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BlackRock Advantage Global Fund, Inc. BlackRock Advantage SMID Cap Fund, Inc. BlackRock Allocation Target Shares BlackRock Balanced Fund, Inc. BlackRock Bond Fund, Inc. BlackRock California Municipal Series Trust BlackRock Capital Appreciation Fund, Inc. BlackRock Emerging Markets Fund, Inc. BlackRock Equity Dividend Fund BlackRock Financial Institutions Series Trust BlackRock Funds SM BlackRock Funds II BlackRock Funds III BlackRock Funds IV BlackRock Funds V BlackRock Funds VI BlackRock Global Allocation Fund, Inc. BlackRock Index Funds, Inc.
BlackRock International Select Equity Fund BlackRock Large Cap Focus Growth Fund, Inc. BlackRock Large Cap Focus Value Fund, Inc. BlackRock Large Cap Series Funds, Inc. BlackRock Liquidity Funds BlackRock Mid-Cap Value Series, Inc. BlackRock Multi-State Municipal Series Trust BlackRock Municipal Bond Fund, Inc. BlackRock Municipal Series Trust BlackRock Natural Resources Trust BlackRock Series Fund, Inc. BlackRock Series Fund II, Inc. BlackRock Series, Inc. BlackRock Strategic Global Bond Fund, Inc. BlackRock Unconstrained Equity Fund BlackRock Variable Series Funds, Inc. BlackRock Variable Series Funds II, Inc.
Supplement dated October 16, 2026 to the Statement of Additional Information (“SAI”) of each of the funds listed in Appendix A (each, a “Fund”), as amended from time to time.
Each Fund’s SAI is amended as follows:
The list in the section entitled “Purchase of Shares - Additional Payments by BlackRock - D. Service Organizations Receiving Additional Payments” in Part II, or in the section entitled “Miscellaneous Additional Payments by BlackRock - D. Service Organizations Receiving Additional Payments,” “Investment Advisory Arrangements - Additional Payments by BlackRock - D. Service Organizations Receiving Additional Payments” or “Investment Adviser and Other Service Providers - Additional Payments by BlackRock - D. Service Organizations Receiving Additional Payments,” as applicable, of each Fund’s current SAI, is deleted in its entirety and replaced with the following:
&Partners AccuTech Systems Corporation ADP Broker-Dealer, Inc. Advisor Credit Exchange, LLC Advisor Group, Inc. AE Wealth Management, LLC Alight Solutions LLC Allianz Life Financial Services, LLC Allianz Life Insurance Company of New York Allianz Life Insurance Company of North America Altruist Financial LLC American Enterprise Investment Services, Inc. American General Life Insurance Company American United Life Insurance Company Annuity Investors Life Insurance Company Anthem Securities LLC Argent Institutional Trust Company Ascensus Broker Dealer Services, Inc. Ascensus, Inc. Atomic Brokerage LLC Avantax Investment Services, LLC Bancroft Capital LLC
Bank of America, N.A. Bank of New York Mellon Barclays Capital Inc. Benefit Plans Administrative Services, Inc. Benefit Trust Company Beta Capital Securities LLC bfinance US Ltd. BlackRock Advisors, LLC BMO Capital Markets Corp. BNP Paribas BNP Paribas Investment Partners UK Limited BNY Mellon, N.A. BofA Securities, Inc. BOKF, N.A. Brighthouse Life Insurance Company Brighthouse Life Insurance Company of NY Broadridge Business Process Outsourcing, LLC Brown Brothers Harriman & Co. Cabrera Capital Markets, LLC Capital One, N.A. Cetera Advisor Networks LLC Cetera Advisors LLC
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Cetera Financial Group Cetera Financial Specialists LLC Cetera Investment Services LLC CF Secured, LLC Charles Schwab & Co., Inc. Charles Schwab Trust Bank Chicago Mercantile Exchange Inc. CIM Investment Management, Inc. Citco Securities, LLC CitiBank, National Association Citigroup Global Markets, Inc. Citizens Bank Citizens Business Bank CME Shareholder Servicing LLC CMFG Life Insurance Company Comerica Bank Commonwealth Financial Network Computershare Trust Company Conduent HR Services, LLC Delaware Life Insurance Company Delaware Trust Company Deutsche Bank AG Deutsche Bank Trust Company Americas Digital Retirement Solutions, Inc. Dunham & Associates Investment Counsel, Inc. Dynasty Financial Partners LLC Edward D. Jones & Co., L.P. Empire Fidelity Investments Life Insurance Company Empower Annuity Insurance Company of America Empower Financial Services, Inc. Empower Life & Annuity Insurance Company of New York Empower Plan Services, LLC Envestnet Asset Management, Inc. Equitable Advisors, LLC Equitable Life Insurance Company E*trade Savings Bank Federal Deposit Insurance Corporation Fidelity Brokerage Services LLC Fidelity Investments Institutional Operations Company, Inc. Fidelity Investments Life Insurance Company Fifth Third Securities, Inc. First Allied Securities, Inc. First Command Financial Planning, Inc. First Hawaiian Bank First Republic Bank First Security Benefit Life Insurance and Annuity Company of New York First Symetra National Life Insurance Company of New York First-Citizens Bank & Trust Company FIS Brokerage & Securities Services LLC
FNEX Capital, LLC Forethought Life Insurance Company FSC Securities Corporation Genworth Life and Annuity Insurance Company Genworth Life Insurance Company of New York Global Atlantic Distributors, LLC Goldman Sachs & Co. Great Pacific Securities, LLC Guardian Insurance & Annuity Co., Inc. Hancock Whitney Bank Hartford Funds Management Company Hartford Securities Distribution Company, Inc. Hazeltree Fund Services, Inc. Hightower Securities, Inc. Hilltop Securities Inc. HSBC Bank USA, N.A. Huntington Securities, Inc. Institutional Cash Distributors, LLC Integrity Life Insurance Company Interactive Brokers, LLC Investment Trust of California J.P. Morgan Institutional Investments Inc. J.P. Morgan Securities LLC Jefferies LLC Jefferson National Life Insurance Company Jefferson National Life Insurance Company of New York John Hancock Life Insurance Company (U.S.A.) John Hancock Life Insurance Company of New York John Hancock Trust Company JPMorgan Chase Bank, N.A. Kestra Investment Services, LLC Lincoln Financial Advisors Corporation Lincoln Financial Securities Corporation Lincoln Life & Annuity Company of New York Lincoln National Life Insurance Company Lincoln Retirement Services LLC Lombard International Life Assurance Company LPL Financial LLC M&T Securities Inc. Manufacturers and Traders Trust Company Massachusetts Mutual Life Insurance Company Members Life Insurance Company Merrill Lynch, Pierce, Fenner & Smith Incorporated Metavante Corporation Metropolitan Life Insurance Company Mid Atlantic Clearing & Settlement Corporation Midland Life Insurance Company Minnesota Life Insurance Company Mischler Financial Group Mizuho Securities USA Inc. MML Distributors, LLC MML Investors Services, LLC Morgan Stanley & Co. LLC
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Morgan Stanley Distribution, Inc. Morgan Stanley Smith Barney LLC MUFG Union Bank, National Association Nassau Life Insurance Company National Financial Services LLC National Integrity Life Insurance Company National Life Insurance Company Nationwide Financial Services, Inc. Nationwide Fund Distributors LLC Nationwide Retirement Solutions NCB Federal Savings Bank New England Pension Plan Systems, LLC New York Life Insurance and Annuity Corporation Newport Retirement Services, Inc. Northbrook Bank & Trust Company Northern Trust Company Northwestern Mutual Investment Services, LLC Northwestern Mutual Life Insurance Company NYLife Distributors LLC Oppenheimer & Co., Inc. Orion Advisor Services, LLC Osaic Wealth, Inc. Pacific Life & Annuity Company Pacific Life Insurance Company Pacific Select Distributors, LLC Park Avenue Securities LLC Penserra Securities LLC Pershing LLC PFPC Inc. Piper Jaffray & Co. PNC Bank, National Association PNC Capital Markets LLC PNC Investments LLC Principal Bank Principal Life Insurance Company Protective Life and Annuity Insurance Company Protective Life Insurance Company Pruco Life Insurance Company Pruco Life Insurance Company of New Jersey Prudential Annuities Distributors, Inc. Prudential Insurance Company of America Raymond James & Associates, Inc. Raymond James Financial Services, Inc. RBC Capital Markets, LLC Regions Bank Reliance Trust Company Reliastar Life Insurance Company Reliastar Life Insurance Company of New York RiverSource Distributors, Inc. RiverSource Life Insurance Co. of New York RiverSource Life Insurance Company SagePoint Financial, Inc. Sammons Retirement Solutions, Inc. Sanctuary Wealth Group, LLC
Santander Bank, N.A. Saturna Trust Company Securities America, Inc. Securities Finance Trust Company Security Benefit Life Insurance Company Security Financial Resources, Inc. Security Life of Denver Insurance Company SEI Private Trust Company SG Americas Securities, LLC Silicon Valley Bank Standard Insurance Company Standard Retirement Services, Inc. State Farm Life and Accident Assurance Company State Farm Life Insurance Company State Farm VP Management Corp. State Street Bank and Trust Company State Street Global Markets, LLC Stern Brothers & Co. Stifel, Nicolaus & Company, Incorporated Summit Brokerage Services, Inc. SVB Asset Management Symetra Life Insurance Company Syntal Capital Partners, LLC T. Rowe Price Retirement Plan Services, Inc. Talcott Resolution Life and Annuity Insurance Company Talcott Resolution Life Insurance Company TD Ameritrade Clearing, Inc. TD Ameritrade, Inc. TD Prime Services (US) LLC Teachers Insurance and Annuity Association of America Tigress Financial Partners, LLC Transamerica Financial Life Insurance Company Transamerica Life Insurance Company Treasury Brokerage Triad Advisors, LLC Truist Bank U.S. Bancorp Investments, Inc. U.S. Bank, National Association UBATCO & Co. UBS Financial Services, Inc. UBS Securities LLC Ultimus Fund Solutions, LLC UMB Bank, National Association United States Life Insurance Company in the City of New York VALIC Retirement Services Company Vanguard Group, Inc. Vanguard Marketing Corporation Voya Financial Advisors, Inc. Voya Financial Partners, LLC Voya Institutional Plan Services, LLC Voya Insurance and Annuity Company
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Voya Investments Distributor, LLC Voya Retirement Insurance and Annuity Company Waddell & Reed, Inc. Wells Fargo Advisors, LLC Wells Fargo Advisors Financial Network, LLC Wells Fargo Bank, N.A.
Wells Fargo Clearing Services, LLC Wells Fargo Investments, LLC Wells Fargo Securities, LLC Wilmington Trust, National Association Woodbury Financial Services, Inc. ZB, National Association
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Appendix A
BlackRock Advantage Global Fund, Inc.
BlackRock Advantage SMID Cap Fund, Inc.
BlackRock Allocation Target Shares BATS: Securitized Total Return Series BATS: Corporate Credit Total Return Series BATS: High Income Municipal Series BATS: High Income Taxable Series BATS: Mortgage Total Return Series BATS: Interest Rate Hedge Series BATS: Short Duration Taxable Total Return Series BATS: Short Term Municipal Income Series
BlackRock Balanced Fund, Inc.
BlackRock Bond Fund, Inc. BlackRock Total Return Fund
BlackRock California Municipal Series Trust BlackRock California Municipal Opportunities Fund
BlackRock Capital Appreciation Fund, Inc.
BlackRock Emerging Markets Fund, Inc.
BlackRock Equity Dividend Fund
BlackRock Financial Institutions Series Trust BlackRock Summit Cash Reserves Fund
BlackRock Funds SM BlackRock Advantage Emerging Markets Fund BlackRock Advantage International Fund BlackRock Advantage Large Cap Growth Fund BlackRock Advantage Small Cap Core Fund BlackRock Advantage Small Cap Growth Fund BlackRock China A Opportunities Fund BlackRock Commodity Strategies Fund BlackRock Daily Reinvestment Stablecoin Reserve Vehicle BlackRock Defensive Advantage Emerging Markets Fund BlackRock Emerging Markets ex-China Fund BlackRock Energy Opportunities Fund BlackRock Exchange Portfolio BlackRock Global Equity Market Neutral Fund BlackRock Health Sciences Opportunities Portfolio BlackRock High Equity Income Fund
BlackRock Mid-Cap Growth Equity Portfolio BlackRock Real Estate Securities Fund BlackRock Short Obligations Fund BlackRock Sustainable Aware Advantage Emerging Markets Equity Fund BlackRock Sustainable Aware Advantage Large Cap Core Fund BlackRock Tactical Opportunities Fund BlackRock Technology Opportunities Fund BlackRock Wealth Liquid Environmentally Aware Fund Circle Reserve Fund iShares Developed Real Estate Index Fund iShares Enhanced Roll Yield Index Fund iShares FTSE NAREIT All Equity REIT Index Fund iShares Municipal Bond Index Fund iShares Russell Mid-Cap Index Fund iShares Russell Small/Mid-Cap Index Fund iShares Short-Term TIPS Bond Index Fund iShares Total U.S. Stock Market Index Fund iShares U.S. Intermediate Credit Bond Index Fund iShares U.S. Intermediate Government Bond Index Fund iShares U.S. Long Credit Bond Index Fund iShares U.S. Long Government Bond Index Fund iShares U.S. Securitized Bond Index Fund
BlackRock Funds II BlackRock 20/80 Target Allocation Fund BlackRock 40/60 Target Allocation Fund BlackRock 60/40 Target Allocation Fund BlackRock 80/20 Target Allocation Fund BlackRock Dynamic High Income Portfolio BlackRock Global Dividend Portfolio BlackRock Managed Income Fund BlackRock Multi-Asset Income Portfolio BlackRock Retirement Income 2030 Fund
BlackRock Funds III BlackRock Cash Funds: Institutional BlackRock Cash Funds: Treasury BlackRock Diversified Equity Alpha Fund BlackRock Diversified Fixed Income Fund BlackRock LifePath ® Dynamic Retirement Fund BlackRock LifePath ® Dynamic 2030 Fund BlackRock LifePath ® Dynamic 2035 Fund BlackRock LifePath ® Dynamic 2040 Fund BlackRock LifePath ® Dynamic 2045 Fund
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BlackRock LifePath ® Dynamic 2050 Fund BlackRock LifePath ® Dynamic 2055 Fund BlackRock LifePath ® Dynamic 2060 Fund BlackRock LifePath ® Dynamic 2065 Fund BlackRock LifePath ® Dynamic 2070 Fund BlackRock LifePath ® Index Retirement Fund BlackRock LifePath ® Index 2030 Fund BlackRock LifePath ® Index 2035 Fund BlackRock LifePath ® Index 2040 Fund BlackRock LifePath ® Index 2045 Fund BlackRock LifePath ® Index 2050 Fund BlackRock LifePath ® Index 2055 Fund BlackRock LifePath ® Index 2060 Fund BlackRock LifePath ® Index 2065 Fund BlackRock LifePath ® Index 2070 Fund iShares MSCI Total International Index Fund iShares Russell 1000 Large-Cap Index Fund iShares S&P 500 Index Fund iShares U.S. Aggregate Bond Index Fund
BlackRock Funds IV BlackRock Credit Relative Value Fund BlackRock Systematic Multi-Strategy Fund
BlackRock Funds V BlackRock Core Bond Portfolio BlackRock Floating Rate Income Portfolio BlackRock High Yield Portfolio BlackRock Income Fund BlackRock Inflation Protected Bond Portfolio BlackRock Low Duration Bond Portfolio BlackRock Strategic Income Opportunities Portfolio
BlackRock Funds VI BlackRock Advantage CoreAlpha Bond Fund
BlackRock Global Allocation Fund, Inc.
BlackRock Index Funds, Inc. iShares MSCI EAFE International Index Fund iShares Russell 2000 Small-Cap Index Fund
BlackRock International Select Equity Fund
BlackRock Large Cap Focus Growth Fund, Inc.
BlackRock Large Cap Focus Value Fund, Inc.
BlackRock Large Cap Series Funds, Inc. BlackRock Advantage Large Cap Core Fund BlackRock Advantage Large Cap Value Fund BlackRock Event Driven Equity Fund
BlackRock Liquidity Funds FedFund MuniCash TempCash BlackRock Select Treasury Based Liquidity Fund T-Fund Treasury Trust Fund
BlackRock Mid-Cap Value Series, Inc. BlackRock Mid-Cap Value Fund
BlackRock Multi-State Municipal Series Trust BlackRock New Jersey Municipal Bond Fund BlackRock New York Municipal Opportunities Fund BlackRock Pennsylvania Municipal Bond Fund
BlackRock Municipal Bond Fund, Inc. BlackRock National Municipal Fund BlackRock Short Duration Muni Fund
BlackRock Municipal Series Trust BlackRock Strategic Municipal Opportunities Fund
BlackRock Natural Resources Trust
BlackRock Series Fund, Inc. BlackRock Advantage Large Cap Core Portfolio BlackRock Balanced Portfolio BlackRock Capital Appreciation Portfolio BlackRock Global Allocation Portfolio BlackRock Government Money Market Portfolio
BlackRock Series Fund II, Inc. BlackRock High Yield Portfolio
BlackRock Series, Inc. BlackRock International Fund
BlackRock Strategic Global Bond Fund, Inc.
BlackRock Unconstrained Equity Fund
BlackRock Variable Series Funds, Inc. BlackRock 60/40 Target Allocation ETF V.I. Fund BlackRock Advantage Large Cap Core V.I. Fund BlackRock Advantage Large Cap Value V.I. Fund BlackRock Advantage SMID Cap V.I. Fund
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BlackRock Basic Value V.I. Fund BlackRock Capital Appreciation V.I. Fund BlackRock Equity Dividend V.I. Fund BlackRock Global Allocation V.I. Fund BlackRock Government Money Market V.I. Fund BlackRock International Index V.I. Fund BlackRock International V.I. Fund
BlackRock Large Cap Focus Growth V.I. Fund BlackRock Managed Volatility V.I. Fund BlackRock S&P 500 Index V.I. Fund BlackRock Small Cap Index V.I. Fund
BlackRock Variable Series Funds II, Inc. BlackRock High Yield V.I. Fund BlackRock Total Return V.I. Fund
Shareholders should retain this Supplement for future reference.
SAI-GLOBAL-1026SUP
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BlackRock Advantage Global Fund, Inc. BlackRock Advantage SMID Cap Fund, Inc. BlackRock Allocation Target Shares BlackRock Balanced Fund, Inc. BlackRock Bond Fund, Inc. BlackRock California Municipal Series Trust BlackRock Capital Appreciation Fund, Inc. BlackRock Emerging Markets Fund, Inc. BlackRock Equity Dividend Fund BlackRock Financial Institutions Series Trust BlackRock Funds SM BlackRock Funds II BlackRock Funds III BlackRock Funds IV BlackRock Funds V BlackRock Funds VI BlackRock Global Allocation Fund, Inc. BlackRock Index Funds, Inc.
BlackRock International Select Equity Fund BlackRock Large Cap Focus Growth Fund, Inc. BlackRock Large Cap Focus Value Fund, Inc. BlackRock Large Cap Series Funds, Inc. BlackRock Liquidity Funds BlackRock Mid-Cap Value Series, Inc. BlackRock Multi-State Municipal Series Trust BlackRock Municipal Bond Fund, Inc. BlackRock Municipal Series Trust BlackRock Natural Resources Trust BlackRock Series Fund, Inc. BlackRock Series Fund II, Inc. BlackRock Series, Inc. BlackRock Strategic Global Bond Fund, Inc. BlackRock Unconstrained Equity Fund BlackRock Variable Series Funds, Inc. BlackRock Variable Series Funds II, Inc.
Supplement dated September 11, 2026 to the Statement of Additional Information (“SAI”) of each of the funds listed in Appendix A (each, a “Fund”), as amended from time to time.
Each Fund’s SAI is amended as follows:
The list in the section entitled “Purchase of Shares - Additional Payments by BlackRock - D. Service Organizations Receiving Additional Payments” in Part II, or in the section entitled “Miscellaneous Additional Payments by BlackRock - D. Service Organizations Receiving Additional Payments,” “Investment Advisory Arrangements - Additional Payments by BlackRock - D. Service Organizations Receiving Additional Payments” or “Investment Adviser and Other Service Providers - Additional Payments by BlackRock - D. Service Organizations Receiving Additional Payments,” as applicable, of each Fund’s current SAI, is deleted in its entirety and replaced with the following:
&Partners AccuTech Systems Corporation ADP Broker-Dealer, Inc. Advisor Credit Exchange, LLC Advisor Group, Inc. AE Wealth Management, LLC Alight Solutions LLC Allianz Life Financial Services, LLC Allianz Life Insurance Company of New York Allianz Life Insurance Company of North America Altruist Financial LLC American Enterprise Investment Services, Inc. American General Life Insurance Company American United Life Insurance Company Annuity Investors Life Insurance Company Anthem Securities LLC Argent Institutional Trust Company Ascensus Broker Dealer Services, Inc. Ascensus, Inc. Atomic Brokerage LLC Avantax Investment Services, LLC
Bancroft Capital LLC Bank of America, N.A. Bank of New York Mellon Barclays Capital Inc. Benefit Plans Administrative Services, Inc. Benefit Trust Company Beta Capital Securities LLC bfinance US Ltd. BlackRock Advisors, LLC BMO Capital Markets Corp. BNP Paribas BNP Paribas Investment Partners UK Limited BNY Mellon, N.A. BofA Securities, Inc. BOKF, N.A. Brighthouse Life Insurance Company Brighthouse Life Insurance Company of NY Broadridge Business Process Outsourcing, LLC Brown Brothers Harriman & Co. Cabrera Capital Markets, LLC Capital One, N.A.
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Cetera Advisor Networks LLC Cetera Advisors LLC Cetera Financial Group Cetera Financial Specialists LLC Cetera Investment Services LLC CF Secured, LLC Charles Schwab & Co., Inc. Charles Schwab Trust Bank Chicago Mercantile Exchange Inc. CIM Investment Management, Inc. Citco Securities, LLC CitiBank, National Association Citigroup Global Markets, Inc. Citizens Bank Citizens Business Bank CME Shareholder Servicing LLC CMFG Life Insurance Company Comerica Bank Commonwealth Financial Network Computershare Trust Company Conduent HR Services, LLC Delaware Life Insurance Company Delaware Trust Company Deutsche Bank AG Deutsche Bank Trust Company Americas Digital Retirement Solutions, Inc. Dunham & Associates Investment Counsel, Inc. Dynasty Financial Partners LLC Edward D. Jones & Co., L.P. Empire Fidelity Investments Life Insurance Company Empower Annuity Insurance Company of America Empower Financial Services, Inc. Empower Life & Annuity Insurance Company of New York Empower Plan Services, LLC Envestnet Asset Management, Inc. Equitable Advisors, LLC Equitable Life Insurance Company E*trade Savings Bank Federal Deposit Insurance Corporation Fidelity Brokerage Services LLC Fidelity Investments Institutional Operations Company, Inc. Fidelity Investments Life Insurance Company Fifth Third Securities, Inc. First Allied Securities, Inc. First Command Financial Planning, Inc. First Hawaiian Bank First Republic Bank First Security Benefit Life Insurance and Annuity Company of New York
First Symetra National Life Insurance Company of New York First-Citizens Bank & Trust Company FIS Brokerage & Securities Services LLC FNEX Capital, LLC Forethought Life Insurance Company FSC Securities Corporation Genworth Life and Annuity Insurance Company Genworth Life Insurance Company of New York Global Atlantic Distributors, LLC Goldman Sachs & Co. Great Pacific Securities, LLC Guardian Insurance & Annuity Co., Inc. Hancock Whitney Bank Hartford Funds Management Company Hartford Securities Distribution Company, Inc. Hazeltree Fund Services, Inc. Hightower Securities, Inc. Hilltop Securities Inc. HSBC Bank USA, N.A. Huntington Securities, Inc. Institutional Cash Distributors, LLC Integrity Life Insurance Company Interactive Brokers, LLC Investment Trust of California J.P. Morgan Institutional Investments Inc. J.P. Morgan Securities LLC Jefferies LLC Jefferson National Life Insurance Company Jefferson National Life Insurance Company of New York John Hancock Life Insurance Company (U.S.A.) John Hancock Life Insurance Company of New York John Hancock Trust Company JPMorgan Chase Bank, N.A. Kestra Investment Services, LLC Lincoln Financial Advisors Corporation Lincoln Financial Securities Corporation Lincoln Life & Annuity Company of New York Lincoln National Life Insurance Company Lincoln Retirement Services LLC Lombard International Life Assurance Company LPL Financial LLC M&T Securities Inc. Manufacturers and Traders Trust Company Massachusetts Mutual Life Insurance Company Members Life Insurance Company Merrill Lynch, Pierce, Fenner & Smith Incorporated Metavante Corporation Metropolitan Life Insurance Company Mid Atlantic Clearing & Settlement Corporation Midland Life Insurance Company
2
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Minnesota Life Insurance Company Mischler Financial Group Mizuho Securities USA Inc. MML Distributors, LLC MML Investors Services, LLC Morgan Stanley & Co. LLC Morgan Stanley Distribution, Inc. Morgan Stanley Smith Barney LLC MUFG Union Bank, National Association Nassau Life Insurance Company National Financial Services LLC National Integrity Life Insurance Company National Life Insurance Company Nationwide Financial Services, Inc. Nationwide Fund Distributors LLC Nationwide Retirement Solutions NCB Federal Savings Bank New England Pension Plan Systems, LLC New York Life Insurance and Annuity Corporation Newport Retirement Services, Inc. Northbrook Bank & Trust Company Northern Trust Company Northwestern Mutual Investment Services, LLC Northwestern Mutual Life Insurance Company NYLife Distributors LLC Oppenheimer & Co., Inc. Orion Advisor Services, LLC Osaic Wealth, Inc. Pacific Life & Annuity Company Pacific Life Insurance Company Pacific Select Distributors, LLC Park Avenue Securities LLC Penserra Securities LLC Pershing LLC PFPC Inc. Piper Jaffray & Co. PNC Bank, National Association PNC Capital Markets LLC PNC Investments LLC Principal Bank Principal Life Insurance Company Protective Life and Annuity Insurance Company Protective Life Insurance Company Pruco Life Insurance Company Pruco Life Insurance Company of New Jersey Prudential Annuities Distributors, Inc. Prudential Insurance Company of America Raymond James & Associates, Inc. Raymond James Financial Services, Inc. RBC Capital Markets, LLC Regions Bank Reliance Trust Company
Reliastar Life Insurance Company Reliastar Life Insurance Company of New York RiverSource Distributors, Inc. RiverSource Life Insurance Co. of New York RiverSource Life Insurance Company SagePoint Financial, Inc. Sammons Retirement Solutions, Inc. Sanctuary Wealth Group, LLC Santander Bank, N.A. Saturna Trust Company Securities America, Inc. Securities Finance Trust Company Security Benefit Life Insurance Company Security Financial Resources, Inc. Security Life of Denver Insurance Company SEI Private Trust Company SG Americas Securities, LLC Silicon Valley Bank Standard Insurance Company State Farm Life and Accident Assurance Company State Farm Life Insurance Company State Farm VP Management Corp. State Street Bank and Trust Company State Street Global Markets, LLC Stern Brothers & Co. Stifel, Nicolaus & Company, Incorporated Summit Brokerage Services, Inc. SVB Asset Management Symetra Life Insurance Company Syntal Capital Partners, LLC T. Rowe Price Retirement Plan Services, Inc. Talcott Resolution Life and Annuity Insurance Company Talcott Resolution Life Insurance Company TD Ameritrade Clearing, Inc. TD Ameritrade, Inc. TD Prime Services (US) LLC Teachers Insurance and Annuity Association of America Tigress Financial Partners, LLC Transamerica Financial Life Insurance Company Transamerica Life Insurance Company Treasury Brokerage Triad Advisors, LLC Truist Bank U.S. Bancorp Investments, Inc. U.S. Bank, National Association UBATCO & Co. UBS Financial Services, Inc. UBS Securities LLC Ultimus Fund Solutions, LLC UMB Bank, National Association
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United States Life Insurance Company in the City of New York VALIC Retirement Services Company Vanguard Group, Inc. Vanguard Marketing Corporation Voya Financial Advisors, Inc. Voya Financial Partners, LLC Voya Institutional Plan Services, LLC Voya Insurance and Annuity Company Voya Investments Distributor, LLC Voya Retirement Insurance and Annuity Company
Waddell & Reed, Inc. Wells Fargo Advisors, LLC Wells Fargo Advisors Financial Network, LLC Wells Fargo Bank, N.A. Wells Fargo Clearing Services, LLC Wells Fargo Investments, LLC Wells Fargo Securities, LLC Wilmington Trust, National Association Woodbury Financial Services, Inc. ZB, National Association
4
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Appendix A
BlackRock Advantage Global Fund, Inc.
BlackRock Advantage SMID Cap Fund, Inc.
BlackRock Allocation Target Shares BATS: Securitized Total Return Series BATS: Corporate Credit Total Return Series BATS: High Income Municipal Series BATS: High Income Taxable Series BATS: Mortgage Total Return Series BATS: Interest Rate Hedge Series BATS: Short Duration Taxable Total Return Series BATS: Short Term Municipal Income Series
BlackRock Balanced Fund, Inc.
BlackRock Bond Fund, Inc. BlackRock Total Return Fund
BlackRock California Municipal Series Trust BlackRock California Municipal Opportunities Fund
BlackRock Capital Appreciation Fund, Inc.
BlackRock Emerging Markets Fund, Inc.
BlackRock Equity Dividend Fund
BlackRock Financial Institutions Series Trust BlackRock Summit Cash Reserves Fund
BlackRock Funds SM BlackRock Advantage Emerging Markets Fund BlackRock Advantage International Fund BlackRock Advantage Large Cap Growth Fund BlackRock Advantage Small Cap Core Fund BlackRock Advantage Small Cap Growth Fund BlackRock China A Opportunities Fund BlackRock Commodity Strategies Fund BlackRock Daily Reinvestment Stablecoin Reserve Vehicle BlackRock Defensive Advantage Emerging Markets Fund BlackRock Emerging Markets ex-China Fund BlackRock Energy Opportunities Fund BlackRock Exchange Portfolio BlackRock Global Equity Market Neutral Fund BlackRock Health Sciences Opportunities Portfolio
BlackRock High Equity Income Fund BlackRock Mid-Cap Growth Equity Portfolio BlackRock Real Estate Securities Fund BlackRock Short Obligations Fund BlackRock Sustainable Aware Advantage Emerging Markets Equity Fund BlackRock Sustainable Aware Advantage Large Cap Core Fund BlackRock Tactical Opportunities Fund BlackRock Technology Opportunities Fund BlackRock Wealth Liquid Environmentally Aware Fund Circle Reserve Fund iShares Developed Real Estate Index Fund iShares Enhanced Roll Yield Index Fund iShares FTSE NAREIT All Equity REIT Index Fund iShares Municipal Bond Index Fund iShares Russell Mid-Cap Index Fund iShares Russell Small/Mid-Cap Index Fund iShares Short-Term TIPS Bond Index Fund iShares Total U.S. Stock Market Index Fund iShares U.S. Intermediate Credit Bond Index Fund iShares U.S. Intermediate Government Bond Index Fund iShares U.S. Long Credit Bond Index Fund iShares U.S. Long Government Bond Index Fund iShares U.S. Securitized Bond Index Fund
BlackRock Funds II BlackRock 20/80 Target Allocation Fund BlackRock 40/60 Target Allocation Fund BlackRock 60/40 Target Allocation Fund BlackRock 80/20 Target Allocation Fund BlackRock Dynamic High Income Portfolio BlackRock Global Dividend Portfolio BlackRock Managed Income Fund BlackRock Multi-Asset Income Portfolio BlackRock Retirement Income 2030 Fund
BlackRock Funds III BlackRock Cash Funds: Institutional BlackRock Cash Funds: Treasury BlackRock Diversified Equity Alpha Fund BlackRock Diversified Fixed Income Fund BlackRock LifePath ® Dynamic Retirement Fund BlackRock LifePath ® Dynamic 2030 Fund BlackRock LifePath ® Dynamic 2035 Fund BlackRock LifePath ® Dynamic 2040 Fund BlackRock LifePath ® Dynamic 2045 Fund
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BlackRock LifePath ® Dynamic 2050 Fund BlackRock LifePath ® Dynamic 2055 Fund BlackRock LifePath ® Dynamic 2060 Fund BlackRock LifePath ® Dynamic 2065 Fund BlackRock LifePath ® Dynamic 2070 Fund BlackRock LifePath ® ESG Index Retirement Fund BlackRock LifePath ® ESG Index 2030 Fund BlackRock LifePath ® ESG Index 2035 Fund BlackRock LifePath ® ESG Index 2040 Fund BlackRock LifePath ® ESG Index 2045 Fund BlackRock LifePath ® ESG Index 2050 Fund BlackRock LifePath ® ESG Index 2055 Fund BlackRock LifePath ® ESG Index 2060 Fund BlackRock LifePath ® ESG Index 2065 Fund BlackRock LifePath ® ESG Index 2070 Fund BlackRock LifePath ® Index Retirement Fund BlackRock LifePath ® Index 2030 Fund BlackRock LifePath ® Index 2035 Fund BlackRock LifePath ® Index 2040 Fund BlackRock LifePath ® Index 2045 Fund BlackRock LifePath ® Index 2050 Fund BlackRock LifePath ® Index 2055 Fund BlackRock LifePath ® Index 2060 Fund BlackRock LifePath ® Index 2065 Fund BlackRock LifePath ® Index 2070 Fund iShares MSCI Total International Index Fund iShares Russell 1000 Large-Cap Index Fund iShares S&P 500 Index Fund iShares U.S. Aggregate Bond Index Fund
BlackRock Funds IV BlackRock Credit Relative Value Fund BlackRock Systematic Multi-Strategy Fund
BlackRock Funds V BlackRock Core Bond Portfolio BlackRock Floating Rate Income Portfolio BlackRock High Yield Portfolio BlackRock Income Fund BlackRock Inflation Protected Bond Portfolio BlackRock Low Duration Bond Portfolio BlackRock Strategic Income Opportunities Portfolio
BlackRock Funds VI BlackRock Advantage CoreAlpha Bond Fund
BlackRock Global Allocation Fund, Inc.
