Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-09102
iShares, Inc.
(Exact name of registrant as specified in charter)
c/o: State Street Bank and Trust Company
200 Clarendon Street, Boston, MA 02116-5021
(Address of principal executive offices) (Zip code)
The Corporation Trust Incorporated
351 West Camden Street, Baltimore, MD 21201
(Name and address of agent for service)
Registrant’s telephone number, including area code: (415) 670-2000
Date of fiscal year end: April 30, 2012
Date of reporting period: April 30, 2012
Table of Contents
| Item 1. Reports to Stockholders.
|
April 30, 2012 |
2012 Annual Report
iShares, Inc.
iShares Asia/Pacific Dividend 30 Index Fund | DVYA | NYSE Arca
iShares Emerging Markets Dividend Index Fund | DVYE | NYSE Arca
Table of Contents
| 5 | ||||
| 9 | ||||
| 10 | ||||
| 10 | ||||
| 11 | ||||
| 14 | ||||
| 17 | ||||
| 19 | ||||
| 26 | ||||
| 27 | ||||
| Board Review and Approval of Investment Advisory Contract (Unaudited) |
28 | |||
| 31 | ||||
| 32 |
Table of Contents
Management’s Discussion of Fund Performance
iSHARES® ASIA/PACIFIC DIVIDEND 30 INDEX FUND
Performance as of April 30, 2012
| Cumulative Total Returns | ||||||||||
| Inception to 4/30/12 | ||||||||||
| NAV | MARKET | INDEX | ||||||||
| 3.32% | 3.60% | 3.37% | ||||||||
“Cumulative Total Returns” represent the total change in value of an investment over the period indicated and are calculated from an inception date of 2/23/12.
The Fund’s per share net asset value or “NAV” is the value of one share of the Fund as calculated in accordance with the standard formula for valuing mutual fund shares. The NAV return is based on the NAV of the Fund and the market return is based on the market price per share of the Fund. The price used to calculate market return (“Market Price”) is determined by using the midpoint between the highest bid and the lowest offer on the primary stock exchange on which shares of the Fund are listed for trading, as of the time that the Fund’s NAV is calculated. Since shares of the Fund did not trade in the secondary market until after the Fund’s inception, for the period from inception to the first day of secondary market trading in shares of the Fund (2/24/12), the NAV of the Fund is used as a proxy for the Market Price to calculate market returns. Market and NAV returns assume that dividends and capital gain distributions have been reinvested in the Fund at Market Price and NAV, respectively.
An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, an index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The performance shown above assumes reinvestment of all dividends and capital gain distributions and does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption or sale of fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund’s past performance is no guarantee of future results.
For the fiscal period ended 4/30/2012, the Fund did not have six months of performance and therefore line graphs are not presented.
The iShares Asia/Pacific Dividend 30 Index Fund (the “Fund”) seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones Asia/Pacific Select Dividend 30 IndexSM (the “Index”). The Index measures the stock performance of high dividend paying companies in Australia, Hong Kong, Japan, New Zealand and Singapore. The Fund invests in a representative sample of securities included in the Index that collectively has an investment profile similar to the Index. Due to the use of representative sampling, the Fund may or may not hold all of the securities that are included in the Index. For the period from February 23, 2012 (inception date of the Fund) through April 30, 2012 (the “reporting period”), the total return for the Fund was 3.32%, net of fees, while the total return for the Index was 3.37%.
| MANAGEMENT’S DISCUSSIONS OF FUND PERFORMANCE |
5 |
Table of Contents
Management’s Discussion of Fund Performance (Continued)
iSHARES® ASIA/PACIFIC DIVIDEND 30 INDEX FUND
Stock markets in the Asia/Pacific region declined modestly for the reporting period. One contributing factor was a general slowdown in economic activity in the region, especially in the emerging economies. Declining exports to these emerging markets weighed on stock markets in developed Asian countries. Another negative factor was the ongoing sovereign debt crisis in Europe. As the reporting period began, efforts by the European Central Bank to support the troubled banking sector and inject liquidity into the debt markets sparked optimism that a positive conclusion to the crisis would be achieved. Toward the end of the reporting period, however, worsening problems in Greece cast doubts on the probability of a near-term solution, putting downward pressure on equity markets worldwide.
On a country-by-country basis, stocks in New Zealand generated the best returns in the Asia/Pacific region, advancing for the reporting period as economic growth remained steady. Equity markets in Hong Kong and China declined as economic growth, although robust in absolute terms, continued to weaken from previous levels. Japan, a major exporter to Europe, also saw its stock market fall during the reporting period.
As represented by the Index, dividend-paying stocks in the Asia/Pacific region posted positive returns, outperforming the region’s broad stock indexes for the reporting period. As interest rates remained low, investors were attracted to higher-yielding alternatives, including stocks with high dividend yields. Furthermore, dividend-paying stocks are typically companies with healthy cash flows and solid balance sheets, and stocks with these characteristics also fared well during the reporting period.
| 6 | 2012 iSHARES ANNUAL REPORT TO SHAREHOLDERS |
Table of Contents
Management’s Discussion of Fund Performance
iSHARES® EMERGING MARKETS DIVIDEND INDEX FUND
Performance as of April 30, 2012
| Cumulative Total Returns | ||||||||||
| Inception to 4/30/12 | ||||||||||
| NAV | MARKET | INDEX | ||||||||
| (2.27)% | (1.67)% | (2.30)% | ||||||||
“Cumulative Total Returns” represent the total change in value of an investment over the period indicated and are calculated from an inception date of 2/23/12.
The Fund’s per share net asset value or “NAV” is the value of one share of the Fund as calculated in accordance with the standard formula for valuing mutual fund shares. The NAV return is based on the NAV of the Fund and the market return is based on the market price per share of the Fund. The price used to calculate market return (“Market Price”) is determined by using the midpoint between the highest bid and the lowest offer on the primary stock exchange on which shares of the Fund are listed for trading, as of the time that the Fund’s NAV is calculated. Since shares of the Fund did not trade in the secondary market until after the Fund’s inception, for the period from inception to the first day of secondary market trading in shares of the Fund (2/24/12), the NAV of the Fund is used as a proxy for the Market Price to calculate market returns. Market and NAV returns assume that dividends and capital gain distributions have been reinvested in the Fund at Market Price and NAV, respectively.
An index is a statistical composite that tracks a specified financial market or sector. Unlike the Fund, an index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by the Fund. These expenses negatively impact the performance of the Fund. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. The performance shown above assumes reinvestment of all dividends and capital gain distributions and does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption or sale of fund shares. The investment return and principal value of shares of the Fund will vary with changes in market conditions. Shares of the Fund may be worth more or less than their original cost when they are redeemed or sold in the market. The Fund’s past performance is no guarantee of future results.
For the fiscal period ended 4/30/2012, the Fund did not have six months of performance and therefore line graphs are not presented.
The iShares Emerging Markets Dividend Index Fund (the “Fund”) seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones Emerging Markets Select Dividend IndexSM (the “Index”). The Index measures the performance of a group of equity securities issued by companies in emerging market countries that have provided relatively high dividend yields on a consistent basis over time. The Fund invests in a representative sample of securities included in the Index that collectively has an investment profile similar to the Index. Due to the use of representative sampling, the Fund may or may not hold all of the securities that are included in the Index. For the period from February 23, 2012 (inception date of the Fund) through April 30, 2012 (the “reporting period”), the total return for the Fund was (2.27)%, net of fees, while the total return for the Index was (2.30)%.
| MANAGEMENT’S DISCUSSIONS OF FUND PERFORMANCE |
7 |
Table of Contents
Management’s Discussion of Fund Performance (Continued)
iSHARES® EMERGING MARKETS DIVIDEND INDEX FUND
Emerging markets stocks declined modestly for the reporting period, reflecting a slowdown in growth rates in many emerging economies. Larger countries such as China, India, and Brazil — among the most rapidly growing economies in the world — have seen their economic growth rates decline over the past year. The key factor behind this slowdown has been the sovereign debt crisis in Europe, which has had a negative impact on the global banking sector and put downward pressure on economic activity on the Continent. The resulting decline in exports to Europe weighed on economic activity in emerging markets and contributed to the negative returns for emerging markets stocks during the reporting period.
On a regional basis, equity markets in Latin America fell the most, led by a sharp decline in the Brazilian stock market. Given their proximity to the Eurozone, Eastern European markets also struggled, most notably Poland and the Czech Republic. Emerging markets in the Asia/Pacific region held up best as positive returns in Thailand and Indonesia helped offset declines in China and Taiwan.
