the Fund and, thus, determined to approve the Management Agreement for the Fund.
     Performance. The Board evaluated the investment performance of the CNL Fund and CBRE, the current sub-advisor to the CNL Fund. The Board evaluated the one-year performance of the CNL Fund relative to its industry peer group within the Lipper Global Real Estate category. In particular, the Board noted that the CNL Fund outperformed its peer group for the one-year period ended September 30, 2009. Thus, the Board concluded that it was satisfied with the historical investment performance record of CBRE.
     Comparisons of the amounts to be paid to the Manager under the Management Agreement and other Global Real Estate Funds in the relevant Morningstar category. In evaluating the Management Agreement, the Board reviewed the Manager’s proposed combined management and administrative services fee schedule (“Management Fee”). The Board considered a comparison of the Management Fee to be charged by the Manager under the Management Agreement versus the fees charged by comparable funds in the Global Real Estate Funds Morningstar category. The Board noted that the Management Fee is lower than the average fee

19


 

Disclosure Regarding the Board of Trustees’ Approval of the Management Agreement and Investment Advisory Agreements of the Fund
(Unaudited)
rate charged by comparable funds in the Fund’s Morningstar peer group. This information assisted the Board in concluding that the Management Fee appeared to be within a reasonable range for the services to be provided to the Fund, in light of all the factors considered.
     Costs of the services to be provided and profits to be realized by the Managers from the relationship with the Fund. In analyzing the cost of services and profitability of the Manager, the Board considered the revenues to be earned and the expenses to be incurred by the Manager in connection with the services to be provided to the Fund. Specifically, the Board considered that the Manager will pay the amount due to CBRE out of its management fees. The Board also considered that the Manager will receive service and administrative fees to compensate the Manager for providing administrative services to the Fund and to compensate third-party administrators and broker-dealers for services to Fund shareholders. Based on the foregoing information, the Board concluded that the profitability levels were reasonable in light of the services to be performed by the Manager.
     Extent to which economies of scale would be realized as the Fund grows and whether fee levels reflect these economies of scale for the benefit of Fund investors. The Board considered that the fees to be paid to CBRE are passed through the Manager by the Fund and that the Manager would not benefit economically from the proposed fee agreement. The Board also considered the Manager’s representation that it does not expect achieving economies of scale in the near term. Thus, the Board concluded that economies of scale were not a material factor in approving the Management Agreement.
     Benefits to be derived by the Manager from the relationship with the Fund. The Board considered the Manager’s representation that it does not anticipate any material “fall-out” benefits resulting from its proposed relationship with the Fund. After consideration of this information, the Board concluded that the potential benefits that may accrue to the Manager by virtue of its relationship with the Fund were not a material factor in approving the Management Agreement.
     Board’s Conclusion. Based on the various considerations described above, the Board, including a majority of Trustees who are not “interested persons” of the Fund, the Manager or CBRE, as that term is defined in the 1940 Act, concluded that the proposed management fee is reasonable and that the approval of the Management Agreement is in the best interests of the Fund and its shareholders and, as a result, approved the Management Agreement.
Disclosure Regarding the Board of Trustees’ Approval of Appointment of CB Richard Ellis Global Real Estate Securities, LLC
     At the November 18, 2009 Board meeting, the Board approved CB Richard Ellis Global Real Estate Securities, LLC (“CBRE”) as an investment sub-advisor to the American Beacon Global Real Estate Securities Fund (“Fund”), a new series of the Trust, following the reorganization of the CNL Global Real Estate Fund (“CNL Fund”) into the Fund. Prior to the meeting, the Board requested and reviewed information provided by CBRE in connection with its consideration of CBRE as an investment advisor to the Fund and the Investment Committee of the Board met with representatives from CBRE. The Board considered, among other materials, responses by CBRE to inquiries requesting:
    a description of the advisory and related services proposed to be provided to the Fund;
 
    identification of the professional personnel to perform services for the Fund and their education, experience and responsibilities;
 
    a comparison of investment performance of accounts managed by CBRE that have investment objectives and policies comparable to the Fund with the performance of applicable peer groups and indices;
 
    an analysis of the proposed subadvisory fee;
 
    a description of the portfolio managers’ compensation, including any incentive arrangements, and if compensation is tied to performance, a description of the oversight mechanisms to prevent a manager with lagging performance from taking undue risks;