BlackRock Index Funds, Inc. iShares MSCI EAFE International Index Fund iShares Russell 2000 Small-Cap Index Fund
BlackRock International Select Equity Fund
BlackRock Large Cap Focus Growth Fund, Inc.
BlackRock Large Cap Focus Value Fund, Inc.
BlackRock Large Cap Series Funds, Inc. BlackRock Advantage Large Cap Core Fund BlackRock Advantage Large Cap Value Fund BlackRock Event Driven Equity Fund
BlackRock Liquidity Funds FedFund MuniCash TempCash BlackRock Select Treasury Based Liquidity Fund T-Fund Treasury Trust Fund
BlackRock Mid-Cap Value Series, Inc. BlackRock Mid-Cap Value Fund
BlackRock Multi-State Municipal Series Trust BlackRock New Jersey Municipal Bond Fund BlackRock New York Municipal Opportunities Fund BlackRock Pennsylvania Municipal Bond Fund
BlackRock Municipal Bond Fund, Inc. BlackRock National Municipal Fund BlackRock Short Duration Muni Fund
BlackRock Municipal Series Trust BlackRock Strategic Municipal Opportunities Fund
BlackRock Natural Resources Trust
BlackRock Series Fund, Inc. BlackRock Advantage Large Cap Core Portfolio BlackRock Balanced Portfolio BlackRock Capital Appreciation Portfolio BlackRock Global Allocation Portfolio BlackRock Government Money Market Portfolio
BlackRock Series Fund II, Inc. BlackRock High Yield Portfolio
BlackRock Series, Inc. BlackRock International Fund
BlackRock Strategic Global Bond Fund, Inc.
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BlackRock Unconstrained Equity Fund
BlackRock Variable Series Funds, Inc. BlackRock 60/40 Target Allocation ETF V.I. Fund BlackRock Advantage Large Cap Core V.I. Fund BlackRock Advantage Large Cap Value V.I. Fund BlackRock Advantage SMID Cap V.I. Fund BlackRock Basic Value V.I. Fund BlackRock Capital Appreciation V.I. Fund BlackRock Equity Dividend V.I. Fund BlackRock Global Allocation V.I. Fund
BlackRock Government Money Market V.I. Fund BlackRock International Index V.I. Fund BlackRock International V.I. Fund BlackRock Large Cap Focus Growth V.I. Fund BlackRock Managed Volatility V.I. Fund BlackRock S&P 500 Index V.I. Fund BlackRock Small Cap Index V.I. Fund
BlackRock Variable Series Funds II, Inc. BlackRock High Yield V.I. Fund BlackRock Total Return V.I. Fund
Shareholders should retain this Supplement for future reference.
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STATEMENT OF ADDITIONAL INFORMATION
BlackRock Funds III
iShares U.S. Aggregate Bond Index Fund
400 Howard Street, San Francisco, California 94105 • Phone No. (800) 441-7762
BlackRock Funds III (the “Trust”) is an open-end, series management investment company. This Statement of Additional Information contains additional information about iShares U.S. Aggregate Bond Index Fund (the “Fund”), a series of the Trust.
The Fund invests substantially all of its assets in U.S. Total Bond Index Master Portfolio (the “Master Portfolio”), a series of Master Investment Portfolio (“MIP”), which has the same investment objective as the Fund. MIP is an open-end, series management investment company. BlackRock Fund Advisors (“BFA” or the “Manager”) serves as investment adviser to the Master Portfolio. References to the investments, investment policies and risks of the Fund, unless otherwise indicated, should be understood to include references to the investments, investment policies and risks of the Master Portfolio.
This Statement of Additional Information of the Fund is not a prospectus and should be read in conjunction with the prospectuses of the Fund, dated April 30, 2026, as they may be amended or supplemented from time to time (the “Prospectus”), which have been filed with the Securities and Exchange Commission (the “Commission” or the “SEC”) and can be obtained, without charge, by calling (800) 441-7762 or by writing to the Fund at the above address. Part I of this Statement of Additional Information and the portions of Part II of this Statement of Additional Information that relate to the Fund have been incorporated by reference into the Fund’s Prospectus. The portions of Part II of this Statement of Additional Information that do not relate to the Fund do not form a part of the Fund’s Statement of Additional Information, have not been incorporated by reference into the Fund’s Prospectus and should not be relied upon by investors in the Fund. The audited financial statements of the Fund and the Master Portfolio are incorporated into this Statement of Additional Information by reference to the Fund’s Annual Financial Statements and Additional Information for the fiscal year ended December 31, 2025, as filed with the SEC on Form N-CSR (the “2025 Annual Financial Statements”). You may request a copy of the 2025 Annual Financial Statements at no charge by calling (800) 441-7762 between 8:00 a.m. and 6:00 p.m. Eastern time on any business day.
References to the Investment Company Act of 1940, as amended (the “Investment Company Act”), or other applicable law, will include any rules promulgated thereunder and any guidance, interpretations or modifications by the Commission, Commission staff or other authority with appropriate jurisdiction, including court interpretations, and exemptive, no-action or other relief or permission from the Commission, Commission staff or other authority.
Class Ticker Symbol Investor A Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BMOAX Institutional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BMOIX Investor P Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BMOPX Class K Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . WFBIX
BlackRock Fund Advisors — Manager
BlackRock Investments, LLC — Distributor
The date of this Statement of Additional Information is April 30, 2026.
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TABLE OF CONTENTS
Page PART I Investment Objective and Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-1 Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-6 Information on Trustees and Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-9 Management, Advisory and Other Service Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-20 Information on Sales Charges and Distribution Related Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-25 Computation of Offering Price Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-26 Por tfolio Transactions and Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-26 Additional Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-28 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I-29
PART II Investment Risks and Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-1 Management and Other Service Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-81 Selective Disclosure of Por tfolio Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-84 Purchase of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II-98 Redemption of Shares . . ........................................................................... I I-115 Shareholder Services . . ............................................................................ I I-118 Pricing of Shares .................................................................................. I I-122 Por tfolio Transactions and Brokerage . . .............................................................. I I-124 Dividends and Taxes . . ............................................................................. I I-128 Per formance Data ................................................................................. I I-136 Proxy Voting Policies and Procedures . . . . . . . . . . . . . . . . . . . . . . ........................................... I I-138 General Information ............................................................................... I I-138 Appendix A — Description of Bond Ratings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1 Appendix B — Proxy Voting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
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PART I: INFORMATION ABOUT THE FUND
Par t I of this Statement of Additional Information (“SAI”) sets for th information about iShares U.S. Aggregate Bond Index Fund (the “Fund”), a series of BlackRock Funds III (the “Trust”). It includes information about the Trust’s Board of Trustees (the “Board” or the “Board of Trustees”), the advisory and management services provided to and the management fees applicable to the Fund and information about other fees applicable to and services provided to the Fund. This Par t I of this SAI should be read in conjunction with the Fund’s Prospectus and those por tions of Par t II of this SAI that per tain to the Fund.
I. Investment Objective and Policies
Please see the Fund’s Prospectus for more information about the Fund’s investment objective and policies. The Fund’s investment objective is non-fundamental, which means it can be changed by the Board without shareholder approval. The Fund invests all of its assets in U.S. Total Bond Index Master Por tfolio (the “Master Por tfolio”) of Master Investment Por tfolio (“MIP”), which has substantially the same investment objective, policies and restrictions as the Fund.
The Fund is subject to Rule 35d-1 under the Investment Company Act of 1940, as amended (the “Investment Company Act”), and will not change its investment policies required by that Rule without giving shareholders 60 days’ prior written notice.
In implementing the Fund’s investment strategy, from time to time, BlackRock Fund Advisors (“BFA” or the “Manager”), the Fund’s investment manager, may consider and employ techniques and strategies designed to minimize and defer the U.S. federal income taxes which may be incurred by shareholders in connection with their investment in the Fund.
The Fund is classified as diversified under the Investment Company Act.
Master/Feeder Structure
The Fund seeks to achieve its investment objective by investing all of its assets in the Master Por tfolio. In other words, the Fund is a “Feeder Fund” into the Master Por tfolio, and the Master Por tfolio in turn is a Master Fund. The Board of Trustees believes that neither the Fund nor its shareholders will be adversely affected by investing its assets in the Master Por tfolio. However, if another feeder fund or other investor withdraws its investment from the Master Por tfolio, the economic efficiencies ( e.g. , spreading fixed expenses among a larger asset base) that the Board of Trustees believes may be available through investment in the Master Por tfolio may not be fully achieved. In addition, although it is unlikely, the master/feeder structure may give rise to accounting or operational difficulties.
The Fund may withdraw its investment in the Master Por tfolio only if the Board of Trustees determines that such action is in the best interests of the Fund and its shareholders. Prior to any such withdrawal, the Board of Trustees would consider alternative investments, including investing all of the Fund’s assets in another investment company with substantially the same investment objective as the Fund or hiring an investment adviser to manage the Fund’s assets in accordance with the investment policies described herein with respect to the Fund and its Master Por tfolio.
Whenever the Fund, as an interestholder of the Master Por tfolio, is requested to vote on any matter submitted to interestholders of the Master Por tfolio, the Fund will either hold a meeting of its shareholders to consider such matters and cast its votes in propor tion to the votes received from its shareholders (shares for which the Fund receives no voting instructions will be voted in the same propor tion as the votes received from the other Fund shareholders) or cast its votes, as an interestholder of the Master Por tfolio, in propor tion to the votes received by the Master Por tfolio from all other interestholders of the Master Por tfolio.
Cer tain policies of the Master Por tfolio that are non-fundamental may be changed by the vote of a majority of MIP’s Trustees without interestholder approval. If the Master Por tfolio’s investment objective or fundamental or non fundamental policies are changed, the Fund may elect to change its investment objective or policies to correspond to those of the Master Por tfolio.
The Fund also may elect to redeem its interests from its Master Por tfolio and either seek a new investment company with a matching investment objective in which to invest or retain its own investment adviser to manage its por tfolio in accordance with its investment objective. In the latter case, the Fund’s inability to find a substitute investment company in which to invest or equivalent management services could adversely affect shareholders’ investments in the Fund. The Fund will provide its shareholders with written notice 30 days prior to the implementation of any change in the investment objective of the Fund or the Master Por tfolio, to the extent possible.
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Set for th below is a listing of some of the types of investments and investment strategies that the Fund may use, and the risks and considerations associated with those investments and investment strategies. Please see Par t II of this SAI for fur ther information on these investments and investment strategies. Information contained in Par t II about the risks and considerations associated with investments and/or investment strategies applies only to the extent the Fund makes each type of investment or uses each investment strategy. Also set for th below is a listing of the proxy voting policy and related guidelines applicable to the Fund. Please see the “Proxy Voting Policies and Procedures” in Par t II of this SAI for fur ther information about these policies. A copy of each policy is included in Appendix B. Information that does not apply to the Fund does not form a par t of the Fund’s SAI and should not be relied on by investors in the Fund.
Only information that is clearly identified as applicable to the Fund is considered to form a par t of the Fund’s SAI.
iShares U.S. Aggregate Bond Index Fund Asset-Backed Securities X Asset-Based Securities Precious Metal-Related Securities Borrowing and Leverage X Cash Management X Collateralized Debt Obligations
Collateralized Bond Obligations Collateralized Loan Obligations Commercial Paper X Commodity-Linked Derivative Instruments and Hybrid Instruments Qualifying Hybrid Instruments Hybrid Instruments Without Principal Protection
Limitations on Leverage Counterpar ty Risk Convertible Securities Corporate Loans Direct Lending Credit Linked Securities Debt Securities X Floating and Variable Rate Securities X Inflation-Indexed Bonds Investment Grade Debt Obligations X High Yield Investments (“Junk Bonds”) Mezzanine Investments
Pay-in-kind Bonds Supranational Entities X Depositary Receipts (ADRs, EDRs and GDRs) X Derivatives X Hedging Speculation Risk Factors in Derivatives X Correlation Risk X Counterpar ty Risk X
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iShares U.S. Aggregate Bond Index Fund Credit Risk X Currency Risk X Illiquidity Risk X
Index Risk Legal Risk Leverage Risk X Market Risk X Operational Risk Valuation Risk X Volatility Risk X
Futures X Swap Agreements X Credit Default Swaps and Similar Instruments Interest Rate Swaps, Floors and Caps X Total Return Swaps X Options X Options on Securities and Securities Indices X
Call Options X Put Options X Options on Government National Mor tgage Association (“GNMA”) Cer tificates Options on Swaps (“Swaptions”) FLEX Options
Foreign Exchange Transactions Spot Transactions and FX Forwards Currency Futures Currency Options Currency Swaps Distressed Securities Environmental, Social and Governance (“ESG”) Integration
Equity Securities X Real Estate-Related Securities Securities of Smaller or Emerging Growth Companies Tracking Stocks Exchange-Traded Notes (“ETNs”) Foreign Investments X
Foreign Investment Risks X Foreign Market Risk X Foreign Economy Risk X Currency Risk and Exchange Risk X Governmental Supervision and Regulation/Accounting Standards X Cer tain Risks of Holding Fund Assets Outside the United States X Publicly Available Information X
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iShares U.S. Aggregate Bond Index Fund Settlement Risk X Sovereign Debt X Withholding Tax Reclaims Risk X U.S. Economic Trading Par tners Risk X
Funding Agreements Guarantees X Illiquid Investments X Index Funds X Cash Flows; Expenses Tracking Error Risk X
S&P 500 Index Russell Indexes MSCI Indexes FTSE Indexes Bloomberg Indexes X ICE BofA Indexes Indexed and Inverse Securities
Inflation Risk X Initial Public Offering (“IPO”) Risk Investment in Emerging Markets X Brady Bonds China Investments Risk Investment in Other Investment Companies X Exchange-Traded Funds X Issuer Insolvency Risk Lease Obligations Life Settlement Investments Liquidity Risk Management X Market Risks/Recent Market Events X
Master Limited Partnerships X Merger Transaction Risk Money Market Obligations of Domestic Banks, Foreign Banks and Foreign Branches of U.S. Banks X Money Market Securities X Mortgage-Related Securities X Mor tgage-Backed Securities X Collateralized Mor tgage Obligations (“CMOs”) X Adjustable Rate Mor tgage Securities X
CMO Residuals Stripped Mor tgage-Backed Securities Tiered Index Bonds TBA Commitments X
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iShares U.S. Aggregate Bond Index Fund Mor tgage Dollar Rolls X Net Interest Margin (NIM) Securities Municipal Investments X Risk Factors and Special Considerations Relating to Municipal Bonds X Description of Municipal Bonds X General Obligation Bonds X Revenue Bonds X Private Activity Bonds (“PABs”) Moral Obligation Bonds Municipal Notes
Municipal Commercial Paper Municipal Lease Obligations X Tender Option Bonds Yields Variable Rate Demand Obligations (“VRDOs”) Transactions in Financial Futures Contracts on Municipal Indexes Call Rights
Municipal Interest Rate Swap Transactions Insured Municipal Bonds X Build America Bonds X Tax-Exempt Municipal Investments Operational and Technology Risks X Participation Notes
Portfolio Turnover Rates X Preferred Stock Tax-Exempt Preferred Shares Trust Preferred Securities Proxy Voting Policies Open-End Active and Fixed Income Index Fund Proxy Voting Policy X BlackRock Active Investment Stewardship Climate and Decarbonization Stewardship Guidelines Index Equity Fund Proxy Voting Policy BlackRock Investment Stewardship Climate and Decarbonization Stewardship Guidelines
Real Estate Investment Trusts (“REITs”) X Reference Rate Replacement Risk X Repurchase Agreements and Purchase and Sale Contracts X Restricted Securities X Reverse Repurchase Agreements X Rights Offerings and Warrants to Purchase
Rule 144A Securities X Securities Lending X Short Sales
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iShares U.S. Aggregate Bond Index Fund Special Purpose Acquisition Companies Standby Commitment Agreements Stripped Securities Structured Notes
Taxability Risk X Temporary Defensive Measures X U.S. Government Obligations X U.S. Treasury Obligations X U.S. Treasury Rolls X Utility Industries X
When-Issued Securities, Delayed Delivery Securities and Forward Commitments X Yields and Ratings Zero Coupon Securities
Regulation Regarding Derivatives. The Commodity Futures Trading Commission (“CFTC”) subjects advisers to registered investment companies to regulation by the CFTC if a fund that is advised by the investment adviser either (i) invests, directly or indirectly, more than a prescribed level of its liquidation value in CFTC-regulated futures, options and swaps (“CFTC Derivatives”), or (ii) markets itself as providing investment exposure to such instruments. To the extent the Fund uses CFTC Derivatives, it intends to do so below such prescribed levels and will not market itself as a “commodity pool” or a vehicle for trading such instruments. Accordingly, BFA has claimed an exclusion from the definition of the term “commodity pool operator” under the Commodity Exchange Act (“CEA”) pursuant to Rule 4.5 under the CEA. BFA is not, therefore, subject to registration or regulation as a “commodity pool operator” under the CEA in respect of the Fund.
II. Investment Restrictions
The Trust, on behalf of the Fund, has adopted restrictions and policies relating to the investment of the Fund’s assets and its activities. Cer tain of the restrictions are fundamental policies of the Fund and may not be changed without the approval of the holders of a majority of the Fund’s outstanding voting securities (which for this purpose and under the Investment Company Act, means the lesser of (i) 67% of the shares represented at a meeting at which more than 50% of the outstanding shares are represented or (ii) more than 50% of the outstanding shares). The Trust, on behalf of the Fund, has also adopted cer tain non-fundamental investment restrictions, which may be changed by the Board of Trustees without shareholder approval. None of the following fundamental or non fundamental investment restrictions shall prevent the Fund from investing all of its assets in shares of another registered investment company with the same investment objective and fundamental policies (in a master/feeder structure).
Fundamental Investment Restrictions of the Fund
The Fund is subject to the following investment restrictions, all of which are fundamental policies. The Fund may not:
(1) Purchase the securities of issuers conducting their principal business activity in the same industry if, immediately after the purchase and as a result thereof, the value of the Fund’s investments in that industry would equal or exceed 25% of the current value of the Fund’s total assets, provided that this restriction does not limit the Fund’s: (i) investments in securities of other investment companies, (ii) investments in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities, or (iii) investments in repurchase agreements collateralized by U.S. Government securities, and provided fur ther that the Fund reserves the right to concentrate in any industry in which the index that the Fund tracks becomes concentrated to approximately the same degree during the same period;
(2) Purchase the securities of any single issuer if, as a result, with respect to 75% of the Fund’s total assets, more than 5% of the value of its total assets would be invested in the securities of such issuer or the Fund’s ownership would be more than 10% of the outstanding voting securities of such issuer, provided that this restriction
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does not limit the Fund’s cash or cash items, investments in securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities, or investments in securities of other investment companies;
(3) Borrow money or issue senior securities, except to the extent permitted under the Investment Company Act, including the rules, regulations and any orders obtained thereunder;
(4) Make loans to other par ties, except to the extent permitted under the Investment Company Act, including the rules, regulations and any orders obtained thereunder. For the purposes of this limitation, entering into repurchase agreements, lending securities and acquiring any debt securities are not deemed to be the making of loans;
(5) Underwrite securities of other issuers, except to the extent that the purchase of permitted investments directly from the issuer thereof or from an underwriter for an issuer and the later disposition of such securities in accordance with the Fund’s investment program may be deemed to be an underwriting; and provided fur ther, that the purchase by the Fund of securities issued by an open-end management investment company, or a series thereof, with substantially the same investment objective, policies and restrictions as the Fund shall not constitute an underwriting for purposes of this paragraph;
(6) Purchase or sell real estate unless acquired as a result of ownership of securities or other instruments (but this shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business);
(7) Purchase or sell commodities, provided that (i) currency will not be deemed to be a commodity for purposes of this restriction, (ii) this restriction does not limit the purchase or sale of futures contracts, forward contracts or options, and (iii) this restriction does not limit the purchase or sale of securities or other instruments backed by commodities or the purchase or sale of commodities acquired as a result of ownership of securities or other instruments; and
(8) Purchase securities on margin (except for shor t-term credit necessary for the clearance of transactions and except for margin payments in connection with options, futures and options on futures) or make shor t sales of securities.
Notations Regarding the Fund’s Fundamental Investment Restrictions
The following notations are not considered to be par t of the Fund’s fundamental investment restrictions and are subject to change without shareholder approval.
With respect to the fundamental policy relating to concentration set for th in fundamental investment restriction no. 1 above, with respect to the Fund’s industry classifications, the Fund currently utilizes 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 Fund management. The policy also will be interpreted to give broad authority to the Fund as to how to classify issuers within or among industries.
While cer tain swaps are now considered commodity interests for purposes of the Commodity Exchange Act and the rules thereunder, at the time of the Fund’s adoption of fundamental investment restriction no. 7 above, many swaps were treated as securities for purposes of the Fund’s compliance with applicable law. Accordingly, fundamental investment restriction no. 7 above is being interpreted to permit the Fund to engage in transactions in swaps and options on swaps related to financial instruments, such as securities, securities indices and currencies, but not to engage in transactions in swaps or options on swaps related to physical commodities, such as oil or metals.
With respect to fundamental investment restriction no. 3 above, the Investment Company Act currently allows the Fund to borrow up to one-third of the value of its total assets (including the amount borrowed) valued at the lesser of cost or market, less liabilities (not including the amount borrowed) at the time the borrowing is made. With respect to fundamental investment restriction no. 4 above, the Investment Company Act and regulatory interpretations currently limit the percentage of the Fund’s securities that may be loaned to one-third of the value of its total assets.
Non-Fundamental Investment Restrictions of the Fund
Under its non-fundamental investment restrictions, which may be changed by the Board without shareholder approval, the Fund may not purchase securities of other investment companies, except to the extent permitted by the Investment Company Act. As a matter of policy, however, the Fund will not purchase shares of any registered open end investment company or registered unit investment trust, in reliance on Section 12(d)(1)(F) or (G) (the “fund of funds” provisions) of the Investment Company Act, at any time the Fund has knowledge that its shares are purchased by another investment company investor in reliance on the provisions of subparagraph (G) of Section 12(d)(1).
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Notwithstanding any other investment policy or restriction (whether or not fundamental), the Fund may and does invest all of its assets in the securities of a single open-end management investment company with substantially the same fundamental investment objective, policies and limitations as the Fund. See “Investment Objective and Policies — Master/Feeder Structure.”
Fundamental Investment Restrictions of the Master Portfolio
The Master Por tfolio has adopted the following investment restrictions as fundamental policies. These restrictions cannot be changed, as to the Master Por tfolio, without approval by the holders of a majority (as defined in the Investment Company Act) of the Master Por tfolio’s outstanding voting interests. The Master Por tfolio may not:
(1) Purchase the securities of issuers conducting their principal business activity in the same industry if, immediately after the purchase and as a result thereof, the value of the Master Por tfolio’s investments in that industry would equal or exceed 25% of the current value of the Master Por tfolio’s total assets, provided that this restriction does not limit the Master Por tfolio’s: (i) investments in securities of other investment companies, (ii) investments in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities, or (iii) investments in repurchase agreements collateralized by U.S. Government securities, and provided fur ther that the Master Por tfolio reserves the right to concentrate in any industry in which the index that the Master Por tfolio tracks becomes concentrated to approximately the same degree during the same period;
(2) Purchase the securities of any single issuer if, as a result, with respect to 75% of the Master Por tfolio’s total assets, more than 5% of the value of its total assets would be invested in the securities of such issuer or the Master Por tfolio’s ownership would be more than 10% of the outstanding voting securities of such issuer, provided that this restriction does not limit the Master Por tfolio’s cash or cash items, investments in securities issued or guaranteed by the U.S. Government, its agencies and instrumentalities, or investments in securities of other investment companies;
(3) Borrow money or issue senior securities, except to the extent permitted under the Investment Company Act, including the rules, regulations and any orders obtained thereunder;
(4) Make loans to other par ties, except to the extent permitted under the Investment Company Act, including the rules, regulations and any orders obtained thereunder. For the purposes of this limitation, entering into repurchase agreements, lending securities and acquiring any debt securities are not deemed to be the making of loans;
(5) Underwrite securities of other issuers, except to the extent that the purchase of permitted investments directly from the issuer thereof or from an underwriter for an issuer and the later disposition of such securities in accordance with the Master Por tfolio’s investment program may be deemed to be an underwriting; and provided fur ther, that the purchase by the Master Por tfolio of securities issued by an open-end management investment company, or a series thereof, with substantially the same investment objective, policies and restrictions as the Master Por tfolio shall not constitute an underwriting for purposes of this paragraph;
(6) Purchase or sell real estate unless acquired as a result of ownership of securities or other instruments (but this shall not prevent the Master Por tfolio from investing in securities or other instruments backed by real estate or securities of companies engaged in the real estate business);
(7) Purchase or sell commodities, provided that (i) currency will not be deemed to be a commodity for purposes of this restriction, (ii) this restriction does not limit the purchase or sale of futures contracts, forward contracts or options, and (iii) this restriction does not limit the purchase or sale of securities or other instruments backed by commodities or the purchase or sale of commodities acquired as a result of ownership of securities or other instruments; and
(8) Purchase securities on margin (except for shor t-term credit necessary for the clearance of transactions and except for margin payments in connection with options, futures and options on futures) or make shor t sales of securities.
Notations Regarding the Master Por tfolio’s Fundamental Investment Restrictions
The following notations are not considered to be par t of the Master Por tfolio’s fundamental investment restrictions and are subject to change without shareholder approval.
With respect to the fundamental policy relating to concentration set for th in fundamental investment restriction no. 1 above, with respect to the Master Por tfolio’s industry classifications, the Master Por tfolio currently utilizes any one or more of the industry sub-classifications used by one or more widely recognized market indexes or rating group
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indexes, and/or as defined by Master Por tfolio management. The policy also will be interpreted to give broad authority to the Master Por tfolio as to how to classify issuers within or among industries.
While cer tain swaps are now considered commodity interests for purposes of the Commodity Exchange Act and the rules thereunder, at the time of the Master Por tfolio’s adoption of fundamental investment restriction no. (7) above, many swaps were treated as securities for purposes of the Master Por tfolio’s compliance with applicable law. Accordingly, fundamental investment restriction no. (7) above is being interpreted to permit the Master Por tfolio to engage in transactions in swaps and options on swaps related to financial instruments, such as securities, securities indices and currencies, but not to engage in transactions in swaps or options on swaps related to physical commodities, such as oil or metals.
With respect to fundamental investment restriction no. (3) above, the Investment Company Act currently allows the Master Por tfolio to borrow up to one-third of the value of its total assets (including the amount borrowed) valued at the lesser of cost or market, less liabilities (not including the amount borrowed) at the time the borrowing is made. With respect to fundamental investment restriction no. (4) above, the Investment Company Act and regulatory interpretations currently limit the percentage of the Master Por tfolio’s securities that may be loaned to one-third of the value of its total assets.
Non-Fundamental Investment Restrictions of the Master Portfolio
Under its non-fundamental investment restrictions, which may be changed by the Board without shareholder approval, the Master Por tfolio may not purchase securities of other investment companies, except to the extent permitted by the Investment Company Act. As a matter of policy, however, the Master Por tfolio will not purchase shares of any registered open-end investment company or registered unit investment trust, in reliance on Section 12(d)(1)(F) or (G) (the “fund of funds” provisions) of the Investment Company Act, at any time the Master Por tfolio has knowledge that its shares are purchased by another investment company investor in reliance on the provisions of subparagraph (G) of Section 12(d)(1).
III. Information on Trustees and Officers
The Board consists of thir teen individuals (each, a “Trustee”), eleven of whom are not “interested persons” of the Trust as defined in the Investment Company Act (the “Independent Trustees”). The same individuals serve on the Board of Trustees of MIP. The registered investment companies advised by the Manager or its affiliates (the “BlackRock-advised Funds”) are organized into the BlackRock Multi-Asset Complex, the BlackRock Fixed-Income Complex, and the iShares Complex (each, a “BlackRock Fund Complex”). The Trust and MIP are included in the BlackRock Fund Complex referred to as the BlackRock Multi-Asset Complex. The Trustees also oversee as board members the operations of the other open-end registered investment companies included in the BlackRock Multi Asset Complex.
The Board has overall responsibility for the oversight of the Trust and the Fund. The Chair of the Board is an Independent Trustee, and the Chair of each Board committee (each, a “Committee”) is an Independent Trustee. The Board has five standing Committees: an Audit Committee, a Governance and Nominating Committee, a Compliance Committee, a Per formance Oversight Committee and an Ad Hoc Topics Committee. The role of the Chair of the Board is to preside at all meetings of the Board and to act as a liaison with service providers, officers, attorneys and other Trustees generally between meetings. The Chair of each Committee per forms a similar role with respect to the Committee. The Chair of the Board or the Chair of a Committee may also per form such other functions as may be delegated by the Board or the Committee from time to time. The Independent Trustees meet regularly outside the presence of Fund management, in executive session or with other service providers to the Fund. The Board has regular meetings five times a year, and may hold special meetings if required before its next regular meeting. Each Committee meets regularly to conduct the oversight functions delegated to that Committee by the Board and repor ts its findings to the Board. The Board and each standing Committee conduct annual assessments of their oversight function and structure. The Board has determined that the Board’s leadership structure is appropriate because it allows the Board to exercise independent judgment over management and to allocate areas of responsibility among Committees and the full Board to enhance effective oversight.
The Board has engaged the Manager to manage the Fund on a day-to-day basis. The Board is responsible for overseeing the Manager, other service providers, the operations of the Fund and associated risks in accordance with the provisions of the Investment Company Act, state law, other applicable laws, the Trust’s char ter, and the Fund’s investment objective and strategies. The Board reviews, on an ongoing basis, the Fund’s per formance, operations and investment strategies and techniques. The Board also conducts reviews of the Manager and its role in running the operations of the Fund.
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Day-to-day risk management with respect to the Fund is the responsibility of the Manager or of sub-advisers or other service providers (depending on the nature of the risk), subject to the supervision of the Manager. The Fund is subject to a number of risks, including investment, compliance, operational and valuation risks, among others. While there are a number of risk management functions per formed by the Manager and the sub-advisers or other service providers, as applicable, it is not possible to eliminate all of the risks applicable to the Fund. Risk oversight forms par t of the Board’s general oversight of the Fund and is addressed as par t of various Board and Committee activities. The Board, directly or through a Committee, also reviews repor ts from, among others, management, the independent registered public accounting firm for the Fund, sub-advisers and internal auditors for the investment adviser or its affiliates, as appropriate, regarding risks faced by the Fund and management’s or the service provider’s risk functions. The Committee system facilitates the timely and efficient consideration of matters by the Trustees, and facilitates effective oversight of compliance with legal and regulatory requirements and of the Fund’s activities and associated risks. The Board has appointed a Chief Compliance Officer, who oversees the implementation and testing of the Trust’s compliance program and repor ts to the Board regarding compliance matters for the Fund and its service providers. The Independent Trustees have engaged independent legal counsel to assist them in per forming their oversight responsibilities.