As represented by the Index, dividend-paying stocks in emerging markets posted negative returns but outperformed the broad emerging markets stock indexes for the reporting period. As interest rates remained low worldwide, investors were attracted to higher-yielding alternatives, including stocks with high dividend yields. Furthermore, dividend-paying stocks are typically companies with healthy cash flows and solid balance sheets, and emerging markets stocks with these characteristics also fared well during the reporting period.
| 8 | 2012 iSHARES ANNUAL REPORT TO SHAREHOLDERS |
Table of Contents
Shareholder Expenses (Unaudited)
iSHARES®, INC.
As a shareholder of a Fund, you incur two types of costs: (1) transaction costs, including brokerage commissions on purchases and sales of Fund shares and (2) ongoing costs, including management fees and other Fund expenses. The following Example is intended to help you understand your ongoing costs (in dollars and cents) of investing in a Fund and to compare these costs with the ongoing costs of investing in other funds.
The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period from November 1, 2011 (or commencement of operations, as applicable) to April 30, 2012.
ACTUAL EXPENSES
The first line under each Fund in the table below 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 for your Fund under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line under each Fund in the table below provides information about hypothetical account values and hypothetical expenses based on each Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. 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 may use this information to compare the ongoing costs of investing in your Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as brokerage commissions paid on purchases and sales of Fund shares. Therefore, the second line under each Fund in the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| iShares Index Fund |
Beginning Account Value a (11/1/11) |
Ending Account Value |
Annualized Expense Ratio |
Expenses Paid (11/1/11 to 4/30/12) |
||||||||||||
| Asia/Pacific Dividend 30 |
||||||||||||||||
| Actual |
$ | 1,000.00 | $ | 1,033.20 | 0.49 | % | $ | 0.91 | ||||||||
| Hypothetical (5% return before expenses) |
1,000.00 | 1,022.40 | 0.49 | 2.46 | ||||||||||||
| Emerging Markets Dividend |
||||||||||||||||
| Actual |
1,000.00 | 977.30 | 0.49 | 0.89 | ||||||||||||
| Hypothetical (5% return before expenses) |
1,000.00 | 1,022.40 | 0.49 | 2.46 | ||||||||||||
| a | The beginning of the period (commencement of operations) is February 23, 2012. |
| b | Actual expenses for the Funds are calculated using each Fund’s annualized expense ratio (as disclosed in the table), multiplied by the average account value for the period, multiplied by the number of days in the period (67 days) and divided by the number of days in the year (366 days). Hypothetical expenses for the Funds, which are based on a hypothetical half year, are calculated using each Fund’s annualized expense ratio (as disclosed in the table), multiplied by the average account value for the period, multiplied by the number of days in the period (182 days) and divided by the number of days in the year (366 days). |
| SHAREHOLDER EXPENSES |
9 |
Table of Contents
iSHARES® ASIA/PACIFIC DIVIDEND 30 INDEX FUND
April 30, 2012
| 10 | 2012 iSHARES ANNUAL REPORT TO SHAREHOLDERS |
Table of Contents
iSHARES® EMERGING MARKETS DIVIDEND INDEX FUND
April 30, 2012
| SCHEDULES OF INVESTMENTS |
11 |
Table of Contents
Schedule of Investments (Continued)
iSHARES® EMERGING MARKETS DIVIDEND INDEX FUND
April 30, 2012
| 12 | 2012 iSHARES ANNUAL REPORT TO SHAREHOLDERS |
Table of Contents
Schedule of Investments (Continued)
iSHARES® EMERGING MARKETS DIVIDEND INDEX FUND
April 30, 2012
| SCHEDULES OF INVESTMENTS |
13 |
Table of Contents
Statements of Assets and Liabilities
iSHARES®, INC.
April 30, 2012
| iShares Asia/Pacific Dividend 30 |
iShares Emerging Markets Dividend Index Fund |
|||||||
| ASSETS |
||||||||
| Investments, at cost: |
||||||||
| Unaffiliated |
$ | 12,930,877 | $ | 16,390,809 | ||||
| Affiliated (Note 2) |
6,489 | 9,466 | ||||||
|
|
|
|
|
|||||
| Total cost of investments |
$ | 12,937,366 | $ | 16,400,275 | ||||
|
|
|
|
|
|||||
| Investments in securities, at fair value (including securities on loana) (Note 1): |
||||||||
| Unaffiliated |
$ | 13,136,019 | $ | 15,866,378 | ||||
| Affiliated (Note 2) |
6,489 | 9,466 | ||||||
|
|
|
|
|
|||||
| Total fair value of investments |
13,142,508 | 15,875,844 | ||||||
| Foreign currencies, at valueb |
20,111 | 32,040 | ||||||
| Receivables: |
||||||||
| Dividends and interest |
34,319 | 68,053 | ||||||
| Capital shares sold |
15,136 | — | ||||||
|
|
|
|
|
|||||
| Total Assets |
13,212,074 | 15,975,937 | ||||||
|
|
|
|
|
|||||
| LIABILITIES |
||||||||
| Payables: |
||||||||
| Investment securities purchased |
16,605 | — | ||||||
| Collateral for securities on loan (Note 5) |
5,500 | — | ||||||
| Investment advisory fees (Note 2) |
4,166 | 5,760 | ||||||
|
|
|
|
|
|||||
| Total Liabilities |
26,271 | 5,760 | ||||||
|
|
|
|
|
|||||
| NET ASSETS |
$ | 13,185,803 | $ | 15,970,177 | ||||
|
|
|
|
|
|||||
| Net assets consist of: |
||||||||
| Paid-in capital |
$ | 12,991,238 | $ | 16,402,791 | ||||
| Undistributed (distributions in excess of) net investment income |
(6,607 | ) | 128,137 | |||||
| Accumulated net realized loss |
(4,646 | ) | (34,982 | ) | ||||
| Net unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies |
205,818 | (525,769 | ) | |||||
|
|
|
|
|
|||||
| NET ASSETS |
$ | 13,185,803 | $ | 15,970,177 | ||||
|
|
|
|
|
|||||
| Shares outstandingc |
250,000 | 300,000 | ||||||
|
|
|
|
|
|||||
| Net asset value per share |
$ | 52.74 | $ | 53.23 | ||||
|
|
|
|
|
|||||
| a | Securities on loan with values of $5,156 and $ —, respectively. See Note 5. |
| b | Cost of foreign currencies: $20,107 and $32,015, respectively. |
| c | $0.001 par value, number of shares authorized: 500 million and 500 million, respectively. |
See notes to financial statements.
| 14 | 2012 iSHARES ANNUAL REPORT TO SHAREHOLDERS |
Table of Contents
Statements of Operations
iSHARES®, INC.
Period ended April 30, 2012
| iShares Asia/Pacific Dividend 30 Index Funda |
iShares Emerging Markets Dividend Index Funda |
|||||||
| NET INVESTMENT INCOME |
||||||||
| Dividends — unaffiliatedb |
$ | 111,336 | $ | 174,755 | ||||
|
|
|
|
|
|||||
| Total investment income |
111,336 | 174,755 | ||||||
|
|
|
|
|
|||||
| EXPENSES |
||||||||
| Investment advisory fees (Note 2) |
8,726 | 14,853 | ||||||
|
|
|
|
|
|||||
| Total expenses |
8,726 | 14,853 | ||||||
| Less investment advisory fees waived (Note 2) |
— | (4,150 | ) | |||||
|
|
|
|
|
|||||
| Net expenses |
8,726 | 10,703 | ||||||
|
|
|
|
|
|||||
| Net investment income |
102,610 | 164,052 | ||||||
|
|
|
|
|
|||||
| NET REALIZED AND UNREALIZED GAIN (LOSS) |
||||||||
| Net realized gain (loss) from: |
||||||||
| Investments — unaffiliated |
(3,302 | ) | (34,982 | ) | ||||
| Foreign currency transactions |
(266 | ) | (7,419 | ) | ||||
|
|
|
|
|
|||||
| Net realized loss |
(3,568 | ) | (42,401 | ) | ||||
|
|
|
|
|
|||||
| Net change in unrealized appreciation/depreciation on: |
||||||||
| Investments |
205,142 | (524,431 | ) | |||||
| Translation of assets and liabilities in foreign currencies |
676 | (1,338 | ) | |||||
|
|
|
|
|
|||||
| Net change in unrealized appreciation/depreciation |
205,818 | (525,769 | ) | |||||
|
|
|
|
|
|||||
| Net realized and unrealized gain (loss) |
202,250 | (568,170 | ) | |||||
|
|
|
|
|
|||||
| NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS |
$ | 304,860 | $ | (404,118 | ) | |||
|
|
|
|
|
|||||
| a | For the period from February 23, 2012 (commencement of operations) to April 30, 2012. |
| b | Net of foreign withholding tax of $6,915 and $12,330, respectively. |
See notes to financial statements.