20


 

Disclosure Regarding the Board of Trustees’ Approval of the Management Agreement and Investment Advisory Agreements of the Fund
(Unaudited)
    a description of CBRE’s compliance program and matters, as well as its trading activities;
 
    a discussion of CBRE’s financial condition and the potential impact of recent market events on services to be performed for the Fund; and
 
    any other information CBRE believed would be material to the Board’s consideration of the Agreement.
     The Board considered multiple factors when evaluating CBRE and in approving the Investment Advisory Agreement between American Beacon Advisors, Inc. (“Manager”) and CBRE on behalf of the Fund (“Agreement”), including CBRE’s experience in managing portfolios containing global real estate securities, its reputation and financial condition, the past performance of the CNL Fund, its overall capabilities to perform the services under the Agreement and its willingness to perform those services for the Fund. A discussion of the factors relating to the Board’s selection of CBRE and approval of the Agreement follows.
     Nature, extent and quality of the services to be provided by CBRE. The Board considered CBRE’s investment philosophy and investment process, as well as the background and experience of its portfolio managers. The Board also considered CBRE’s investment resources, infrastructure and the adequacy of its compliance program. In addition, the Board took into consideration the Manager’s recommendation on behalf of CBRE. CBRE also represented that it was adequately staffed and resourced to effectively service the Fund and that it plans to hire additional staff as necessary. Based on this information, the Board concluded that the nature, extent and quality of the advisory services to be provided by CBRE were appropriate for the Fund in light of its investment objective, and, thus, supported a decision to approve the Agreement.
     Performance of CBRE. The Board evaluated CBRE’s historical investment performance record in managing portfolios containing real estate securities. In particular, the Board evaluated the performance history of a composite of accounts managed by CBRE relative to the FTSE EPRA/NAREIT Global Developed Real Estate Index (“Index”) for the one- and three-year periods ended September 30, 2009. The Board noted that the composite slightly underperformed the Index for the relevant time periods. The Board also noted that the CNL Fund, which is currently subadvised by CBRE, outperformed its relevant peer group for the one-year period ended September 30, 2009. Thus, the Board concluded that the historical investment performance record of CBRE supported approval of the Agreement.
     Comparisons of the amounts to be paid under the Agreement with those under contracts between CBRE and its other clients. In evaluating the Agreement, the Board reviewed the proposed advisory fee rate to be paid by the Manager for services performed on behalf of the Fund, noting that the Manager was still seeking to negotiate a slightly lower fee rate with CBRE.
     The Board also noted that CBRE’s investment advisory fee rate under the Agreement will be paid by the Manager out of its management fee, which was lower than the industry average fee rate for accounts with a similar investment mandate. Consequently, the Board concluded that the fee rate to be paid to CBRE by the Manager was not a material factor in approving the Agreement.
     Costs of the services to be provided and profits to be realized by CBRE and its affiliates from the relationship with the Fund. The Board considered that the fees to be paid to CBRE are passed through the Manager by the Fund and that the Manager would not benefit economically from the proposed fee agreement. Based on the foregoing information, the Board concluded that economies of scale were not a material factor in approving the Agreement.
     Extent to which economies of scale would be realized as the Fund grows and whether fee levels reflect these economies of scale for the benefit of Fund investors. The Board considered that the fees to be paid to CBRE are passed through the Manager by the Fund and that the Manager would not benefit economically from the proposed fee agreement. The Board also considered CBRE’s representation that due to its increasing client base, it is able to leverage its platform to provide economies of scale to the benefit of its clients. Thus, the Board concluded that the Fund will receive economies of scale from its relationship with CBRE.