Audit Committee. The members of the Audit Committee (the “Audit Committee”) are Henry R. Keizer (Chair), Neil A. Cotty, Lori Richards, Kenneth L. Urish and Claire A. Walton, all of whom are Independent Trustees. The principal responsibilities of the Audit Committee are to approve, and recommend to the full Board for approval, the selection, retention, termination and compensation of the Fund’s independent registered public accounting firm (the “Independent Registered Public Accounting Firm”) and to oversee the Independent Registered Public Accounting Firm’s work. The Audit Committee’s responsibilities include, without limitation, to (1) evaluate the qualifications and independence of the Independent Registered Public Accounting Firm; (2) approve all audit engagement terms and fees for the Fund; (3) review the conduct and results of each independent audit of the Fund’s annual financial statements; (4) review any issues raised by the Independent Registered Public Accounting Firm or Fund management regarding the accounting or financial repor ting policies and practices of the Fund and the internal controls of the Fund and cer tain service providers; (5) oversee the per formance of the Fund’s Independent Registered Public Accounting Firm; (6) review and discuss with management and the Fund’s Independent Registered Public Accounting Firm the per formance and findings of the Fund’s internal auditors; (7) discuss with Fund management its policies regarding risk assessment and risk management as such matters relate to the Fund’s financial repor ting and controls; (8) resolve any disagreements between Fund management and the Independent Registered Public Accounting Firm regarding financial repor ting; and (9) under take such other duties and responsibilities as may from time to time be delegated by the Board to the Audit Committee. The Board has adopted a written char ter for the Audit Committee. During the fiscal year ended December 31, 2025, the Audit Committee met four times.
Governance and Nominating Committee. The members of the Governance and Nominating Committee (the “Governance Committee”) are Cynthia A. Montgomery (Chair), Christopher J. Ailman, Susan J. Car ter, Collette Chilton and Henry R. Keizer, all of whom are Independent Trustees. The principal responsibilities of the Governance Committee are to (1) identify individuals qualified to serve as Independent Trustees of the Trust and recommend Independent Trustee nominees for election by shareholders or appointment by the Board; (2) advise the Board with respect to Board composition, procedures and committees (other than the Audit Committee); (3) oversee periodic self-assessments of the Board and committees of the Board (other than the Audit Committee); (4) review and make recommendations regarding Independent Trustee compensation; (5) monitor corporate governance matters and develop appropriate recommendations to the Board; (6) act as the administrative committee with respect to Board policies and procedures, committee policies and procedures (other than the Audit Committee) and codes of ethics as they relate to Independent Trustees; and (7) under take such other duties and responsibilities as may from time to time be delegated by the Board to the Governance Committee. The Governance Committee may consider nominations for Trustees made by the Fund’s shareholders as it deems appropriate. Fund shareholders who wish to recommend a nominee should send nominations to the Secretary of the Trust that include biographical information and set for th the qualifications of the proposed nominee. The Board has adopted a written char ter for the Governance Committee. During the fiscal year ended December 31, 2025, the Governance Committee met eleven times.
Compliance Committee. The members of the Compliance Committee (the “Compliance Committee”) are Claire A. Walton (Chair), Cynthia A. Montgomery, Donald C. Opatrny, Lori Richards and Kenneth L. Urish, all of whom are Independent Trustees. The Compliance Committee’s purpose is to assist the Board in fulfilling its responsibility to oversee regulatory and fiduciary compliance matters involving the Trust, the fund-related activities of BFA and any sub-adviser and the Trust’s third-par ty service providers. The Compliance Committee’s responsibilities include, without limitation, to (1) oversee the compliance policies and procedures of the Trust and its service providers and recommend changes or additions to such policies and procedures; (2) review information on and, where appropriate,
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recommend policies concerning the Trust’s compliance with applicable law; (3) review repor ts from, oversee the annual per formance review of, and make cer tain recommendations and determinations regarding the Trust’s Chief Compliance Officer (the “CCO”), including determining the amount and structure of the CCO’s compensation and recommending such amount and structure to the full Board for approval and ratification; and (4) under take such other duties and responsibilities as may from time to time be delegated by the Board to the Compliance Committee. The Board has adopted a written char ter for the Compliance Committee. During the fiscal year ended December 31, 2025, the Compliance Committee met four times.
Per formance Oversight Committee. The members of the Per formance Oversight Committee (the “Per formance Oversight Committee”) are Donald C. Opatrny (Chair), Christopher J. Ailman, Susan J. Car ter, Collette Chilton and Neil A. Cotty, all of whom are Independent Trustees. The Per formance Oversight Committee’s purpose is to assist the Board in fulfilling its responsibility to oversee the Fund’s investment per formance relative to its agreed-upon per formance objectives and to assist the Independent Trustees in their consideration of investment advisory agreements. The Per formance Oversight Committee’s responsibilities include, without limitation, to (1) review information on, and make recommendations to the full Board in respect of, the Fund’s investment objective, policies and practices; (2) review information on the Fund’s investment per formance; (3) review information on appropriate benchmarks and competitive universes and unusual or exceptional investment matters; (4) review personnel and other resources devoted to management of the Fund and evaluate the nature and quality of information furnished to the Per formance Oversight Committee; (5) recommend any required action regarding changes in fundamental and non-fundamental investment policies and restrictions, fund mergers or liquidations; (6) request and review information on the nature, extent and quality of services provided to the shareholders; (7) make recommendations to the Board concerning the approval or renewal of investment advisory agreements; and (8) under take such other duties and responsibilities as may from time to time be delegated by the Board to the Per formance Oversight Committee. The Board has adopted a written char ter for the Per formance Oversight Committee. During the fiscal year ended December 31, 2025, the Per formance Oversight Committee met five times.
Ad Hoc Topics Committee. The members of the Ad Hoc Topics Committee (the “Ad Hoc Topics Committee”) are Mark Stalnecker (Chair) and Claire A. Walton, both of whom are Independent Trustees, and John M. Perlowski, who serves as an interested Trustee. The principal responsibilities of the Ad Hoc Topics Committee are to (1) act on routine matters between meetings of the Board; (2) act on such matters as may require urgent action between meetings of the Board; and (3) exercise such other authority as may from time to time be delegated to the Ad Hoc Topics Committee by the Board. The Board has adopted a written char ter for the Ad Hoc Topics Committee. During the fiscal year ended December 31, 2025, the Ad Hoc Topics Committee did not meet.
The Governance Committee has adopted a statement of policy that describes the experience, qualifications, skills and attributes that are necessary and desirable for potential Independent Trustee candidates (the “Statement of Policy”). The Board believes that each Independent Trustee satisfied, at the time he or she was initially elected or appointed a Trustee, and continues to satisfy, the standards contemplated by the Statement of Policy. Fur thermore, in determining that a par ticular Independent Trustee was and continues to be qualified to serve as a Trustee, the Board has considered a variety of criteria, none of which, in isolation, was controlling. The Board believes that, collectively, the Independent Trustees have balanced and diverse experience, skills, attributes and qualifications, which allow the Board to operate effectively in governing the Trust and protecting the interests of shareholders. Among the attributes common to all Independent Trustees are their ability to review critically, evaluate, question and discuss information provided to them, to interact effectively with the Fund’s investment adviser, sub-advisers, other service providers, counsel and the Independent Registered Public Accounting Firm, and to exercise effective business judgment in the per formance of their duties as Trustees.
Each Trustee’s ability to per form his or her duties effectively is evidenced by his or her educational background or professional training; business, consulting, public service or academic positions; experience from service as a board member of the Trust and the other funds in the BlackRock Fund Complexes (and any predecessor funds), other investment funds, public companies, non-profit entities or other organizations; ongoing commitment to and par ticipation in Board and Committee meetings, as well as his or her leadership of standing and ad hoc committees throughout the years; or other relevant life experiences.
Trustees Elect. Jeffrey Jarczyk and Marc D. Stern have been appointed as Trustees of the Trust effective July 1, 2026 (each, a “Trustee Elect”). Each Trustee Elect is expected to qualify as an Independent Trustee at the time of his service. Each Trustee Elect has been retained as a consultant to the Independent Trustees to assist the Independent Trustees in the per formance of their duties to the Trust and is expected to serve in that capacity until July 1, 2026.
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The table below discusses some of the experiences, qualifications and skills of each of the Trustees that suppor t the conclusion that each Trustee should serve on the Board.
Trustees Experience, Qualifications and Skills Independent Trustees Christopher J. Ailman Christopher Ailman has more than 30 years of experience in the financial services industry, including most recently serving as Chief Investment Officer of the California State Teachers Retirement System (CalSTRS) from 2000 to June 2024 where he led its investment program. Mr. Ailman currently is a principal at Ailman Advisers. In addition, he has held various roles in the industry, including as member and chair of the asset owner committee of the Kroner Center for Financial Research, chairman of the Nor th American Chapter of the 300 Club of Global CIOs, and co-chair of the Milken Global Capital Markets Advisory Council. These positions have provided Mr. Ailman with considerable investment exper tise across asset classes and strategies, and insight and perspective on the markets and the economy. In addition, Mr. Ailman serves as a member of the Governance Committee and the Per formance Oversight Committee.
Susan J. Car ter Susan J. Car ter has over 35 years of experience in investment management. She has served as President & Chief Executive Officer of Commonfund Capital, Inc. (“CCI”), a registered investment adviser focused on non-profit investors, from 1997 to 2013, Chief Executive Officer of CCI from 2013 to 2014 and Senior Advisor to CCI in 2015. Ms. Car ter also served as director of the Pacific Pension Institute from 2014 to 2018, trustee to the Financial Accounting Foundation from 2017 to 2021, Advisory Board Member for the Center for Private Equity and Entrepreneurship at Tuck School of Business from 1997 to 2021, Advisory Board Member for Bridges Fund Management from 2016 to 2018, Advisory Board Member for Girls Who Invest from 2015 to 2018 and Board Member thereof from 2018 to 2022, and Practitioner Advisory Board Member for Private Capital Research Institute (“PCRI”) from 2017 to 2024. She currently serves as Member of the President’s Counsel for Commonfund. These positions have provided her with insight and perspective on the markets and the economy.
Collette Chilton Collette Chilton has over 20 years of experience in investment management. She held the position of Chief Investment Officer of Williams College from October 2006 to June 2023. Prior to that she was President and Chief Investment Officer of Lucent Asset Management Corporation, where she oversaw approximately $40 billion in pension and retirement savings assets for the company. These positions have provided her with insight and perspective on the markets and the economy.
Neil A. Cotty Neil A. Cotty has more than 30 years of experience in the financial services industry, including 19 years at Bank of America Corporation and its affiliates, where he served, at different times, as the Chief Financial Officer of various businesses including Investment Banking, Global Markets, Wealth Management and Consumer and also served ten years as the Chief Accounting Officer for Bank of America Corporation. Mr. Cotty has been determined by the Audit Committee to be an audit committee financial exper t, as such term is defined in the applicable Commission rules.
Henry R. Keizer Henry R. Keizer brings over 40 years of executive, financial, operational, strategic and global exper tise gained through his 35 year career at KPMG, a global professional services organization and by his service as a director to both publicly and privately held organizations. He has extensive experience with issues facing complex, global companies and exper tise in financial repor ting, accounting, auditing, risk management, and regulatory affairs for such companies. Mr. Keizer’s experience also includes service as an audit committee chair to both publicly and privately held organizations across numerous industries including professional services, proper ty and casualty reinsurance, insurance, diversified financial services, banking, direct to consumer, business to business and technology. Mr. Keizer is a cer tified public accountant and also served on the board of the American Institute of Cer tified Public Accountants. Mr. Keizer has been determined by the Audit Committee to be an audit committee financial exper t, as such term is defined in the applicable Commission rules.
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Trustees Experience, Qualifications and Skills Cynthia A. Montgomery Cynthia A. Montgomery has served for over 20 years on the boards of registered investment companies, most recently as a member of the boards of cer tain BlackRock advised Funds and predecessor funds, including the legacy Merrill Lynch Investment Managers, L.P. (“MLIM”) funds. The Board benefits from Ms. Montgomery’s more than 20 years of academic experience as a professor at Harvard Business School where she taught courses on corporate strategy and corporate governance. Ms. Montgomery also has business management and corporate governance experience through her service on the corporate boards of a variety of public companies. She has also authored numerous ar ticles and books on these topics.
Donald C. Opatrny Donald C. Opatrny has more than 40 years of business, oversight and executive experience, including through his service as president, director and investment committee chair for academic and not-for-profit organizations, and his experience as a par tner, managing director and advisory director at Goldman Sachs for 32 years. He also has investment management experience as a board member of Athena Capital Advisors LLC.
Lori Richards Lori Richards has more than 30 years of experience in the financial services industry, most notably as the first Director of the Office of Compliance Inspections and Examinations (“OCIE”) of the Securities and Exchange Commission (“SEC”) from 1995 to 2009. During 14 years as the Director of OCIE, she led the SEC’s nationwide examination oversight program for advisers, mutual funds, hedge funds, broker-dealers, stock exchanges, and other industry firms. Prior to that, from 1985 to 1995, she held various roles at the SEC, including Associate Director for Enforcement for the SEC’s Pacific Regional Office and executive assistant and senior advisor to then SEC Chairman Ar thur Levitt. More recently, Ms. Richards served as Chief Compliance Officer of the Asset and Wealth Management global lines of business at JPMorgan Chase & Co. from 2013 to 2018 where she led its global compliance program, advised business leaders on compliance issues, oversaw risk assessment, monitoring, testing and training, and maintained relationships with regulators. In addition, Ms. Richards served as a member of the National Adjudicatory Council of the Financial Industry Regulatory Authority (FINRA) from 2019 to 2022 and held the chair and vice chair posts during her tenure. Prior thereto, from 2010 to 2013, she was a Principal at PricewaterhouseCoopers LLP (“PwC”) and co-leader of its Asset Management Regulatory group. At PwC, she assisted a broad range of financial services clients in designing and implementing risk management and compliance programs, and preparing for new regulatory expectations. These positions have provided her with insight and perspective on the markets and the economy, as well as asset management regulation and compliance. In addition, Ms. Richards serves as a member of the Audit Committee and the Compliance Committee.
Mark Stalnecker Mark Stalnecker has gained a wealth of experience in investing and asset management from his over 13 years of service as the Chief Investment Officer of the University of Delaware as well as from his various positions with First Union Corporation, including Senior Vice President and State Investment Director of First Investment Advisors. The Board benefits from his experience and perspective as the Chief Investment Officer of a university endowment and from the oversight experience he gained from service on various private and non-profit boards.
Kenneth L. Urish Kenneth L. Urish has served for over 15 years on the boards of registered investment companies, most recently as a member of the boards of cer tain BlackRock-advised Funds and predecessor funds, including the legacy BlackRock funds. He has over 30 years of experience in public accounting. Mr. Urish has served as a managing member of an accounting and consulting firm. Mr. Urish has been determined by the Audit Committee to be an audit committee financial exper t, as such term is defined in the applicable Commission rules.
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Trustees Experience, Qualifications and Skills Claire A. Walton Claire A. Walton has over 25 years of experience in investment management. She has served as the Chief Operating Officer and Chief Financial Officer of Liber ty Square Asset Management, LP from 1998 to 2015, an investment manager that specialized in long/ shor t non-U.S. equity investments, and was an owner and General Par tner of Neon Liber ty Capital Management, LLC from 2003 to 2023, a firm focusing on long/shor t equities in global emerging and frontier markets. These positions have provided her with insight and perspective on the markets and the economy. Ms. Walton has been determined by the Audit Committee to be an audit committee financial exper t, as such term is defined in the applicable Commission rules.
Trustees Elect Jeffrey Jarczyk Mr. Jarczyk is a CPA and has more than 30 years of experience in the financial services industry, including over 19 years at Fidelity Investments, where he served, at different times, as the Chief Auditor and the Chief Accounting Officer of Fidelity Investments’ parent company, FMR LLC. Prior to working at Fidelity, Mr. Jarczyk was a par tner at Deloitte and Ar thur Andersen for approximately 17 years. These positions have allowed him to work extensively with audit and risk committees and company executives helping to identify, manage and mitigate risks for financial services companies.
Marc D. Stern Mr. Stern has more than 30 years of experience in investing and asset management. Mr. Stern served as the Chief Executive Officer at Bessemer Trust, a wealth management business, for 13 years. During his tenure at Bessemer Trust, Mr. Stern served on the firm’s board of directors, chaired the board’s trust and investment committee, and led the firm’s executive committee. He also served as Bessemer’s Chief Investment Officer for 8 years, where he was Chair of the Investment Policy and Strategy Committee with responsibility for overall asset allocation and investment strategy. Mr. Stern also served as Chair of the Private Clients Investment group at AllianceBernstein. These positions provide Mr. Stern with insight and perspective into investment management, the economy, and fiduciary governance.
Interested Trustees Rober t Fairbairn Rober t Fairbairn has more than 25 years of experience with BlackRock, Inc. and over 30 years of experience in finance and asset management. In par ticular, Mr. Fairbairn’s positions as Vice Chairman of BlackRock, Inc., Member of BlackRock’s Global Operating Committee and Co-Chair of BlackRock’s Human Capital Committee provide the Board with a wealth of practical business knowledge and leadership. In addition, Mr. Fairbairn has global investment management and oversight experience through his former positions as a Member of BlackRock’s Global Executive Committee, Global Head of BlackRock’s Retail and iShares ® businesses, Head of BlackRock’s Global Client Group, Chairman of BlackRock’s international businesses and his previous oversight over BlackRock’s Strategic Par tner Program and Strategic Product Management Group. Mr. Fairbairn also serves as a board member for the funds in the BlackRock Fixed-Income Complex.
John M. Perlowski John M. Perlowski’s experience as Managing Director of BlackRock, Inc. since 2009, as the Head of BlackRock Global Accounting and Product Services since 2009, and as President and Chief Executive Officer of the BlackRock-advised Funds provides him with a strong understanding of the BlackRock-advised Funds, their operations, and the business and regulatory issues facing the BlackRock-advised Funds. Mr. Perlowski’s prior position as Managing Director and Chief Operating Officer of the Global Product Group at Goldman Sachs Asset Management, and his former service as Treasurer and Senior Vice President of the Goldman Sachs Mutual Funds and as Director of the Goldman Sachs Offshore Funds provides the Board with the benefit of his experience with the management practices of other financial companies. Mr. Perlowski also serves as a board member for the funds in the BlackRock Fixed-Income Complex. Mr. Perlowski is a member of BlackRock’s Global Executive Committee.
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Biographical Information
Cer tain biographical and other information relating to the Trustees of the Trust is set for th below, including their address and year of bir th, principal occupations for at least the last five years, length of time served, total number of registered investment companies and investment por tfolios overseen in the BlackRock-advised Funds and any currently held public company and other investment company directorships.
Name and Year of Birth 1,2
Position(s) Held (Length of Service) 3 Principal Occupation(s) During Past Five Years
Number of BlackRock Advised Registered Investment Companies (“RICs”) Consisting of Investment Portfolios (“Portfolios”) Overseen
Public Company and Other Investment Company Directorships Held During Past Five Years Independent Trustees Mark Stalnecker 1951
Chair of the Board (Since 2019) and Trustee (Since 2015)
Chief Investment Officer, University of Delaware from 1999 to 2013; Trustee and Chair of the Finance and Investment Committees, Winterthur Museum and Country Estate from 2005 to 2016; Member of the Investment Committee, Delaware Public Employees’ Retirement System from 2002 to 2024; Member of the Investment Committee, Christiana Care Health System from 2009 to 2017; Member of the Investment Committee, Delaware Community Foundation from 2013 to 2014; Director and Chair of the Audit Committee, SEI Private Trust Co. from 2001 to 2014.
26 RICs consisting of 169 Portfolios
None
Christopher J. Ailman 1958
Trustee (Since 2024)
Principal, Ailman Advisers, since 2024; Chief Investment Officer, California State Teachers Retirement System (CalSTRS) from 2000 to 2024.
26 RICs consisting of 169 Portfolios
None
Susan J. Carter 1956
Trustee (Since 2016)
Trustee, Financial Accounting Foundation from 2017 to 2021; Advisory Board Member, Center for Private Equity and Entrepreneurship at Tuck School of Business from 1997 to 2021; Director, Pacific Pension Institute from 2014 to 2018; Senior Advisor, CCI (investment adviser) in 2015; Chief Executive Officer, CCI from 2013 to 2014; President & Chief Executive Officer, CCI from 1997 to 2013; Advisory Board Member, Girls Who Invest from 2015 to 2018 and Board Member thereof from 2018 to 2022; Advisory Board Member, Bridges Fund Management from 2016 to 2018; Practitioner Advisory Board Member, PCRI from 2017 to 2024; Lecturer in the Practice of Management, Yale School of Management since 2019; Advisor to Finance Committee, Altman Foundation from 2020 to 2024; Investment Committee Member, Tostan since 2021; Member of the President’s Counsel, Commonfund since 2023.
26 RICs consisting of 169 Portfolios
None
Collette Chilton 1958
Trustee (Since 2015)
Trustee, UC Berkeley Foundation Board since 2024; Committee member, Oxford University Endowment Management since 2024; Senior advisor, Insignia since 2024; Chief Investment Officer, Williams College from 2006 to 2023; Chief Investment Officer, Lucent Asset Management Corporation from 1998 to 2006; Director, Boys and Girls Club of Boston since 2017; Director, B1 Capital since 2018; Director, David and Lucile Packard Foundation since 2020.
26 RICs consisting of 169 Portfolios
None
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Name and Year of Birth 1,2
Position(s) Held (Length of Service) 3 Principal Occupation(s) During Past Five Years
Number of BlackRock Advised Registered Investment Companies (“RICs”) Consisting of Investment Portfolios (“Portfolios”) Overseen
Public Company and Other Investment Company Directorships Held During Past Five Years Neil A. Cotty 1954
Trustee (Since 2016)
Bank of America Corporation from 1996 to 2015, serving in various senior finance leadership roles, including Chief Accounting Officer from 2009 to 2015, Chief Financial Officer of Global Banking, Markets and Wealth Management from 2008 to 2009, Chief Accounting Officer from 2004 to 2008, Chief Financial Officer of Consumer Bank from 2003 to 2004, Chief Financial Officer of Global Corporate Investment Bank from 1999 to 2002.
26 RICs consisting of 169 Portfolios
None
Henry R. Keizer 1956
Trustee (Since 2019)
Director, Park Indemnity Ltd. (captive insurer) from 2010 to 2022.
26 RICs consisting of 169 Portfolios
GrafTech International Ltd. (materials manufacturing); WABCO (commercial vehicle safety systems) from 2015 to 2020; Sealed Air Corp. (packaging); Hertz Global Holdings (car rental) from 2015 to 2021. Cynthia A. Montgomery 1952
Trustee (Since 2009)
Professor, Harvard Business School since 1989.
26 RICs consisting of 169 Portfolios
None
Donald C. Opatrny 1952
Trustee (Since 2019)
Chair of the Board of Phoenix Art Museum since 2022 and Trustee thereof since 2018; Chair of the Investment Committee of The Arizona Community Foundation since 2022 and Trustee thereof since 2020; Director, Athena Capital Advisors LLC (investment management firm) from 2013 to 2020; Trustee, Vice Chair, Member of the Executive Committee and Chair of the Investment Committee, Cornell University from 2004 to 2019; Member of Affordable Housing Supply Board of Jackson, Wyoming from 2017 to 2022; Member, Investment Funds Committee, State of Wyoming from 2017 to 2023; Member of the Investment Committee, Mellon Foundation from 2009 to 2015; President, Trustee and Member of the Investment Committee, The Aldrich Contemporary Art Museum from 2007 to 2014; Trustee and Chair of the Investment Committee, Community Foundation of Jackson Hole since 2014.
26 RICs consisting of 169 Portfolios
None
Lori Richards 1960
Trustee (Since 2024)
Trustee, SEC Historical Society since 2018; Trustee, Garrett College Foundation since 2019; Director, PharmaCann, Inc. from 2021 to 2024; Director, Wahed Invest from 2022 to 2024.
26 RICs consisting of 169 Portfolios
None
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Name and Year of Birth 1,2
Position(s) Held (Length of Service) 3 Principal Occupation(s) During Past Five Years
Number of BlackRock Advised Registered Investment Companies (“RICs”) Consisting of Investment Portfolios (“Portfolios”) Overseen
Public Company and Other Investment Company Directorships Held During Past Five Years Kenneth L. Urish 1951
Trustee (Since 2009)
Managing Partner, Urish Popeck & Co., LLC (certified public accountants and consultants) since 1976; Past-Chairman of the Professional Ethics Committee of the Pennsylvania Institute of Certified Public Accountants and Committee Member thereof since 2007; Member of External Advisory Board, The Pennsylvania State University Accounting Department since 2001, Emeritus since 2022; Principal, UP Strategic Wealth Investment Advisors, LLC since 2013; Trustee, The Holy Family Institute from 2001 to 2010; President and Trustee, Pittsburgh Catholic Publishing Associates from 2003 to 2008; Director, Inter-Tel from 2006 to 2007; Member, Advisory Board, ESG Competent Boards since 2020.
26 RICs consisting of 169 Portfolios
None
Claire A. Walton 1957
Trustee (Since 2016)
Director/Treasurer, Reading Community Trust since 2024; Advisory Board Member, Grossman School of Business at the University of Vermont since 2023; Advisory Board Member, Scientific Financial Systems since 2022; General Partner of Neon Liberty Capital Management, LLC from 2003 to 2023; Chief Operating Officer and Chief Financial Officer of Liberty Square Asset Management, LP from 1998 to 2015; Director, Boston Hedge Fund Group from 2009 to 2018; Director, Massachusetts Council on Economic Education from 2013 to 2015; Director, Woodstock Ski Runners from 2013 to 2022.
26 RICs consisting of 169 Portfolios
None
Trustees Elect4 t4 Jeffrey Jarczyk 1964
Trustee Elect Director, The Friends of the Public Garden since 2021; Executive Vice President, Chief Auditor, Fidelity Investments from 2016 to 2021; Executive Vice President, Chief Accounting Officer, Fidelity Investments from 2007 to 2016.
26 RICs consisting of 169 Portfolios
None
Marc D. Stern 1962
Trustee Elect Chief Executive Officer and Director, Bessemer Trust from 2013 to 2026.
26 RICs consisting of 169 Portfolios
None
Interested Trustees 5
Robert Fairbairn 1965
Trustee (Since 2018)
Vice Chairman of BlackRock, Inc. since 2019; Member of BlackRock’s Global Operating Committee; Co-Chair of BlackRock’s Human Capital Committee; Senior Managing Director of BlackRock, Inc. from 2010 to 2019; oversaw BlackRock’s Strategic Partner Program and Strategic Product Management Group from 2012 to 2019; Member of the Board of Managers of BlackRock Investments, LLC from 2011 to 2018; Global Head of BlackRock’s Retail and iShares ® businesses from 2012 to 2016.
76 RICs consisting of 252 Portfolios
None
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Name and Year of Birth 1,2
Position(s) Held (Length of Service) 3 Principal Occupation(s) During Past Five Years
Number of BlackRock Advised Registered Investment Companies (“RICs”) Consisting of Investment Portfolios (“Portfolios”) Overseen
Public Company and Other Investment Company Directorships Held During Past Five Years John M. Perlowski 6 1964
Trustee (Since 2015) President and Chief Executive Officer (Since 2010)
Managing Director of BlackRock, Inc. since 2009; Head of BlackRock Global Accounting and Product Services since 2009; Advisory Director of Family Resource Network (charitable foundation) since 2009; Member of BlackRock’s Global Executive Committee since 2025.
78 RICs consisting of 254 Portfolios
None
1 The address of each Trustee is c/o BlackRock, Inc., 50 Hudson Yards, New York, New York 10001. 2 Independent Trustees serve until their resignation, retirement, removal or death, or until December 31 of the year in which they turn 75. The Board may determine to extend the terms of Independent Trustees on a case-by-case basis, as appropriate. 3 In connection with the acquisition of Barclays Global Investors by BlackRock, Inc. in December 2009, cer tain Independent Trustees were elected to the Board. Fur thermore, effective January 1, 2019, three BlackRock Fund Complexes were realigned and consolidated into two BlackRock Fund Complexes. As a result, although the char t shows the year that each Independent Trustee joined the Board, cer tain Independent Trustees first became members of the boards of other BlackRock-advised Funds as follows: Cynthia A. Montgomery, 1994; Kenneth L. Urish, 1999; Henry R. Keizer, 2016; Donald C. Opatrny, 2015. 4 Jeffrey Jarczyk and Marc D. Stern have been appointed as Trustees of the Trust effective July 1, 2026. Each Trustee Elect is expected to qualify as an Independent Trustee at the time of his service. Each Trustee Elect has been retained as a consultant to the Independent Trustees to assist the Independent Trustees in the per formance of their duties to the Trust and is expected to serve in that capacity until July 1, 2026. 5 Mr. Fairbairn and Mr. Perlowski are both “interested persons,” as defined in the Investment Company Act, of the Trust and MIP based on their positions with BlackRock, Inc. and its affiliates. Mr. Fairbairn and Mr. Perlowski are also board members of the BlackRock Fixed-Income Complex. 6 Mr. Perlowski is also a trustee of the BlackRock Credit Strategies Fund and BlackRock Private Investments Fund.
Cer tain biographical and other information relating to the officers of the Trust who are not Trustees is set for th below, including their address and year of bir th, principal occupations for at least the last five years and length of time served.
Name and Year of Birth 1,2 Position(s) Held (Length of Service) Principal Occupation(s) During Past Five Years Officers Who Are Not Trustees Roland Villacorta 1971
Vice President (Since 2022)
Managing Director of BlackRock, Inc. since 2002; Head of Global Cash Management and Head of Securities Lending within BlackRock’s Global Markets Group since 2022; Member of BlackRock’s Global Operating Committee since 2016 and Human Capital Committee since 2023. Jennifer McGovern 1977
Vice President (Since 2014)
Managing Director of BlackRock, Inc. since 2016.
Trent Walker 1974
Chief Financial Officer (Since 2021)
Managing Director of BlackRock, Inc. since 2019; Executive Vice President of PIMCO from 2016 to 2019.
Jay M. Fife 1970
Treasurer (Since 2009)
Managing Director of BlackRock, Inc. since 2007.
Aaron Wasserman 1974
Chief Compliance Officer (Since 2023)
Managing Director of BlackRock, Inc. since 2018; Chief Compliance Officer of the BlackRock-advised funds in the BlackRock Multi-Asset Complex, the BlackRock Fixed-Income Complex and the iShares Complex since 2023; Deputy Chief Compliance Officer for the BlackRock-advised funds in the BlackRock Multi-Asset Complex, the BlackRock Fixed-Income Complex and the iShares Complex from 2014 to 2023. Lisa Belle 1968
Anti-Money Laundering Compliance Officer (Since 2019)
Managing Director of BlackRock, Inc. since 2019; Global Financial Crime Head for Asset and Wealth Management of JP Morgan from 2013 to 2019. Janey Ahn 1975
Secretary (Since 2019)
Managing Director of BlackRock, Inc. since 2018.
1 The address of each Officer is c/o BlackRock, Inc., 50 Hudson Yards, New York, New York 10001.
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2 Officers of the Trust and MIP serve at the pleasure of the Board.
Share Ownership
Information relating to each Trustee’s share ownership in the Fund and in all BlackRock-advised Funds that are currently overseen by the respective Trustee (“Supervised Funds”) as of December 31, 2025 is set for th in the char t below. Amounts shown may include shares as to which a Trustee has indirect beneficial ownership, such as through par ticipation in cer tain family accounts, 529 college savings plan interests, or similar arrangements where the Trustee has beneficial economic interest but not a direct ownership interest.
Name
Dollar Range of Equity Securities in the Fund
Aggregate Dollar Range of Equity Securities in Supervised Funds Independent Trustees Christopher J. Ailman ............................................. None Over $100,000 Susan J. Car ter .................................................. None Over $100,000 Collette Chilton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None Over $100,000 Neil A. Cotty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None Over $100,000 Henry R. Keizer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None Over $100,000 Cynthia A. Montgomery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None Over $100,000 Donald C. Opatrny ................................................ None Over $100,000 Lori Richards . . . ................................................. None None Mark Stalnecker ................................................. None Over $100,000 Kenneth L. Urish . ................................................ None Over $100,000 Claire A. Walton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None Over $100,000 Interested Trustees Rober t Fairbairn .................................................. None Over $100,000 John M. Perlowski ................................................ None Over $100,000
As of April 2, 2026, the Trustees and officers of the Trust as a group directly or indirectly beneficially owned an aggregate of less than 1% of any class of the outstanding shares of the Fund. As of December 31, 2025, none of the Independent Trustees of the Trust or their immediate family members owned beneficially or of record any securities of the Fund’s investment adviser, principal underwriter, or any person directly or indirectly controlling, controlled by, or under common control with such entities.