| FINANCIAL STATEMENTS |
15 |
Table of Contents
Statements of Changes in Net Assets
iSHARES®, INC.
| iShares Asia/Pacific Dividend 30 Index Fund |
iShares Emerging Markets Dividend Index Fund |
|||||||
| Period from to April 30, 2012 |
Period from to April 30, 2012 |
|||||||
| INCREASE (DECREASE) IN NET ASSETS |
||||||||
| OPERATIONS: |
||||||||
| Net investment income |
$ | 102,610 | $ | 164,052 | ||||
| Net realized loss |
(3,568 | ) | (42,401 | ) | ||||
| Net change in unrealized appreciation/depreciation |
205,818 | (525,769 | ) | |||||
|
|
|
|
|
|||||
| Net increase (decrease) in net assets resulting from operations |
304,860 | (404,118 | ) | |||||
|
|
|
|
|
|||||
| DISTRIBUTIONS TO SHAREHOLDERS: |
||||||||
| From net investment income |
$ | (108,951 | ) | $ | (28,496 | ) | ||
| From net realized gain |
(1,344 | ) | — | |||||
| From return of capital |
(3,727 | ) | — | |||||
|
|
|
|
|
|||||
| Total distributions to shareholders |
(114,022 | ) | (28,496 | ) | ||||
|
|
|
|
|
|||||
| CAPITAL SHARE TRANSACTIONS: |
||||||||
| Proceeds from shares sold |
12,994,965 | 16,402,791 | ||||||
|
|
|
|
|
|||||
| Net increase in net assets from capital share transactions |
12,994,965 | 16,402,791 | ||||||
|
|
|
|
|
|||||
| INCREASE IN NET ASSETS |
13,185,803 | 15,970,177 | ||||||
| NET ASSETS |
||||||||
| Beginning of period |
— | — | ||||||
|
|
|
|
|
|||||
| End of period |
$ | 13,185,803 | $ | 15,970,177 | ||||
|
|
|
|
|
|||||
| Undistributed (distributions in excess of) net investment income included in net assets at end of period |
$ | (6,607 | ) | $ | 128,137 | |||
|
|
|
|
|
|||||
| SHARES ISSUED |
||||||||
| Shares sold |
250,000 | 300,000 | ||||||
|
|
|
|
|
|||||
| Net increase in shares outstanding |
250,000 | 300,000 | ||||||
|
|
|
|
|
|||||
| a | Commencement of operations. |
See notes to financial statements.
| 16 | 2012 iSHARES ANNUAL REPORT TO SHAREHOLDERS |
Table of Contents
iSHARES®, INC.
(For a share outstanding throughout the period)
| iShares Asia/Pacific Dividend 30 Index Fund | ||||
| Period from to Apr. 30, 2012 |
||||
| Net asset value, beginning of period |
$ | 51.62 | ||
|
|
|
|||
| Income from investment operations: |
||||
| Net investment incomeb |
0.55 | |||
| Net realized and unrealized gainc |
1.14 | |||
|
|
|
|||
| Total from investment operations |
1.69 | |||
|
|
|
|||
| Less distributions from: |
||||
| Net investment income |
(0.54 | ) | ||
| Net realized gain |
(0.01 | ) | ||
| Return of capital |
(0.02 | ) | ||
|
|
|
|||
| Total distributions |
(0.57 | ) | ||
|
|
|
|||
| Net asset value, end of period |
$ | 52.74 | ||
|
|
|
|||
| Total return |
3.32 | %d | ||
|
|
|
|||
| Ratios/Supplemental data: |
||||
| Net assets, end of period (000s) |
$ | 13,186 | ||
| Ratio of expenses to average net assetse |
0.49 | % | ||
| Ratio of net investment income to average net assetse |
5.76 | % | ||
| Portfolio turnover ratef |
1 | % | ||
| a | Commencement of operations. |
| b | Based on average shares outstanding throughout the period. |
| c | The amount reported for a share outstanding may not accord with the change in aggregate gains and losses in securities for the fiscal period due to the timing of capital share transactions in relation to the fluctuating market values of the Fund’s underlying securities. |
| d | Not annualized. |
| e | Annualized for periods of less than one year. |
| f | Portfolio turnover rate excludes portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. |
See notes to financial statements.
| FINANCIAL STATEMENTS |
17 |
Table of Contents
Financial Highlights (Continued)
iSHARES®, INC.
(For a share outstanding throughout the period)
| iShares Emerging Markets Dividend Index Fund | ||||
| Period from to Apr. 30, 2012 |
||||
| Net asset value, beginning of period |
$ | 54.61 | ||
|
|
|
|||
| Income from investment operations: |
||||
| Net investment incomeb |
0.74 | |||
| Net realized and unrealized lossc |
(1.98 | ) | ||
|
|
|
|||
| Total from investment operations |
(1.24 | ) | ||
|
|
|
|||
| Less distributions from: |
||||
| Net investment income |
(0.14 | ) | ||
|
|
|
|||
| Total distributions |
(0.14 | ) | ||
|
|
|
|||
| Net asset value, end of period |
$ | 53.23 | ||
|
|
|
|||
| Total return |
(2.27 | )%d | ||
|
|
|
|||
| Ratios/Supplemental data: |
||||
| Net assets, end of period (000s) |
$ | 15,970 | ||
| Ratio of expenses to average net assetse |
0.49 | % | ||
| Ratio of expenses to average net assets prior to waived feese |
0.68 | % | ||
| Ratio of net investment income to average net assetse |
7.51 | % | ||
| Portfolio turnover ratef |
2 | % | ||
| a | Commencement of operations. |
| b | Based on average shares outstanding throughout the period. |
| c | The amount reported for a share outstanding may not accord with the change in aggregate gains and losses in securities for the fiscal period due to the timing of capital share transactions in relation to the fluctuating market values of the Fund’s underlying securities. |
| d | Not annualized. |
| e | Annualized for periods of less than one year. |
| f | Portfolio turnover rate excludes portfolio securities received or delivered in Creation Units but includes portfolio transactions that are executed as a result of the Fund processing capital share transactions in Creation Units partially for cash in U.S. dollars. See Note 4. |
See notes to financial statements.
| 18 | 2012 iSHARES ANNUAL REPORT TO SHAREHOLDERS |
Table of Contents
iSHARES®, INC.
iShares, Inc. (the “Company”) is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. The Company was incorporated under the laws of the State of Maryland on September 1, 1994 pursuant to amended and restated Articles of Incorporation.
These financial statements relate only to the following funds (each, a “Fund,” and collectively, the “Funds”):
| iShares Index Fund | Diversification Classification | |
| Asia/Pacific Dividend 30a |
Non-diversified | |
| Emerging Markets Dividenda |
Non-diversified |
| a | The Fund commenced operations on February 23, 2012. |
Non-diversified funds generally hold securities of fewer issuers than diversified funds and may be more susceptible to the risks associated with these particular issuers, or to a single economic, political or regulatory occurrence affecting these issuers.
The investment objective of each Fund is to seek investment results that correspond generally to the price and yield performance, before fees and expenses, of its underlying index. The investment adviser uses a “passive” or index approach to try to achieve each Fund’s investment objective.
Each Fund may invest in securities of non-U.S. issuers that may trade in non-U.S. markets. This may involve certain considerations and risks not typically associated with securities of U.S. issuers. Such risks include, but are not limited to: generally less liquid and less efficient securities markets; generally greater price volatility; exchange rate fluctuations and exchange controls; imposition of restrictions on the expatriation of funds or other assets of the Funds; less publicly available information about issuers; the imposition of withholding or other taxes; higher transaction and custody costs; settlement delays and risk of loss attendant in settlement procedures; difficulties in enforcing contractual obligations; less regulation of securities markets; different accounting, disclosure and reporting requirements; more substantial governmental involvement in the economy; higher inflation rates; greater social, economic and political uncertainties; the risk of nationalization or expropriation of assets and the risk of war.