21


 

Disclosure Regarding the Board of Trustees’ Approval of the Management Agreement and Investment Advisory Agreements of the Fund
(Unaudited)
     Benefits to be derived by CBRE from the relationship with the Fund. The Board considered the “fall-out” or ancillary benefits that may accrue to CBRE as a result of the advisory relationship with the Fund. In this regard, the Board considered CBRE’s representation that it does not anticipate accruing any “fall-out” benefits as a result of its relationship with the Fund. After consideration of this information, the Board concluded that the potential benefits that may accrue to CBRE by virtue of its relationship with the Fund were not a material factor in approving the Agreement.
     Board’s Conclusion. The Board did not identify any single factor as being of paramount importance, and different Trustees may have given different weight to different factors. However, based on the various considerations described above, the Board, including a majority of Trustees who are not “interested persons” of the Fund, the Manager or CBRE, as that term is defined in the 1940 Act, concluded that the proposed investment advisory fee is reasonable and that the approval of the Agreement is in the best interests of the Fund and its shareholders and, as a result, approved the Agreement.

22


 

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23


 

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24


 

(LOGO)
Delivery of Documents
To reduce expenses, your financial institution may mail only one copy of the Summary Prospectus, Annual Report and Semi-Annual Report to those addresses shared by two or more accounts. If you wish to receive individual copies of these documents, please contact your financial institution. Delivery of individual copies will commence thirty days after receiving your request.
If you invest in the Fund through a financial institution, you may be able to receive the Fund’s regulatory mailings, such as the Summary Prospectus, Annual Report and Semi-Annual Report, by e-mail. If you are interested in this option, please go to www.icsdelivery.com and search for your financial institution’s name or contact your financial institution directly.
To obtain more information about the Fund:
     
(LOGO)
  (LOGO)
By E-mail:
  On the Internet:
american_beacon.funds@ambeacon.com
  Visit our website at www.americanbeaconfunds.com
 
   
(LOGO)
  (LOGO)
By Telephone:
  By Mail:
Call (800) 658-5811
  American Beacon Funds
 
  P.O. Box 219643
 
  Kansas City, MO 64121-9643
     
Availability of Quarterly Portfolio Schedules
  Availability of Proxy Voting Policy and Records
 
   
In addition to the Schedule of Investments provided in each semi-annual and annual report, the Fund files a complete schedule of its portfolio holdings with the Securities and Exchange Commission (“SEC”) on Form N-Q as of the first and third fiscal quarters. The Fund’s Forms N-Q are available on the SEC’s website at www.sec.gov. The Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room, 450 Fifth Street, NW, Washington, DC 20549. Information regarding the operation of the SEC’s Public Reference Room may be obtained by calling 1-800-SEC-0330. A complete schedule of the Fund’s portfolio holdings is also available on the Funds’ website (www.americanbeaconfunds.com) approximately twenty days after the end of each month.
  A description of the policies and procedures the Fund uses to determine how to vote proxies relating to portfolio securities is available in the Fund’s Statement of Additional Information, is available free of charge on the Fund’s website (www.americanbeaconfunds.com) and by calling 1-800-967-9009 or by accessing the SEC’s website at www.sec.gov. The Fund’s proxy voting record for the most recent year ended June 30 is filed annually with the SEC on Form N-PX. The Fund’s Forms N-PX are available on the SEC’s website at www.sec.gov. The Fund’s proxy voting record may also be obtained by calling 1-800-967-9009.
Fund Service Providers:
             
Custodian
  Transfer Agent   Independent Registered   Distributor
State Street Bank and
  Boston Financial Data   Public Accounting   Foreside Fund Services,
Trust
  Services   Firm   LLC
Boston, Massachusetts
  Kansas City, Missouri   Ernst & Young LLP   Portland, Maine
 