Compensation of Trustees
Each Trustee who is an Independent Trustee is paid as compensation an annual retainer of $375,000 per year for his or her services as a board member of the BlackRock-advised Funds in the BlackRock Multi-Asset Complex, including the Trust and MIP, and a $20,000 board meeting fee to be paid for each in-person board meeting attended (and may receive a board meeting fee for telephonic attendance at board meetings), for up to five board meetings held in a calendar year (compensation for meetings in excess of this number to be determined on a case-by-case basis), together with out-of-pocket expenses in accordance with a board policy on travel and other business expenses relating to attendance at meetings. The Chairs of the Audit Committee, Compliance Committee, Governance Committee and Per formance Oversight Committee are paid as compensation an additional annual retainer of $45,000, respectively. The Chair of the Board is paid an additional annual retainer of $150,000.
Each Trustee Elect currently serves as a consultant to the Independent Trustees in the per formance of the Independent Trustees’ duties to the Trust and is paid compensation at the same rate as the compensation paid to any Independent Trustees who are not the Chair of the Board or a Chair of a Committee. This compensation arrangement will continue until July 1, 2026, when each Trustee Elect is expected to begin serving as an Independent Trustee and will be compensated in a manner similar to other Independent Trustees.
The following table sets for th the compensation MIP paid to the Trustees on behalf of the Master Por tfolio, for the fiscal year ended December 31, 2025, and the aggregate compensation paid to them by all BlackRock-advised Funds for the calendar year ended December 31, 2025. The Trustees received no additional compensation from the Trust on behalf of the Fund.
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Name Compensation from the Master Portfolio
Estimated Annual Benefits upon Retirement
Aggregate Compensation from the Master Portfolio and Other BlackRock Advised Funds 1 Independent Trustees Christopher J. Ailman 2 . . . . . . . . . . . . . . . . . . . . . . . $2,379 None $445,000 Susan J. Car ter . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,379 None $445,000 Collette Chilton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,379 None $445,000 Neil A. Cotty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,451 None $467,500 Henry R. Keizer 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,607 None $490,000 Cynthia A. Montgomery 3 . . . . . . . . . . . . . . . . . . . . . $2,607 None $490,000 Donald C. Opatrny 4 . . . . . . . . . . . . . . . . . . . . . . . . . . $2,607 None $490,000 Lori Richards 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,379 None $445,000 Mark Stalnecker 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,138 None $595,000 Kenneth L. Urish . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,379 None $445,000 Claire A. Walton 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,607 None $490,000 Interested Trustees Rober t Fairbairn . . . . . . . . . . . . . . . . . . . . . . . . . . . . None None None John M. Perlowski . . . . . . . . . . . . . . . . . . . . . . . . . . None None None
1 For the number of BlackRock-advised Funds from which each Trustee receives compensation, see “Biographical Information” beginning on page I-15. 2 Chair of the Audit Committee. 3 Chair of the Governance Committee. 4 Chair of the Per formance Oversight Committee. 5 Chair of the Board and Chair of the Ad Hoc Topics Committee. 6 Chair of the Compliance Committee.
IV. Management, Advisory and Other Service Arrangements
Investment Adviser
BFA provides investment advisory services to the Master Por tfolio pursuant to an investment advisory contract (the “Advisory Contract”) with MIP. Pursuant to the Advisory Contract, BFA furnishes to MIP’s Board of Trustees periodic repor ts on the investment strategy and per formance of the Master Por tfolio.
BFA is an indirect wholly-owned subsidiary of BlackRock, Inc.
The Advisory Contract is subject to annual approval by (i) MIP’s Board of Trustees or (ii) vote of a majority (as defined in the Investment Company Act) of the outstanding voting interests of the Master Por tfolio, provided that in either event the continuance also is approved by a majority of the Independent Trustees of MIP, by a vote cast in person at a meeting called for the purpose of voting on such approval. The Advisory Contract is terminable without penalty on 60 days’ written notice by either par ty. The Advisory Contract will terminate automatically, as to the Master Por tfolio, in the event of its assignment (as defined in the Investment Company Act).
BFA receives as compensation for its services to the Master Por tfolio a management fee equal to 0.04% of the Master Por tfolio’s average daily net assets.
BFA has contractually agreed to waive the management fee with respect to any por tion of the Master Por tfolio’s assets estimated to be attributable to investments in other equity and fixed-income mutual funds and exchange traded funds managed by BFA or its affiliates that have a contractual management fee, through June 30, 2027. In addition, BFA has contractually agreed to waive its management fees by the amount of investment advisory fees the Master Por tfolio pays to BFA indirectly through its investment in money market funds advised by BFA or its affiliates, through June 30, 2027. The contractual agreements may be terminated upon 90 days’ notice by a majority of the Independent Trustees or by a vote of a majority of the outstanding voting securities of the Master Por tfolio.
For the fiscal years shown below, the Master Por tfolio in which the Fund invests paid the following management fees to BFA, net of waivers and/or offsetting credits:
Fiscal Year Ended December 31, Master Portfolio 2025 2024 2023 U.S. Total Bond Index Master Por tfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1, 165,966 $1,011,755 $861,091
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The fees and expenses of the Independent Trustees of MIP, counsel to the Independent Trustees of MIP and the Independent Registered Public Accounting Firm that provides audit services in connection with the Master Por tfolio (collectively referred to as the “MIP Independent Expenses”) are paid directly by the Master Por tfolio. Each of BlackRock Advisors, LLC (“BAL”) and BFA, as applicable, has contractually under taken to reimburse or provide an offsetting credit to the Master Por tfolio for such MIP Independent Expenses through June 30, 2027. Such contractual arrangement may not be terminated prior to July 1, 2027 unless approved by a majority of the Independent Trustees of the Trust and of MIP (with 90 days’ notice) or by a vote of a majority of the outstanding voting securities of the Fund and the Master Por tfolio.
For the fiscal years shown below, BFA paid an offsetting credit in the amounts shown against management fees paid with respect to the Master Por tfolio:
Fiscal Year Ended December 31, Master Portfolio 2025 2024 2023 U.S. Total Bond Index Master Por tfolio . . . . . . . . . . . . . . . . . . . . . . . ............ $53,093 $25,311 $28,556
For the fiscal years shown below, BFA waived the following management fees with respect to the Master Por tfolio:
Fiscal Year Ended December 31, Master Portfolio 2025 2024 2023 U.S. Total Bond Index Master Por tfolio . . . . . . . . . . . . . . . . . . . . . . . ............ $88,818 $97,990 $68,274
Administrator
The Trust has engaged BAL to provide cer tain administration services to the Fund. BAL and its affiliates provide the Fund with administration services, including provision of management repor ting and treasury administration services, financial repor ting, legal and tax services, and supervision of the Fund’s administrative operations, preparation of proxy statements and shareholder repor ts. BAL and its affiliates also furnish office space and cer tain facilities to conduct the Fund’s business and compensate the Trust’s Trustees, officers and employees who are affiliated with BAL. For providing administrative services, BAL is entitled to receive an annual administration fee as a percentage of average daily net assets attributable to each share class of the Fund equal to 0.06% for Investor A Shares, 0.06% for Institutional Shares, 0.06% for Investor P Shares and 0.01% for Class K Shares.
BAL also may engage and supervise Shareholder Servicing Agents, as defined in “Shareholder Servicing Agents” below, on behalf of the Fund.
BAL has also agreed to bear all costs of the Fund’s operations, other than brokerage expenses, management fees, distribution plan expenses, cer tain fees and expenses related to the Trust’s Independent Trustees and their counsel, auditing fees, litigation expenses, taxes or other extraordinary expenses.
For the fiscal years shown below, the Fund paid the following administration fees to BAL, net of waivers and/or offsetting credits:
Fiscal Year Ended December 31, Fund Name 2025 2024 2023 iShares U.S. Aggregate Bond Index Fund . . . . . . . . . . . . . . . . . ............. $500,543 $464,552 $397,224
The fees and expenses of the Independent Trustees of the Trust, counsel to the Independent Trustees of the Trust and the Independent Registered Public Accounting Firm that provides audit services in connection with the Fund (collectively referred to as the “Independent Expenses”) are paid directly by the Fund. Each of BAL and BFA, as applicable, has contractually under taken to reimburse or provide an offsetting credit to the Fund for such Independent Expenses through June 30, 2027. Such contractual arrangements may not be terminated prior to July 1, 2027 without the consent of the Boards of Trustees of the Trust and of MIP.
For the fiscal years shown below, BAL provided an offsetting credit, in the amounts shown, against administration fees paid with respect to the Fund:
Fiscal Year Ended December 31, Fund Name 2025 2024 2023 iShares U.S. Aggregate Bond Index Fund. . . . . . . . . . . . . . . . . . ................ $11,485 $11,505 $12,166
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In addition, pursuant to a Shareholders’ Administrative Services Agreement, BAL provides cer tain shareholder liaison services in connection with the Trust’s investor service center. The Trust, on behalf of the Fund, reimburses BAL for its costs in maintaining the service center, which costs include, among other things, employee salaries, leasehold expenses, and other out-of-pocket expenses.
For the past three fiscal years, the Fund did not reimburse BAL fees for services it provided under this agreement.
Information Regarding the Portfolio Managers
James Mauro, Jonathan Graves, CFA and Marcus Tom are the por tfolio managers and are jointly and primarily responsible for the day-to-day management of the Master Por tfolio’s por tfolio.
Other Funds and Accounts Managed
The following table sets for th information about the funds and accounts other than the Fund for which the por tfolio managers are jointly and primarily responsible for the day-to-day por tfolio management as of the fiscal year ended December 31, 2025.
Number of Other Accounts Managed and Assets by Account Type Number of Other Accounts and Assets for Which Advisory Fee is Performance-Based
Name of Portfolio Manager
Other Registered Investment Companies
Other Pooled Investment Vehicles Other Accounts
Other Registered Investment Companies
Other Pooled Investment Vehicles Other Accounts Jonathan Graves, CFA 37 68 9 0 0 0 $143.00 Billion $31.42 Billion $3.03 Billion $0 $0 $0 James Mauro 135 45 4 0 0 0 $859.34 Billion $50.53 Billion $3.32 Billion $0 $0 $0 Marcus Tom 15 11 5 0 0 0 $83.53 Billion $50.58 Billion $1.79 Billion $0 $0 $0
Por tfolio Manager Compensation Overview
The discussion below describes the por tfolio managers’ compensation as of December 31, 2025.
BlackRock’s financial arrangements with its por tfolio managers, its competitive compensation and its career path emphasis at all levels reflect the value senior management places on key resources. Compensation may include a variety of components and may vary from year to year based on a number of factors. The principal components of compensation include a base salary, a per formance-based discretionary bonus, par ticipation in various benefits programs and one or more of the incentive compensation programs established by BlackRock.
Base Compensation. Generally, por tfolio managers receive base compensation based on their position with the firm.
Discretionary Incentive Compensation
Discretionary incentive compensation is a function of several components: the per formance of BlackRock, Inc., the per formance of the por tfolio manager’s group within BlackRock, the investment per formance, including risk adjusted returns, of the firm’s assets under management or supervision by that por tfolio manager relative to predetermined benchmarks, and the individual’s per formance and contribution to the overall per formance of these por tfolios and BlackRock. In most cases, these benchmarks are the same as the benchmark or benchmarks against which the per formance of the Fund or other accounts managed by the por tfolio managers are measured. Among other things, BlackRock’s Chief Investment Officers make a subjective determination with respect to each por tfolio manager’s compensation based on the per formance of the Fund and other accounts managed by each por tfolio manager relative to the various benchmarks. Per formance of fixed-income funds is measured on a pre-tax and/or after-tax basis over various time periods including 1-, 3- and 5-year periods, as applicable. With respect to these por tfolio managers, such benchmarks for the Fund and other accounts are:
Portfolio Manager Benchmarks James Mauro Marcus Tom
A combination of market-based indices ( e.g. , Bloomberg MBS Index and the Bloomberg U.S. TIPS 0-5 Years Index).
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Portfolio Manager Benchmarks
Jonathan Graves, CFA A combination of market-based indices ( e.g., Bloomberg U.S. Aggregate Bond Index), cer tain customized indices and cer tain fund industry peer groups.
Distribution of Discretionary Incentive Compensation. Discretionary incentive compensation is distributed to por tfolio managers in a combination of cash, deferred BlackRock, Inc. stock awards, and/or deferred cash awards that notionally track the return of cer tain BlackRock investment products.
Por tfolio managers receive their annual discretionary incentive compensation in the form of cash. Por tfolio managers whose total compensation is above a specified threshold also receive deferred BlackRock, Inc. stock awards annually as par t of their discretionary incentive compensation. Paying a por tion of discretionary incentive compensation in the form of deferred BlackRock, Inc. stock puts compensation earned by a por tfolio manager for a given year “at risk” based on BlackRock’s ability to sustain and improve its per formance over future periods. In some cases, additional deferred BlackRock, Inc. stock may be granted to cer tain key employees as par t of a long-term incentive award to aid in retention, align interests with long-term shareholders and motivate per formance. Deferred BlackRock, Inc. stock awards are generally granted in the form of BlackRock, Inc. restricted stock units that vest pursuant to the terms of the applicable plan and, once vested, settle in BlackRock, Inc. common stock. The por tfolio managers of this Fund have deferred BlackRock, Inc. stock awards.
For cer tain por tfolio managers, a por tion of the discretionary incentive compensation is also distributed in the form of deferred cash awards that notionally track the returns of select BlackRock investment products they manage, which provides direct alignment of por tfolio manager discretionary incentive compensation with investment product results. Deferred cash awards vest ratably over a number of years and, once vested, settle in the form of cash. Only por tfolio managers who manage specified products and whose total compensation is above a specified threshold are eligible to par ticipate in the deferred cash award program.
Other Compensation Benefits. In addition to base salary and discretionary incentive compensation, por tfolio managers may be eligible to receive or par ticipate in one or more of the following:
Incentive Savings Plans — BlackRock, Inc. has created a variety of incentive savings plans in which BlackRock employees are eligible to par ticipate, including a 401(k) plan, the BlackRock Retirement Savings Plan (RSP), and the BlackRock Employee Stock Purchase Plan (ESPP). The employer contribution components of the RSP include a company match equal to 50% of the first 8% of eligible pay contributed to the plan capped at $5,000 per year, and a company retirement contribution equal to 3-5% of eligible compensation up to the Internal Revenue Service limit ($350,000 for 2025). The RSP offers a range of investment options, including registered investment companies and collective investment funds managed by the firm. BlackRock contributions follow the investment direction set by par ticipants for their own contributions or, absent par ticipant investment direction, are invested into a target date fund that corresponds to, or is closest to, the year in which the par ticipant attains age 65. The ESPP allows for investment in BlackRock common stock at a 5% discount on the fair market value of the stock on the purchase date. Annual par ticipation in the ESPP is limited to the purchase of 1,000 shares of common stock or a dollar value of $25,000 based on its fair market value on the purchase date. All of the eligible por tfolio managers are eligible to par ticipate in these plans.
Por tfolio Manager Beneficial Holdings
The following table sets for th the dollar range of equity securities of the Fund beneficially owned by each por tfolio manager of the Fund as of December 31, 2025.
Portfolio Manager
Dollar Range of Equity Securities Beneficially Owned James Mauro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None Jonathan Graves, CFA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None Marcus Tom. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . None
Por tfolio Manager Potential Material Conflicts of Interest
BlackRock has built a professional working environment, firm-wide compliance culture and compliance procedures and systems designed to protect against potential incentives that may favor one account over another. BlackRock has adopted policies and procedures that address the allocation of investment oppor tunities, execution of por tfolio transactions, personal trading by employees and other potential conflicts of interest that are designed to ensure that all client accounts are treated equitably over time. Never theless, BlackRock furnishes investment
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management and advisory services to numerous clients in addition to the Fund, and BlackRock may, consistent with applicable law, make investment recommendations to other clients or accounts (including accounts which are hedge funds or have per formance or higher fees paid to BlackRock, or in which por tfolio managers have a personal interest in the receipt of such fees), which may be the same as or different from those made to the Fund. In addition, BlackRock, its affiliates and significant shareholders and any officer, director, shareholder or employee may or may not have an interest in the securities whose purchase and sale BlackRock recommends to the Fund. BlackRock, or any of its affiliates or significant shareholders, or any officer, director, shareholder, employee or any member of their families may take different actions than those recommended to the Fund by BlackRock with respect to the same securities. Moreover, BlackRock may refrain from rendering any advice or services concerning securities of companies of which any of BlackRock’s (or its affiliates’ or significant shareholders’) officers, directors or employees are directors or officers, or companies as to which BlackRock or any of its affiliates or significant shareholders or the officers, directors and employees of any of them has any substantial economic interest or possesses material non public information. Cer tain por tfolio managers also may manage accounts whose investment strategies may at times be opposed to the strategy utilized for the Fund. It should also be noted that Messrs. Mauro, Graves and Tom may be managing hedge fund and/or long only accounts, or may be par t of a team managing hedge fund and/or long only accounts, subject to incentive fees. Messrs. Mauro, Graves and Tom may therefore be entitled to receive a por tion of any incentive fees earned on such accounts.
As a fiduciary, BlackRock owes a duty of loyalty to its clients and must treat each client fairly. When BlackRock purchases or sells securities for more than one account, the trades must be allocated in a manner consistent with its fiduciary duties. BlackRock attempts to allocate investments in a fair and equitable manner among client accounts, with no account receiving preferential treatment. To this end, BlackRock has adopted policies that are intended to ensure reasonable efficiency in client transactions and provide BlackRock with sufficient flexibility to allocate investments in a manner that is consistent with the par ticular investment discipline and client base, as appropriate.
Accounting Services
State Street Bank and Trust Company (“State Street”), serves as the accounting services provider for the Master Por tfolio. State Street maintains the books of account and other financial records (other than those maintained by the Master Por tfolio’s custodian); records general ledger entries; calculates daily net income; reconciles activity to the trial balance; calculates and publishes daily net asset value; prepares account balances; and provides such other accounting services as may be required. In connection with its accounting services, State Street also provides cer tain administration services.
Custodian
State Street, which has its principal offices at One Congress Street, Suite 1, Boston, Massachusetts 021142016, is the custodian for the Fund and Master Por tfolio. The custodian, among other responsibilities, maintains a custody account or accounts in the name of the Fund and the Master Por tfolio, receives and delivers all assets for the Fund and the Master Por tfolio upon purchase and upon sale or maturity, and collects and receives all income and other payments and distributions on account of the assets of the Fund and the Master Por tfolio.
Shareholder Servicing Agents
The Board of Trustees has adopted a Shareholder Servicing Plan pursuant to which the Fund has entered into Shareholder Servicing Agreements with BAL and other entities, and BAL may also enter into Shareholder Servicing Agreements with securities dealers, brokers, investment advisers, service providers or other industry professionals (including BFA, BlackRock Investments, LLC (“BRIL”) and their affiliates) (collectively, “Shareholder Servicing Agents”) for the provision of cer tain services to Fund shareholders. The services provided by BAL or Shareholder Servicing Agents may include serving as an agent of the Fund for purposes of accepting orders for purchases and redemptions of Fund shares, providing administrative suppor t and account service such as processing purchases and redemptions of shares on behalf of individual and omnibus Fund accounts, answering shareholder inquiries, keeping records, transmitting repor ts and communications from the Fund, and providing repor ts on the status of individual and omnibus accounts. Shareholder Servicing Agents may provide these services, in whole or in par t, by operating electronic transaction systems or websites through which shareholders may obtain information or engage in purchase or redemption transactions of Fund shares. By operating these systems or providing other services described above, the Shareholder Servicing Agents make the Fund available to their clients.
A Shareholder Servicing Agent may make decisions about which investment options it will service and make available to its clients based on the payments the Shareholder Servicing Agent may be eligible to receive for its
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services. Therefore, payments to a Shareholder Servicing Agent may create potential conflicts of interest between the Shareholder Servicing Agent and its clients where the Shareholder Servicing Agent determines which investment options it will make available to those clients.
Pursuant to its Administration Agreement with the Trust, as described in the section entitled “Administrator,” BAL pays shareholder servicing fees to cer tain Shareholder Servicing Agents in amounts not exceeding maximum fee rates approved by the Trust’s Board of Trustees for those shareholder servicing, sub-administration, recordkeeping, sub-transfer agency and processing services that the Shareholder Servicing Agents per form for their clients that would otherwise be per formed by BAL or the Fund’s other service providers. For providing some or all of these services, each Shareholder Servicing Agent is entitled to receive a monthly fee at the annual rate of up to 0.25% of the average daily net assets of the Fund represented by shares owned during the period for which payment is being made by investors with whom the Shareholder Servicing Agent maintains a servicing relationship, or an amount that equals the maximum amount payable to the Shareholder Servicing Agent under applicable laws, regulations or rules, including the Conduct Rules of the Financial Industry Regulatory Authority, Inc., whichever is less.
A Shareholder Servicing Agent also may impose cer tain conditions on its customers, subject to the terms of the Fund’s Prospectus and this SAI, that are in addition to or different from those imposed by the Trust, such as requiring a minimum initial investment or payment of a separate fee for additional services.
Transfer and Dividend Disbursing Agent
BNY Mellon Investment Servicing (US) Inc., which has its principal place of business at 118 Flanders Road, Westborough, Massachusetts 01581, serves as the transfer agent and dividend disbursing agent for the Fund.
Credit Agreement
MIP, on behalf of the Master Por tfolio, along with cer tain other funds managed by the Manager and its affiliates (“Par ticipating Funds”), is a par ty to a 364-day, $2.4 billion credit agreement with a group of lenders, which facility terminates on April 8, 2027, unless otherwise extended or renewed (the “Credit Agreement”). Excluding commitments designated for cer tain Par ticipating Funds, the Par ticipating Funds, including the Master Por tfolio, can borrow up to an aggregate commitment amount of $1.75 billion at any time outstanding, subject to asset coverage and other limitations as specified in the Credit Agreement. The Master Por tfolio may borrow under the Credit Agreement to meet shareholder redemptions and for other lawful purposes. However, the Master Por tfolio may not borrow under the Credit Agreement for leverage. The Master Por tfolio may borrow up to the maximum amount allowable under the Fund’s current Prospectuses and SAI, subject to various other legal, regulatory or contractual limits. Borrowing results in interest expense and other fees and expenses for the the Master Por tfolio which may impact the Master Por tfolio’s net expenses. The costs of borrowing may reduce the Master Por tfolio’s return. The Master Por tfolio is charged its pro rata share of upfront fees and commitment fees on the aggregate commitment amount based on its net assets. If the Master Por tfolio borrows pursuant to the Credit Agreement, the Master Por tfolio will be charged interest at a variable rate.
V. Information on Sales Charges and Distribution Related Expenses
BlackRock Investments, LLC (“BRIL”) is the distributor for the Fund’s shares. BRIL is a registered broker-dealer located at 50 Hudson Yards, New York, New York 10001.
The Trust has entered into a distribution agreement with BRIL in connection with the continuous offering of shares of the Fund.
Set for th below is information on sales charges (including any contingent deferred sales charges “CDSCs”)) received by the Fund, including the amounts paid to affiliates of the Manager (“affiliates”) for the periods shown.
Investor P Shares
Gross Sales Charges Collected
Sales Charges Retained by BRIL Sales Charges Paid To Affiliates
CDSCs Received on Redemption of Load-Waived Shares Fiscal Year Ended December 31, 2025. ............. $37,505 $3,500 $3,500 $0 Fiscal Year Ended December 31, 2024. ............. $24,925 $2,276 $2,276 $0 Fiscal Year Ended December 31, 2023. ............. $15,013 $1,249 $1,249 $0
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The Trust has adopted a Distribution Plan for Investor A and Investor P Shares pursuant to Rule 12b-1 under the Investment Company Act (the “Plan”) pursuant to which the Investor A and Investor P Shares of the Fund pay the Distributor an ongoing service fee, accrued daily and paid monthly, at the annual rate of 0.25% of the average daily net assets attributable to such shares. The Independent Trustees believe that there is reasonable likelihood that the Plan will benefit the Fund and its Investor A and Investor P shareholders.
For the fiscal year ended December 31, 2025, the Fund’s Investor A and Investor P Shares bore the following distribution and/or service fees under the Plan:
Class Name Fees Paid to BRIL Investor A Shares . . ......................................................................... $438,332 Investor P Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,310
VI. Computation of Offering Price Per Share
An illustration of the computation of the offering price of the Investor P Shares of the Fund based on the value of the Fund’s Investor P Shares’ net assets and the number of Investor P Shares outstanding on December 31, 2025 is set for th below:
Investor P Shares Net Assets . . . .......................................................................... $13,049,280 Number of Shares Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 423,006 Net Asset Value Per Share (net assets divided by number of shares outstanding) . . . . . . . . . . . . . . . . $9.17 Sales Charge (4.00% of offering price; 4.17% of net asset value per share) 1 . . . . . . . . . . . . . . . . . . . . $0.38 Offering Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9.55
1 Rounded to the nearest one-hundredth percent; assumes maximum sales charge is applicable. The offering price for the Fund’s other share classes is equal to the share class’ net asset value computed as set for th above for Investor P Shares. Though not subject to a sales charge, cer tain share classes may be subject to a CDSC on redemption. For more information on the purchasing and valuation of shares, please see “Purchase of Shares” and “Pricing of Shares” in Par t II of this SAI.
VII. Portfolio Transactions and Brokerage
See “Por tfolio Transactions and Brokerage” in Par t II of this SAI for more information.
The Master Por tfolio paid no brokerage commissions during the past three fiscal years.
The following table shows the dollar amount of brokerage commissions paid to brokers for providing Section 28(e) research/brokerage services under Section 28(e) of the Securities Exchange Act of 1934, as amended, and the approximate dollar amount of the transactions involved for the fiscal year ended December 31, 2025. The provision of Section 28(e) research/brokerage services was not necessarily a factor in the placement of all brokerage business with such brokers.
Amount of Commissions Paid to Brokers for Providing 28(e) Eligible Research Services Amount of Brokerage Transactions Involved $0 $0
As of December 31, 2025, the value of the Master Por tfolio’s aggregate holdings of the securities of its regular brokers or dealers (as defined in Rule 10b-1 under the Investment Company Act) or their parents, if any por tion of such holdings were purchased during the fiscal year ended December 31, 2025, is as follows:
Regular Broker/Dealer Debt (D)/Equity (E) Aggregate Holidings (000’s) JPMorgan Chase & Co ................................................ D $21,429 Morgan Stanley. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D $19,819 Bank Of America NA .................................................. D $19,184 Wells Fargo & Company .............................................. D $17,088 Citigroup INC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D $15,875
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Regular Broker/Dealer Debt (D)/Equity (E) Aggregate Holidings (000’s) Goldman Sachs Group INC ............................................ D $14,430 BMO Mor tgage Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D $ 1,711
Securities Lending
To the extent that the Master Por tfolio engages in securities lending, the Master Por tfolio conducts its securities lending pursuant to an exemptive order from the Commission permitting it to lend por tfolio securities to borrowers affiliated with the Master Por tfolio and to retain an affiliate of the Master Por tfolio as securities lending agent. To the extent that the Master Por tfolio engages in securities lending, BlackRock Institutional Trust Company, N.A. (“BTC”) acts as securities lending agent for the Master Por tfolio, subject to the overall supervision of BFA, pursuant to a written agreement (the “Securities Lending Agency Agreement”). BTC administers the lending program in accordance with guidelines approved by MIP’s Board.
The Master Por tfolio retains a por tion of the securities lending income and remits the remaining por tion to BTC as compensation for its services as securities lending agent. Securities lending income is generally equal to the total of income earned from the reinvestment of cash collateral (and excludes collateral investment fees as defined below), and any fees or other payments to and from borrowers of securities. As securities lending agent, BTC bears all operational costs directly related to securities lending. The Master Por tfolio is responsible for fees in connection with the investment of cash collateral received for securities on loan in money market funds advised by BFA or its affiliates, and such fees will not be subject to any waivers (the “collateral investment fees”); however, BTC has agreed to reduce the amount of securities lending income it receives in order to effectively limit the collateral investment fees the Master Por tfolio bears to an annual rate of 0.04%. Such money market fund shares will not be subject to a sales load, distribution fee or service fee.
To the extent that the Master Por tfolio invests cash collateral in a non-government money market fund, the Master Por tfolio may be subject to a discretionary liquidity fee of up to 2% on all redemptions. Discretionary liquidity fees may be imposed or terminated at any time at the discretion of the board of directors of the money market fund, or its delegate, if it is determined that such fee would be, or would not be, respectively, in the best interest of the money market fund. Additionally, the Master Por tfolio will be subject to a mandatory liquidity fee if the money market fund’s total net redemptions on a single day exceed 5% of the money market fund’s net assets, unless the liquidity costs are de minimis (i.e., less than one basis point (0.01%)). The money market fund will determine the size of the mandatory liquidity fee by making a good faith estimate of cer tain costs the money market fund would incur if it were to sell a pro rata amount of each security in the por tfolio to satisfy the amount of net redemptions on that day. There is no limit to the size of a mandatory liquidity fee. If the money market fund cannot estimate the costs of selling a pro rata amount of each por tfolio security in good faith and suppor ted by data, it is required to apply a default liquidity fee of 1% on the value of shares redeemed on that day. The imposition of any such discretionary or mandatory liquidity fee would reduce the Master Por tfolio’s returns on securities lending.
Under the securities lending program, the Master Por tfolio is categorized into one of several specific asset classes. The determination of the Master Por tfolio’s asset class category (fixed-income, domestic equity, international equity or fund of funds), each of which may be subject to a different fee arrangement, is based on a methodology agreed to by MIP and BTC.
Pursuant to the current securities lending agreement: (i) the Master Por tfolio retains 82% of securities lending income (which excludes collateral investment fees); and (ii) this amount can never be less than 70% of the sum of securities lending income plus collateral investment fees.
In addition, commencing the business day following the date that the aggregate securities lending income earned across the BlackRock Multi-Asset Complex in a calendar year exceeds a specific threshold, the Master Por tfolio, pursuant to the current securities lending agreement, will receive for the remainder of that calendar year securities lending income as follows: (i) 85% of securities lending income (which excludes collateral investment fees); and (ii) this amount can never be less than 70% of the sum of securities lending income plus collateral investment fees.Prior to January 1, 2026, the Master Por tfolio was subject to the same securities lending fee arrangement.
The services provided to the Master Por tfolio by BTC, in the most recent fiscal year ended December 31, 2025, primarily included the following: (1) selecting borrowers from an approved list of borrowers and executing a securities lending agreement as agent on behalf of the Master Por tfolio with each such borrower; (2) negotiating the terms of securities loans, including the amount of fees;
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(3) directing the delivery of loaned securities; (4) monitoring the daily value of the loaned securities and directing the payment of additional collateral or the return of excess collateral, as necessary; (5) investing cash collateral received in connection with any loaned securities; (6) monitoring distributions on loaned securities (for example, interest and dividend activity); (7) in the event of default by a borrower with respect to any securities loan, using the collateral or the proceeds of the liquidation of collateral to purchase replacement securities of the same issue, type, class and series as that of the loaned securities; and (8) terminating securities loans and arranging for the return of loaned securities to the Master Por tfolio at loan termination.
The following table shows the dollar amounts of income and fees/compensation related to the securities lending activities of the Master Por tfolio during its most recent fiscal year ended December 31, 2025.
Gross income from securities lending activities ................................................ $7,660,678 Fees and/or compensation for securities lending activities and related services Securities lending income paid to BTC for services as securities lending agent . . . . . . . . . . . . . . . . . . . . $ 84,406 Cash collateral management expenses not included in securities lending income paid to BTC. . . . . . . . $ 68,496 Administrative fees not included in securities lending income paid to BTC ......................... $ 0 Indemnification fees not included in securities lending income paid to BTC . . ...................... $ 0 Rebates (paid to borrowers) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7, 100,062 Other fees not included in securities lending income paid to BTC . . . ............................. $ 0 Aggregate fees/compensation for securities lending activities .................................. $7,252,964 Net income from securities lending activities .................................................. $ 407,714
VIII. Additional Information
Independent Registered Public Accounting Firm. PricewaterhouseCoopers LLP, with offices located at Two Commerce Square, 2001 Market Street, Suite 1800, Philadelphia, Pennsylvania 19103, serves as the Fund’s independent registered public accounting firm.
Counsel. Ropes & Gray LLP, with offices at 1211 Avenue of the Americas, New York, New York 10036, serves as the Fund’s counsel.