Pursuant to the Company’s organizational documents, the Funds’ officers and directors are indemnified against certain liabilities that may arise out of the performance of their duties to the Funds. Additionally, in the normal course of business, the Funds enter into contracts with service providers that contain general indemnification clauses. The Funds’ maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Funds that have not yet occurred.
| 1. | SIGNIFICANT ACCOUNTING POLICIES |
The following significant accounting policies are consistently followed by the Funds in the preparation of their financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
| NOTES TO FINANCIAL STATEMENTS |
19 |
Table of Contents
Notes to Financial Statements (Continued)
iSHARES®, INC.
SECURITY VALUATION
U.S. GAAP defines fair value as the price a fund would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. The securities and other assets of each Fund are valued at fair value pursuant to the policies and procedures approved by the Board of Directors of the Company (the “Board”).
| • | Equity investments traded on a recognized securities exchange are valued at that day’s last reported trade price or the official closing price, as applicable, on the exchange where the stock is primarily traded. Equity investments traded on a recognized exchange for which there were no sales on that day are valued at the last traded price. |
| • | Open-end U.S. mutual funds are valued at that day’s published net asset value (NAV). |
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 fair value of such investment or if a price is not available, the investment will be valued based upon other available factors in accordance with policies approved by the Board. Such valuations are reported to the Board.
Fair value pricing could result in a difference between the prices used to calculate a Fund’s net asset value and the prices used by the Fund’s underlying index, which in turn could result in a difference between the Fund’s performance and the performance of the Fund’s underlying index.
Various inputs are used in determining the fair value of financial instruments. Inputs may be based on independent market data (“observable inputs”) or they may be internally developed (“unobservable inputs”). These inputs are categorized into a disclosure hierarchy consisting of three broad levels for financial reporting purposes. The level of a value determined for a financial instrument within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are as follows:
| • | Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities; |
| • | Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not considered to be active, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means; and |
| • | Level 3 — Unobservable inputs for the asset or liability, including the Funds’ assumptions used in determining the fair value of investments. |
Changes in valuation techniques may result in transfers in or out of an assigned level within the disclosure hierarchy. The categorization of a value determined for a financial instrument within the hierarchy is based upon the pricing transparency of the instrument and does not necessarily correspond to the Funds’ perceived risk of that instrument.
As of April 30, 2012, the value of each of the Funds’ investments was classified as Level 1. The breakdown of each Fund’s investments into major categories is disclosed in its respective Schedule of Investments.
| 20 | 2012 iSHARES ANNUAL REPORT TO SHAREHOLDERS |
Table of Contents
Notes to Financial Statements (Continued)
iSHARES®, INC.
SECURITY TRANSACTIONS AND INCOME RECOGNITION
Security transactions are accounted for on trade date. Dividend income is recognized on the ex-dividend date, net of any foreign taxes withheld at source. Any taxes withheld that are reclaimable from foreign tax authorities as of April 30, 2012 are reflected in dividends receivable. Non-cash dividends received in the form of stock in an elective dividend, if any, are recorded as dividend income at fair value. Distributions received by the Funds may include a return of capital that is estimated by management. Such amounts are recorded as a reduction of the cost of investments or reclassified to capital gains. Interest income is accrued daily. Realized gains and losses on investment transactions are determined using the specific identification method.
FOREIGN CURRENCY TRANSLATION
The accounting records of the Funds are maintained in U.S. dollars. Foreign currencies, as well as investment securities and other assets and liabilities denominated in foreign currencies, are translated into U.S. dollars using exchange rates deemed appropriate by the investment adviser. Purchases and sales of securities, income receipts and expense payments are translated into U.S. dollars on the respective dates of such transactions.
Each Fund does not isolate the effect of fluctuations in foreign exchange rates from the effect of fluctuations in the market prices of securities. Such fluctuations are reflected by the Funds as a component of realized and unrealized gains and losses from investments for financial reporting purposes.
FOREIGN TAXES
The Funds may be subject to foreign taxes (a portion of which may be reclaimable) on income, capital gains on investments, certain foreign currency transactions or other corporate events. All foreign taxes are recorded in accordance with the applicable foreign tax regulations and rates that exist in the foreign jurisdictions in which the Funds invest. These foreign taxes, if any, are paid by the Funds and are reflected in their Statements of Operations as follows: foreign taxes withheld at source are presented as a reduction of income, foreign taxes on securities lending income are presented as a reduction of securities lending income, foreign taxes on capital gains from sales of investments and foreign currency transactions are included in their respective net realized gain (loss) categories, and foreign taxes on other corporate events are reflected in “Other foreign taxes.” Foreign taxes payable as of April 30, 2012, if any, are disclosed in the Funds’ Statements of Assets and Liabilities.
DISTRIBUTIONS TO SHAREHOLDERS
Dividends and distributions paid by each Fund are recorded on the ex-dividend dates. Distributions are determined on a tax basis and may differ from net investment income and net realized capital gains for financial reporting purposes. Dividends and distributions are paid in U.S. dollars and cannot be automatically reinvested in additional shares of the Funds.
FEDERAL INCOME TAXES
Each Fund is treated as an entity separate from the Company’s other funds for federal income tax purposes. It is the policy of each Fund to qualify as a regulated investment company by complying with the provisions applicable to regulated investment companies, as defined under Subchapter M of the Internal Revenue Code of 1986, as amended, and to annually distribute substantially all of its ordinary income and any net capital gains (taking into account any capital loss carryforwards) sufficient to relieve it from all, or substantially all, federal income and excise taxes. Accordingly, no provision for federal income taxes is required.
| NOTES TO FINANCIAL STATEMENTS |
21 |
Table of Contents
Notes to Financial Statements (Continued)
iSHARES®, INC.
| 2. | INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES |
Pursuant to an Investment Advisory Agreement with the Company, BlackRock Fund Advisors (“BFA”) manages the investment of each Fund’s assets. BFA is a California corporation indirectly owned by BlackRock, Inc. (“BlackRock”). Under the Investment Advisory Agreement, BFA is responsible for substantially all expenses of the Funds, except interest, taxes, brokerage commissions and other expenses connected with the execution of portfolio transactions, distribution fees, litigation expenses and any extraordinary expenses.
For its investment advisory services to each Fund, BFA is entitled to an annual investment advisory fee based on the average daily net assets of each Fund as follows:
| iShares Index Fund | Investment Advisory Fee |
|||
| Asia/Pacific Dividend 30 |
0.49 | % | ||
| Emerging Markets Dividend |
0.68 | |||
BFA has contractually agreed to waive a portion of its investment advisory fees for the iShares Emerging Markets Dividend Index Fund through December 31, 2014 in an amount equal to the investment advisory fees payable on the amount of the Fund’s investment in other iShares funds. The Fund did not hold any iShares funds during the period ended April 30, 2012. In addition, BFA has contractually agreed to waive a portion of its investment advisory fees for the Fund through December 31, 2014 in order to limit total annual operating expenses to 0.49% of average daily net assets.
The U.S. Securities and Exchange Commission has issued an exemptive order which permits BlackRock Institutional Trust Company, N.A. (“BTC”) to serve as securities lending agent for the Funds, subject to applicable conditions. BTC is an affiliate of BFA. Securities lending income is equal to the total of income earned from the reinvestment of cash collateral, and any fees or other payments to and from borrowers of securities. Each Fund retains 65% of securities lending income and pays a fee to BTC equal to 35% of such income. As securities lending agent, BTC is responsible for all transaction fees and all other operational costs relating to securities lending activities, other than extraordinary expenses. BTC is also responsible for fees and expenses incurred by each Fund as a result of the investment of cash collateral received for securities on loan in a money market fund managed by BFA or an affiliate.
At the Special Meeting of the Board of Directors held on January 5, 2012, the Board approved a new distribution agreement with BlackRock Investments, LLC (“BRIL”). BRIL is an affiliate of BFA. Effective April 1, 2012, BRIL replaced SEI Investments Distribution Co. as the distributor for each Fund. Pursuant to the new distribution agreement, BFA is responsible for any fees or expenses for distribution services provided to the Funds.
Each Fund may invest its positive cash balances in certain money market funds managed by BFA or an affiliate. The income earned on these temporary cash investments is included in “Interest — affiliated” in the Statements of Operations.
As of April 30, 2012, The PNC Financial Services Group, Inc. (“PNC”) and Barclays PLC (“Barclays”) are the largest stockholders of BlackRock. Due to the ownership structure, PNC is an affiliate of the Funds for 1940 Act purposes, but Barclays is not.
The iShares Emerging Markets Dividend Index Fund, in order to improve its portfolio liquidity and its ability to track its underlying index, may invest in shares of other iShares funds that invest in securities in the Fund’s underlying index.
| 22 | 2012 iSHARES ANNUAL REPORT TO SHAREHOLDERS |
Table of Contents
Notes to Financial Statements (Continued)
iSHARES®, INC.