      Dallas, Texas    
This report is prepared for shareholders of the American Beacon Funds and may be distributed to others only if preceded or accompanied by a current prospectus or summary prospectus.
American Beacon Funds and American Beacon Global Real Estate Fund are service marks of American Beacon Advisors, Inc
SAR 6/10

 


 

ITEM 2. CODE OF ETHICS.
The Trust did not amend the code of ethics that applies to its principal executive and financial officers (the “Code”) nor did it grant any waivers to the provisions of the Code during the period covered by the shareholder report presented in Item 1.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
The schedules of investments for each series of the Trust are included in the shareholder report presented in Item 1.
ITEM 7.   DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not Applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9.   PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS.
Not Applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Trust has made no material changes to the procedures by which shareholders may recommend nominees to the Trust’s Board of Trustees since the Trust last disclosed such procedures in Schedule 14A.
ITEM 11. CONTROLS AND PROCEDURES.
  (a)   Based upon an evaluation within 90 days of the filing date of this report, the principal executive and financial officers concluded that the disclosure controls and procedures of the Trust are effective.
 
  (b)   There were no changes in the Trust’s internal control over financial reporting during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Trust’s internal control over financial reporting.
ITEM 12. EXHIBITS.
  (a)(1)   Not Applicable.
 
  (a)(2)   A separate certification for each principal executive officer and principal financial officer of the Trust as required by Rule 30a-2(a) under the Investment Company Act of 1940 is attached hereto as EX-99.CERT.
 
  (a)(3)   Not Applicable.
 
  (b)   The certifications required by Rule 30a-2(b) under the Investment Company Act of 1940 are attached hereto as EX-99.906CERT.

 


 

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant): American Beacon Funds
         
By
  /s/ Gene L. Needles, Jr.
 
Gene L. Needles, Jr.
   
 
  President    
 
       
Date: September 2, 2010    
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
         
By
  /s/ Gene L. Needles, Jr.
 
Gene L. Needles, Jr.
   
 
  President    
 
       
Date: September 2, 2010    
 
       
By
  /s/ Melinda G. Heika
 
Melinda G. Heika
   
 
  Treasurer    
 
       
Date: September 2, 2010    

 

EX-99.CERT 2 d75832exv99wcert.htm EX-99.CERT exv99wcert
For period ended 06/30/2010
Registrant Name: American Beacon Funds
File Number: 811-4984
EXHIBIT 99.CERT
I, Melinda G. Heika, certify that:
1. I have reviewed this report on Form N-CSR of American Beacon Funds;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
     
Date: September 2, 2010  /s/ Melinda G. Heika    
  Melinda G. Heika   
  Treasurer
American Beacon Funds 
 
 

 


 

I, Gene L. Needles, Jr., certify that:
1. I have reviewed this report on Form N-CSR of American Beacon Funds;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
     
Date: September 2, 2010  /s/ Gene L. Needles, Jr.    
  Gene L. Needles, Jr.   
  President
American Beacon Funds 
 
 

 

EX-99.906CERT 3 d75832exv99w906cert.htm EX-99.906CERT exv99w906cert
For period ended 06/30/2010
Registrant Name: American Beacon Funds
File Number: 811-04984
EX-99.906CERT
Gene L. Needles, Jr. and Melinda G. Heika, respectively, the President and Treasurer of the American Beacon Funds (the “Registrant”), each certify to the best of his or her knowledge and belief that:
1. the Registrant’s report on Form N-CSR for the period ended June 30, 2010 (the “Form N-CSR”) fully complies with the requirements of Section 15(d) of the Securities Exchange Act of 1934, as amended; and
2. the information contained in such Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
     
/s/ Gene L. Needles, Jr.
  /s/ Melinda G. Heika
 
   
Gene L. Needles, Jr.
  Melinda G. Heika
President
  Treasurer
American Beacon Funds
  American Beacon Funds
Date: September 2, 2010
A signed original of this written statement required by Section 906 has been provided to American Beacon Funds and will be retained by American Beacon Funds and furnished to the Securities and Exchange Commission or its staff upon request.

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