Principal Shareholders
To the knowledge of the Trust, the following entities owned of record or beneficially 5% or more of a class of the Fund’s currently outstanding shares as of April 1, 2026:
Name Address Percentage Class Missionsquare Retirement 777 Nor th Capitol Street, NE Washington DC, 20002
17.21% Investor A Shares
Pershing LLC 1 Pershing Plaza Jersey City NJ 07399-0001
12.59% Investor A Shares
Benefit Trust Company Po Box 12765 Overland Park, KS 66282
5.04% Investor A Shares
Charles Schwab & Co Inc 101 Montgomery St San Francisco CA 94104-4122
24.87% Institutional Shares
Raymond James 880 Carillon Pkwy Saint Petersburg FL 33716
9.95% Institutional Shares
Empower Trust Company LLC 8515 E Orchard Rd 2T2 Greenwood Village CO 80111-5002
9.77% Institutional Shares
National Financial Services LLC 499 Washington Boulevard Jersey City, NJ 07310
8.50% Institutional Shares
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Name Address Percentage Class Ubatco & Co Po Box 82535 Lincoln NE 68501
8.21% Institutional Shares
Empower Trust 8515 E Orchard Road Greenwood Village, CO 80111
6.75% Institutional Shares
Pershing LLC 1 Pershing Plaza Jersey City, NJ 07399-0001
80.04% Investor P Shares
Merrill Lynch Pierce Fenner 4800 E. Deer Lake Drive, 3 rd Floor Jacksonville, FL 32246-6484
16.69% Class K Shares
EMPOWER TRUST 8515 E ORCHARD RD 2T2 GREENWOOD VILLAGE CO 80111
13.19% Class K Shares
BTC as Trustee for YourPath 5901 College Boulevard, Suite 200 Overland Park, KS 66211
9.96% Class K Shares
National Financial Services LLC 499 Washington Boulevard Jersey City, NJ 07310
6.96% Class K Shares
Capital Stock
As of the date of this SAI, the beneficial interests in the Trust are divided into transferable shares of 37 separate and distinct series authorized and established by the Board of Trustees. The number of shares of each series, and classes thereof, is unlimited and each share has no par value. The Board of Trustees may, in the future, authorize the issuance of other series representing shares of additional investment por tfolios or funds. Except to the extent the Investment Company Act expressly grants to shareholders the power to vote on such termination(s), the Trust, or any series (or class) thereof, may be terminated at any time by the Trustees with written notice to the shareholders.
Although the Trust is not required to hold regular annual shareholder meetings, occasional annual or special meetings may be required for purposes such as electing and removing Trustees, approving advisory contracts, and changing the Fund’s fundamental investment policies.
History of the Trust
The Trust was organized on December 4, 2001 as a statutory trust under the laws of the State of Delaware under the name Barclays Global Investors Funds. The Trust was originally organized as a Maryland corporation named Barclays Global Investors Funds, Inc. (the “Maryland corporation”). On August 21, 2001, the Board of Directors of the Maryland corporation approved a proposal to redomicile the Maryland corporation in Delaware as a Delaware statutory trust (the “Redomiciling”). Shareholders of the Maryland corporation approved the Redomiciling on November 16, 2001. The Trust was established with multiple series corresponding to, and having identical designations as, the series of the Maryland corporation. The Redomiciling was effected on January 11, 2002, at which time the Trust assumed the operations of the Maryland corporation and adopted the Maryland corporation’s registration statement. Shor tly thereafter, the Maryland corporation was dissolved. On December 1, 2009, the Trust was renamed BlackRock Funds III.
IX. Financial Statements
The audited financial statements, financial highlights and notes thereto in the Fund’s Annual Financial Statements and Additional Information for the fiscal year ended December 31, 2025, as filed with the SEC on Form N-CSR (the “2025 Annual Financial Statements”), are incorporated in this SAI by reference. No other par ts of the 2025 Annual Financial Statements are incorporated by reference herein. The 2025 Annual Financial Statements have been audited by PricewaterhouseCoopers LLP. The repor t of PricewaterhouseCoopers LLP is incorporated herein by reference. Such 2025 Annual Financial Statements have been incorporated herein in reliance upon the repor t of such firm given their authority as exper ts in accounting and auditing. Additional copies of the Fund’s annual and semi annual repor ts to shareholders and the Fund’s Annual and Semi-Annual Financial Statements and Additional Information may be obtained at no charge by telephoning the Distributor at the telephone number appearing on the front page of this SAI.
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PART II
Throughout this Statement of Additional Information (“SAI”), each BlackRock-advised fund may be referred to as a “Fund” or collectively with others as the “Funds.” Cer tain Funds may also be referred to as “Municipal Funds” if they invest cer tain of their assets in municipal investments described below.
Each Fund is organized either as a Maryland corporation, a Massachusetts business trust or a Delaware statutory trust. In each jurisdiction, nomenclature varies. For ease and clarity of presentation, shares of common stock and shares of beneficial interest are referred to herein as “shares” or “Common Stock,” holders of shares of Common Stock are referred to as “shareholders,” the trustees or directors of each Fund are referred to as “Directors,” the boards of trustees/directors of each Fund are referred to as the “Board of Directors” or the “Board,” BlackRock Advisors, LLC, BlackRock Fund Advisors or their respective affiliates is the investment adviser or manager of each Fund and is referred to herein as the “Manager” or “BlackRock,” and the investment advisory agreement or management agreement applicable to each Fund is referred to as the “Management Agreement.” Each Fund’s Ar ticles of Incorporation or Declaration of Trust, together with all amendments thereto, is referred to as its “char ter.” The Investment Company Act of 1940, as amended, is referred to herein as the “Investment Company Act.” The Securities Act of 1933, as amended, is referred to herein as the “Securities Act.” The Securities and Exchange Commission is referred to herein as the “Commission” or the “SEC.”
Cer tain Funds are “feeder” funds (each, a “Feeder Fund”) that invest all or a por tion of their assets in a corresponding “master” por tfolio (each, a “Master Por tfolio”) of a master limited liability company (each, a “Master LLC”), a mutual fund that has the same objective and strategies as the Feeder Fund. All investments are generally made at the level of the Master Por tfolio. This structure is sometimes called a “master/feeder” structure. A Feeder Fund’s investment results will correspond directly to the investment results of the underlying Master Por tfolio in which it invests. For simplicity, this SAI uses the term “Fund” to include both a Feeder Fund and its Master Por tfolio.
In addition to containing information about the Funds, Par t II of this SAI contains general information about all funds in the BlackRock-advised fund complex. Cer tain information contained herein may not be relevant to a par ticular Fund.
INVESTMENT RISKS AND CONSIDERATIONS
Set for th below are descriptions of some of the types of investments and investment strategies that one or more of the Funds may use, and the risks and considerations associated with those investments and investment strategies. Please see each Fund’s prospectuses (the “Prospectus”) and the “Investment Objective and Policies,” “Investment Objectives and Policies” or “Investment Strategies and Risks of the Fund” section, as applicable, of Par t I of this SAI for fur ther information on each Fund’s investment policies and risks. Information contained in this section about the risks and considerations associated with a Fund’s investments and/or investment strategies applies only to those Funds specifically identified in Par t I of this SAI as making each type of investment or using each investment strategy (each, a “Covered Fund”). Information that does not apply to a Covered Fund does not form a par t of that Covered Fund’s SAI and should not be relied on by investors in that Covered Fund. Only information that is clearly identified as applicable to a Covered Fund is considered to form a par t of that Covered Fund’s SAI.
Asset-Backed Securities. Asset-backed securities are securities backed by home equity loans, installment sale contracts, credit card receivables or other assets. Asset-backed securities are “pass-through” securities, meaning that principal and interest payments — net of expenses — made by the borrower on the underlying assets (such as credit card receivables) are passed through to a Fund. The value of asset-backed securities, like that of traditional fixed-income securities, typically increases when interest rates fall and decreases when interest rates rise. However, asset-backed securities differ from traditional fixed-income securities because of their potential for prepayment. The price paid by a Fund for its asset-backed securities, the yield the Fund expects to receive from such securities and the average life of the securities are based on a number of factors, including the anticipated rate of prepayment of the underlying assets. In a period of declining interest rates, borrowers may prepay the underlying assets more quickly than anticipated, thereby reducing the yield to maturity and the average life of the asset-backed securities. Moreover, when a Fund reinvests the proceeds of a prepayment in these circumstances, it will likely receive a rate of interest that is lower than the rate on the security that was prepaid. To the extent that a Fund purchases asset backed securities at a premium, prepayments may result in a loss to the extent of the premium paid. If a Fund buys such securities at a discount, both scheduled payments and unscheduled prepayments will increase current and total returns and unscheduled prepayments will also accelerate the recognition of income which, when distributed to shareholders, will be taxable as ordinary income. In a period of rising interest rates, prepayments of the underlying assets may occur at a slower than expected rate, creating maturity extension risk. This par ticular risk may effectively change a security that was considered shor t- or intermediate-term at the time of purchase into a longer term security.
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Since the value of longer-term securities generally fluctuates more widely in response to changes in interest rates than does the value of shor ter-term securities, maturity extension risk could increase the volatility of the Fund. When interest rates decline, the value of an asset-backed security with prepayment features may not increase as much as that of other fixed-income securities, and, as noted above, changes in market rates of interest may accelerate or retard prepayments and thus affect maturities.
Asset-Based Securities. Cer tain Funds may invest in debt, preferred or conver tible securities, the principal amount, redemption terms or conversion terms of which are related to the market price of some natural resource asset such as gold bullion. These securities are referred to as “asset-based securities.” A Fund will purchase only asset-based securities that are rated, or are issued by issuers that have outstanding debt obligations rated, investment grade (for example, AAA, AA, A or BBB by S&P Global Ratings (“S&P”) or Fitch Ratings (“Fitch”), or Baa by Moody’s Investors Service, Inc. (“Moody’s”) or commercial paper rated A-1 by S&P or Prime-1 by Moody’s) or by issuers that the Manager has determined to be of similar creditwor thiness. Obligations ranked in the four th highest rating category, while considered “investment grade,” may have cer tain speculative characteristics and may be more likely to be downgraded than securities rated in the three highest rating categories. If an asset-based security is backed by a bank letter of credit or other similar facility, the Manager may take such backing into account in determining the creditwor thiness of the issuer. While the market prices for an asset-based security and the related natural resource asset generally are expected to move in the same direction, there may not be per fect correlation in the two price movements. Asset-based securities may not be secured by a security interest in or claim on the underlying natural resource asset. The asset-based securities in which a Fund may invest may bear interest or pay preferred dividends at below market (or even relatively nominal) rates. Cer tain asset-based securities may be payable at maturity in cash at the stated principal amount or, at the option of the holder, directly in a stated amount of the asset to which it is related. In such instance, because no Fund presently intends to invest directly in natural resource assets, a Fund would sell the asset-based security in the secondary market, to the extent one exists, prior to maturity if the value of the stated amount of the asset exceeds the stated principal amount and thereby realize the appreciation in the underlying asset.
Precious Metal-Related Securities. A Fund may invest in the equity and other securities of companies that explore for, extract, process or deal in precious metals ( e.g. , gold, silver and platinum), and in asset-based securities indexed to the value of such metals. Such securities may be purchased when they are believed to be attractively priced in relation to the value of a company’s precious metal-related assets or when the values of precious metals are expected to benefit from inflationary pressure or other economic, political or financial uncer tainty or instability. Based on historical experience, during periods of economic or financial instability the securities of companies involved in precious metals may be subject to extreme price fluctuations, reflecting the high volatility of precious metal prices during such periods. In addition, the instability of precious metal prices may result in volatile earnings of precious metal-related companies, which may, in turn, adversely affect the financial condition of such companies. The major producers of gold include the Republic of South Africa, Russia, Canada, the United States, Brazil and Australia. Sales of gold by Russia are largely unpredictable and often relate to political and economic considerations rather than to market forces. Economic, financial, social and political factors within South Africa may significantly affect South African gold production.
Borrowing and Leverage. Each Fund may borrow as a temporary measure for extraordinary or emergency purposes, including to meet redemptions or to settle securities transactions. Cer tain Funds will not purchase securities at any time when borrowings exceed 5% of their total assets, except (a) to honor prior commitments or (b) to exercise subscription rights when outstanding borrowings have been obtained exclusively for settlements of other securities transactions.
Cer tain Funds may also borrow in order to make investments, to the extent disclosed in such Fund’s Prospectus. The purchase of securities while borrowings are outstanding will have the effect of leveraging the Fund. Such leveraging increases the Fund’s exposure to capital risk, and borrowed funds are subject to interest costs that will reduce net income. The use of leverage by a Fund creates an oppor tunity for greater total return, but, at the same time, creates special risks. For example, leveraging may exaggerate changes in the net asset value (“NAV”) of Fund shares and in the yield on the Fund’s por tfolio. Although the principal of such borrowings will be fixed, the Fund’s assets may change in value during the time the borrowings are outstanding. Borrowings will create interest expenses for the Fund that can exceed the income from the assets purchased with the borrowings. To the extent the income or capital appreciation derived from securities purchased with borrowed funds exceeds the interest the Fund will have to pay on the borrowings, the Fund’s return will be greater than if leverage had not been used. Conversely, if the income or capital appreciation from the securities purchased with such borrowed funds is not sufficient to cover the cost of borrowing, the return to the Fund will be less than if leverage had not been used and, therefore, the amount available for distribution to shareholders as dividends will be reduced. In the latter case, the Manager in its best judgment
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never theless may determine to maintain the Fund’s leveraged position if it expects that the benefits to the Fund’s shareholders of maintaining the leveraged position will outweigh the current reduced return.
Cer tain types of borrowings by a Fund may result in the Fund being subject to covenants in credit agreements relating to asset coverage, por tfolio composition requirements and other matters. It is not anticipated that observance of such covenants would impede the Manager from managing a Fund’s por tfolio in accordance with the Fund’s investment objectives and policies. However, a breach of any such covenants not cured within the specified cure period may result in acceleration of outstanding indebtedness and require the Fund to dispose of por tfolio investments at a time when it may be disadvantageous to do so.
Each Fund may at times borrow from affiliates of the Manager, provided that the terms of such borrowings are no less favorable than those available from comparable sources of funds in the marketplace.
Cash Management. Generally, the Manager will employ futures and options on futures to provide liquidity necessary to meet anticipated redemptions or for day-to-day operating purposes. However, if considered appropriate in the opinion of the Manager, a por tion of a Fund’s assets may be invested in cer tain types of instruments with remaining maturities of 397 days or less for liquidity purposes. Such instruments would consist of: (i) obligations of the U.S. Government, its agencies, instrumentalities, authorities or political subdivisions (“U.S. Government Securities”); (ii) other fixed-income securities rated Aa or higher by Moody’s or AA or higher by S&P or, if unrated, of comparable quality in the opinion of the Manager; (iii) commercial paper; (iv) bank obligations, including negotiable cer tificates of deposit, time deposits and bankers’ acceptances; and (v) repurchase agreements. At the time the Fund invests in commercial paper, bank obligations or repurchase agreements, the issuer or the issuer’s parent must have outstanding debt rated Aa or higher by Moody’s or AA or higher by S&P or outstanding commercial paper, bank obligations or other shor t-term obligations rated Prime-1 by Moody’s or A-1 by S&P; or, if no such ratings are available, the instrument must be of comparable quality in the opinion of the Manager. For more information on money market instruments, see “Money Market Securities” below.
Collateralized Debt Obligations. Cer tain Funds may invest in collateralized debt obligations (“CDOs”), which include collateralized bond obligations (“CBOs”), collateralized loan obligations (“CLOs”) and other similarly structured securities. CDOs are types of asset-backed securities. A CBO is ordinarily issued by a trust or other special purpose entity (“SPE”) and is typically backed by a diversified pool of fixed-income securities (which may include high risk, below investment grade securities) held by such issuer. A CLO is ordinarily issued by a trust or other SPE and is typically collateralized by a pool of loans, which may include, among others, domestic and non-U.S. senior secured loans, senior unsecured loans, and subordinate corporate loans, including loans that may be rated below investment grade or equivalent unrated loans, held by such issuer. Investments in a CLO organized outside of the United States may not be deemed to be foreign securities if the CLO is collateralized by a pool of loans, a substantial por tion of which are U.S. loans. Although cer tain CDOs may benefit from credit enhancement in the form of a senior-subordinate structure, over-collateralization or bond insurance, such enhancement may not always be present, and may fail to protect a Fund against the risk of loss on default of the collateral. Cer tain CDO issuers may use derivatives contracts to create “synthetic” exposure to assets rather than holding such assets directly, which entails the risks of derivative instruments described elsewhere in this SAI. CDOs may charge management fees and administrative expenses, which are in addition to those of a Fund.
For both CBOs and CLOs, the cash flows from the SPE are split into two or more por tions, called tranches, varying in risk and yield. The riskiest por tion is the “equity” tranche, which bears the first loss from defaults from the bonds or loans in the SPE and serves to protect the other, more senior tranches from default (though such protection is not complete). Since it is par tially protected from defaults, a senior tranche from a CBO or CLO typically has higher ratings and lower yields than its underlying securities, and may be rated investment grade. Despite the protection from the equity tranche, CBO or CLO tranches can experience substantial losses due to actual defaults, downgrades of the underlying collateral by rating agencies, forced liquidation of the collateral pool due to a failure of coverage tests, increased sensitivity to defaults due to collateral default and disappearance of protecting tranches, market anticipation of defaults as well as investor aversion to CBO or CLO securities as a class. Interest on cer tain tranches of a CDO may be paid in kind or deferred and capitalized (paid in the form of obligations of the same type rather than cash), which involves continued exposure to default risk with respect to such payments.
The risks of an investment in a CDO depend largely on the type of the collateral securities and the class of the CDO in which a Fund invests. Normally, CBOs, CLOs and other CDOs are privately offered and sold, and thus are not registered under the securities laws. However, an active dealer market may exist for CDOs, allowing a CDO to qualify for Rule 144A transactions. In addition to the normal risks associated with fixed-income securities and asset-backed securities generally discussed elsewhere in this SAI, CDOs carry additional risks including, but not limited to: (i) the possibility that distributions from collateral securities will not be adequate to make interest or other payments; (ii) the
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risk that the collateral may default or decline in value or be downgraded, if rated by a nationally recognized statistical rating organization (“NRSRO”); (iii) a Fund may invest in tranches of CDOs that are subordinate to other tranches; (iv) the structure and complexity of the transaction and the legal documents could lead to disputes among investors regarding the characterization of proceeds; (v) the investment return achieved by the Fund could be significantly different than those predicted by financial models; (vi) the lack of a readily available secondary market for CDOs; (vii) the risk of forced “fire sale” liquidation due to technical defaults such as coverage test failures; and (viii) the CDO’s manager may per form poorly.
Commercial Paper. Cer tain Funds may purchase commercial paper. Commercial paper purchasable by each Fund includes “Section 4(a)(2) paper,” a term that includes debt obligations issued in reliance on the “private placement” exemption from registration afforded by Section 4(a)(2) of the Securities Act. Section 4(a)(2) paper is restricted as to disposition under the Federal securities laws, and is frequently sold (and resold) to institutional investors such as the Fund through or with the assistance of investment dealers who make a market in the Section 4(a)(2) paper, thereby providing liquidity. Cer tain transactions in Section 4(a)(2) paper may qualify for the registration exemption provided in Rule 144A under the Securities Act. Most Funds can purchase commercial paper rated (at the time of purchase) “A-1” by S&P or “Prime-1” by Moody’s or when deemed advisable by a Fund’s Manager or sub adviser, “high quality” issues rated “A-2”, “Prime-2” or “F-2” by S&P, Moody’s or Fitch, respectively.
Commercial paper is generally considered to be shor t-term unsecured debt of corporations. Like all fixed income securities, commercial paper prices are susceptible to fluctuations in interest rates. If interest rates rise, commercial paper prices will decline and vice versa. However, the shor t-term nature of a commercial paper investment generally makes it less susceptible to volatility than many other fixed income securities because interest rate risk typically increases as maturity lengths increase. Commercial paper tends to yield smaller returns than longer-term corporate debt because securities with shor ter maturities typically have lower effective yields than those with longer maturities.
Commodity-Linked Derivative Instruments and Hybrid Instruments. Cer tain Funds seek to gain exposure to the commodities markets primarily through investments in hybrid instruments. Hybrid instruments are either equity or debt derivative securities with one or more commodity-dependent components that have payment features similar to a commodity futures contract, a commodity option contract, or a combination of both. Therefore, these instruments are “commodity-linked.” They are considered “hybrid” instruments because they have both commodity-like and security-like characteristics. Hybrid instruments are derivative instruments because at least par t of their value is derived from the value of an underlying commodity, futures contract, index or other readily measurable economic variable.
The prices of commodity-linked derivative instruments may move in different directions than investments in traditional equity and debt securities when the value of those traditional securities is declining due to adverse economic conditions. As an example, during periods of rising inflation, debt securities have historically tended to decline in value due to the general increase in prevailing interest rates. Conversely, during those same periods of rising inflation, the prices of cer tain commodities, such as oil and metals, have historically tended to increase. Of course, there cannot be any guarantee that these investments will per form in that manner in the future, and at cer tain times the price movements of commodity-linked instruments have been parallel to those of debt and equity securities. Commodities have historically tended to increase and decrease in value during different par ts of the business cycle than financial assets. Never theless, at various times, commodities prices may move in tandem with the prices of financial assets and thus may not provide overall por tfolio diversification benefits. Under favorable economic conditions, the Fund’s investments may be expected to under-per form an investment in traditional securities. Over the long term, the returns on the Fund’s investments are expected to exhibit low or negative correlation with stocks and bonds.
Qualifying Hybrid Instruments. Cer tain Funds may invest in hybrid instruments that qualify for exclusion from regulation under the Commodity Exchange Act and the regulations adopted thereunder. A hybrid instrument that qualifies for this exclusion from regulation must be “predominantly a security.” A hybrid instrument is considered to be predominantly a security if (a) the issuer of the hybrid instrument receives payment in full of the purchase price of the hybrid instrument, substantially contemporaneously with delivery of the hybrid instrument; (b) the purchaser or holder of the hybrid instrument is not required to make any payment to the issuer in addition to the purchase price paid under subparagraph (a), whether as margin, settlement payment, or otherwise, during the life of the hybrid instrument or at maturity; (c) the issuer of the hybrid instrument is not subject by the terms of the instrument to mark-to-market margining requirements; and (d) the hybrid instrument is not marketed as a contract of sale of a commodity for future delivery (or option on such a contract) subject to applicable provisions of the Commodity Exchange Act. Hybrid instruments may be principal protected, par tially protected, or offer no principal protection. A principal protected hybrid instrument means that the issuer will pay, at a minimum, the par value of the note at
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maturity. Therefore, if the commodity value to which the hybrid instrument is linked declines over the life of the note, the Fund will receive at maturity the face or stated value of the note. With a principal protected hybrid instrument, the Fund will receive at maturity the greater of the par value of the note or the increase in its value based on the underlying commodity or index. This protection is, in effect, an option whose value is subject to the volatility and price level of the underlying commodity. The Manager’s decision whether to use principal protection depends in par t on the cost of the protection. In addition, the protection feature depends upon the ability of the issuer to meet its obligation to buy back the security, and, therefore, depends on the creditwor thiness of the issuer. With full principal protection, the Fund will receive at maturity of the hybrid instrument either the stated par value of the hybrid instrument, or potentially, an amount greater than the stated par value if the underlying commodity, index, futures contract or economic variable to which the hybrid instrument is linked has increased in value. Par tially protected hybrid instruments may suffer some loss of principal if the underlying commodity, index, futures contract or economic variable to which the hybrid instrument is linked declines in value during the term of the hybrid instrument. However, par tially protected hybrid instruments have a specified limit as to the amount of principal that they may lose.
Hybrid Instruments Without Principal Protection. Cer tain Funds may invest in hybrid instruments that offer no principal protection. At maturity, there is a risk that the underlying commodity price, futures contract, index or other economic variable may have declined sufficiently in value such that some or all of the face value of the hybrid instrument might not be returned. The Manager, at its discretion, may invest in a par tially protected principal structured note or a note without principal protection. In deciding to purchase a note without principal protection, the Manager may consider, among other things, the expected per formance of the underlying commodity futures contract, index or other economic variable over the term of the note, the cost of the note, and any other economic factors that the Manager believes are relevant.
Limitations on Leverage. Some of the hybrid instruments in which a Fund may invest may involve leverage. To avoid being subject to undue leverage risk, a Fund will seek to limit the amount of economic leverage it has under any one hybrid instrument that it buys and the leverage of the Fund’s overall por tfolio. A Fund will not invest in a hybrid instrument if, at the time of purchase: (i) that instrument’s “leverage ratio” exceeds 300% of the price increase in the underlying commodity, futures contract, index or other economic variable or (ii) the Fund’s “por tfolio leverage ratio” exceeds 150%, measured at the time of purchase. “Leverage ratio” is the expected increase in the value of a hybrid instrument, assuming a one percent price increase in the underlying commodity, futures contract, index or other economic factor. In other words, for a hybrid instrument with a leverage factor of 150%, a 1% gain in the underlying economic variable would be expected to result in a 1.5% gain in value for the hybrid instrument. Conversely, a hybrid instrument with a leverage factor of 150% would suffer a 1.5% loss if the underlying economic variable lost 1% of its value. “Por tfolio leverage ratio” is defined as the average (mean) leverage ratio of all instruments in a Fund’s por tfolio, weighted by the market values of such instruments or, in the case of futures contracts, their notional values. A Fund may at times or from time to time decide not to use leverage in its investments or use less leverage than may otherwise be allowable.
Counterpar ty Risk. A significant risk of hybrid instruments is counterpar ty risk. Unlike exchange-traded futures and options, which are standard contracts, hybrid instruments are customized securities, tailor-made by a specific issuer. With a listed futures or options contract, an investor’s counterpar ty is the exchange clearinghouse. Exchange clearinghouses are capitalized by the exchange members and typically have high investment grade ratings ( e.g. , ratings of AAA or AA by S&P). Therefore, the risk is small that an exchange clearinghouse might be unable to meet its obligations at maturity. However, with a hybrid instrument, a Fund will take on the counterpar ty credit risk of the issuer. That is, at maturity of the hybrid instrument, there is a risk that the issuer may be unable to per form its obligations under the structured note.
Convertible Securities. A conver tible security is a bond, debenture, note, preferred stock or other security that may be conver ted into or exchanged for a prescribed amount of common stock or other equity security of the same or a different issuer within a par ticular period of time at a specified price or formula. A conver tible security entitles the holder to receive interest paid or accrued on debt or the dividend paid on preferred stock until the conver tible security matures or is redeemed, conver ted or exchanged. Before conversion, conver tible securities have characteristics similar to nonconver tible income securities in that they ordinarily provide a stable stream of income with generally higher yields than those of common stocks of the same or similar issuers, but lower yields than comparable nonconver tible securities. The value of a conver tible security is influenced by changes in interest rates, with investment value declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also may have an effect on the conver tible security’s investment value. Conver tible securities rank senior to common stock in a corporation’s capital structure but are usually subordinated to comparable nonconver tible securities. Conver tible securities may be subject to redemption at the option of the issuer at a price established in the conver tible security’s governing instrument.
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The characteristics of conver tible securities make them potentially attractive investments for an investment company seeking a high total return from capital appreciation and investment income. These characteristics include the potential for capital appreciation as the value of the underlying common stock increases, the relatively high yield received from dividend or interest payments as compared to common stock dividends and decreased risks of decline in value relative to the underlying common stock due to their fixed-income nature. As a result of the conversion feature, however, the interest rate or dividend preference on a conver tible security is generally less than would be the case if the securities were issued in nonconver tible form.
In analyzing conver tible securities, the Manager will consider both the yield on the conver tible security relative to its credit quality and the potential capital appreciation that is offered by the underlying common stock, among other things.
Conver tible securities are issued and traded in a number of securities markets. Even in cases where a substantial por tion of the conver tible securities held by a Fund are denominated in U.S. dollars, the underlying equity securities may be quoted in the currency of the country where the issuer is domiciled. As a result, fluctuations in the exchange rate between the currency in which the debt security is denominated and the currency in which the share price is quoted will affect the value of the conver tible security. With respect to conver tible securities denominated in a currency different from that of the underlying equity securities, the conversion price may be based on a fixed exchange rate established at the time the security is issued, which may increase the effects of currency risk. As described below, a Fund is authorized to enter into foreign currency hedging transactions in which it may seek to reduce the effect of exchange rate fluctuations.
Apar t from currency considerations, the value of conver tible securities is influenced by both the yield on nonconver tible securities of comparable issuers and by the value of the underlying common stock. The value of a conver tible security viewed without regard to its conversion feature ( i.e. , strictly on the basis of its yield) is sometimes referred to as its “investment value.” To the extent interest rates change, the investment value of the conver tible security typically will fluctuate. At the same time, however, the value of the conver tible security will be influenced by its “conversion value,” which is the market value of the underlying common stock that would be obtained if the conver tible security were conver ted. Conversion value fluctuates directly with the price of the underlying common stock. If the conversion value of a conver tible security is substantially below its investment value, the price of the conver tible security is governed principally by its investment value. To the extent the conversion value of a conver tible security increases to a point that approximates or exceeds its investment value, the price of the conver tible security will be influenced principally by its conversion value. A conver tible security will sell at a premium over the conversion value to the extent investors place value on the right to acquire the underlying common stock while holding a fixed-income security. The yield and conversion premium of conver tible securities issued in Japan and the Euromarket are frequently determined at levels that cause the conversion value to affect their market value more than the securities’ investment value.
Holders of conver tible securities generally have a claim on the assets of the issuer prior to the common stockholders but may be subordinated to other debt securities of the same issuer. A conver tible security may be subject to redemption at the option of the issuer at a price established in a char ter provision, indenture or other governing instrument pursuant to which the conver tible security was issued. If a conver tible security held by a Fund is called for redemption, the Fund will be required to redeem the security, conver t it into the underlying common stock or sell it to a third par ty. Cer tain conver tible debt securities may provide a put option to the holder, which entitles the holder to cause the security to be redeemed by the issuer at a premium over the stated principal amount of the debt security under cer tain circumstances.
A Fund may also invest in synthetic conver tible securities. Synthetic conver tible securities may include either Cash-Settled Conver tibles or Manufactured Conver tibles. “Cash-Settled Conver tibles” are instruments that are created by the issuer and have the economic characteristics of traditional conver tible securities but may not actually permit conversion into the underlying equity securities in all circumstances. As an example, a private company may issue a Cash-Settled Conver tible that is conver tible into common stock only if the company successfully completes a public offering of its common stock prior to maturity and otherwise pays a cash amount to reflect any equity appreciation. “Manufactured Conver tibles” are created by the Manager or another par ty by combining separate securities that possess one of the two principal characteristics of a conver tible security, i.e. , fixed-income (“fixed income component”) or a right to acquire equity securities (“conver tibility component”). The fixed-income component is achieved by investing in nonconver tible fixed-income securities, such as nonconver tible bonds, preferred stocks and money market instruments. The conver tibility component is achieved by investing in call options, warrants, or other securities with equity conversion features (“equity features”) granting the holder the right to purchase a
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specified quantity of the underlying stocks within a specified period of time at a specified price or, in the case of a stock index option, the right to receive a cash payment based on the value of the underlying stock index.
A Manufactured Conver tible differs from traditional conver tible securities in several respects. Unlike a traditional conver tible security, which is a single security that has a unitary market value, a Manufactured Conver tible is comprised of two or more separate securities, each with its own market value. Therefore, the total “market value” of such a Manufactured Conver tible is the sum of the values of its fixed-income component and its conver tibility component.
More flexibility is possible in the creation of a Manufactured Conver tible than in the purchase of a traditional conver tible security. Because many corporations have not issued conver tible securities, the Manager may combine a fixed-income instrument and an equity feature with respect to the stock of the issuer of the fixed-income instrument to create a synthetic conver tible security otherwise unavailable in the market. The Manager may also combine a fixed-income instrument of an issuer with an equity feature with respect to the stock of a different issuer when the Manager believes such a Manufactured Conver tible would better promote a Fund’s objective than alternative investments. For example, the Manager may combine an equity feature with respect to an issuer’s stock with a fixed income security of a different issuer in the same industry to diversify the Fund’s credit exposure, or with a U.S. Treasury instrument to create a Manufactured Conver tible with a higher credit profile than a traditional conver tible security issued by that issuer. A Manufactured Conver tible also is a more flexible investment in that its two components may be purchased separately and, upon purchasing the separate securities, “combined” to create a Manufactured Conver tible. For example, the Fund may purchase a warrant for eventual inclusion in a Manufactured Conver tible while postponing the purchase of a suitable bond to pair with the warrant pending development of more favorable market conditions.