Certain directors and officers of the Company are also officers of BTC and/or BFA.
| 3. | INVESTMENT PORTFOLIO TRANSACTIONS |
Purchases and sales of investments (excluding in-kind transactions and short-term investments) for the period ended April 30, 2012 were as follows:
| iShares Index Fund | Purchases | Sales | ||||||
| Asia/Pacific Dividend 30 |
$ | 70,337 | $ | 97,568 | ||||
| Emerging Markets Dividend |
8,048,907 | 227,227 | ||||||
In-kind transactions (see Note 4) for the period ended April 30, 2012 were as follows:
| iShares Index Fund | In-kind Purchases |
In-kind Sales |
||||||
| Asia/Pacific Dividend 30 |
$ | 12,961,410 | $ | — | ||||
| Emerging Markets Dividend |
8,604,111 | — | ||||||
| 4. | CAPITAL SHARE TRANSACTIONS |
Capital shares are issued and redeemed by each Fund only in aggregations of a specified number of shares or multiples thereof (“Creation Units”) at net asset value. Except when aggregated in Creation Units, shares of each Fund are not redeemable. Transactions in capital shares for each Fund are disclosed in detail in the Statements of Changes in Net Assets.
The consideration for the purchase of Creation Units of a fund in the Company generally consists of the in-kind deposit of a designated portfolio of securities, which constitutes an optimized representation of the securities of that fund’s underlying index, and a specified amount of cash. Certain funds in the Company may be offered in Creation Units solely or partially for cash in U.S. dollars. Investors purchasing and redeeming Creation Units may pay a purchase transaction fee and a redemption transaction fee directly to State Street Bank and Trust Company, the Company’s administrator, to offset transfer and other transaction costs associated with the issuance and redemption of Creation Units, including Creation Units for cash. Investors transacting in Creation Units for cash pay an additional variable charge to compensate the relevant fund for certain transaction costs (i.e., stamp taxes, taxes on currency or other financial transactions, and brokerage costs) and market impact expenses relating to investing in portfolio securities.
| 5. | LOANS OF PORTFOLIO SECURITIES |
Each Fund may lend its investment securities to approved borrowers, such as brokers, dealers and other financial institutions. The borrower pledges and maintains with the Fund collateral consisting of cash, an irrevocable letter of credit issued by a bank, or securities issued or guaranteed by the U.S. government. The initial collateral received by each Fund is required to have a value of at least 102% of the current value of the loaned securities for securities traded on U.S. exchanges and a value of at least 105% for all other securities. The collateral is maintained thereafter, at a value equal to at least 100% of the current value of the securities on loan. The risks of securities lending include the risk that the borrower may not provide additional collateral when required or may not return the securities when due. Any securities lending cash collateral may be reinvested in certain short-term instruments either directly on behalf of a fund or through one or more joint accounts or money market funds, including those managed by BFA or its affiliates. Each Fund could suffer a loss if the value of an investment purchased with cash collateral falls below the value of the cash collateral received.
| NOTES TO FINANCIAL STATEMENTS |
23 |
Table of Contents
Notes to Financial Statements (Continued)
iSHARES®, INC.
As of April 30, 2012, any securities on loan were collateralized by cash. The cash collateral received was invested in money market funds managed by BFA. The value of the securities on loan as of April 30, 2012 and the value of the related collateral are disclosed in the Statements of Assets and Liabilities. Securities lending income, as disclosed in the Statements of Operations, represents the income earned from the investment of the cash collateral, net of fees and other payments to and from borrowers, and less the fees paid to BTC as securities lending agent.
| 6. | INCOME TAX INFORMATION |
U.S. GAAP requires that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset values per share. The following permanent differences as of April 30, 2012, attributable to foreign currency transactions were reclassified to the following accounts:
| iShares Index Fund | Undistributed Net Investment Income/Distributions in Excess of Net Investment Income |
Undistributed Net Realized Gain/Accumulated Net Realized Loss |
||||||
| Asia/Pacific Dividend 30 |
$ | (266 | ) | $ | 266 | |||
| Emerging Markets Dividend |
(7,419 | ) | 7,419 | |||||
The tax character of distributions paid during the period ended April 30, 2012 was as follows:
| iShares Index Fund | 2012 | |||
| Asia/Pacific Dividend 30 |
||||
| Ordinary income |
$ | 110,295 | ||
| Return of capital |
3,727 | |||
|
|
|
|||
| $ | 114,022 | |||
|
|
|
|||
| Emerging Markets Dividend |
||||
| Ordinary income |
$ | 28,496 | ||
|
|
|
|||
As of April 30, 2012, the tax components of accumulated net earnings (losses) were as follows:
| iShares Index Fund | Undistributed Ordinary Income |
Capital Loss Carryforwards |
Net Unrealized Gains (Losses) a |
Total | ||||||||||||
| Asia/Pacific Dividend 30 |
$ | — | $ | — | $ | 194,565 | $ | 194,565 | ||||||||
| Emerging Markets Dividend |
129,689 | (32,766 | ) | (529,537 | ) | (432,614 | ) | |||||||||
| a | The difference between book-basis and tax-basis unrealized gains (losses) was attributable primarily to the tax deferral of losses on wash sales and the realization for tax purposes of unrealized gains on investments in passive foreign investment companies. |
| 24 | 2012 iSHARES ANNUAL REPORT TO SHAREHOLDERS |
Table of Contents
Notes to Financial Statements (Continued)
iSHARES®, INC.
As of April 30, 2012, the iShares Emerging Markets Dividend Index Fund had non-expiring capital loss carryforwards in the amount of $32,766 available to offset future realized capital gains.
The Funds may own shares in certain foreign investment entities, referred to, under U.S. tax law, as “passive foreign investment companies.” The Funds may elect to mark-to-market annually the shares of each passive foreign investment company and would be required to distribute to shareholders any such marked-to-market gains.
As of April 30, 2012, gross unrealized appreciation and gross unrealized depreciation based on cost for federal income tax purposes were as follows:
| iShares Index Fund | Tax Cost | Gross Unrealized Appreciation |
Gross Unrealized Depreciation |
Net Unrealized Appreciation (Depreciation) |
||||||||||||
| Asia/Pacific Dividend 30 |
$ | 12,948,619 | $ | 456,439 | $ | (262,550 | ) | $ | 193,889 | |||||||
| Emerging Markets Dividend |
16,404,043 | 257,657 | (785,856 | ) | (528,199 | ) | ||||||||||
Management has reviewed the tax positions as of April 30, 2012 and has determined that no provision for income tax is required in the Funds’ financial statements.
| 7. | SUBSEQUENT EVENTS |
Management has evaluated the impact of all subsequent events on the Funds through the date the financial statements were available to be issued and has determined that there were no subsequent events requiring adjustment or disclosure in the financial statements.
| NOTES TO FINANCIAL STATEMENTS |
25 |
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
iShares, Inc.:
In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the iShares Asia/Pacific Dividend 30 Index Fund and iShares Emerging Markets Dividend Index Fund (the “Funds”), at April 30, 2012, the results of each of their operations, the changes in each of their net assets and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Funds’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at April 30, 2012 by correspondence with the custodian, transfer agent and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
June 21, 2012
| 26 | 2012 iSHARES ANNUAL REPORT TO SHAREHOLDERS |
Table of Contents
iSHARES® INC.
For the fiscal year ended April 30, 2012, the Funds earned foreign source income and paid foreign taxes which they intend to pass through to their shareholders pursuant to Section 853 of the Internal Revenue Code (the “Code”) as follows:
| iShares Index Fund | Foreign Source Income Earned |
Foreign Taxes Paid |
||||||
| Asia/Pacific Dividend 30 |
$ | 118,251 | $ | 6,915 | ||||
| Emerging Markets Dividend |
187,085 | 12,330 | ||||||
Under Section 854(b)(2) of the Code, the Funds hereby designate the following maximum amounts as qualified dividend income for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended April 30, 2012:
| iShares Index Fund | Qualified Dividend Income |
|||
| Asia/Pacific Dividend 30 |
$ | 77,168 | ||
| Emerging Markets Dividend |
40,826 | |||
In February 2013, shareholders will receive Form 1099-DIV which will include their share of qualified dividend income distributed during the calendar year 2012. Shareholders are advised to check with their tax advisers for information on the treatment of these amounts on their income tax returns.
| TAX INFORMATION |
27 |
Table of Contents
Board Review and Approval of Investment Advisory
Contract (Unaudited)
iSHARES®, INC.