The value of a Manufactured Conver tible may respond to cer tain market fluctuations differently from a traditional conver tible security with similar characteristics. For example, in the event a Fund created a Manufactured Conver tible by combining a shor t-term U.S. Treasury instrument and a call option on a stock, the Manufactured Conver tible would be expected to outper form a traditional conver tible of similar maturity that is conver tible into that stock during periods when Treasury instruments outper form corporate fixed-income securities and underper form during periods when corporate fixed-income securities outper form Treasury instruments.
Corporate Loans. Cer tain Funds may invest in corporate loans. Corporate loans are generally non-investment grade floating rate instruments. Usually, they are freely callable at the issuer’s option. Cer tain Funds may invest in fixed and floating rate loans (“Loans”) arranged through private negotiations between a corporate borrower or a foreign sovereign entity and one or more financial institutions or institutional investors (“Lenders”). A Fund may invest in such Loans in the form of par ticipations in Loans (“Par ticipations”) and assignments of all or a por tion of Loans from third par ties (“Assignments”). A Fund considers these investments to be investments in debt securities for purposes of its investment policies. Par ticipations typically will result in the Fund having a contractual relationship only with the Lender, not with the borrower. The Fund will have the right to receive payments of principal, interest and any fees to which it is entitled only from the Lender selling the Par ticipation and only upon receipt by the Lender of the payments from the borrower. In connection with purchasing Par ticipations, the Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the Loans, nor any rights of set off against the borrower, and the Fund may not benefit directly from any collateral suppor ting the Loan in which it has purchased the Par ticipation. As a result, the Fund will assume the credit risk of both the borrower and the Lender that is selling the Par ticipation. In the event of the insolvency of the Lender selling the Par ticipation, the Fund may be treated as a general creditor of the Lender and may not benefit from any set-off between the Lender and the borrower. The Fund will acquire Par ticipations only if the Lender interpositioned between the Fund and the borrower is determined by the Fund’s manager to be creditwor thy. When the Fund purchases Assignments from Lenders, the Fund will acquire direct rights against the borrower on the Loan, and will not have exposure to a counterpar ty’s credit risk. The Funds may enter into Par ticipations and Assignments on a forward commitment or “when-issued” basis, whereby a Fund would agree to purchase a Par ticipation or Assignment at set terms in the future. For more information on forward commitments and when-issued securities, see “When-Issued Securities, Delayed Delivery Securities and Forward Commitments” below.
A Fund may have difficulty disposing of Assignments and Par ticipations. In cer tain cases, the market for such instruments may lack sufficient liquidity, and therefore the Fund anticipates that in such cases such instruments could be sold only to a limited number of institutional investors. The lack of a sufficiently liquid secondary market may have an adverse impact on the value of such instruments and on the Fund’s ability to dispose of par ticular Assignments or Par ticipations in response to a specific economic event, such as deterioration in the creditwor thiness of the borrower.
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Leading financial institutions often act as agent for a broader group of Lenders, generally referred to as a syndicate. The syndicate’s agent arranges the loans, holds collateral and accepts payments of principal and interest. Failure by the syndicate agent to fulfill its obligations may delay or adversely affect receipt of payment by the Fund.
The Loans in which the Fund may invest are subject to the risk of loss of principal and income. Although borrowers frequently provide collateral to secure repayment of these obligations they do not always do so. If they do provide collateral, the value of the collateral may not completely cover the borrower’s obligations at the time of a default. If a borrower files for protection from its creditors under the U.S. bankruptcy laws, these laws may limit a Fund’s rights to its collateral. In addition, the value of collateral may erode during a bankruptcy case. In the event of a bankruptcy, the holder of a Loan may not recover its principal, may experience a long delay in recovering its investment and may not receive interest during the delay.
Transactions in corporate loans may settle on a delayed basis. As a result, the proceeds from the sale of corporate loans may not be readily available to make additional investments or to meet a Fund’s redemption obligations. To the extent the extended settlement process gives rise to shor t-term liquidity needs, a Fund may hold additional cash, sell investments or temporarily borrow from banks and other lenders.
In cer tain circumstances, Loans may not be deemed to be securities under cer tain federal securities laws. Therefore, in the event of fraud or misrepresentation by a borrower or an arranger, Lenders and purchasers of interests in Loans, such as the Funds, may not have the protection of the anti-fraud provisions of the federal securities laws as would otherwise be available for bonds or stocks. Instead, in such cases, par ties generally would rely on the contractual provisions in the Loan agreement itself and common-law fraud protections under applicable state law.
Direct Lending. The Fund may act as the originator for direct loans and engage in direct lending. Direct loans between the Fund and a borrower may not be administered by an underwriter or agent bank. The Fund may provide financing to commercial borrowers directly or through companies acquired (or created) and owned by or otherwise affiliated with the Fund. The terms of the direct loans are negotiated with borrowers in private transactions. Fur thermore, a direct loan may be secured or unsecured.
In determining whether to make a direct loan, the Fund will rely primarily upon the creditwor thiness of the borrower and/or any collateral for payment of interest and repayment of principal. The risks associated with direct loans are substantially similar to those associated with investing in corporate loans. In making a direct loan, the Fund is exposed to the risk that the borrower may default or become insolvent and, consequently, that the Fund will lose money on the loan. Fur thermore, direct loans may subject the Fund to liquidity and interest rate risk and cer tain direct loans may be deemed illiquid. Direct loans are not publicly traded and may not have a secondary market. The lack of a secondary market for direct loans may have an adverse impact on the ability of the Fund to dispose of a direct loan and/or to value the direct loan.
When engaging in direct lending, the Fund’s per formance may depend, in par t, on the ability of the Fund to originate loans on advantageous terms. In originating loans, the Fund will compete with a broad spectrum of lenders. Increased competition for, or a diminishment in the available supply of, qualifying loans could result in lower yields on such loans, which could reduce Fund per formance.
As par t of its lending activities, the Fund may originate loans to companies that are experiencing significant financial or business difficulties, including companies involved in bankruptcy or other reorganization and liquidation proceedings. Although the terms of such financing may result in significant financial returns to the Fund, they involve a substantial degree of risk. The level of analytical sophistication, both financial and legal, necessary for successful financing to companies experiencing significant business and financial difficulties is unusually high.
Credit Linked Securities. Among the income producing securities in which a Fund may invest are credit linked securities, which are issued by a limited purpose trust or other vehicle that, in turn, invests in a derivative instrument or basket of derivative instruments, such as credit default swaps, interest rate swaps and other securities, in order to provide exposure to cer tain fixed-income markets. For instance, a Fund may invest in credit linked securities as a cash management tool in order to gain exposure to a cer tain market and/or to remain fully invested when more traditional income producing securities are not available.
Like an investment in a bond, investments in these credit linked securities represent the right to receive periodic income payments (in the form of distributions) and payment of principal at the end of the term of the security.
However, these payments are conditioned on the issuer’s receipt of payments from, and the issuer’s potential obligations to, the counterpar ties to the derivative instruments and other securities in which the issuer invests. For instance, the issuer may sell one or more credit default swaps, under which the issuer would receive a stream of
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payments over the term of the swap agreements provided that no event of default has occurred with respect to the referenced debt obligation upon which the swap is based. If a default occurs, the stream of payments may stop and the issuer would be obligated to pay the counterpar ty the par (or other agreed upon value) of the referenced debt obligation. This, in turn, would reduce the amount of income and principal that a Fund would receive. A Fund’s investments in these instruments are indirectly subject to the risks associated with derivative instruments, including, among others, credit risk, default or similar event risk, counterpar ty risk, interest rate risk, leverage risk and management risk. It is also expected that the securities will be exempt from registration under the Securities Act. Accordingly, there may be no established trading market for the securities and they may constitute illiquid investments.
Debt Securities. Debt securities, such as bonds, involve credit risk. This is the risk that the issuer will not make timely payments of principal and interest. The degree of credit risk depends on the issuer’s financial condition and on the terms of the debt securities. Changes in an issuer’s credit rating or the market’s perception of an issuer’s creditwor thiness may also affect the value of a Fund’s investment in that issuer. Credit risk is reduced to the extent a Fund limits its debt investments to U.S. Government Securities.
All debt securities, however, are subject to interest rate risk. This is the risk that the value of the security may fall when interest rates rise. If interest rates move sharply in a manner not anticipated by Fund management, a Fund’s investments in debt securities could be adversely affected and the Fund could lose money. In general, the market price of debt securities with longer maturities will go up or down more in response to changes in interest rates than will the market price of shor ter-term debt securities.
During periods of rising interest rates, the average life of cer tain fixed-income securities is extended because of slower than expected principal payments. This may lock in a below-market interest rate and extend the duration of these fixed-income securities, especially mor tgage-related securities, making them more sensitive to changes in interest rates. As a result, in a period of rising interest rates, these securities may exhibit additional volatility and lose value. This is known as extension risk.
The value of fixed-income securities in the Funds can be expected to vary inversely with changes in prevailing interest rates. Fixed-income securities with longer maturities, which tend to produce higher yields, are subject to potentially greater capital appreciation and depreciation than securities with shor ter maturities. The Funds are not restricted to any maximum or minimum time to maturity in purchasing individual por tfolio securities, and the average maturity of a Fund’s assets will vary.
Floating and Variable Rate Securities . Cer tain Funds may invest in debt instruments that pay a variable coupon rate. Securities with floating or variable interest rates can be less sensitive to interest rate changes than securities with fixed interest rates, but may decline in value if their interest rates do not rise as much, or as quickly, as interest rates in general. Conversely, floating rate securities will not generally increase in value if interest rates decline. The impact of interest rate changes on floating rate investments is typically mitigated by the periodic interest rate reset of the investments. Benchmark interest rates used for floating and variable rate securities may not accurately track market interest rates.
Inflation-Indexed Bonds. Cer tain Funds may invest in inflation-indexed bonds, which are fixed-income securities or other instruments whose principal value is periodically adjusted according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers use a structure that accrues inflation into the principal value of the bond. Most other issuers pay out the Consumer Price Index (“CPI”) accruals as par t of a semi-annual coupon.
Inflation-indexed securities issued by the U.S. Treasury have maturities of five, ten or thir ty years, although it is possible that securities with other maturities will be issued in the future. The U.S. Treasury securities pay interest on a semi-annual basis, equal to a fixed percentage of the inflation-adjusted principal amount. For example, if a Fund purchased an inflation-indexed bond with a par value of $1,000 and a 3% real rate of return coupon (payable 1.5% semi-annually), and inflation over the first six months was 1%, the mid-year par value of the bond would be $1,010 and the first semi-annual interest payment would be $15.15 ($1,010 times 1.5%). If inflation during the second half of the year resulted in the whole year’s inflation equaling 3%, the end-of-year par value of the bond would be $1,030 and the second semi-annual interest payment would be $15.45 ($1,030 times 1.5%).
If the periodic adjustment rate measuring inflation falls, the principal value of inflation-indexed bonds will be adjusted downward, and, consequently, the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds, even during a period of deflation. However, the current market value of the bonds is not guaranteed, and will fluctuate. Cer tain Funds may also invest in other inflation related bonds which may or may not provide a similar guarantee. If a guarantee of principal is not provided,
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the adjusted principal value of the bond repaid at maturity may be less than the original principal. In addition, if the Fund purchases inflation-indexed bonds offered by foreign issuers, the rate of inflation measured by the foreign inflation index may not be correlated to the rate of inflation in the United States.
The value of inflation-indexed bonds is expected to change in response to changes in real interest rates. Real interest rates, in turn, are tied to the relationship between nominal interest rates and the rate of inflation. Therefore, if inflation were to rise at a faster rate than nominal interest rates, real interest rates might decline, leading to an increase in value of inflation-indexed bonds. In contrast, if nominal interest rates increased at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation-indexed bonds. There can be no assurance, however, that the value of inflation-indexed bonds will be directly correlated to changes in interest rates.
While these securities are expected to be protected from long-term inflationary trends, shor t-term increases in inflation may lead to a decline in value. If interest rates rise due to reasons other than inflation (for example, due to changes in currency exchange rates), investors in these securities may not be protected to the extent that the increase is not reflected in the bond’s inflation measure.
In general, the measure used to determine the periodic adjustment of U.S. inflation-indexed bonds is the Consumer Price Index for Urban Consumers (“CPI-U”), which is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in the cost of living, made up of components such as housing, food, transpor tation and energy. Inflation-indexed bonds issued by a foreign government are generally adjusted to reflect a comparable inflation index, calculated by that government. There can be no assurance that the CPI-U or any foreign inflation index will accurately measure the real rate of inflation in the prices of goods and services. Moreover, there can be no assurance that the rate of inflation in a foreign country will be correlated to the rate of inflation in the United States.
Any increase in the principal amount of an inflation-indexed bond will be considered taxable ordinary income, even though investors do not receive their principal until maturity.
Investment Grade Debt Obligations. Cer tain Funds may invest in “investment grade securities,” which are securities rated in the four highest rating categories of an NRSRO or deemed to be of equivalent quality by a Fund’s Manager. Cer tain Funds may invest in debt securities rated Aaa by Moody’s or AAA by S&P. It should be noted that debt obligations rated in the lowest of the top four ratings ( i.e. , “Baa” by Moody’s or “BBB” by S&P) are considered to have some speculative characteristics and are more sensitive to economic change than higher rated securities. If an investment grade security of a Fund is subsequently downgraded below investment grade, the Fund’s Manager will consider such an event in determining whether the Fund should continue to hold the security. Subject to its investment strategies, there is no limit on the amount of such downgraded securities a Fund may hold.
See Appendix A to this SAI for a description of applicable securities ratings.
High Yield Investments (“Junk Bonds”).
Non-investment grade or “high yield” fixed-income or conver tible securities commonly known to investors as “junk bonds” are debt securities that are rated below investment grade by the major rating agencies or are securities that Fund management believes are of comparable quality. While generally providing greater income and oppor tunity for gain, non-investment grade debt securities may be subject to greater risks than securities which have higher credit ratings, including a high risk of default, and their yields will fluctuate over time. High yield securities will generally be in the lower rating categories of recognized rating agencies (rated “Ba” or lower by Moody’s or “BB” or lower by S&P) or will be non-rated. The credit rating of a high yield security does not necessarily address its market value risk, and ratings may from time to time change, positively or negatively, to reflect developments regarding the issuer’s financial condition. High yield securities are considered to be speculative with respect to the capacity of the issuer to timely repay principal and pay interest or dividends in accordance with the terms of the obligation and may have more credit risk than higher rated securities.
The major risks in junk bond investments include the following:
• Junk bonds may be issued by less creditwor thy companies. These securities are vulnerable to adverse changes in the issuer’s industry and to general economic conditions. Issuers of junk bonds may be unable to meet their interest or principal payment obligations because of an economic downturn, specific issuer developments or the unavailability of additional financing.
• The issuers of junk bonds may have a larger amount of outstanding debt relative to their assets than issuers of investment grade bonds. If the issuer experiences financial stress, it may be unable to meet its debt obligations. The issuer’s ability to pay its debt obligations also may be lessened by specific issuer developments, or the
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unavailability of additional financing. Issuers of high yield securities are often in the growth stage of their development and/or involved in a reorganization or takeover.
• Junk bonds are frequently ranked junior to claims by other creditors. If the issuer cannot meet its obligations, the senior obligations are generally paid off before the junior obligations, which will potentially limit a Fund’s ability to fully recover principal or to receive interest payments when senior securities are in default. Thus, investors in high yield securities have a lower degree of protection with respect to principal and interest payments than do investors in higher rated securities.
• Junk bonds frequently have redemption features that permit an issuer to repurchase the security from a Fund before it matures. If an issuer redeems the junk bonds, a Fund may have to invest the proceeds in bonds with lower yields and may lose income.
• Prices of junk bonds are subject to extreme price fluctuations. Negative economic developments may have a greater impact on the prices of junk bonds than on those of other higher rated fixed-income securities.
• Junk bonds may be less liquid than higher rated fixed-income securities even under normal economic conditions. Under cer tain economic and/or market conditions, a Fund may have difficulty disposing of cer tain high yield securities due to the limited number of investors in that sector of the market. There are fewer dealers in the junk bond market, and there may be significant differences in the prices quoted for junk bonds by the dealers, and such quotations may not be the actual prices available for a purchase or sale. Because junk bonds are less liquid than higher rated bonds, judgment may play a greater role in valuing cer tain of a Fund’s por tfolio securities than in the case of securities trading in a more liquid market.
• The secondary markets for high yield securities are not as liquid as the secondary markets for higher rated securities. The secondary markets for high yield securities are concentrated in relatively few market makers and par ticipants in the markets are mostly institutional investors, including insurance companies, banks, other financial institutions and mutual funds. In addition, the trading volume for high yield securities is generally lower than that for higher rated securities and the secondary markets could contract under adverse market or economic conditions independent of any specific adverse changes in the condition of a par ticular issuer. Under cer tain economic and/or market conditions, a Fund may have difficulty disposing of cer tain high yield securities due to the limited number of investors in that sector of the market. An illiquid secondary market may adversely affect the market price of the high yield security, which may result in increased difficulty selling the par ticular issue and obtaining accurate market quotations on the issue when valuing a Fund’s assets. Market quotations on high yield securities are available only from a limited number of dealers, and such quotations may not be the actual prices available for a purchase or sale. When the secondary market for high yield securities becomes more illiquid, or in the absence of readily available market quotations for such securities, the relative lack of reliable objective data makes it more difficult to value a Fund’s securities, and judgment plays a more impor tant role in determining such valuations.
• A Fund may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting issuer.
• The junk bond markets may react strongly to adverse news about an issuer or the economy, or to the perception or expectation of adverse news, whether or not it is based on fundamental analysis. Additionally, prices for high yield securities may be affected by legislative and regulatory developments. These developments could adversely affect a Fund’s NAV and investment practices, the secondary market for high yield securities, the financial condition of issuers of these securities and the value and liquidity of outstanding high yield securities, especially in a thinly traded market. For example, federal legislation requiring the divestiture by federally insured savings and loan associations of their investments in high yield bonds and limiting the deductibility of interest by cer tain corporate issuers of high yield bonds adversely affected the market in the past.
• The rating assigned by a rating agency evaluates the issuing agency’s assessment of the safety of a non investment grade security’s principal and interest payments, but does not address market value risk. Because such ratings of the ratings agencies may not always reflect current conditions and events, in addition to using recognized rating agencies and other sources, the Manager or sub-adviser per forms its own analysis of the issuers whose non-investment grade securities a Fund holds. Because of this, the Fund’s per formance may depend more on the Manager’s or sub-adviser’s own credit analysis than in the case of mutual funds investing in higher-rated securities.
In selecting non-investment grade securities, the Manager or sub-adviser considers factors such as those relating to the creditwor thiness of issuers, the ratings and per formance of the securities, the protections afforded the securities and the diversity of the Fund. The Manager or sub-adviser continuously monitors the issuers of non investment grade securities held by the Fund for their ability to make required principal and interest payments, as
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well as in an effor t to control the liquidity of the Fund so that it can meet redemption requests. If a security’s rating is reduced below the minimum credit rating that is permitted for a Fund, the Fund’s adviser or sub-adviser will consider whether the Fund should continue to hold the security.
In the event that a Fund investing in high yield securities experiences an unexpected level of net redemptions, the Fund could be forced to sell its holdings without regard to the investment merits, thereby decreasing the assets upon which the Fund’s rate of return is based.
The costs attributable to investing in the junk bond markets are usually higher for several reasons, such as higher investment research costs and higher commission costs.
Mezzanine Investments. Cer tain Funds, consistent with their restrictions on investing in securities of a specific credit quality, may invest in cer tain high yield securities known as mezzanine investments, which are subordinated debt securities which are generally issued in private placements in connection with an equity security ( e.g. , with attached warrants). Such mezzanine investments may be issued with or without registration rights. Similar to other high yield securities, maturities of mezzanine investments are typically seven to ten years, but the expected average life is significantly shor ter at three to five years. Mezzanine investments are usually unsecured and subordinate to other obligations of the issuer.
Pay-in-kind Bonds. Cer tain Funds may invest in pay-in-kind, or PIK, bonds. PIK bonds are bonds which pay interest through the issuance of additional debt or equity securities. Similar to zero coupon obligations, pay-in-kind bonds also carry additional risk as holders of these types of securities realize no cash until the cash payment date unless a por tion of such securities is sold and, if the issuer defaults, a Fund may obtain no return at all on its investment. The market price of pay-in-kind bonds is affected by interest rate changes to a greater extent, and therefore tends to be more volatile, than that of securities which pay interest in cash. Additionally, current U.S. federal tax law requires the holder of pay-in-kind bonds to accrue income with respect to these securities prior to the receipt of cash payments. To maintain its qualification as a regulated investment company and avoid liability for U.S. federal income and excise taxes, each Fund may be required to distribute income accrued with respect to these securities and may have to dispose of por tfolio securities under disadvantageous circumstances in order to generate cash to satisfy these distribution requirements.
Supranational Entities. A Fund may invest in debt securities of supranational entities. Examples of such entities include the International Bank for Reconstruction and Development (the World Bank), the European Steel and Coal Community, the Asian Development Bank and the Inter-American Development Bank. The government members, or “stockholders,” usually make initial capital contributions to the supranational entity and in many cases are committed to make additional capital contributions if the supranational entity is unable to repay its borrowings. There is no guarantee that one or more stockholders of a supranational entity will continue to make any necessary additional capital contributions. If such contributions are not made, the entity may be unable to pay interest or repay principal on its debt securities, and a Fund may lose money on such investments.
Depositary Receipts (ADRs, EDRs and GDRs). Cer tain Funds may invest in the securities of foreign issuers in the form of Depositary Receipts or other securities conver tible into securities of foreign issuers. Depositary Receipts may not necessarily be denominated in the same currency as the underlying securities into which they may be conver ted. The Fund may invest in both sponsored and unsponsored American Depositary Receipts (“ADRs”), European Depositary Receipts (“EDRs”), Global Depositary Receipts (“GDRs”) and other similar global instruments. ADRs typically are issued by an American bank or trust company and evidence ownership of underlying securities issued by a foreign corporation. EDRs, which are sometimes referred to as Continental Depositary Receipts, are receipts issued in Europe, typically by foreign banks and trust companies, that evidence ownership of either foreign or domestic underlying securities. GDRs are depositary receipts structured like global debt issues to facilitate trading on an international basis. In addition to investment risks associated with the underlying issuer, Depositary Receipts expose a Fund to additional risks associated with the non-uniform terms that apply to Depositary Receipt programs, credit exposure to the depository bank and to the sponsors and other par ties with whom the depository bank establishes the programs, currency risk and the risk of an illiquid market for Depositary Receipts. Unsponsored ADR, EDR and GDR programs are organized independently and without the cooperation of the issuer of the underlying securities. Unsponsored programs generally expose investors to greater risks than sponsored programs and do not provide holders with many of the shareholder benefits that come from investing in a sponsored Depositary Receipt. Available information concerning the issuer may not be as current as for sponsored ADRs, EDRs and GDRs, and the prices of unsponsored ADRs, EDRs and GDRs may be more volatile than if such instruments were sponsored by the issuer. Depositary Receipts are generally subject to the same risks as the foreign securities that they evidence or into which they may be conver ted. Investments in ADRs, EDRs and GDRs present additional investment considerations as described under “Foreign Investment Risks.”
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Derivatives.
General. Each Fund may use instruments referred to as derivatives, which are financial instruments that derive their value from one or more securities, commodities (such as gold or oil), currencies, interest rates, credit events or indices (a measure of value or rates, such as the S&P 500 Index or the prime lending rate) or other reference asset. Derivatives may allow a Fund to increase or decrease the level of risk to which the Fund is exposed more quickly and efficiently than with other transactions. Cer tain Funds may use derivatives to maintain a por tion of their long and shor t positions. Unless otherwise permitted, no Fund may use derivatives to gain exposure to an asset or asset class it is prohibited by its investment restrictions from purchasing directly. As described below, derivatives can be used for hedging or speculative purposes. Funds will engage in transaction-level payment netting, i.e. , the payment obligations of derivatives contracts are netted against one another with the Fund receiving or paying, as the case may be, only the net amount of the two payment streams.
Hedging. Each Fund may use derivatives for hedging purposes, in which a derivative is used to offset the risks associated with other Fund holdings. Losses on other investments may be substantially reduced by gains on a derivative that reacts in an opposite manner to market movements. Although hedging may reduce losses, it may also reduce or eliminate gains. In addition, hedging may cause losses if the market moves in an unanticipated manner, or if the cost of the derivative outweighs the benefit of the hedge. The effectiveness of hedging may be reduced by correlation risk, i.e. , the risk that changes in the value of the derivative will not match those of the holdings being hedged as expected by a Fund, which may result in additional losses to the Fund. The inability to close or offset derivatives could also reduce the effectiveness of a Fund’s hedging. There is no assurance that a Fund’s hedging will be effective. No Fund is required to use derivatives to hedge.
Speculation. Cer tain Funds may also use derivatives for speculative purposes to seek to enhance returns. The use of a derivative is speculative if the Fund is primarily seeking to achieve gains, rather than offset the risk of other positions. To the extent a Fund invests in a derivative for speculative purposes, the Fund will be fully exposed to the risks of loss of that derivative, which may sometimes be greater than the derivative’s cost, and the potential for loss in cer tain cases may be unlimited.
Regulation of Derivatives.
Rule 18f-4 Under the Investment Company Act. Rule 18f-4 under the Investment Company Act permits a Fund to enter into Derivatives Transactions (as defined below) and cer tain other transactions notwithstanding the restrictions on the issuance of “senior securities” under Section 18 of the Investment Company Act. Section 18 of the Investment Company Act, among other things, prohibits open-end funds, including the Funds, from issuing or selling any “senior security,” other than borrowing from a bank (subject to a requirement to maintain 300% “asset coverage”).
Under Rule 18f-4, “Derivatives Transactions” include the following: (1) any swap, security-based swap (including a contract for differences), futures contract, forward contract, option (excluding purchased options), any combination of the foregoing, or any similar instrument, under which a Fund is or may be required to make any payment or delivery of cash or other assets during the life of the instrument or at maturity or early termination, whether as margin or settlement payment or otherwise; (2) any shor t sale borrowing; (3) reverse repurchase agreements and similar financing transactions ( e.g. , recourse and non-recourse tender option bonds, and borrowed bonds), if a Fund elects to treat all of these transactions as Derivatives Transactions under Rule 18f-4; and (4) when-issued or forward-settling securities ( e.g. , firm and standby commitments, including to-be-announced (“TBA”) commitments, and dollar rolls) and non-standard settlement cycle securities, unless such transactions meet the Delayed-Settlement Securities Provision (as defined below under “—When-Issued Securities, Delayed Delivery Securities and Forward Commitments”).
Unless a Fund is relying on the Limited Derivatives User Exception (as defined below), the Fund must comply with Rule 18f-4 with respect to its Derivatives Transactions. Rule 18f-4, among other things, requires a Fund to adopt and implement a comprehensive written derivatives risk management program (“DRMP”) and comply with a relative or absolute limit on Fund leverage risk calculated based on value-at-risk (“VaR”). The DRMP is administered by a “derivatives risk manager,” who is appointed by the Fund’s Board, including a majority of the independent Directors, and periodically reviews the DRMP and repor ts to the Fund’s Board.
Rule 18f-4 provides an exception from the DRMP, VaR limit and cer tain other requirements if a Fund’s “derivatives exposure” is limited to 10% of its net assets (as calculated in accordance with Rule 18f-4) and the Fund adopts and implements written policies and procedures reasonably designed to manage its derivatives risks (the “Limited Derivatives User Exception”).
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Dodd-Frank Regulations. The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), enacted in July 2010, includes provisions that comprehensively regulate the over-the-counter (“OTC”) derivatives markets for the first time. While the Commodity Futures Trading Commission (“CFTC”) and other U.S. regulators have adopted many of the required Dodd-Frank regulations, cer tain regulations have only recently become effective and other regulations remain to be adopted. The full impact of Dodd-Frank on the Funds remains uncer tain.
Many OTC derivatives dealers are required to register with the CFTC as “swap dealers” and/or with the SEC as “security-based swap dealers”. Registered swap dealers and security-based swap dealers are subject to various regulatory requirements, including, but not limited to, margin, recordkeeping, repor ting, transparency, position limits, limitations on conflicts of interest, business conduct standards, minimum capital requirements and other regulatory requirements, which indirectly impact the Funds that enter into transactions with them.
The CFTC requires that cer tain interest rate swaps and cer tain credit default swaps must be executed in regulated markets and be submitted for clearing to regulated clearinghouses. The SEC is also expected to impose similar requirements on cer tain security-based derivatives in the future. OTC derivatives trades submitted for clearing are subject to minimum initial and variation margin requirements set by the relevant clearinghouse, as well as margin requirements mandated by the CFTC, SEC and/or federal prudential regulators. In addition, futures commission merchants (“FCMs”), who act as clearing members on behalf of customers for cleared OTC derivatives and futures contracts, also have discretion to increase a Fund’s margin requirements for these transactions beyond any regulatory and clearinghouse minimums subject to any restrictions on such discretion in the documentation between the FCM and the customer. These regulatory requirements may make it more difficult and costly for the Funds to enter into highly tailored or customized transactions, potentially rendering cer tain investment strategies impossible or not economically feasible. If a Fund decides to execute and clear cleared OTC derivatives and/or futures contracts through execution facilities, exchanges or clearinghouses, either indirectly through an executing broker, clearing member FCM or as a direct member, a Fund would be required to comply with the rules of the execution facility, exchange or clearinghouse and other applicable law.
With respect to cleared OTC derivatives and futures contracts and options on futures, a Fund will not face a clearinghouse directly but rather will do so through a FCM that is registered with the CFTC and/or SEC and that acts as a clearing member. A Fund may face the indirect risk of the failure of another clearing member customer to meet its obligations to its clearing member. Such scenario could arise due to a default by the clearing member on its obligations to the clearinghouse simultaneously with a customer’s failure to meet its obligations to the clearing member.
Clearing member FCMs are required to post initial margin to the clearinghouses through which they clear their customers’ cleared OTC derivatives and futures contracts, instead of using such initial margin in their businesses, as was widely permitted for OTC derivatives before Dodd-Frank. While an FCM may require its customer to post initial margin in excess of clearinghouse requirements, and cer tain clearinghouses may share a por tion of their earnings on initial margin with their clearing members, some por tion of the initial margin that is passed through to the clearinghouse does not generate earnings for the FCM. The inability of FCMs to earn the same levels of returns on initial margin for cleared OTC derivatives as they could earn with respect to non-cleared OTC derivatives may cause FCMs to charge higher fees, or provide less favorable pricing on cleared OTC derivatives than swap dealers will provide for non-cleared OTC derivatives. Fur thermore, customers, including the Funds, are subject to additional fees payable to FCMs with respect to cleared OTC derivatives, which may raise the cost to Funds of clearing as compared to trading non-cleared OTC derivatives bilaterally.
With respect to uncleared swaps, registered swap dealers and security-based swap dealers are required to exchange variation margin with a Fund and may be required by applicable regulations to collect (and in some cases exchange) initial margin with a Fund. Both initial and variation margin may be comprised of cash and/or securities, subject to applicable regulatory haircuts and other restrictions. Shares of investment companies (other than cer tain money market funds) may not be posted as collateral under applicable regulations.
The CFTC, cer tain foreign regulators, and many futures exchanges have established (and continue to evaluate and monitor) speculative position limits (“position limits”) on the maximum speculative position which any person, or group of persons acting in concer t, may hold or control in par ticular contracts. In addition, U.S. federal position limits apply to swaps that are economically equivalent to futures contracts on cer tain agricultural, metals and energy commodities. All positions owned or controlled by the same person or entity, even if in different accounts, must be aggregated for purposes of complying with the speculative limits. Thus, even if a Fund does not intend to exceed applicable position limits, it is possible that different clients managed by the Manager and its affiliates may be aggregated for this purpose. Therefore, the trading decisions of the Manager may have to be modified and positions held by a Fund liquidated in order to avoid exceeding such limits. The modification of investment decisions or the
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elimination of open positions, if it occurs, may adversely affect the profitability of a Fund. A violation of position limits could also lead to regulatory action materially adverse to a Fund’s investment strategy. A Fund may also be affected by other regimes, including those of the European Union and United Kingdom, and trading venues that impose position limits on commodity derivative contracts.
Additional Regulation of Derivatives. Regulatory bodies outside the U.S. have also passed, proposed, or may propose in the future, legislation similar to Dodd-Frank or other legislation that could increase the costs of par ticipating in, or otherwise adversely impact the liquidity of, par ticipating in the commodities markets. For example, the European Market Infrastructure Regulation (Regulation (EU) No 648/2012) (“EMIR”) introduced cer tain requirements in respect of OTC derivatives including: (i) the mandatory clearing of OTC derivative contracts declared subject to the clearing obligation; (ii) risk mitigation techniques in respect of uncleared OTC derivative contracts, including the mandatory margining of uncleared OTC derivative contracts; and (iii) repor ting and recordkeeping requirements in respect of all derivatives contracts. By way of fur ther example, the European Union Markets in Financial Instruments Directive (Directive 2014/65/EU) and Markets in Financial Instruments Regulation (Regulation (EU) No 600/2014) (together “MiFID II”), which have applied since January 3, 2018, govern the provision of investment services and activities in relation to, as well as the organized trading of, financial instruments such as shares, bonds, units in collective investment schemes and derivatives. In par ticular, MiFID II requires European Union Member States to apply position limits to the size of a net position a person can hold at any time in commodity derivatives traded on European Union trading venues and in “economically equivalent” OTC contracts. If the requirements of EMIR and MiFID II apply, the cost of derivatives transactions is expected to increase.
In addition, regulations adopted by global prudential regulators that are now in effect require cer tain prudentially regulated entities and cer tain of their affiliates and subsidiaries (including swap dealers) to include in their derivatives contracts and cer tain other financial contracts, terms that delay or restrict the rights of counterpar ties (such as the Funds) to terminate such contracts, foreclose upon collateral, exercise other default rights or restrict transfers of credit suppor t in the event that the prudentially regulated entity and/or its affiliates are subject to cer tain types of resolution or insolvency proceedings. Similar regulations and laws have been adopted in non-U.S. jurisdictions that may apply to a Fund’s counterpar ties located in those jurisdictions. In par ticular, in the United Kingdom and the European Union, governmental authorities could reduce, eliminate or conver t to equity the liabilities to a Fund of a counterpar ty experiencing financial difficulties (sometimes referred to as a “bail in”). It is possible that these requirements, as well as potential additional related government regulation, could adversely affect a Fund’s ability to terminate existing derivatives contracts, exercise default rights or satisfy obligations owed to it with collateral received under such contracts.
Risk Factors in Derivatives.
There are significant risks that apply generally to derivatives transactions, including:
Correlation Risk — the risk that changes in the value of a derivative will not match the changes in the value of the por tfolio holdings that are being hedged or of the par ticular market or security to which the Fund seeks exposure. There are a number of factors which may prevent a derivative instrument from achieving the desired correlation (or inverse correlation) with an underlying asset, rate or index, such as the impact of fees, expenses and transaction costs, the timing of pricing, and disruptions or illiquidity in the markets for such derivative instrument.
Counterpar ty Risk — the risk that a derivatives transaction counterpar ty will be unable or unwilling to make payments or otherwise honor its obligations to a Fund and the related risks of having concentrated exposure to such a counterpar ty. In par ticular, derivatives traded in OTC markets often are not guaranteed by an exchange or clearing corporation and often do not require payment of margin, and to the extent that the Fund has unrealized gains in such instruments or has deposited collateral with its counterpar ties the Fund is at risk that its counterpar ties will become bankrupt or otherwise fail to honor their obligations. A Fund will typically attempt to minimize counterpar ty risk by engaging in OTC derivatives transactions only with creditwor thy entities that have substantial capital or that have provided the Fund with a third-par ty guaranty or other credit suppor t. When a Fund enters into a derivatives transaction that is centrally cleared (whether mandatorily or voluntarily), the Fund is subject to the credit risk of the clearing house and the clearing member through which it holds its cleared position. Credit risk of market par ticipants with respect to derivatives that are centrally cleared is concentrated in a few clearing houses and increasingly fewer clearing members. It is not clear how an insolvency proceeding of a clearing house would be conducted and what impact an insolvency of a clearing house would have on the financial system. Also, a Fund will not be fully protected in the event of the bankruptcy of a Fund’s clearing member because the Fund would be limited to recovering only a pro rata share of the funds held by the clearing member on behalf of customers by account class for cleared derivatives. Although a clearing member is required to segregate assets from customers with respect to cleared derivatives positions from the clearing member’s proprietary assets, if a clearing member does not comply with the
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applicable regulations, or in the event of fraud or misappropriation of customer assets by a clearing member, a Fund could have only an unsecured creditor claim in an insolvency of the clearing member with respect to the assets held by the clearing member.
Credit Risk — the risk that the reference entity in a credit default swap or similar derivative will not be able to honor its financial obligations.
Currency Risk — the risk that changes in the exchange rate between two currencies will adversely affect the value (in U.S. dollar terms) of a derivative.
Illiquidity Risk — the risk that cer tain securities or instruments may be difficult or impossible to sell at the time or at the price desired by a Fund in connection with payments of margin, collateral, or settlement payments. There can be no assurance that a Fund will be able to unwind or offset a derivative at its desired price, in a secondary market or otherwise. It may, therefore, not be possible for the Fund to unwind its position in a derivative without incurring substantial losses (if at all). Cer tain OTC derivatives, including swaps and OTC options, involve substantial illiquidity risk. Illiquidity may also make it more difficult for a Fund to ascer tain a market value for such derivatives. A Fund will, therefore, acquire illiquid OTC derivatives (i) if the agreement pursuant to which the instrument is purchased contains a formula price at which the instrument may be terminated or sold, or (ii) for which the Manager anticipates the Fund can receive on each business day at least two independent bids or offers, unless a quotation from only one dealer is available, in which case that dealer’s quotation may be used. The illiquidity of the derivatives markets may be due to various factors, including congestion, disorderly markets, limitations on deliverable supplies, the par ticipation of speculators, government regulation and intervention, and technical and operational or system failures. In addition, the liquidity of a market in an exchange-traded derivative contract may be adversely affected by “daily price fluctuation limits” established by the exchanges which limit the amount of fluctuation in an exchange traded contract price during a single trading day. Once the daily limit has been reached in the contract, no trades may be entered into at a price beyond the limit, thus preventing the liquidation of open positions. Prices have in the past moved to the daily limit on a number of consecutive trading days with little to no trading. If it is not possible to close an open derivative position entered into by the Fund, the Fund would continue to be required to make daily cash payments of variation margin in the event of adverse price movements. In such a situation, if the Fund has insufficient cash, it may have to sell por tfolio securities to meet daily variation margin requirements at a time when it may be disadvantageous to do so.
Index Risk — if the derivative is linked to the per formance of an index, it will be subject to the risks associated with changes in that index. If the index changes, the Fund could receive lower interest payments or experience a reduction in the value of the derivative to below the price that the Fund paid for such derivative.
Legal Risk — the risk of insufficient documentation, insufficient capacity or authority of counterpar ty, or legality or enforceability of a contract.
Leverage Risk — the risk that a Fund’s derivatives transactions can magnify the Fund’s gains and losses. Relatively small market movements may result in large changes in the value of a derivatives position and can result in losses that greatly exceed the amount originally invested.
Market Risk — the risk that changes in the value of one or more markets or changes with respect to the value of the underlying asset will adversely affect the value of a derivative. In the event of an adverse movement, a Fund may be required to pay substantial additional margin to maintain its position or the Fund’s returns may be adversely affected.
Operational Risk — the risk related to potential operational issues, including documentation issues, settlement issues, systems failures, inadequate controls and human error.
Valuation Risk — the risk that valuation sources for a derivative will not be readily available in the market. This is possible especially in times of market distress, since many market par ticipants may be reluctant to purchase complex instruments or quote prices for them.
Volatility Risk — the risk that the value of derivatives will fluctuate significantly within a shor t time period.
Types of Derivatives Transactions.
A Fund may enter into derivatives transactions in accordance with its investment guidelines and restrictions, including the following:
Futures.
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A Fund may enter into futures contracts (“futures”) and options on futures contracts. Futures are standardized, exchange-traded contracts that require a purchaser to take delivery, and a seller to make delivery, of a specified amount of an asset at a specified future date and price. Upon purchasing or selling a futures contract, a Fund is required to deposit initial margin equal to a percentage of the contract value. Futures contracts are marked to market daily for the duration of the contract, and the Fund will either post additional margin or be entitled to a payment, as applicable, based on the mark-to-market movement of the contract.
A Fund may sell a futures contract prior to the completion of its term to limit its risk of loss from a decline in the market value of por tfolio holdings correlated with the futures contract. However, in the event the market value of the por tfolio holdings correlated with the futures contract increases rather than decreases, a Fund will realize a loss on the futures position and a lower return on the por tfolio holdings than would have been realized without the purchase of the futures contract.
The purchase of a futures contract may provide a Fund a lower cost alternative to purchasing securities or commodities directly. In the event that such securities or commodities decline in value or a Fund determines not to complete an anticipatory hedge transaction relating to a futures contract, however, the Fund may realize a loss relating to the futures position.
Futures contracts are also subject to position limits. In order to comply with position limits, a Fund may be required to liquidate positions or may not be able to fully implement trading instructions. Any such liquidation or limited implementation could result in substantial costs to a Fund. See “—Regulation of Derivatives — Dodd-Frank Regulations” above.
A Fund is also permitted to purchase or sell call and put options on futures contracts, including financial futures and stock indices. Generally, these strategies would be used under the same market and market sector conditions ( i.e. , conditions relating to specific types of investments) in which the Fund entered into futures transactions. A Fund may purchase put options or write call options on futures contracts and stock indices in lieu of selling the underlying futures contract in anticipation of a decrease in the market value of its securities. Similarly, a Fund can purchase call options, or write put options on futures contracts and stock indices, as a substitute for the purchase of such futures contracts to hedge against the increased cost resulting from an increase in the market value of securities which the Fund intends to purchase.
To maintain greater flexibility, a Fund may invest in instruments which have characteristics similar to futures contracts. These instruments may take a variety of forms, such as debt securities with interest or principal payments determined by reference to the value of a security, an index of securities or a commodity at a future point in time. The risks of such investments could reflect the risks of investing in futures and securities, including volatility and illiquidity.
Futures contracts and options on futures contracts are subject to significant correlation risk, leverage risk, illiquidity risk, market risk and counterpar ty risk with respect to a Fund’s futures broker or the clearinghouse. See “—Risk Factors in Derivatives” above.
Cer tain Funds may invest in futures based on carbon “allowances.” Under cer tain regulatory regimes, a limit is set by a regulator, such as a government entity, on the total amount of specific greenhouse gases, such as CO2, that can be emitted by regulated entities, such as manufacturers or energy producers. The regulator then may issue or sell individual “emission allowances” to regulated entities, which can then be traded on the open market. Commodity futures contracts linked to the value of emission allowances are known as “carbon futures.”
The price for carbon futures contracts is based on a number of factors, including the supply of and the demand for carbon futures contracts. Changes in law, market conditions and expectations, position limits, collateral requirements, and other factors each can impact the supply of and demand for carbon futures contracts. The market for carbon futures contracts is still developing and may be subject to periods of illiquidity. During such times it may be difficult or impossible to buy or sell a position at the desired price. Market disruptions or volatility can also make it difficult to find a counterpar ty willing to transact at a reasonable price and sufficient size.
Swap Agreements.
A Fund may enter into swap agreements for hedging purposes or speculative purposes. Swap agreements are OTC contracts entered into primarily by financial institutions and institutional investors which may or may not be cleared by a central clearinghouse. In a standard “swap” transaction, two par ties agree to exchange the returns earned or realized from one or more underlying assets or rates of return, which may be adjusted for an interest factor. The gross returns to be exchanged or “swapped” between the par ties are generally calculated with respect to a “notional amount,” e.g. , the return or increase in value of a par ticular dollar amount invested at a par ticular
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interest rate, in a par ticular foreign currency, or in a “basket” of securities representing a par ticular index. The notional amount of the swap agreement is only used to calculate the obligations that the par ties to a swap agreement have agreed to exchange. A Fund’s obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each par ty to the agreement. Swaps that are not cleared involve substantial counterpar ty risk. A Fund will typically attempt to mitigate this counterpar ty risk by entering into swap agreements only with creditwor thy entities that have substantial capital or that have provided the Fund with a third-par ty guaranty or other credit suppor t. A Fund’s ability to use swap agreements may be restricted by the tax rules applicable to registered investment companies.
Credit Default Swaps and Similar Instruments. Cer tain Funds may enter into credit default swaps and similar instruments. Credit default swaps are standardized agreements in which the protection “buyer” pays the protection “seller” an up-front payment, or a periodic stream of payments, over the term of the contract, provided generally that no credit event on a reference obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the difference between the notional amount of the contract and the value of a por tfolio of securities issued by the reference entity. A Fund may be either the buyer or seller in the transaction. The Funds may enter into credit default swaps that reference the obligations of a single entity (“single-name CDS”) or the obligations of entities that make up an index (“index CDS”). References to “credit default swaps” shall collectively refer to single-name CDS and index CDS.
Credit default swaps have as reference obligations one or more securities or loans that are not currently held by a Fund. In circumstances in which a Fund does not own the securities or loans that are deliverable under a credit default swap, the Fund is exposed to the risk that deliverable securities will not be available in the market, or will be available only at unfavorable prices, as would be the case in a so-called “shor t squeeze.” In cer tain instances of issuer defaults or restructurings, it has been unclear under the standard industry documentation for credit default swaps whether or not a “credit event” triggering the seller’s payment obligation had occurred. Cer tain initiatives adopted by derivatives market par ticipants, including the International Swaps and Derivatives Association (“ISDA”), are designed to implement uniform settlement terms into standard credit default swap documentation, as well as refine the practices for the transparent conduct of the credit default swap market generally. Among these initiatives are the ISDA Credit Derivatives Determination Committee and the implementation of market-wide cash settlement protocols applicable to all market-standard credit default swaps. These initiatives are intended to reduce both the uncer tainty as to the occurrence of credit events and the risk of a “shor t squeeze” by providing that the ISDA Credit Derivatives Determinations Committee will make determinations as to whether a credit event has occurred, establish an auction to determine a settlement price and identify the deliverable securities for purposes of the auction, although the ISDA Credit Derivatives Determinations Committee may in cer tain limited circumstances refrain from doing so. In the event the ISDA Credit Derivatives Determinations Committee cannot reach a timely resolution with respect to a “credit event” or otherwise does not establish a cash settlement auction, a Fund may not be able to realize the full value of the credit default swap upon a default by the reference entity. Fur thermore, a Fund may enter into cer tain credit default swaps or similar instruments that may not be covered by these initiatives.
If a Fund is a buyer, it will lose the payments made under the terms of the credit default swap and recover nothing should no credit event occur. If a Fund is a seller and a credit event occurs, the value of any deliverable obligation received by the Fund or the amount of cash settlement received by the Fund pursuant to the relevant cash settlement auction, together with the up-front or periodic payments previously received, may be less than the amount it pays to the buyer, resulting in a loss of value to the Fund. A Fund that sells credit default swaps incurs leveraged exposure to the credit of one or more reference entities and is subject to many of the same risks it would incur if it were holding debt securities issued by the relevant reference entity. However, a Fund will not have any legal recourse against any reference entity and will not benefit from any collateral securing the reference entity’s debt obligations. In the event the ISDA Credit Derivatives Determinations Committee does not establish a cash settlement auction and identify the relevant deliverable securities or loans, the credit default swap buyer will have broad discretion to select which of the reference entity’s debt obligations to deliver to the Fund following a credit event and will likely choose the obligations with the lowest market value in order to maximize the payment obligations of the Fund. In addition, credit default swaps generally trade on the basis of theoretical pricing and valuation models, which may not accurately value such swap positions when established or when subsequently traded or unwound under actual market conditions.
Dodd-Frank requires that cer tain index CDS be executed in regulated markets and submitted for clearing to regulated clearinghouses. See “—Derivatives — Regulation of Derivatives — Dodd-Frank Regulations” above. Other single-name CDS and index CDS are permitted, although not required, to be cleared through regulated clearinghouses. The Funds clear all credit default swaps that are subject to mandatory clearing and may voluntarily clear some, but not all, of the other credit default swaps not subject to mandatory clearing. The Funds face
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counterpar ty risk with respect to the clearinghouse when entering into cleared single-name CDS and cleared index CDS. The Funds face significant counterpar ty risk with respect to their counterpar ties to non-cleared credit default swaps and similar instruments. A Fund typically will enter into non-cleared credit default swaps and similar instruments with swap dealers and creditwor thy entities that have substantial capital or that have provided the Fund with a third-par ty guaranty or other credit suppor t.
In cer tain instances, a Fund may enter into bespoke credit default swaps or similar instruments either as protection buyer or protection seller. While these contracts are similar in their operation to the market-standard credit default swaps described above, they are less standardized and instead have bespoke or tailored features. For example, as compared to market-standard credit defaults, the range of “credit events” triggering settlement of such bespoke contracts may be narrower or broader, any such triggered contracts are settled by physical delivery of the underlying security or loan to or by the Fund rather than by way of cash settlement, and there may be a wider range of securities as the reference obligations and/or deliverable obligations.
In addition, credit default swaps and similar instruments generally involve greater risks than if a Fund had invested in the reference obligation directly and are subject to significant credit risk, correlation risk, leverage risk, illiquidity risk and market risk. See “—Risk Factors in Derivatives” above.
Interest Rate Swaps, Floors and Caps. Cer tain Funds may enter into OTC derivatives in the form of interest rate swaps and interest rate caps and floors. As described in fur ther detail below, a Fund may enter into these transactions primarily to preserve a return or spread on a par ticular investment or por tion of its holdings, as a duration management technique, to protect against an increase in the price of securities a Fund anticipates purchasing at a later date, or for speculation to increase returns.
Dodd-Frank requires that cer tain interest rate swaps be executed in regulated markets and submitted for clearing to regulated clearinghouses. See “—Regulation of Derivatives — Dodd-Frank Regulations” above. Other interest rate swaps are permitted, although not required, to be cleared. Most of the interest rate swaps entered into by the Funds are cleared. The Funds face counterpar ty risk with respect to the clearinghouse when entering into cleared interest rate swaps.
The Funds face significant counterpar ty risk with respect to their counterpar ties to non-cleared interest rate swaps and interest rate caps and floors. The typical counterpar ties for a Fund’s non-cleared interest rate derivatives transactions are swap dealers and other creditwor thy entities that have substantial capital or that have provided the Fund with a third-par ty guaranty or other credit suppor t. If the Fund’s counterpar ty defaults on such a transaction, a Fund will have contractual remedies with respect to the transaction but there can be no guarantee that the Fund will be successful in enforcing such remedies. The market for interest rate swaps is relatively liquid in comparison with other similar instruments traded in the interbank market. A Fund may be limited in its ability to enter into cer tain interest rate derivatives due to applicable income tax requirements.
Interest rate swaps are transactions in which each par ty makes periodic interest payments based on a fixed or variable interest rate, index or asset in return for periodic payments from its counterpar ty based on a different fixed or variable interest rate, index or asset.
The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a notional principal amount from the par ty selling such interest rate floor.
The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index rises above a predetermined interest rate, to receive payments of interest on a notional principal amount from the par ty selling such interest rate cap.
A Fund may enter into an interest rate swap to effectively exchange with another par ty their respective commitments to pay or receive interest, e.g. , an exchange of fixed rate payments for floating rate payments. For example, if a Fund holds a mor tgage-backed security with an interest rate that is reset only once each year, it may swap the right to receive interest at this fixed rate for the right to receive interest at a rate that is reset every week. This would enable a Fund to offset a decline in the value of the mor tgage-backed security due to rising interest rates but would also limit its ability to benefit from falling interest rates. Conversely, if a Fund holds a mor tgage-backed security with an interest rate that is reset every week and it would like to lock in what it believes to be a high interest rate for one year, it may swap the right to receive interest at this variable weekly rate for the right to receive interest at a rate that is fixed for one year. Such a swap would protect the Fund from a reduction in yield due to falling interest rates and may permit the Fund to enhance its income through the positive differential between one week and one year interest rates, but would preclude it from taking full advantage of rising interest rates.
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Gains from transactions in interest rate swaps distributed to shareholders will be taxable as ordinary income or, in cer tain circumstances, as long term capital gains to shareholders.
Interest rate swaps and interest rate caps and floors may be subject to correlation risk, leverage risk, illiquidity risk and market risk. See “—Risk Factors in Derivatives” above.
Total Return Swaps. Total return swaps are contracts in which one par ty agrees to make periodic payments to the other par ty based on the return of the assets underlying the contract in exchange for periodic payments based on a fixed or variable interest rate or the total return from different underlying assets. The return of the assets underlying the contract includes both the income generated by the asset and the change in market value of the asset. The asset underlying the contract may include a specified security, basket of securities or securities indices. Total return swaps on a specified security, basket of securities or securities indices may sometimes be referred to as “contracts for difference.”
Total return swaps may be used to obtain exposure to a security or market without owning or taking physical custody of such security or investing directly in such market. Upon entering into a total return swap, a Fund is required to deposit initial margin but the par ties do not exchange the notional amount. As a result, total return swaps may effectively add leverage to the Fund’s por tfolio because the Fund would be subject to investment exposure on the notional amount of the swap.
Total return swaps are subject to significant correlation risk, leverage risk, illiquidity risk, market risk and counterpar ty risk. See “—Risk Factors in Derivatives” above.
Options.
Options on Securities and Securities Indices. A Fund may engage in transactions in options on individual securities, baskets of securities or securities indices, or par ticular measurements of value or rates, such as an index of the price of treasury securities or an index representative of shor t-term interest rates. Such investments may be made on exchanges and in the OTC markets. In general, exchange-traded options have standardized exercise prices and expiration dates and require the par ties to post margin against their obligations, and the per formance of the par ties’ obligations in connection with such options is guaranteed by the exchange or a related clearing corporation. OTC options have more flexible terms negotiated between the buyer and the seller, but are subject to greater credit risk. OTC options also involve greater illiquidity risk.
A Fund may also engage in transactions in options which have additional features that result in different payment structures and/or expirations (commonly referred to as exotic options). For example, barrier options are exotic options that can only be exercised (or automatically expire) if the price of the underlying asset reaches one or more predetermined levels on or before expiration. Binary options are another example of exotic options which have a fixed all-or-nothing payout if one or more predetermined conditions are met. Exotic options are typically traded in OTC markets.
There are several risks associated with transactions in options on securities and indexes. For example, there are significant differences between the securities and options markets that could result in an imper fect correlation between these markets, causing a given transaction not to achieve its objectives. In addition, a liquid market for par ticular options, whether traded OTC or on a national securities exchange (“Exchange”) may be absent for reasons which include the following: there may be insufficient trading interest in cer tain options; restrictions may be imposed by an Exchange on opening transactions or closing transactions or both; trading halts, suspensions or other restrictions may be imposed with respect to par ticular classes or series of options or underlying securities; unusual or unforeseen circumstances may interrupt normal operations on an Exchange; the facilities of an Exchange or the Options Clearing Corporation may not at all times be adequate to handle current trading volume; or one or more Exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a par ticular class or series of options), in which event the market on that Exchange (or in that class or series of options) would cease to exist, although outstanding options that had been issued by the Options Clearing Corporation as a result of trades on that Exchange would continue to be exercisable in accordance with their terms.
Each of the options exchanges has established limitations governing the maximum number of call or put options on the same asset that may be bought or written by a single investor, whether acting alone or in concer t with others (regardless of whether such options are written on the same or different exchanges or are held or written on one or more accounts or through one or more brokers). Under these limitations, option positions of all investment companies advised by the Manager are combined for purposes of these limits. Pursuant to these limitations, an
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exchange may order the liquidation of positions and may impose other sanctions or restrictions. These position limits may restrict the number of listed options that a Fund may buy or sell.
Call Options. A Fund may purchase call options on any of the types of securities or instruments in which it may invest. A purchased call option gives a Fund the right to buy, and obligates the seller to sell, the underlying security at the exercise price at any time during the option period. A Fund also may purchase and sell call options on indices. Index options are similar to options on securities except that, rather than taking or making delivery of securities underlying the option at a specified price upon exercise, an index option gives the holder the right to receive cash upon exercise of the option if the level of the index upon which the option is based is greater than the exercise price of the option.
A written call option is covered if a Fund holds a call on the same security or index as the call written where the exercise price of the call held is (i) equal to or less than the exercise price of the call written, or (ii) greater than the exercise price of the call written provided the difference is maintained by the Fund in assets which are not considered illiquid investments under the Funds’ Liquidity Program (as defined below) (“liquid assets”) designated on the Manager’s or the sub-adviser’s books and records to the extent required by Commission guidelines.
A Fund may write ( i.e. , sell) covered call options on the securities or instruments in which it may invest and to enter into closing purchase transactions with respect to cer tain of such options. A covered call option is an option in which a Fund, in return for a premium, gives another par ty a right to buy specified securities owned by the Fund at a specified future date and price set at the time of the contract. The principal reason for writing call options is the attempt to realize, through the receipt of premiums, a greater return than would be realized on the securities alone. By writing covered call options, a Fund gives up the oppor tunity, while the option is in effect, to profit from any price increase in the underlying security above the option exercise price. In addition, a Fund’s ability to sell the underlying security will be limited while the option is in effect unless the Fund enters into a closing purchase transaction. A closing purchase transaction cancels out a Fund’s position as the writer of an option by means of an offsetting purchase of an identical option prior to the expiration of the option it has written. Covered call options also serve as a par tial hedge to the extent of the premium received against the price of the underlying security declining.
A Fund may write (i.e. , sell) uncovered call options on securities or instruments in which it may invest but that are not currently held by the Fund. The principal reason for writing uncovered call options is to realize income without committing capital to the ownership of the underlying securities or instruments. When writing uncovered call options, a Fund must deposit and maintain sufficient margin with the broker-dealer through which it made the uncovered call option as collateral to ensure that the securities can be purchased for delivery if and when the option is exercised. During periods of declining securities prices or when prices are stable, writing uncovered calls can be a profitable strategy to increase a Fund’s income with minimal capital risk. Uncovered calls are riskier than covered calls because there is no underlying security held by a Fund that can act as a par tial hedge. Uncovered calls have speculative characteristics and the potential for loss is unlimited. When an uncovered call is exercised, a Fund must purchase the underlying security to meet its call obligation. There is also a risk, especially with preferred and debt securities that lack sufficient liquidity, that the securities may not be available for purchase. If the purchase price exceeds the exercise price, a Fund will lose the difference.
Put Options. A Fund may purchase put options to seek to hedge against a decline in the value of its securities or to enhance its return. By buying a put option, a Fund acquires a right to sell the underlying securities or instruments at the exercise price, thus limiting the Fund’s risk of loss through a decline in the market value of the securities or instruments until the put option expires. The amount of any appreciation in the value of the underlying securities or instruments will be par tially offset by the amount of the premium paid for the put option and any related transaction costs. Prior to its expiration, a put option may be sold in a closing sale transaction and profit or loss from the sale will depend on whether the amount received is more or less than the premium paid for the put option plus the related transaction costs. A closing sale transaction cancels out a Fund’s position as the purchaser of an option by means of an offsetting sale of an identical option prior to the expiration of the option it has purchased. A Fund also may purchase uncovered put options.
A Fund also may write ( i.e. , sell) put options on the types of securities or instruments that may be held by the Fund. A Fund will receive a premium for writing a put option, which increases the Fund’s return.
A Fund also may write ( i.e. , sell) uncovered put options on securities or instruments in which it may invest but with respect to which the Fund does not currently have a corresponding shor t position or has not deposited as collateral cash equal to the exercise value of the put option with the broker-dealer through which it made the uncovered put option. The principal reason for writing uncovered put options is to receive premium income and to acquire such securities or instruments at a net cost below the current market value. A Fund has the obligation to buy
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the securities or instruments at an agreed upon price if the price of the securities or instruments decreases below the exercise price. If the price of the securities or instruments increases during the option period, the option will expire wor thless and a Fund will retain the premium and will not have to purchase the securities or instruments at the exercise price.
Options on Government National Mor tgage Association (“GNMA”) Cer tificates. The following information relates to the unique characteristics of options on GNMA Cer tificates. Since the remaining principal balance of GNMA Cer tificates declines each month as a result of mor tgage payments, a Fund, as a writer of a GNMA call holding GNMA Cer tificates as “cover” to satisfy its delivery obligation in the event of exercise, may find that the GNMA Cer tificates it holds no longer have a sufficient remaining principal balance for this purpose. Should this occur, a Fund will purchase additional GNMA Cer tificates from the same pool (if obtainable) or other GNMA Cer tificates in the cash market in order to maintain its “cover.”
A GNMA Cer tificate held by a Fund to cover an option position in any but the nearest expiration month may cease to represent cover for the option in the event of a decline in the GNMA coupon rate at which new pools are originated under the FHA/VA loan ceiling in effect at any given time. If this should occur, a Fund will no longer be covered, and the Fund will either enter into a closing purchase transaction or replace such Cer tificate with a cer tificate that represents cover. When a Fund closes its position or replaces such Cer tificate, it may realize an unanticipated loss and incur transaction costs.
Options on Swaps (“Swaptions”). A swaption gives a counterpar ty the option (but not the obligation) to enter into a new swap agreement or to shor ten, extend, cancel or otherwise modify an existing swap agreement, at a designated future time on specified terms. A Fund may write ( i.e. , sell) and purchase put and call swaptions. Depending on the terms of the par ticular option agreement, a Fund will generally incur a greater degree of risk when it writes a swaption than it will incur when it purchases a swaption. When a Fund purchases a swaption, it risks losing only the amount of the premium it has paid should it decide to let the option expire unexercised. However, when a Fund writes a swaption, upon exercise of the option the Fund will become obligated according to the terms of the underlying agreement and the potential for loss may be unlimited. Cer tain swaptions are permitted, although not required, to be cleared.
A Fund will likely enter into these transactions to preserve a return or spread on a par ticular investment or por tion of its por tfolio or to protect against any increase in the price of securities the Fund anticipates purchasing at a later date. A Fund generally will use these transactions for hedging purposes, not for speculation.
Swaptions may be subject to correlation risk, leverage risk, illiquidity risk and market risk. See “—Risk Factors in Derivatives” above.
FLEX Options. FLEX Options are customized option contracts available through national securities exchanges that are guaranteed for settlement by the Options Clearing Corporation (“OCC”). FLEX Options are listed on a U.S. national securities exchange. FLEX Options provide investors with the ability to customize assets referenced by the options, exercise prices, exercise styles ( i.e. , American-style, exercisable any time prior to the expiration date, or European style, exercisable only on the option expiration date) and expiration dates, while achieving price discovery in competitive, transparent auctions markets and avoiding the counterpar ty exposure of OTC options positions. Each option contract entitles the holder thereof to purchase (for the call options) or sell (for the put options) shares of the reference asset at the strike price. A Fund’s por tfolio may include several types of FLEX Options, including both purchased and written put and call options (as fur ther described below). The FLEX Options are all European style options, which means that they are exercisable at a predetermined specified price (the “strike price”) only on the FLEX Option’s expiration date.
The OCC guarantees per formance by each of the counterpar ties to the FLEX Options, becoming the “buyer for every seller and the seller for every buyer”, reducing counterpar ty risk for clearing members and options traders. Although guaranteed for settlement by the OCC, FLEX Options are still subject to counterpar ty risk with the OCC and subject to the risk that the OCC may fail to per form the settlement of the FLEX Options due to bankruptcy or other adverse reasons. A Fund bears the risk that the OCC will be unable or unwilling to per form its obligations under the FLEX Options contracts.
Subject to determination by the Securities Committee of the OCC, adjustments may be made to the FLEX Options for cer tain events (collectively, “Corporate Actions”) specified in the OCC’s by-laws and rules: cer tain stock dividends or distributions, stock splits, reverse stock splits, rights offerings, distributions, reorganizations, recapitalizations, or reclassifications with respect to an underlying security, or a merger, consolidation, dissolution or liquidation of the issuer of the underlying security. According to the OCC’s by-laws, the nature and extent of any such adjustment is to be determined by the OCC’s Securities Committee, in light of the circumstances known to it at the
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time such determination is made, based on its judgment as to what is appropriate for the protection of investors and the public interest, taking into account such factors as fairness to holders and writers (or purchasers and sellers) of the affected options, the maintenance of a fair and orderly market in the affected options, consistency of interpretation and practice, efficiency of exercise settlement procedures, and the coordination with other clearing agencies of the clearance and settlement of transactions in the underlying interest.
Cer tain Considerations Regarding Options . The FLEX Options in which each Fund may invest will be options on an exchange-traded fund (“ETF”) or the S&P 500 Index (together with such ETF, a “Reference Asset”). As such, the value of a Fund’s FLEX Options will fluctuate with changes in the value of the securities held by the ETF, and thus the ETF’s share price. In addition to the value of the ETF, the value of an option, in general, will reflect, among other things, the time remaining until expiration (the end of the Outcome Period), the relationship of the exercise price to the market price of the Reference Asset, and general market conditions. Options that expire unexercised have no value.