Under Section 15(c) of the Investment Company Act of 1940 (the “1940 Act”), the Company’s Board of Directors (the “Board”), including a majority of Directors who are not “interested persons” of the Company (as that term is defined in the 1940 Act) (the “Independent Directors”), is required to consider and approve the proposed Investment Advisory Contract between the Company and BFA on behalf of the Funds (the “Advisory Contract”). As required by Section 15(c), the Board requested, and BFA provided, such information as the Board, with advice from independent counsel, deemed reasonably necessary to evaluate the terms of the proposed Advisory Contract.
At a meeting held on December 5-6, 2011, the Board approved the selection of BFA and the Advisory Contract for the Funds, based on its review of qualitative and quantitative information provided by BFA. The Board also considered information previously provided by BFA, BlackRock Institutional Trust Company, N.A. (“BTC”), and BlackRock, Inc. (“BlackRock”), as applicable, at prior Board meetings. The Independent Directors were advised by their independent counsel throughout the process.
In selecting BFA and approving the Advisory Contract for the Funds, the Board, including the Independent Directors, considered the following factors, no one of which was controlling, and made the following conclusions:
Nature, Extent and Quality of Services to be Provided by BFA — The Board reviewed the scope of services to be required of or provided by BFA under the Advisory Contract. In reviewing the scope of these services, the Board considered BFA’s investment philosophy and experience as well as the resources expected to be available from BFA and its affiliates for the support of the Funds and their shareholders. The Board considered in particular that BFA’s services for other iShares funds reflect BFA’s core competencies, including BFA’s effective use of its proprietary investment systems analyzing securities market risk, asset class correlations and expected returns. The Board also considered services provided by BFA and its affiliates to other iShares funds in connection with the review of counterparty and issuer credit risk and securities lending opportunities and the oversight of intermediaries that provide shareholder support and processing functions. The Board considered representations by BFA, BTC, and BlackRock that the scope and quality of services to be provided to the Funds would be similar to the scope and quality of services provided to other iShares funds.
The Board also considered BFA’s compliance program and its compliance record with respect to other iShares funds. The Board noted that BFA reports to the Board about portfolio management and compliance matters on a periodic basis in connection with regularly scheduled meetings of the Board, and on other occasions as necessary and appropriate, and has provided information and made appropriate officers available as needed to provide further assistance with these matters. The Board also reviewed the background and experience of the persons who will be responsible for the day-to-day management of the Funds. In addition to the above considerations, the Board reviewed and considered BFA’s investment and risk management processes and strategies, and matters related to BFA’s portfolio compliance policies and procedures.
The Board took into account discussions at prior Board meetings, including representations and information provided by management regarding the resources and strengths of BFA and the financial condition of BFA and BlackRock.
Based on review of this information, the Board concluded that the nature, extent and quality of services to be provided by BFA to the Funds under the Advisory Contract supported the Board’s approval of the Advisory Contract.
Fund Expenses — The Board reviewed statistical information prepared by Lipper Inc. (“Lipper”), an independent provider of investment company data, regarding the expense ratio components, including actual advisory fees, waivers/reimbursements, and gross and net total expenses of the Funds in comparison with the same information for other registered investment companies objectively selected by Lipper as comprising the Funds’ applicable peer group pursuant to Lipper’s proprietary methodology (the “Lipper Group”). Because there are few, if any, exchange traded funds or index funds that track indexes similar to those tracked by the Funds, the Lipper Group included in part mutual funds, closed-end funds, exchange traded funds, or funds with differing investment objective classifications, investment focuses and
| 28 | 2012 iSHARES ANNUAL REPORT TO SHAREHOLDERS |
Table of Contents
Board Review and Approval of Investment Advisory
Contract (Unaudited) (Continued)
iSHARES®, INC.
other characteristics (e.g., actively managed funds and funds sponsored by “at-cost” service providers). In support of its review of the statistical information, the Board was provided with a general description of the methodology used by Lipper to determine the applicable Lipper Group and to prepare this information. The Board further noted that due to the limitations in providing comparable funds in the Lipper Group, the statistical information may or may not provide meaningful direct comparisons to the Funds. The Board also noted that the proposed investment advisory fee rate and overall expenses for the Funds compared favorably to the investment advisory fee rate and overall expenses of the funds in the Lipper Group.
Based on this review, the other factors considered at the meeting, and their general knowledge of mutual fund pricing, the Board concluded that the proposed investment advisory fees and expense levels of the Funds, as compared to the investment advisory fees and expense levels of the funds in the Lipper Group, supported the Board’s approval of the Advisory Contract.
Costs of Services to be Provided to the Funds and Profits to be Realized by BFA and Affiliates — The Board did not consider the profitability of the Funds to BFA based on the fees payable under the Advisory Contract or revenue to be received by BFA or its affiliates in connection with services to be provided to the Funds since the proposed relationships had not yet commenced. The Board noted that it expects to receive profitability information from BFA on at least an annual basis and will thus be in a position to evaluate whether, following the expiration of the Advisory Contract’s initial two year term, any adjustments in Funds fees would be appropriate.
Economies of Scale — The Board reviewed information regarding economies of scale or other efficiencies that may result from increases in the Funds’ assets. The Board further that the Advisory Contract did not provide for any breakpoints in the Funds’ investment advisory rates as the assets of the Funds increase. However, the Board noted that should material economies of scale exist in the future, a breakpoint structure for the Funds may be appropriate. The Board noted information presented at prior Board meetings regarding BFA’s historic profitability as investment adviser to the iShares fund complex and noted that BFA and BlackRock had continued to make significant investments in the iShares fund complex and the infrastructure supporting the iShares funds.
Based on this review, as well as the discussions described above in connection with the Lipper Group comparisons, the Board, recognizing its responsibility to consider this issue at least annually following an initial two-year period, concluded that the structure of the investment advisory fees reflects appropriate sharing of potential economies of scale with the Funds’ shareholders and supported the Board’s approval of the Advisory Contract.
Fees and Services Provided for Other Comparable Funds/Accounts Managed by BFA and its Affiliates — The Board considered certain information regarding the investment advisory/management fee rate for other funds/accounts in the U.S. for which BFA (or its affiliates) provides investment advisory/management services, including open-end and closed-end funds registered under the 1940 Act, collective trust funds, and institutional separate accounts (together, the “Other Accounts”). The Board noted that BFA and its affiliates do not manage Other Accounts that track the same underlying indexes as the Funds. The Board further noted that BFA previously provided the Board with detailed information regarding how Other Accounts (particularly institutional clients) generally differ from the Funds, including in terms of the different services provided as well as other significant differences in the approach of BFA and its affiliates to the Funds, on one hand, and Other Accounts, on the other. In that regard, the Board considered that the pricing of services to institutional clients is typically based on a number of factors beyond the nature and extent of the specific services to be provided and often depends on the overall relationship between the client and its affiliates and the adviser and its affiliates. In addition, the Board considered the relative complexity and inherent risks of managing and providing other services to the Funds, as publicly traded exchange traded funds, as compared to Other Accounts that are institutional clients in light of differing regulatory requirements and client-imposed mandates. The Board noted that the investment advisory fee rate under the Advisory Contract for the Funds was generally higher than the investment advisory/management fee rates for
| BOARD REVIEW AND APPROVAL OF INVESTMENT ADVISORY CONTRACT |
29 |
Table of Contents
Board Review and Approval of Investment Advisory
Contract (Unaudited) (Continued)
iSHARES®, INC.
Other Accounts that are institutional clients of BFA (or its affiliates), and concluded that the differences appeared to be consistent with the factors discussed.
Other Benefits to BFA and/or its Affiliates — Except as noted below, the Board did not consider any ancillary revenue to be received by BFA and/or its affiliates in connection with the services to be provided to the Funds by BFA since the proposed relationship had not yet commenced. However, the Board noted that BFA would not use soft dollars or consider the value of research or other services that may be provided to BFA (including its affiliates) in selecting brokers for portfolio transactions for the Funds. The Board considered the potential payment of advisory fees and/or administration fees to BFA and BTC (or their affiliates) in connection with any investments by the Funds in other funds for which BFA (or its affiliates) provides investment advisory services and/or administration services. The Board also considered the potential for revenue to BTC, the Funds’ securities lending agent, for loaning any portfolio securities. The Board further noted that any portfolio transactions on behalf of the Funds placed through a BFA affiliate or purchased from an underwriting syndicate in which a BFA affiliate participates, are reported to the Board pursuant to Rule 17e-1 or Rule 10f-3, as applicable, under the 1940 Act. The Board concluded that any such ancillary benefits would not be disadvantageous to the Funds’ shareholders.
Based on the considerations described above, the Board determined that the investment advisory fee rates under the Advisory Contract do not constitute fees that are so disproportionately large as to bear no reasonable relationship to the services to be rendered and that could not have been the product of arm’s-length bargaining and concluded that it is in the best interest of the Funds and their shareholders to approve the Advisory Contract.
| 30 | 2012 iSHARES ANNUAL REPORT TO SHAREHOLDERS |
Table of Contents
Supplemental Information (Unaudited)
iSHARES®, INC.
Section 19(a) Notices
The amounts and sources of distributions reported are only estimates and are not being provided for tax reporting purposes. The actual amounts and sources of the amounts for tax reporting purposes will depend upon each Fund’s investment experience during the year and may be subject to changes based on the tax regulations. Shareholders will receive a Form 1099-DIV each calendar year that will inform them how to report distributions for federal income tax purposes.
| Total Cumulative Distributions for the Fiscal Year |
% Breakdown of the Total Cumulative Distributions for the Fiscal Year |
|||||||||||||||||||||||||||||||
| iShares Index Fund | Net Investment Income |
Net Realized Capital Gains |
Return of Capital |
Total Per Share |
Net Investment Income |
Net Realized Capital Gains |
Return of Capital |
Total Per Share |
||||||||||||||||||||||||
| Asia/Pacific Dividend 30 |
$ | 0.52829 | $ | — | $ | 0.04182 | $ | 0.57011 | 93 | % | — | % | 7 | % | 100 | % | ||||||||||||||||
| Emerging Markets Dividend |
0.14200 | — | 0.00048 | 0.14248 | 100 | — | 0 | a | 100 | |||||||||||||||||||||||
| a | Rounds to less than 1%. |
| SUPPLEMENTAL INFORMATION |
31 |
Table of Contents
Director and Officer Information (Unaudited)
iSHARES®, INC.
The Board of Directors has responsibility for the overall management and operations of the Company, including general supervision of the duties performed by BFA and other service providers. Each Director serves until he or she resigns, is removed, dies, retires or becomes incapacitated. The President, Treasurer and Secretary shall each hold office until their successors are chosen and qualified, and all other officers shall hold office until he or she resigns or is removed. Directors who are not interested persons (as defined in the 1940 Act) are referred to as Independent Directors.
The registered investment companies advised by BFA or its affiliates are organized into one complex of closed-end funds, two complexes of open-end funds and one complex of exchange-traded funds (“Exchange-Traded Fund Complex”) (each, a “BlackRock Fund Complex”). Each Fund is included in the BlackRock Fund Complex referred to as the Exchange-Traded Fund Complex. Each Director of iShares, Inc. also serves as a Trustee of iShares Trust and a Director of iShares MSCI Russia Capped Index Fund, Inc. and, as a result, oversees a total of 272 funds within the Exchange-Traded Fund Complex. With the exception of Robert S. Kapito, the address of each Trustee and Officer is c/o BlackRock, Inc., 400 Howard Street, San Francisco, CA 94105. The address of Mr. Kapito is c/o BlackRock, Inc., Park Avenue Plaza, 55 East 52nd Street, New York, NY 10055. The Board has designated Robert H. Silver as its Independent Chairman. Additional information about the Funds’ Directors and Officers may be found in the Funds’ combined Statement of Additional Information, which is available without charge, upon request, by calling toll-free 1-800-iShares (1-800-474-2737).
Interested Directors and Officers
| Name (Age) | Position(s) (Length of Service) |
Principal Occupation(s) During the Past 5 Years |
Other Directorships Held | |||
| Robert S. Kapitoa (55) |
Director (since 2009). | President and Director, BlackRock, Inc. (since 2006 and 2007, respectively); Vice Chairman of BlackRock, Inc. and Head of BlackRock’s Portfolio Management Group (since its formation in 1998) and BlackRock’s predecessor entities (since 1988); Trustee, University of Pennsylvania (since 2009); President of Board of Directors, Hope & Heroes Children’s Cancer Fund (since 2002); President of the Board of Directors, Periwinkle Theatre for Youth (since 1983). | Trustee of iShares Trust (since 2009); Director of iShares MSCI Russia Capped Index Fund, Inc. (since 2010); Director of BlackRock, Inc. (since 2007). | |||
| Michael Lathamb (46) |
Director (since 2010); President (since 2007). | Chairman of iShares, BlackRock, Inc. (since 2011); Global Chief Executive Officer of iShares, BTC (2010-2011); Managing Director, BTC (since 2009); Head of Americas iShares, Barclays Global Investors (“BGI”) (2007-2009); Director and Chief Financial Officer of Barclays Global Investors International, Inc. (2005-2009); Chief Operating Officer of the Intermediary Investor and Exchange-Traded Products Business of BGI (2003-2007). | Trustee of iShares Trust (since 2010); Director of iShares MSCI Russia Capped Index Fund, Inc. (since 2010). | |||
| a | Robert S. Kapito is deemed to be an “interested person” (as defined in the 1940 Act) of the Company due to his affiliations with BlackRock, Inc. |
| b | Michael Latham is deemed to be an “interested person” (as defined in the 1940 Act) of the Company due to his affiliations with BlackRock, Inc. and its affiliates. |
| 32 | 2012 iSHARES ANNUAL REPORT TO SHAREHOLDERS |
Table of Contents
Director and Officer Information (Unaudited) (Continued)
iSHARES®, INC.
Independent Directors
| Name (Age) | Position(s) (Length of Service) |
Principal Occupation(s) During the Past 5 Years |
Other Directorships Held | |||
| Robert H. Silver (57) |
Director (since 2007); Independent Chairman (since 2012). | President and Co-Founder of The Bravitas Group, Inc. (since 2006); Member, Non-Investor Advisory Board of Russia Partners II, LP (since 2006); Director and Vice Chairman of the YMCA of Greater NYC (2001-2011); Broadway Producer (2006-2011); Co-Founder and Vice President of Parentgiving Inc. (since 2008); Director and Member of the Audit and Compensation Committee of EPAM Systems, Inc. (2006-2009). | Trustee of iShares Trust (since 2007); Director of iShares MSCI Russia Capped Index Fund, Inc. (since 2010); Independent Chairman of iShares Trust and iShares MSCI Russia Capped Index Fund, Inc. (since 2012). | |||
| Cecilia H. Herbert (63) |
Director (since 2005). | Director (since 1998) and President (2007-2010) of the Board of Directors, Catholic Charities CYO; Trustee of Pacific Select Funds (2004-2005); Trustee (2002-2011) and Chair of the Finance Committee (2006-2009) and Investment Committee (2006-2011) of the Thacher School; Member (since 1994) and Chair (1994-2005) of Investment Committee, Archdiocese of San Francisco; Trustee and member (since 2011) of the Investment Committee, WNET, a New York public broadcasting company. | Trustee of iShares Trust (since 2005); Director of iShares MSCI Russia Capped Index Fund, Inc. (since 2010); Director, Forward Funds (34 portfolios) (since 2009). | |||
| Charles A. Hurty (68) |
Director (since 2005). | Retired; Partner, KPMG LLP (1968-2001). |
Trustee of iShares Trust (since 2005); Director of iShares MSCI Russia Capped Index Fund, Inc. (since 2010); Director of GMAM Absolute Return Strategy Fund (1 portfolio) (since 2002); Director of Skybridge Multi-Adviser Hedge Fund Portfolios LLC (2 portfolios) (since 2002). | |||
| John E. Kerrigan (56) |
Director (since 2005). | Chief Investment Officer, Santa Clara University (since 2002). | Trustee of iShares Trust (since 2005); Director of iShares MSCI Russia Capped Index Fund, Inc. (since 2010). | |||
| John E. Martinez (51) |
Director (since 2003). | Director of EquityRock, Inc. (since 2005). |
Trustee of iShares Trust (since 2003); Director of iShares MSCI Russia Capped Index Fund, Inc. (since 2010). | |||
| DIRECTOR AND OFFICER INFORMATION |
33 |
Table of Contents
Director and Officer Information (Unaudited) (Continued)
iSHARES®, INC.