The puts and calls on the Reference Asset entitle the purchaser of the option the right to purchase (for a call option) or sell (for a put option) the Reference Asset at a predetermined specified price (the “strike price”). When a Fund writes a call on the Reference Asset, it receives a premium and agrees that the purchaser of the call, upon exercise of the call, will receive from the Fund the delivery of a specified number of shares of the ETF in exchange for the strike price. When a Fund buys a call on the Reference Asset, it pays a premium and has the same rights to such call as indicated above. When a Fund buys a put on the Reference Asset, it pays a premium and has the right to require the seller of the put, upon the Fund’s exercise of the put, to deliver the specified number of shares of the ETF in exchange for the strike price. When a Fund writes a put on the Reference Asset, it receives a premium and the purchaser of the put has the right to require the Fund to deliver the specified number of shares of the ETF in exchange for the strike price.
Although each Fund will generally utilize FLEX Options that are physically settled, a Fund may also utilize FLEX Options that are cash-settled. Cash-settled options give the holder the right to receive an amount (or owe an amount) of cash upon the exercise of the option. Gain or loss depends on changes in the value of the ETF’s share price relative to the strike price for a given option contract. The amount of cash is equal to the difference between the closing price of the ETF’s share price and the exercise price of the option contract times a specified multiple (“multiplier”), which determines the total value for each point of such difference.
Risks of Options on the Reference Assets . If a Fund has purchased an option and exercises it before the closing value for that day is available, it runs the risk that the level of the Reference Asset may subsequently change. If such a change causes the exercised option to fall out of the money, the applicable Fund will be required to pay the difference between the closing Reference Asset value and the exercise price of the option (times the applicable multiplier) to the assigned writer.
Foreign Exchange Transactions.
A Fund may enter into spot foreign exchange transactions, forward foreign exchange transactions (“FX forwards”) and currency swaps, purchase and sell currency options, currency futures and related options thereon (collectively, “Currency Instruments”) for purposes of hedging against the decline in the value of currencies in which its por tfolio holdings are denominated against the U.S. dollar or, with respect to cer tain Funds, to seek to enhance returns.
Such transactions could be effected to hedge with respect to foreign dollar denominated securities owned by a Fund, sold by a Fund but not yet delivered, or committed or anticipated to be purchased by a Fund. As an illustration, a Fund may use such techniques to hedge the stated value in U.S. dollars of an investment in a yen-denominated security. For example, the Fund may purchase a foreign currency put option enabling it to sell a specified amount of yen for dollars at a specified price by a future date. To the extent the hedge is successful, a loss in the value of the yen relative to the dollar will tend to be offset by an increase in the value of the put option. To offset, in whole or in par t, the cost of acquiring such a put option, the Fund may also sell a call option which, if exercised, requires it to sell a specified amount of yen for dollars at a specified price by a future date (a technique called a “straddle”). By selling such a call option in this illustration, the Fund gives up the oppor tunity to profit without limit from increases in the relative value of the yen to the dollar. “Straddles” of the type that may be used by a Fund are considered hedging transactions. Cer tain Funds have a fundamental investment restriction that restricts currency option strategies.
Hedging transactions involving Currency Instruments involve substantial risks, including correlation risk. A Fund’s use of Currency Instruments to effect hedging strategies is intended to reduce the volatility of the NAV of the Fund’s shares; however, the use of such hedging strategies will not prevent the NAV of the Fund’s shares from fluctuating. Moreover, although Currency Instruments will be used with the intention of hedging against adverse currency movements, transactions in Currency Instruments involve the risk that anticipated currency movements will not be
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accurately predicted and that the Fund’s hedging strategies will be ineffective. To the extent that a Fund hedges against anticipated currency movements that do not occur, the Fund may realize losses and decrease its total return. Fur thermore, a Fund will only engage in hedging activities from time to time and may not be engaging in hedging activities when movements in currency exchange rates actually occur.
In connection with its trading in forward foreign currency contracts, a Fund will contract with a foreign or domestic bank, or foreign or domestic securities dealer, to make or take future delivery of a specified amount of a par ticular currency. There are no limitations on daily price moves in such forward contracts, and banks and dealers are not required to continue to make markets in such contracts. There have been periods during which cer tain banks or dealers have refused to quote prices for such forward contracts or have quoted prices with an unusually wide spread between the price at which the bank or dealer is prepared to buy and that at which it is prepared to sell. Governmental imposition of currency controls might limit any such forward contract trading. With respect to its trading of forward contracts, if any, a Fund will be subject to counterpar ty risk. Any such failure to per form by a counterpar ty would deprive the Fund of any profit potential or force the Fund to cover its commitments for resale, if any, at the then market price and could result in a loss to the Fund.
It may not be possible for a Fund to hedge against currency exchange rate movements, even if correctly anticipated, in the event that (i) the currency exchange rate movement is so generally anticipated that the Fund is not able to enter into a hedging transaction at an effective price, or (ii) the currency exchange rate movement relates to a market with respect to which Currency Instruments are not available and it is not possible to engage in effective foreign currency hedging. The cost to a Fund of engaging in foreign currency transactions varies with such factors as the currencies involved, the length of the contract period and the market conditions then prevailing. Since transactions in foreign currency exchange usually are conducted on a principal basis, no fees or commissions are involved.
A Fund will not hedge a currency in excess of the aggregate market value of the securities that it owns (including receivables for unsettled securities sales), or has committed to purchase or anticipates purchasing, which are denominated in such currency.
Spot Transactions and FX Forwards. FX forwards are OTC contracts to purchase or sell a specified amount of a specified currency or multinational currency unit at a specified price and specified future date. Spot foreign exchange transactions are similar but are settled in the current, or “spot”, market. A Fund will enter into foreign exchange transactions for purposes of hedging either a specific transaction or a por tfolio position, or, with respect to cer tain Funds, to seek to enhance returns. FX forwards involve substantial currency risk, credit risk and liquidity risk. A Fund may enter into a foreign exchange transaction for purposes of hedging a specific transaction by, for example, purchasing a currency needed to settle a security transaction or selling a currency in which the Fund has received or anticipates receiving a dividend or distribution. A Fund may enter into a foreign exchange transaction for purposes of hedging a por tfolio position by selling forward a currency in which a por tfolio position of the Fund is denominated or by purchasing a currency in which the Fund anticipates acquiring a por tfolio position in the near future. A Fund may also hedge a currency by entering into a transaction in a Currency Instrument denominated in a currency other than the currency being hedged (a “cross-hedge”). A Fund will only enter into a cross-hedge if the Manager believes that (i) there is a demonstrably high correlation between the currency in which the cross-hedge is denominated and the currency being hedged, and (ii) executing a cross-hedge through the currency in which the cross-hedge is denominated will be significantly more cost-effective or provide substantially greater liquidity than executing a similar hedging transaction by means of the currency being hedged.
A Fund may also engage in proxy hedging transactions to reduce the effect of currency fluctuations on the value of existing or anticipated holdings of por tfolio securities. Proxy hedging is often used when the currency to which the Fund is exposed is difficult to hedge, or to hedge against the U.S. dollar. Proxy hedging entails entering into a forward contract to sell a currency whose changes in value are generally considered to be linked to a currency or currencies in which some or all of the Fund’s securities are, or are expected to be, denominated, and to buy U.S. dollars. Proxy hedging involves some of the same risks and considerations as other transactions with similar instruments. Currency transactions can result in losses to the Fund if the currency being hedged fluctuates in value to a degree or in a direction that is not anticipated. In addition, there is the risk that the perceived linkage between various currencies may not be present, including during the par ticular time that a Fund is engaging in proxy hedging.
A Fund may also cross-hedge currencies by entering into forward contracts to sell one or more currencies that are expected to decline in value relative to other currencies to which the Fund has or in which the Fund expects to have por tfolio exposure. For example, a Fund may hold both Canadian government bonds and Japanese government bonds, and the Manager or sub-adviser may believe that Canadian dollars will deteriorate against Japanese yen. The Fund would sell Canadian dollars to reduce its exposure to that currency and buy Japanese yen. This strategy would
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be a hedge against a decline in the value of Canadian dollars, although it would expose the Fund to declines in the value of the Japanese yen relative to the U.S. dollar.
Some of the forward non-U.S. currency contracts entered into by the Funds are classified as non-deliverable forwards (“NDFs”). NDFs are cash-settled, shor t-term forward contracts that may be thinly traded or are denominated in non-conver tible foreign currency, where the profit or loss at the time at the settlement date is calculated by taking the difference between the agreed upon exchange rate and the spot rate at the time of settlement, for an agreed upon notional amount of funds. All NDFs have a fixing date and a settlement date. The fixing date is the date at which the difference between the prevailing market exchange rate and the agreed upon exchange rate is calculated. The settlement date is the date by which the payment of the difference is due to the par ty receiving payment. NDFs are commonly quoted for time periods of one month up to two years, and are normally quoted and settled in U.S. dollars. They are often used to gain exposure to and/or hedge exposure to foreign currencies that are not internationally traded.
Currency Futures. A Fund may seek to enhance returns or hedge against the decline in the value of a currency through use of currency futures or options on currency futures. Currency futures are similar to forward foreign exchange transactions except that futures are standardized, exchange-traded contracts while forward foreign exchange transactions are traded in the OTC market. Currency futures involve substantial currency risk as well as the risks discussed above in “—Futures.”
Currency Options. A Fund may seek to enhance returns or hedge against the decline in the value of a currency through the use of currency options. Cer tain Funds have fundamental investment restrictions that permit the purchase of currency options, but prohibit the writing of currency options. Currency options are similar to options on securities. For example, in consideration for an option premium the writer of a currency option is obligated to sell (in the case of a call option) or purchase (in the case of a put option) a specified amount of a specified currency on or before the expiration date for a specified amount of another currency. A Fund may engage in transactions in options on currencies either on exchanges or OTC markets. Such transactions in options may include exotic options on currencies, which are typically traded in OTC markets and have additional features that result in different payment structures and/or expirations. Where a Fund is permitted to write currency options, it may write covered call options on up to 100% of the currencies in its por tfolio. See “—Options” above. Currency options involve substantial currency risk, and may also involve credit, leverage or illiquidity risk.
Currency Swaps. A Fund may enter into currency swaps in order to protect against currency fluctuations or to hedge por tfolio positions. Currency swaps are transactions in which one currency is simultaneously bought for a second currency on a spot basis and sold for the second currency on a forward basis. Currency swaps involve the exchange of the rights of a Fund and another par ty to make or receive payments in specified currencies, and typically require the delivery of the entire principal value of one designated currency in exchange for the other designated currency. As a result, the entire principal value of a currency swap is subject to the risk that the other par ty to the swap will default on its contractual delivery obligations.
Distressed Securities. A Fund may invest in securities, including loans purchased in the secondary market, that are the subject of bankruptcy proceedings or otherwise in default or in risk of being in default as to the repayment of principal and/or interest at the time of acquisition by the Fund or that are rated in the lower rating categories by one or more nationally recognized statistical rating organizations (for example, Ca or lower by Moody’s and CC or lower by S&P or Fitch) or, if unrated, are in the judgment of the Manager of equivalent quality (“Distressed Securities”). Investment in Distressed Securities is speculative and involves significant risks.
A Fund will generally make such investments only when the Manager believes it is reasonably likely that the issuer of the Distressed Securities will make an exchange offer or will be the subject of a plan of reorganization pursuant to which the Fund will receive new securities in return for the Distressed Securities. However, there can be no assurance that such an exchange offer will be made or that such a plan of reorganization will be adopted. In addition, a significant period of time may pass between the time at which a Fund makes its investment in Distressed Securities and the time that any such exchange offer or plan of reorganization is completed. During this period, it is unlikely that a Fund will receive any interest payments on the Distressed Securities, the Fund will be subject to significant uncer tainty as to whether or not the exchange offer or plan of reorganization will be completed and the Fund may be required to bear cer tain extraordinary expenses to protect and recover its investment. Therefore, to the extent the Fund seeks capital appreciation through investment in distressed securities, the Fund’s ability to achieve current income for its shareholders may be diminished. The Fund also will be subject to significant uncer tainty as to when and in what manner and for what value the obligations evidenced by the distressed securities will eventually be satisfied ( e.g. , through a liquidation of the obligor’s assets, an exchange offer or plan of reorganization involving the distressed securities or a payment of some amount in satisfaction of the obligation). Even if an exchange offer is
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made or plan of reorganization is adopted with respect to Distressed Securities held by a Fund, there can be no assurance that the securities or other assets received by a Fund in connection with such exchange offer or plan of reorganization will not have a lower value or income potential than may have been anticipated when the investment was made or no value. Moreover, any securities received by a Fund upon completion of an exchange offer or plan of reorganization may be restricted as to resale. Similarly, if a Fund par ticipates in negotiations with respect to any exchange offer or plan of reorganization with respect to an issuer of Distressed Securities, the Fund may be restricted from disposing of such securities. To the extent that a Fund becomes involved in such proceedings, the Fund may have a more active par ticipation in the affairs of the issuer than that assumed generally by an investor. The Fund, however, will not make investments for the purpose of exercising day-to-day management of any issuer’s affairs.
Environmental, Social and Governance (“ESG”) Integration . Although a Fund does not seek to implement a specific sustainability objective, strategy or process unless disclosed in its Prospectus, Fund management will consider ESG factors as par t of the investment process for the Fund. Fund management views ESG integration as the practice of incorporating financially material ESG data or information into investment processes with the objective of enhancing risk-adjusted returns. These ESG considerations will vary depending on a Fund’s par ticular investment strategies and may include consideration of third-par ty research as well as consideration of proprietary BlackRock research across the ESG risks and oppor tunities regarding an issuer. The ESG characteristics utilized in a Fund’s investment process are anticipated to evolve over time and one or more characteristics may not be relevant with respect to all issuers that are eligible for investment.
Cer tain of these considerations may affect a Fund’s exposure to cer tain companies or industries. While Fund management views ESG considerations as having the potential to contribute to a Fund’s long-term per formance, there is no guarantee that such results will be achieved.
Equity Securities. Cer tain Funds may invest in equity securities, which include common stock and, for cer tain Funds, preferred stock (including conver tible preferred stock); bonds, stock purchase warrants and rights; equity interests in trusts; general and limited par tnerships and limited liability companies; and depositary receipts. Stock markets are volatile. The price of equity securities will fluctuate and can decline and reduce the value of a por tfolio investing in equities. The price of equity securities fluctuates based on changes in a company’s financial condition and overall market and economic conditions. The value of equity securities purchased by the Fund could decline if the financial condition of the companies the Fund invests in decline or if overall market and economic conditions deteriorate. They may also decline due to factors that affect a par ticular industry or industries, such as labor shor tages or increase in production costs and competitive conditions within an industry. In addition, they may decline due to general market conditions that are not specifically related to a company or industry, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates or generally adverse investor sentiment.
From time to time cer tain of the Funds may invest in shares of companies through initial public offerings (“IPOs”). IPOs have the potential to produce, and have in fact produced, substantial gains for cer tain Funds. There is no assurance that any Fund will have continued access to profitable IPOs and therefore investors should not rely on these past gains as an indication of future per formance. The investment per formance of a Fund during periods when it is unable to invest significantly or at all in IPOs may be lower than during periods when it is able to do so. In addition, as a Fund increases in size, the impact of IPOs on its per formance will generally decrease. Securities issued in IPOs are subject to many of the same risks as investing in companies with smaller market capitalizations. Securities issued in IPOs have no trading history, and information about the companies may be available for very limited periods. In addition, the prices of securities sold in IPOs may be highly volatile or may decline shor tly after the initial public offering.
The Funds may invest in companies that have relatively small market capitalizations. These organizations will normally have more limited product lines, markets and financial resources and will be dependent upon a more limited management group than larger capitalized companies. In addition, it is more difficult to get information on smaller companies, which tend to be less well known, have shor ter operating histories, do not have significant ownership by large investors and are followed by relatively few securities analysts. The securities of smaller capitalized companies are often traded in the OTC markets and may have fewer market makers and wider price spreads. This may result in greater price movements and less ability to sell a Fund’s investment than if the Fund held the securities of larger, more established companies.
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For a discussion of the types of equity securities in which your Fund may invest and the risks associated with investing in such equity securities, see your Fund’s Prospectus. Cer tain of the Funds may also invest in shares of private companies, which are subject to the risks of “Illiquid Investments” and “Restricted Securities” described below.
Real Estate-Related Securities. Although no Fund may invest directly in real estate, cer tain Funds may invest in equity securities of issuers that are principally engaged in the real estate industry. Such investments are subject to cer tain risks associated with the ownership of real estate and with the real estate industry in general. These risks include, among others: possible declines in the value of real estate; risks related to general and local economic conditions; possible lack of availability of mor tgage funds or other limitations on access to capital; overbuilding; risks associated with leverage; market illiquidity; extended vacancies of proper ties; increase in competition, proper ty taxes, capital expenditures and operating expenses; changes in zoning laws or other governmental regulation; costs resulting from the clean-up of, and liability to third par ties for damages resulting from, environmental problems; tenant bankruptcies or other credit problems; casualty or condemnation losses; uninsured damages from floods, ear thquakes or other natural disasters; limitations on and variations in rents, including decreases in market rates for rents; investment in developments that are not completed or that are subject to delays in completion; and changes in interest rates. To the extent that assets underlying a Fund’s investments are concentrated geographically, by proper ty type or in cer tain other respects, the Fund may be subject to cer tain of the foregoing risks to a greater extent. Investments by a Fund in securities of companies providing mor tgage servicing will be subject to the risks associated with refinancings and their impact on servicing rights.
In addition, if a Fund receives rental income or income from the disposition of real proper ty acquired as a result of a default on securities the Fund owns, the receipt of such income may adversely affect the Fund’s ability to retain its tax status as a regulated investment company because of cer tain income source requirements applicable to regulated investment companies under the Internal Revenue Code of 1986, as amended (the “Code”).
Securities of Smaller or Emerging Growth Companies. Investment in smaller or emerging growth companies involves greater risk than is customarily associated with investments in more established companies. The securities of smaller or emerging growth companies may be subject to more abrupt or erratic market movements than larger, more established companies or the market average in general. These companies may have limited product lines, markets or financial resources, or they may be dependent on a limited management group.
Investments in smaller or emerging growth companies may involve greater risks and thus may be considered speculative. Full development of these companies and trends frequently takes time.
Small cap and emerging growth securities will often be traded only in the OTC market or on a regional securities exchange and may not be traded every day or in the volume typical of trading on a national securities exchange. As a result, the disposition by a Fund of por tfolio securities to meet redemptions or otherwise may require the Fund to make many small sales over a lengthy period of time, or to sell these securities at a discount from market prices or during periods when, in Fund management’s judgment, such disposition is not desirable.
The process of selection and continuous supervision by Fund management does not guarantee successful investment results. Careful initial selection is par ticularly impor tant in this area as many new enterprises have promise but lack cer tain of the fundamental factors necessary to prosper. Investing in small cap and emerging growth companies requires specialized research and analysis.
Fund management believes that relatively small companies may have the oppor tunity to develop into significant business enterprises. A Fund may invest in securities of small issuers in the relatively early stages of business development that have a new technology, a unique or proprietary product or service, or a favorable market position.
Equity securities of specific small cap issuers may present different oppor tunities for long-term capital appreciation during varying por tions of economic or securities market cycles, as well as during varying stages of their business development. The market valuation of small cap issuers tends to fluctuate during economic or market cycles.
Tracking Stocks . A tracking stock is a separate class of common stock whose value is linked to a specific business unit or operating division within a larger company and is designed to “track” the per formance of such business unit or division. The tracking stock may pay dividends to shareholders independent of the parent company. The parent company, rather than the business unit or division, generally is the issuer of tracking stock. However, holders of the tracking stock may not have the same rights as holders of the company’s common stock.
Exchange-Traded Notes (“ETNs”). Cer tain Funds may invest in ETNs. ETNs are generally notes representing debt of the issuer, usually a financial institution. ETNs combine aspects of both bonds and ETFs. An ETN’s returns
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are based on the per formance of one or more underlying assets, reference rates or indexes, minus fees and expenses. Similar to ETFs, ETNs are listed on an exchange and traded in the secondary market. However, unlike an ETF, an ETN can be held until the ETN’s maturity, at which time the issuer will pay a return linked to the per formance of the specific asset, index or rate (“reference instrument”) to which the ETN is linked minus cer tain fees. Unlike regular bonds, ETNs do not make periodic interest payments, and principal is not protected.
The value of an ETN may be influenced by, among other things, time to maturity, level of supply and demand for the ETN, volatility and lack of liquidity in underlying markets, changes in the applicable interest rates, the per formance of the reference instrument, changes in the issuer’s credit rating and economic, legal, political or geographic events that affect the reference instrument. ETNs are subject to credit risk and the value of the ETN may drop due to a downgrade in an issuer’s credit rating, despite the underlying reference instrument remaining unchanged. When a Fund invests in ETNs, it will bear its propor tionate share of any fees and expenses borne by the ETN.
An ETN that is tied to a reference instrument may not replicate the per formance of the reference instrument. ETNs also incur cer tain expenses not incurred by their applicable reference instrument. Some ETNs that use leverage may, at times, be illiquid and may be difficult to purchase or sell at a fair price. Levered ETNs are subject to the same risk as other instruments that use leverage in any form. While leverage allows for greater potential return, the potential for loss is also greater. Finally, additional losses may be incurred if the investment loses value because, in addition to the money lost on the investment, the loan still needs to be repaid.
Because the return on the ETN is dependent on the issuer’s ability or willingness to meet its obligations, the value of the ETN may change due to a change in the issuer’s credit rating, despite no change in the underlying reference instrument. The market value of ETN shares may differ from the value of the reference instrument. This difference in price may be due to the fact that the supply and demand in the market for ETN shares at any point in time is not always identical to the supply and demand in the market for the assets underlying the reference instrument that the ETN seeks to track.
There may be restrictions on the Fund’s right to redeem its investment in an ETN, which are generally meant to be held until maturity. The Fund’s decision to sell its ETN holdings may be limited by the availability of a secondary market. An investor in an ETN could lose some or all of the amount invested.
ETNs are also subject to tax risks. The Internal Revenue Service (the “IRS”) may not accept, and a cour t may not uphold, how the Funds characterize and treat ETNs for tax purposes. The timing and character of income and gains derived by a Fund from investments in ETNs may be affected by future legislation.
Foreign Investments.
Foreign Investment Risks. Cer tain Funds may invest in foreign securities, including securities from issuers located in emerging market countries. These securities may be denominated in U.S. dollars or in a foreign currency. Investing in foreign securities involves risks not typically associated with investing in securities of companies organized and operated in the United States that can increase the chances that a Fund will lose money.
Securities issued by cer tain companies organized outside the United States may not be deemed to be foreign securities (but rather deemed to be U.S. securities) if (i) the company’s principal operations are conducted from the U.S., (ii) the company’s equity securities trade principally on a U.S. stock exchange, (iii) the company does a substantial amount of business in the U.S. or (iv) the issuer of securities is included in the Fund’s primary U.S. benchmark index.
In addition to equity securities, foreign investments of the Funds may include: (a) debt obligations issued or guaranteed by foreign sovereign governments or their agencies, authorities, instrumentalities or political subdivisions, including a foreign state, province or municipality; (b) debt obligations of supranational organizations; (c) debt obligations of foreign banks and bank holding companies; (d) debt obligations of domestic banks and corporations issued in foreign currencies; (e) debt obligations denominated in the Euro; and (f) foreign corporate debt securities and commercial paper. Such securities may include loan par ticipations and assignments, conver tible securities and zero-coupon securities.
Dividends or interest on, or proceeds from the sale of, foreign securities may be subject to foreign withholding taxes.
To the extent that the underlying securities or other instruments held by a Fund trade on foreign exchanges or in foreign markets that are closed when the securities exchange on which the Fund’s shares trade is open, there are likely to be deviations between the current price of such an underlying security and the last quoted price for the
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underlying security ( i.e. , the Fund’s quote from the closed foreign market). The impact of a closed foreign market on a Fund is likely to be greater where a large por tion of the Fund’s underlying securities or other instruments trade on that closed foreign market or when the foreign market is closed for unscheduled reasons. These deviations may result in premiums or discounts to cer tain Funds’ NAVs that may be greater than those experienced by other ETFs.
Foreign Market Risk. Funds that may invest in foreign securities offer the potential for more diversification than a Fund that invests only in the United States because securities traded on foreign markets have often (though not always) per formed differently from securities traded in the United States. However, such investments often involve risks not present in U.S. investments that can increase the chances that a Fund will lose money. In par ticular, a Fund is subject to the risk that, because there are generally fewer investors on foreign exchanges and a smaller number of shares traded each day, it may be difficult for the Fund to buy and sell securities on those exchanges. In addition, prices of foreign securities may fluctuate more than prices of securities traded in the United States. Investments in foreign markets may also be adversely affected by governmental actions such as the imposition of punitive taxes or tariffs. In addition, economic conditions, such as volatile currency exchange rates and interest rates, political events, military action and other conditions may, without prior warning, lead to the governments of cer tain countries, or the U.S. Government with respect to cer tain countries, prohibiting or imposing substantial restrictions through capital controls and/or sanctions on foreign investing in the capital markets or cer tain industries in those countries. Capital controls and/or sanctions may include the prohibition of, or restrictions on, the ability to own or transfer currency, securities, derivatives or other assets and may also include retaliatory actions of one government against another government, such as seizure of assets. Any of these actions could severely impair a Fund’s ability to purchase, sell, transfer, receive, deliver or otherwise obtain exposure to foreign securities and assets, including the ability to transfer the Fund’s assets or income back into the United States, and could negatively impact the value and/or liquidity of such assets or otherwise adversely affect a Fund’s operations, causing the Fund to decline in value. Other potential foreign market risks include exchange controls, difficulties in pricing securities, defaults on foreign government securities, difficulties in enforcing favorable legal judgments in foreign cour ts, and political and social conditions, such as diplomatic relations, confiscatory taxation, expropriation, limitation on the removal of funds or assets, or imposition of (or change in) exchange control regulations. Legal remedies available to investors in cer tain foreign countries may be less extensive than those available to investors in the United States or other foreign countries. In addition, changes in government administrations or economic or monetary policies in the United States or abroad could result in appreciation or depreciation of por tfolio securities and could favorably or adversely affect a Fund’s operations.
Foreign Economy Risk. The economies of cer tain foreign markets often do not compare favorably with that of the United States with respect to such issues as growth of gross national product, reinvestment of capital, resources, and balance of payments position. Cer tain such economies may rely heavily on par ticular industries or foreign capital and are more vulnerable to diplomatic developments, the imposition of economic sanctions against a par ticular country or countries, changes in international trading patterns, trade barriers, and other protectionist or retaliatory measures.
Currency Risk and Exchange Risk. Because foreign securities generally are denominated and pay dividends or interest in foreign currencies, the value of a Fund that invests in foreign securities as measured in U.S. dollars will be affected favorably or unfavorably by changes in exchange rates. Generally, when the U.S. dollar rises in value against a foreign currency, a security denominated in that currency loses value because the currency is wor th fewer U.S. dollars. Conversely, when the U.S. dollar decreases in value against a foreign currency, a security denominated in that currency gains value because the currency is wor th more U.S. dollars. This risk, generally known as “currency risk,” means that a stronger U.S. dollar will reduce returns for U.S. investors while a weak U.S. dollar will increase those returns. Currency exchange rates can also be affected unpredictably by intervention by U.S. or foreign governments or central banks, or the failure to intervene, or buy currency controls or political developments in the United States or abroad.
Governmental Supervision and Regulation/Accounting Standards. Many foreign governments supervise and regulate stock exchanges, brokers and the sale of securities less than does the United States. Some countries may not have laws to protect investors comparable to the U.S. securities laws. For example, some foreign countries may have no laws or rules against insider trading. Insider trading occurs when a person buys or sells a company’s securities based on nonpublic information about that company. Accounting standards in other countries are not necessarily the same as in the United States. If the accounting standards in another country do not require as much detail as U.S. accounting standards, it may be harder for Fund management to completely and accurately determine a company’s financial condition. In addition, the U.S. Government has from time to time in the past imposed restrictions, through penalties and otherwise, on foreign investments by U.S. investors such as the Fund. If such restrictions should be reinstituted, it might become necessary for the Fund to invest all or substantially all of its
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assets in U.S. securities. Also, brokerage commissions and other costs of buying or selling securities often are higher in foreign countries than they are in the United States. This reduces the amount the Fund can earn on its investments.
Cer tain Risks of Holding Fund Assets Outside the United States. A Fund generally holds its foreign securities and cash in foreign banks and securities depositories. Some foreign banks and securities depositories may be recently organized or new to the foreign custody business. In addition, there may be limited or no regulatory oversight over their operations. Also, the laws of cer tain countries may put limits on a Fund’s ability to recover its assets if a foreign bank or depository or issuer of a security or any of their agents goes bankrupt. In addition, it is often more expensive for a Fund to buy, sell and hold securities in cer tain foreign markets than in the United States. The increased expense of investing in foreign markets reduces the amount a Fund can earn on its investments and typically results in a higher operating expense ratio for the Fund as compared to investment companies that invest only in the United States.
Publicly Available Information. In general, less information is publicly available with respect to foreign issuers than is available with respect to U.S. companies. Most foreign companies are also not subject to the uniform accounting and financial repor ting requirements applicable to issuers in the United States. While the volume of transactions effected on foreign stock exchanges has increased in recent years, it remains appreciably below that of the New York Stock Exchange. Accordingly, a Fund’s foreign investments may be less liquid than, and their prices may be more volatile than, comparable investments in securities in U.S. companies. In addition, there is generally less government supervision and regulation of securities exchanges, brokers and issuers in foreign countries than in the United States.
Settlement Risk. Settlement and clearance procedures in cer tain foreign markets differ significantly from those in the United States. Supervisory authorities may also be unable to apply standards which are comparable with those in the United States. Foreign settlement procedures and trade regulations also may involve cer tain risks (such as delays in payment for or delivery of securities) not typically generated by the settlement of U.S. investments.
Communications between the United States and emerging market countries may be unreliable, increasing the risk of delayed settlements or losses of security cer tificates in markets that still rely on physical settlement. Settlements in cer tain foreign countries at times have not kept pace with the number of securities transactions; these problems may make it difficult for a Fund to carry out transactions. If a Fund cannot settle or is delayed in settling a purchase of securities, it may miss attractive investment oppor tunities and cer tain of its assets may be uninvested with no return earned thereon for some period. If a Fund cannot settle or is delayed in settling a sale of securities, it may lose money if the value of the security then declines or, if it has contracted to sell the security to another par ty, the Fund could be liable to that par ty for any losses incurred.
Because of uncer tainties in the operation of settlement systems in individual markets, competing claims may arise in respect of securities held by or to be transferred to a Fund. Compensation schemes may not exist or may otherwise be limited or inadequate to meet the Fund’s claims in case of such event.
Sovereign Debt. Investment in sovereign debt can involve a high degree of risk. The governmental entity that controls the repayment of sovereign debt may not be able or willing to repay the principal and/or interest when due in accordance with the terms of such debt. A governmental entity’s willingness or ability to repay principal and interest due in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the governmental entity’s policy towards the International Monetary Fund and the political constraints to which a governmental entity may be subject. Governmental entities may also be dependent on expected disbursements from foreign governments, multilateral agencies and others abroad to reduce principal and interest arrearages on their debt. The commitment on the par t of these governments, agencies and others to make such disbursements may be conditioned on the implementation of economic reforms and/or economic per formance and the timely service of such debtor’s obligations. Failure to implement such reforms, achieve such levels of economic per formance or repay principal or interest when due may result in the cancellation of such third par ties’ commitments to lend funds to the governmental entity, which may fur ther impair such debtor’s ability or willingness to timely service its debts. Consequently, governmental entities may default on their sovereign debt.
Holders of sovereign debt may be requested to par ticipate in the rescheduling of such debt and to extend fur ther loans to governmental entities. In the event of a default by a governmental entity, there may be few or no effective legal remedies for collecting on such debt.
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Withholding Tax Reclaims Risk . A Fund may file claims to recover foreign withholding taxes on dividend and interest income (if any) received from issuers in cer tain countries and capital gains on the disposition of stocks or securities where such withholding tax reclaim is possible. Whether or when a Fund will receive a withholding tax refund is within the control of the tax authorities in such countries. Where a Fund expects to recover withholding taxes, the net asset value of the Fund generally includes accruals for such tax refunds. Each Fund regularly evaluates the probability of recovery. If the likelihood of recovery materially decreases, due to, for example, a change in tax regulation or approach in the foreign country, accruals in a Fund’s net asset value for such refunds may be written down par tially or in full, which will adversely affect the Fund’s net asset value. Shareholders in a Fund at the time an accrual is written down will bear the impact of the resulting reduction in net asset value regardless of whether they were shareholders during the accrual period. Conversely, if a Fund receives a tax refund that has not been previously
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