Independent Directors (Continued)
| Name (Age) | Position(s) (Length of Service) |
Principal Occupation(s) During the Past 5 Years |
Other Directorships Held | |||
| George G.C. Parker (73) |
Director (since 2002). | Dean Witter Distinguished Professor of Finance, Emeritus, Stanford University: Graduate School of Business (Professor since 1973; Emeritus since 2006). | Trustee of iShares Trust (since 2000); Director of iShares MSCI Russia Capped Index Fund, Inc. (since 2010); Director of Tejon Ranch Company (since 1999); Director of Threshold Pharmaceuticals (since 2004); Director of Colony Financial, Inc. (since 2009); Director of First Republic Bank (since 2010). | |||
| Madhav V. Rajan (47) |
Director (since 2011). | Gregor G. Peterson Professor of Accounting and Senior Associate Dean for Academic Affairs, Stanford University: Graduate School of Business (since 2001); Professor of Law (by courtesy), Stanford Law School (since 2005); Visiting Professor, University of Chicago (Winter 2007-2008). | Trustee of iShares Trust (since 2011); Director of iShares MSCI Russia Capped Index Fund, Inc. (since 2011). | |||
| 34 | 2012 iSHARES ANNUAL REPORT TO SHAREHOLDERS |
Table of Contents
Director and Officer Information (Unaudited) (Continued)
iSHARES®, INC.
Officers
| Name (Age) | Position(s) (Length of Service) |
Principal Occupation(s) During the Past 5 Years | ||
| Edward B. Baer (43) |
Vice President and Chief Legal Officer (since 2012). | Managing Director, BlackRock (since 2006). | ||
| Eilleen M. Clavere (60) |
Secretary (since 2007). | Director, BlackRock (since 2009); Director of Legal Administration of Intermediary Investor Business of BGI (2006-2009). | ||
| Jack Gee (52) |
Treasurer and Chief Financial Officer (since 2008). | Managing Director, BlackRock (since 2009); Senior Director of Fund Administration of Intermediary Investor Business of BGI (2009); Director of Fund Administration of Intermediary Investor Business of BGI (2004-2009). | ||
| Amy Schioldager (49) |
Executive Vice President (since 2007). | Managing Director, BlackRock (since 2009); Global Head of Index Equity, BGI (2008-2009); Global Head of U.S. Indexing, BGI (2006-2008). | ||
| Ira P. Shapiro (49) |
Vice President (since 2007). | Managing Director, BlackRock (since 2009); Chief Legal Officer, Exchange- Traded Funds Complex (2007-2012); Associate General Counsel, BGI (2004-2009). | ||
| Matt Tucker (39) |
Vice President (since 2007). |
Managing Director, BlackRock (since 2009); Director of Fixed Income Investment Strategy, BGI (2009); Head of U.S. Fixed Income Investment Solutions, BGI (2005-2008). | ||
| DIRECTOR AND OFFICER INFORMATION |
35 |
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Notes:
| 36 | 2012 iSHARES ANNUAL REPORT TO SHAREHOLDERS |
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Notes:
| NOTES |
37 |
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Notes:
| 38 | 2012 iSHARES ANNUAL REPORT TO SHAREHOLDERS |
Table of Contents
For more information visit www.iShares.com
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iS-AR-47-0412
Table of Contents
Item 2. Code of Ethics.
iShares, Inc. (the “Registrant”) adopted a new code of ethics on July 1, 2011 that applies to persons appointed by the Registrant’s Board of Directors as the President and/or Chief Financial Officer, and any persons performing similar functions. For the fiscal year ended April 30, 2012, there were no amendments to any provision of the former and new codes of ethics, nor were there any waivers granted from any provision of the former and new codes of ethics. A copy of the new code of ethics is filed with this Form N-CSR under Item 12(a)(1).
Item 3. Audit Committee Financial Expert.
The Registrant’s Board of Directors has determined that the Registrant has more than one audit committee financial expert, as that term is defined under Item 3(b) and 3(c), serving on its audit committee. The audit committee financial experts serving on the Registrant’s audit committee are Charles A. Hurty, John E. Kerrigan, George G.C. Parker and Robert H. Silver, all of whom are independent, as that term is defined under Item 3(a)(2).
Item 4. Principal Accountant Fees and Services.
The principal accountant fees disclosed in items 4(a), 4(b), 4(c), 4(d) and 4(g) are for the two series of the Registrant for which the fiscal year-end is April 30, 2012 (the “Funds”), and whose annual financial statements are reported in Item 1.
| (a) | Audit Fees – The aggregate fees billed for the fiscal period from the commencement of operations on February 23, 2012 through April 30, 2012 for professional services rendered by the principal accountant for the audit of the Funds’ annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements was $27,000. |
| (b) | Audit-Related Fees – There were no fees billed for the fiscal period from the commencement of operations on February 23, 2012 through April 30, 2012 for assurance and related services by the principal accountant that were reasonably related to the performance of the audit of the Funds’ financial statements and are not reported under (a) of this Item. |
| (c) | Tax Fees – There were no fees billed for the fiscal period from the commencement of operations on February 23, 2012 through April 30, 2012 for professional services rendered by the principal accountant for the review of the Funds’ tax returns and excise tax calculations. |
| (d) | All Other Fees – There were no other fees billed for the fiscal period from the commencement of operations on February 23, 2012 through April 30, 2012 for products and services provided by the principal accountant, other than the services reported in (a) through (c) of this Item. |
| (e) | (1) The Registrant’s audit committee charter, as amended, provides that the audit committee is responsible for the approval, prior to appointment, of the engagement of the principal accountant to annually audit and provide their opinion on the Registrant’s financial statements. The audit committee must also approve, prior to appointment, the engagement of the principal accountant to provide non-audit services to the Registrant or to any entity controlling, controlled by or under common control with the Registrant’s investment adviser (“Adviser Affiliate”) that provides ongoing services to the Registrant, if the engagement relates directly to the operations and financial reporting of the Registrant. |
(2) There were no services described in (b) through (d) above (including services required by the audit committee pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X) that were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
| (f) | None of the hours expended on the principal accountant’s engagement to audit the Funds’ financial statements for the fiscal period from the commencement of operations on February 23, 2012 through April 30, 2012 were attributable to work performed by persons other than the principal accountant’s full-time, permanent employees. |
| (g) | There were no non-audit fees billed by the Registrant’s principal accountant for services rendered to the Funds, and rendered to the Registrant’s investment adviser, or any Adviser Affiliate that provides ongoing services to the Registrant for the fiscal period from the commencement of operations on February 23, 2012 through April 30, 2012. |
| (h) | The Registrant’s audit committee has considered whether the provision of non-audit services rendered to the Registrant’s investment adviser and any Adviser Affiliate that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X, if any, are compatible with maintaining the principal accountant’s independence, and has determined that the provision of these services do not compromise the principal accountant’s independence. |
.
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Item 5. Audit Committee of Listed Registrants.
The Registrant is a listed issuer as defined in Rule 10A-3 under the Exchange Act and has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The Registrant’s audit committee members are George G.C. Parker, Cecilia H. Herbert, Charles A. Hurty, John E. Kerrigan, Robert H. Silver, John E. Martinez and Madhav V. Rajan.
Item 6. Schedule of Investments.
| (a) | Schedules of investments are included as part of the report to shareholders filed under Item 1 of this Form. |
| (b) | Not applicable. |
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable to the Registrant.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable to the Registrant.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable to the Registrant.
Item 10. Submission of Matters to a Vote of Security Holders.
There were no material changes to the procedures by which shareholders may recommend nominees to the Registrant’s Board of Directors.
Item 11. Controls and Procedures.
| (a) | The President (the Registrant’s Principal Executive Officer) and Chief Financial Officer (the Registrant’s Principal Financial Officer) have concluded that, based on their evaluation as of a date within 90 days of the filing date of this report, the disclosure controls and procedures of the Registrant (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) are reasonably designed to achieve the purposes described in Section 4(a) of the attached certification. |
| (b) | There were no changes in the Registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) that occurred during the second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Registrant’s internal control over financial reporting. |
Item 12. Exhibits.
(a) (1) Code of Ethics for Senior Officers that is the subject of Item 2 is attached.
(a) (2) Section 302 Certifications are attached.
(a) (3) Not applicable to the Registrant.
(b) Section 906 Certifications are attached.
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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.
iShares, Inc.
| By: | /s/ Michael Latham |
| Michael Latham, President (Principal Executive Officer) | ||
| Date: | June 20, 2012 |
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/ Michael Latham |
| Michael Latham, President (Principal Executive Officer) | ||
| Date: | June 20, 2012 |
| By: | /s/ Jack Gee |
|
Jack Gee, Treasurer and Chief Financial Officer (Principal Financial Officer) | ||
| Date: | June 20, 2012 |